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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 Annual Report
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
  þ
    
    Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended October 31, 2007
  o
    
    Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from  to
 Commission File Number 000-31797
 VERMONT PURE HOLDINGS, LTD.
 
 Delaware
    
    03-0366218(State or other jurisdiction of
incorporation or organization)
    
    I.R.S. Employer Identification Number
  
 (860) 945-0661
 Securities registered pursuant to Section 12(b) of the Act:
    
    Common Stock, par value $.001 per share
    
    American Stock Exchange(Title of Class)
    
    (Exchange registration)
  o þ
 o þ
 þ o
 þ
  o o þ
 o þ
   Documents Incorporated by Reference




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Table of Contents
 PagePart I
    
    
    
    
    3Item 1.
    
    Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    11Item 1B.
    
    Unresolved Staff Comments
    
    
    16Item 2.
    
    Properties
    
    
    16Item 3.
    
    Legal Proceedings
    
    
    17Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    17Part II
    
    
    
    
    18Item 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    18Item 6.
    
    Selected Financial Data
    
    
    20Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 8.
    
    Financial Statements and Supplementary Data
    
    
    33Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    33Item 9A.
    
    Controls and Procedures
    
    
    33Item 9B.
    
    Other Information
    
    
    33Part III
    
    
    
    
    34Item 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    34Item 11.
    
    Executive Compensation
    
    
    34Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    34Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    35Item 14.
    
    Principal Accountant Fees and Services
    
    
    35Part IV
    
    
    
    
    36Item 15.
    
    Exhibits and Financial Statement Schedules
    
    
    36Signatures
    
    
    39EX-10.29 Installation Agreement with American Capital Energy, Inc. dated August 29, 2007EX-10.30 Connecticut Innovations Agreement dated August 20, 2007EX-21.1 SubsidiaryEX-23.1 Consent of Wolf & Company, P.C.EX-23.2 Consent of Deloitte & Touche LLPEX-31.1 Section 302 Certification of CEOEX-31.2 Section 302 Certification of CFOEX-32.1 Section 906 Certification of CEOEX-32.2 Section 906 Certification of CFO
   
  
  2




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PART I
 
 ITEM 1. BUSINESS.
 Introduction and Industry Trends
    Company Background
 ® ® ®
  3




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®
  ® ® ® ®
 ® ®
  Other Significant Product Lines
 
 4




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Water Sources, Treatment, and Bottling Operations
 ®
 ®
 ®
     5




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Products
 ® ® ®
 Marketing and Sales of Branded Products
  6




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Advertising and Promotion
  Sales and Distribution
   Supplies
   7




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Seasonality
  Competition
  ® ®
    8




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
    
    Completed the planning for an extensive solar electricity generation installation in our
Watertown facility that is scheduled to be operational in 2008 and to supply a significant
amount of the energy for that facility.
    
    Upgraded the lighting in most of our facilities to high efficiency lighting.
    
    Instituted no-idling and other driving policies in all of our locations.
    
    Finalized plans to upgrade many of our older vehicles to new, more energy efficient
vehicles.
 Trademarks
 ® ® ® ® ® ® ® ® ® ®
 Government Regulation
    9




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Employees
  Additional Available Information
    10




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ITEM 1A. RISK FACTORS.
  Over a period of years, we have borrowed substantial amounts of money to finance acquisitions. If
we are unable to meet our debt service obligations to our senior and subordinated lenders, we would
be in default under those obligations, and that could hurt our business or even result in
foreclosure, reorganization or bankruptcy.
     The Baker family currently owns a majority of our voting stock and controls the company. Such
control affects our corporate governance, and could also have the effect of delaying or preventing
a change of control of the company.
   11




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Our success depends on the continued services of key personnel.
  The personal interests of our directors and officers create a conflict.
  We face competition from companies with far greater resources than we have. In addition, methods
of competition in the distribution of home and office refreshment products continue to change and
evolve. If we are unable to meet these changes, our business could be harmed.
   The bottled water industry is regulated at both the state and federal level. If we are unable to
continue to comply with applicable regulations and standards in any jurisdiction, we might not be
able to sell our products in that jurisdiction, and our business could be seriously harmed.
  12




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Legislative and executive action in state and local governments banning the use of municipal funds
for purchasing bottled water, enacting local taxes on bottled water or water extraction, and
restricting water withdrawal and usage rights from public and private sources could adversely
affect our business and financial results.
    We depend upon maintaining the integrity of our water resources and manufacturing process. If our
water sources or bottling processes were contaminated for any reason, our business would be
seriously harmed.
  13




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Fluctuations in the cost of essential raw materials and commodities, including fuel costs, for the
manufacture and delivery of our products could significantly impact our business.
    We have a limited amount of bottling capacity. Significant interruptions of our bottling
facilities could adversely affect our business.
  We rely upon a single software vendor that supplies the software for our route accounting system.
  Our customer base is located in New England, New York and New Jersey. If there were to be a
material decline in the economy in these regions, our business would likely be adversely affected.
 14




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##### Table of Contents



Our business is seasonal, which may cause fluctuations in our stock price.
  Acquisitions may disrupt our operations or adversely affect our results
  
    
    charges related to any potential acquisition from which we may withdraw;
    
    diversion of our managements time, attention, and resources;
    
    decreased utilization during the integration process;
    
    loss of key acquired personnel;
    
    increased costs to improve or coordinate managerial, operational, financial, and
administrative systems including compliance with the Sarbanes-Oxley Act of 2002;
    
    dilutive issuances of equity securities, including convertible debt securities;
    
    the assumption of legal liabilities;
    
    amortization of acquired intangible assets;
    
    potential write-offs related to the impairment of goodwill;
    
    difficulties in integrating diverse corporate cultures; and
    
    additional conflicts of interests.
 We are required to be in full compliance with Section 404 of the Sarbanes-Oxley Act as of our
fiscal year ending October 31, 2009. Under current regulations, the financial cost of compliance
with Section 404 is significant. Failure to achieve and maintain effective internal
 15




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control in accordance with Section 404 could have a material adverse effect on our business and our stock
price.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS.
  
 ITEM 2. PROPERTIES.
  Location
    
    Lease expiration
    
    Sq. Ft.
    
    Annual RentWilliston, VT
    
    June 2009
    
    
    10,000
    
    
    $
    70,936Waltham, MA
    
    December 2008
    
    
    11,760
    
    
    $
    147,000Bow, NH
    
    June 2010
    
    
    9,600
    
    
    $
    48,360Rochester, NY
    
    January 2012
    
    
    15,000
    
    
    $
    60,000Buffalo, NY
    
    September 2010
    
    
    10,000
    
    
    $
    62,500Syracuse, NY
    
    December 2010
    
    
    10,000
    
    
    $
    38,333Halfmoon, NY
    
    October 2011
    
    
    22,500
    
    
    $
    148,500Plattsburgh, NY
    
    May 2010
    
    
    5,000
    
    
    $
    24,000Watertown, CT
    
    October 2016
    
    
    67,000
    
    
    $
    414,000Stamford, CT
    
    October 2010
    
    
    22,000
    
    
    $
    248,400White River Junction, VT
    
    June 2009
    
    
    12,000
    
    
    $
    76,647Waterbury, CT
    
    June 2008
    
    
    5,000
    
    
    $
    17,240Groton, CT
    
    June 2009
    
    
    7,500
    
    
    $
    56,375
    16




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Years 1-2
    
    $
    452,250Years 3-4
    
    $
    461,295Years 4-5
    
    $
    475,521
      
 ITEM 3. LEGAL PROCEEDINGS.
 Vermont Pure Holdings, Ltd. vs. Thomas M. Sobol, et
al. quantum meruit
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  17




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PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
  High
    
    LowFiscal Year Ended October 31, 2007First Quarter
    
    $
    1.75
    
    
    $
    1.38Second Quarter
    
    $
    1.98
    
    
    $
    1.75Third Quarter
    
    $
    1.94
    
    
    $
    1.79Fourth Quarter
    
    $
    1.93
    
    
    $
    1.61Fiscal Year Ended October 31, 2006First Quarter
    
    $
    2.05
    
    
    $
    1.73Second Quarter
    
    $
    2.04
    
    
    $
    1.69Third Quarter
    
    $
    1.71
    
    
    $
    1.33Fourth Quarter
    
    $
    1.77
    
    
    $
    1.30
    Performance Graph
   18




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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Vermont Pure Holdings, Ltd., The AMEX Composite Index,
A New Peer Group And An Old Peer Group
 
 10/02
    
    10/03
    
    10/04
    
    10/05
    
    10/06
    
    10/07Vermont
Pure Holdings, Ltd.
    
    
    100.00
    
    
    
    88.95
    
    
    
    47.11
    
    
    
    53.68
    
    
    
    39.47
    
    
    
    43.95AMEX Composite
    
    
    100.00
    
    
    
    132.26
    
    
    
    160.11
    
    
    
    203.56
    
    
    
    246.95
    
    
    
    316.31New Peer Group
    
    
    100.00
    
    
    
    112.10
    
    
    
    134.88
    
    
    
    217.75
    
    
    
    419.59
    
    
    
    799.90Old Peer Group
    
    
    100.00
    
    
    
    112.27
    
    
    
    112.02
    
    
    
    116.82
    
    
    
    133.80
    
    
    
    153.81
 
 *
    
    $100 invested on 10/31/02 in stock or index-including reinvestment of dividends.
Fiscal year ending October 31. The stock price performance included in this graph is not necessarily indicative of future stock
price performance.
 Issuer Purchase of Equity Securities
  Total Number of
    
    
    MaximumShares
    
    
    Number ofPurchased as
    
    
    Shares that MayTotal Number of
    
    
    
    
    
    
    Part of Publicly
    
    
    Yet beShares
    
    
    Average Price
    
    
    Announced
    
    
    Purchased UnderPeriod
    
    Purchased
    
    
    Paid per Share
    
    
    Program (1)
    
    
    the Program (1)August 1-31
    
    
    15,100
    
    
    $
    1.80
    
    
    
    15,100
    
    
    
    141,600September 1-30
    
    
    9,100
    
    
    $
    1.86
    
    
    
    9,100
    
    
    
    132,500October 1-31
    
    
    5,200
    
    
    $
    1.81
    
    
    
    5,200
    
    
    
    127,300Total
    
    
    29,400
    
    
    $
    1.82
    
    
    
    29,400
 
 (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. 19




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ITEM 6. SELECTED FINANCIAL DATA.
  Fiscal Years EndedOctober 31,
    
    October 31,
    
    October 31,
    
    October 31,
    
    October 31,(000s except per share)
    
    2007
    
    2006
    
    2005
    
    2004
    
    2003Net sales
    
    $
    65,231
    
    
    $
    62,774
    
    
    $
    59,835
    
    
    $
    52,473
    
    
    $
    49,854Income (loss) from
continuing operations
    
    $
    2,076
    
    
    $
    (20,670
    )
    
    $
    871
    
    
    $
    500
    
    
    $
    941Income (loss) per share
from continuing
operations
    
    $
    .10
    
    
    $
    (.96
    )
    
    $
    .04
    
    
    $
    .02
    
    
    $
    .04Total assets
    
    $
    80,718
    
    
    $
    81,335
    
    
    $
    102,889
    
    
    $
    103,781
    
    
    $
    111,123Long term debt, less
current portion
    
    $
    31,442
    
    
    $
    33,875
    
    
    $
    37,975
    
    
    $
    37,854
    
    
    $
    48,274
 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
  
    
    Business Overview  a brief description of fiscal year 2007.
    
    Results of Operations an analysis of our consolidated results of operations for
the three years presented in our consolidated financial statements.
    
    Liquidity and Capital Resources an analysis of cash flows, sources and uses of
cash, and contractual obligations and a discussion of factors affecting our future cash
flow.
    
    Critical Accounting Policies a discussion of accounting policies that require
critical judgments and estimates. Our significant accounting policies, including the
critical accounting policies discussed in this section, are summarized in the notes to
the accompanying consolidated financial statements.
 Business Overview
   20




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Results of Operations
 Fiscal Year Ended October 31, 2007 Compared to Fiscal Year Ended October 31, 2006
 Sales
   Product Line
    
    2007
    
    
    2006
    
    
    Difference
    
    
    % Diff.(in 000s $)
    
    
    (in 000s $)
    
    
    (in 000s $)Water
    
    $
    29,560
    
    
    $
    28,886
    
    
    $
    674
    
    
    
    2
    %Coffee and Related
    
    
    19,341
    
    
    
    17,430
    
    
    
    1,911
    
    
    
    11
    %Equipment Rental
    
    
    9,143
    
    
    
    9,013
    
    
    
    130
    
    
    
    1
    %Other
    
    
    7,187
    
    
    
    7,445
    
    
    
    (258
    )
    
    
    (3
    %)Total
    
    $
    65,231
    
    
    $
    62,774
    
    
    $
    2,457
    
    
    
    4
    %
 Water
 Coffee
 Equipment Rental
 21




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Other
 Gross Profit/Cost of Goods Sold
   Income from Operations/Operating Expenses
    22




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Other Income and Expense, Income Taxes, and Income from Operations
    Net Income (Loss)
    23




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24




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Fiscal Year Ended October 31, 2006 Compared to Fiscal Year Ended October 31, 2005
 Sales
   Product Line
    
    2006
    
    
    2005
    
    
    Difference
    
    
    % Diff.(in 000s $)
    
    
    (in 000s $)
    
    
    (in 000s $)Water
    
    $
    28,886
    
    
    $
    28,869
    
    
    $
    17
    
    
    
    Coffee and Related
    
    
    17,430
    
    
    
    15,388
    
    
    
    2,042
    
    
    
    13
    %Equipment Rental
    
    
    9,013
    
    
    
    9,337
    
    
    
    (324
    )
    
    
    (3
    %)Other
    
    
    7,445
    
    
    
    6,241
    
    
    
    1,204
    
    
    
    19
    %Total
    
    $
    62,774
    
    
    $
    59,835
    
    
    $
    2,939
    
    
    
    5
    %
 Water
 Coffee
 Equipment Rental
 Other
 Gross Profit/Cost of Goods Sold
  25




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Income from Operations/Operating Expenses
       26




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Other Income and Expense, Income Taxes, and Income from Continuing Operations
    Net (Loss) Income
    Liquidity and Capital Resources
  27




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28




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Payment due by PeriodContractual Obligations
    
    Total
    
    
    2008
    
    
    2009-2010
    
    
    2011-2012
    
    
    After 2012Debt
    
    $
    34,702,000
    
    
    $
    3,260,000
    
    
    $
    6,695,000
    
    
    $
    6,760,000
    
    
    $
    17,987,000Interest on Debt (1)
    
    
    14,724,000
    
    
    
    2,678,000
    
    
    
    4,750,000
    
    
    
    3,901,000
    
    
    
    3,395,000Operating Leases
    
    
    10,359,000
    
    
    
    2,784,000
    
    
    
    4,086,000
    
    
    
    1,615,000
    
    
    
    1,874,000Coffee
Purchase Commitments
    
    
    247,000
    
    
    
    247,000
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    60,032,000
    
    
    $
    8,969,000
    
    
    $
    15,531,000
    
    
    $
    12,276,000
    
    
    $
    23,256,000
 
 (1)
    
    Interest based on 75% of outstanding senior debt at the hedged interest rate discussed above,
25% of outstanding senior debt at a variable rate of 6.46%, and subordinated debt at a rate of 12%.   Factors Affecting Future Cash Flow
  29




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Factors Affecting Quarterly Performance
  Critical Accounting Policies
  Accounts Receivable  Allowance for Doubtful Accounts
  Fixed Assets  Depreciation
  30




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Goodwill  Intangible Asset Impairment
  Income Taxes
  Stock Based Compensation
     31




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Off-Balance Sheet Arrangements
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 Interest Rate Risks
    Commodity Price Risks
 Coffee
  Diesel Fuel
  32




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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  
 ITEM 9B. OTHER INFORMATION.
  33




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PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
  
 ITEM 11. EXECUTIVE COMPENSATION.
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
 Securities Authorized for Issuance Under Equity Compensation Plans.
  (a)
    
    (b)
    
    (c)Number of Securitiesremaining available forNumber of Securities to be
    
    Weighted-average exercise
    
    future issuance underissued upon exercise of
    
    price of outstanding
    
    equity compensation plansoutstanding options,
    
    options, warrants and
    
    (excluding securitiesPlan Category
    
    warrants and rights
    
    rights
    
    reflected in column (a)).Equity compensation
plans approved by
security holders
    
    
    659,500
    
    
    $
    3.01
    
    
    
    1,724,185Equity compensation
plans not approved
by security holders
    
    
    -0-
    
    
    
    
    
    
    
    -0-Total
    
    
    659,500
    
    
    $
    3.01
    
    
    
    1,724,185
 34




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##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  35




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PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
  (1) Financial StatementsReports of Independent Registered Public Accounting Firms
    
    F-1, F-2Consolidated Balance Sheets as of October 31, 2007 and 2006
    
    F-3Consolidated Statements of Operations for the years ended October 31, 2007, 2006 and 2005
    
    F-4Consolidated Statements of Shareholders Equity and Comprehensive income (loss) for the years ended October 31, 2007, 2006 and 2005
    
    F-5Consolidated Statements of Cash Flows for the years ended October 31, 2007, 2006 and 2005
    
    F-6Notes to Consolidated Financial Statements
    
    F-7 - F-27(2) SchedulesNone(3) Exhibits:
 Filed withExhibit
    
    
    
    this Form
    
    Incorporated by ReferenceNo.
    
    Description
    
    10-K
    
    Form
    
    Filing Date
    
    Exhibit No.3.1
    
    Certificate of Incorporation
    
    
    
    S-4
    
    September 6, 2000
    
    Exhibit B to
Appendix A3.2
    
    Certificate of Amendment to
Certificate of Incorporation
    
    
    
    8-K
    
    October 19, 2000
    
    
    4.23.3
    
    By-laws
    
    
    
    10-Q
    
    September 14, 2001
    
    
    3.34.1
    
    Registration Rights Agreement
with Peter K. Baker, Henry E.
Baker, John B. Baker and Ross
Rapaport
    
    
    
    8-K
    
    October 19, 2000
    
    
    4.610.1*
    
    1998 Incentive and Non-Statutory
Stock Option Plan, as amended
    
    
    
    14A
    
    March 10, 2003
    
    
    A10.2*
    
    1999 Employee Stock Purchase Plan
    
    
    
    14A
    
    March 15, 1999
    
    
    A10.3*
    
    2004 Stock Incentive Plan
    
    
    
    14A
    
    March 9, 2004
    
    
    B10.4*
    
    Instrument of Amendment dated
September 22, 2005 amending the
1999 Employee Stock Purchase
Plan
    
    
    
    8-K
    
    September 28, 2005
    
    
    10.110.5*
    
    Employment Agreement dated May
2, 2007 with Peter K. Baker
    
    
    
    8-K
    
    May 2, 2007
    
    
    10.110.6*
    
    Employment Agreement dated May
2, 2007 with Bruce S. MacDonald
    
    
    
    8-K
    
    May 2, 2007
    
    
    10.310.7*
    
    Employment Agreement dated May
2, 2007 with John B. Baker
    
    
    
    8-K
    
    May 2, 2007
    
    
    10.210.8*
    
    Employment Agreement dated
January 1, 2005 with Henry E.
Baker
    
    
    
    8-K
    
    June 29, 2005
    
    
    10.110.9*
    
    Severance Agreement dated
December 5, 2005 with Timothy
Fallon
    
    
    
    10-K
    
    January 30, 2006
    
    
    10.11
 36




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Filed withExhibit
    
    
    
    this Form
    
    Incorporated by ReferenceNo.
    
    Description
    
    10-K
    
    Form
    
    Filing Date
    
    Exhibit No.10.10
    
    Lease of Grounds in Stamford,
Connecticut from Henry E. Baker
    
    
    
    S-4
    
    September 6, 2000
    
    
    10.2410.11
    
    Lease of Buildings and Grounds
in Watertown, Connecticut from
the Bakers Grandchildren Trust
    
    
    
    S-4
    
    September 6, 2000
    
    
    10.2210.12
    
    Lease of Building in Stamford,
Connecticut from Henry E. Baker
    
    
    
    S-4
    
    September 6, 2000
    
    
    10.2310.13
    
    First Amendment to the Lease of
Buildings and Grounds in
Watertown, Connecticut from the
Bakers Grandchildren Trust
    
    
    
    10-Q
    
    September 14, 2007
    
    
    10.410.14
    
    Credit Agreement dated April 5,
2005 with Bank of America and
Webster Bank
    
    
    
    10-Q
    
    July 8, 2005
    
    
    10.110.15
    
    Form of Term Note dated April 5,
2005 issued to Bank of America
and Webster Bank
    
    
    
    10-Q
    
    July 8, 2005
    
    
    10.210.16
    
    Form of Subordination and Pledge
Agreement dated April 5, 2005
between Henry E. Baker, Joan
Baker, John B. Baker, Peter K.
Baker and Bank of America
    
    
    
    10-Q
    
    July 8, 2005
    
    
    10.310.17
    
    Form of Second Amended and
Restated Promissory Note dated
April 5, 2005 issued to Henry E.
Baker, Joan Baker, John B. Baker
and Peter K. Baker
    
    
    
    10-Q
    
    July 8, 2005
    
    
    10.410.18
    
    Form of Acquisition Note dated
April 5, 2005 issued to Bank of
America and Webster Bank
    
    
    
    10-Q
    
    July 8, 2005
    
    
    10.510.19
    
    Form of Revolving Credit Note
dated April 5, 2005 issued to
Bank of America and Webster Bank
    
    
    
    10-Q
    
    July 8, 2005
    
    
    10.610.20
    
    First Amendment to the Credit
Agreement dated April 5, 2005
with Bank of America
    
    
    
    10-Q
    
    September 14, 2007
    
    
    10.110.21
    
    Second Amendment to the Credit
Agreement dated April 5, 2005
with Bank of America
    
    
    
    10-Q
    
    September 14, 2007
    
    
    10.210.22
    
    Third Amendment to the Credit
Agreement dated April 5, 2005
with Bank of America
    
    
    
    10-Q
    
    September 14, 2007
    
    
    10.310.23
    
    Form of Indemnification
Agreement dated November 2, 2005
with each of Henry E. Baker,
John B. Baker, Peter K. Baker,
Phillip Davidowitz, Martin A.
Dytrych, David Jurasek, John M.
Lapides, Bruce S. MacDonald and
Ross S. Rapaport
    
    
    
    10-K
    
    January 30, 2006
    
    
    10.2110.24
    
    Form of Indemnification
Agreement dated November 2, 2005
with each of John M. Lapides and
Martin A. Dytrych
    
    
    
    10-K
    
    January 30, 2006
    
    
    10.2210.25
    
    Purchase and Sale Agreement
dated March 1, 2004 with
MicroPack Corporation
    
    
    
    10-Q
    
    March 16, 2004
    
    
    10.2710.26
    
    Trademark License Agreement
dated March 1, 2004 with
MicroPack Corporation
    
    
    
    10-Q
    
    March 16, 2004
    
    
    10.2810.27
    
    Supply and License Agreement
dated March 1, 2004 with
MicroPack Corporation
    
    
    
    10-Q
    
    March 16, 2004
    
    
    10.2910.28
    
    Agreement dated May 5, 2006 with
Nestle Waters of North America
Inc. to discontinue the Civil
Action Vermont Pure Holdings,
Ltd. v. Nestle Waters of North
America Inc.
    
    
    
    10-Q
    
    June 14, 2006
    
    
    10.110.29
    
    Installation Agreement with
American Capital Energy, Inc.
dated August 29, 2007
    
    X10.30
    
    Financial Assistance Agreement
with
    
    X
 37




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##### Table of Contents



Filed withExhibit
    
    
    
    this Form
    
    Incorporated by ReferenceNo.
    
    Description
    
    10-K
    
    Form
    
    Filing Date
    
    Exhibit No.Connecticut Innovations
dated August 20, 200721.1
    
    Subsidiary
    
    X23.1
    
    Consent of Wolf & Company, P.C.
    
    X23.2
    
    Consent of Deloitte & Touche LLP
    
    X31.1
    
    Certification of Chief Executive
Officer pursuant to Section 302
of the Sarbanes-Oxley Act of
2002
    
    X31.2
    
    Certification of Chief Financial
Officer pursuant to Section 302
of the Sarbanes-Oxley Act of
2002
    
    X32.1
    
    Certification of Chief Executive
Officer pursuant to Section 906
of the Sarbanes-Oxley Act of
2002
    
    X32.2
    
    Certification of Chief Financial
Officer pursuant to Section 906
of the Sarbanes-Oxley Act of
2002
    
    X
 
 *
    
    Management contract or compensatory plan. 38




---



##### Table of Contents



SIGNATURES
  VERMONT PURE HOLDINGS, LTD.By:
    /s/ Peter K. BakerDated: January 29, 2008
    
    Peter K. Baker, Chief Executive Officer  Name
    
    Title
    
    Date/s/ Ross S. Rapaport

Ross S. Rapaport
    
    Chairman of the Board of Directors
    
    January 29, 2008/s/ Henry E. Baker

Henry E. Baker
    
    Director, Chairman Emeritus
    
    January 29, 2008/s/ John B. Baker

John B. Baker
    
    Executive Vice President and Director
    
    January 29, 2008/s/ Peter K. Baker

Peter K. Baker
    
    Chief Executive Officer and Director
    
    January 29, 2008/s/ Phillip Davidowitz

Phillip Davidowitz
    
    Director
    
    January 29, 2008/s/ Martin A. Dytrych

Martin A. Dytrych
    
    Director
    
    January 29, 2008/s/ John M. Lapides

John M. Lapides
    
    Director
    
    January 29, 2008/s/ Bruce S. MacDonald

Bruce S. MacDonald
    
    Chief Financial Officer, Chief 
Accounting Officer and Secretary
    
    January 29, 2008
 39




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##### Table of Contents



EXHIBITS TO VERMONT PURE HOLDINGS, LTD.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2006
Exhibits Filed Herewith
 ExhibitNumber
    
    Description10.29
    
    Installation Agreement with American Capital Energy, Inc. dated August 29, 200710.30
    
    Financial Assistance Agreement with Connecticut Innovations dated August 20, 200721.1
    
    Subsidiary23.1
    
    Consent of Wolf & Company, P.C.23.2
    
    Consent of Deloitte & Touche LLP31.1
    
    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.
 40




---



##### 



PAGEReport of Independent Registered Public Accounting Firms
    
    
    F-1, F-2Financial Statements:Consolidated Balance Sheets, October 31, 2007 and 2006
    
    
    F-3Consolidated Statements of Operations, Fiscal Years Ended October 31, 2007, 2006, and 2005
    
    
    F-4Consolidated
Statements of Stockholders Equity and Comprehensive Income (Loss) Fiscal Years Ended October 31, 2007, 2006, and 2005
    
    
    F-5Consolidated Statements of Cash Flows, Fiscal Years Ended October 31, 2007, 2006, and 2005
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7  F-27




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    
 F-1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 F-2




---



##### Table of Contents



VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
 CONSOLIDATED BALANCE SHEETS
 October 31,
    
    
    October 31,2007
    
    
    2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    1,873,385
    
    
    $
    2,120,111Accounts receivable, trade  net of reserve of $354,825 and
$352,844 for 2007 and 2006, respectively
    
    
    7,522,831
    
    
    
    7,212,054Inventories
    
    
    1,711,366
    
    
    
    1,192,286Current portion of deferred tax asset
    
    
    499,441
    
    
    
    683,509Other current assets
    
    
    683,212
    
    
    
    884,031Unrealized gain on derivatives
    
    
    
    
    
    
    134,737TOTAL CURRENT ASSETS
    
    
    12,290,235
    
    
    
    12,226,728PROPERTY AND EQUIPMENT  net
    
    
    10,697,018
    
    
    
    10,718,834OTHER ASSETS:Goodwill
    
    
    54,423,997
    
    
    
    54,421,662Other intangible assets  net
    
    
    2,653,488
    
    
    
    3,197,575Other assets
    
    
    696,139
    
    
    
    770,212TOTAL OTHER ASSETS
    
    
    57,773,624
    
    
    
    58,389,449TOTAL ASSETS
    
    $
    80,760,877
    
    
    $
    81,335,011LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current portion of long term debt
    
    $
    3,260,030
    
    
    $
    3,583,564Accounts payable
    
    
    2,101,399
    
    
    
    2,005,283Accrued expenses
    
    
    3,454,487
    
    
    
    3,414,036Current portion of customer deposits
    
    
    755,965
    
    
    
    706,401Unrealized loss on derivatives
    
    
    109,722
    
    
    
    TOTAL CURRENT LIABILITIES
    
    
    9,681,603
    
    
    
    9,709,284Long term debt, less current portion
    
    
    31,441,667
    
    
    
    33,875,000Deferred tax liability
    
    
    3,123,091
    
    
    
    3,233,228Customer deposits
    
    
    2,910,875
    
    
    
    2,828,208TOTAL LIABILITIES
    
    
    47,157,236
    
    
    
    49,645,720COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock  $.001 par value, 50,000,000 authorized shares,
21,800,555 issued and 21,606,305 outstanding shares as of
October 31, 2007 and 21,747,572 issued and 21,608,922
outstanding as of October 31, 2006
    
    
    21,800
    
    
    
    21,747Additional paid in capital
    
    
    58,307,395
    
    
    
    58,220,887Treasury stock, at cost, 194,250 shares as of October 31,
2007 and 138,650 shares as of October 31, 2006
    
    
    (474,441
    )
    
    
    (369,662
    )Accumulated deficit
    
    
    (24,183,977
    )
    
    
    (26,260,341
    )Accumulated other comprehensive (loss) income
    
    
    (67,136
    )
    
    
    76,660TOTAL STOCKHOLDERS EQUITY
    
    
    33,603,641
    
    
    
    31,689,291TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    80,760,877
    
    
    $
    81,335,011
  F-3




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##### Table of Contents



VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Fiscal Year Ended October 312007
    
    
    2006
    
    
    2005NET SALES
    
    $
    65,230,997
    
    
    $
    62,773,812
    
    
    $
    59,834,575COST OF GOODS SOLD
    
    
    28,188,533
    
    
    
    26,473,269
    
    
    
    24,842,247GROSS PROFIT
    
    
    37,042,464
    
    
    
    36,300,543
    
    
    
    34,992,328OPERATING EXPENSES:Selling, general and administrative expenses
    
    
    27,968,022
    
    
    
    27,934,390
    
    
    
    27,790,539Advertising expenses
    
    
    1,602,327
    
    
    
    1,082,725
    
    
    
    1,193,905Amortization
    
    
    846,160
    
    
    
    877,855
    
    
    
    787,043Gain on disposal of property and equipment
    
    
    (17,511
    )
    
    
    (74,092
    )
    
    
    (15,067
    )Impairment loss  goodwill
    
    
    
    
    
    
    22,950,018
    
    
    
    TOTAL OPERATING EXPENSES
    
    
    30,398,998
    
    
    
    52,770,896
    
    
    
    29,756,420INCOME (LOSS) FROM OPERATIONS
    
    
    6,643,466
    
    
    
    (16,470,353
    )
    
    
    5,235,908OTHER INCOME (EXPENSE):Interest
    
    
    (3,249,999
    )
    
    
    (3,268,192
    )
    
    
    (3,364,902
    )Miscellaneous income (expense)
    
    
    
    
    
    
    750,000
    
    
    
    (260,647
    )TOTAL OTHER EXPENSE, NET
    
    
    (3,249,999
    )
    
    
    (2,518,192
    )
    
    
    (3,625,549
    )INCOME (LOSS) BEFORE INCOME TAXES
    
    
    3,393,467
    
    
    
    (18,988,545
    )
    
    
    1,610,359INCOME TAX EXPENSE
    
    
    1,317,103
    
    
    
    1,681,573
    
    
    
    739,766NET INCOME (LOSS)
    
    $
    2,076,364
    
    
    $
    (20,670,118
    )
    
    $
    870,593NET INCOME (LOSS) PER SHARE  BASIC:
    
    $
    0.10
    
    
    $
    (0.96
    )
    
    $
    0.04NET INCOME (LOSS) PER SHARE  DILUTED:
    
    $
    0.10
    
    
    $
    (0.96
    )
    
    $
    0.04WEIGHTED AVERAGE SHARES USED IN COMPUTATION  BASIC
    
    
    21,624,381
    
    
    
    21,630,739
    
    
    
    21,619,863WEIGHTED AVERAGE SHARES USED IN COMPUTATION  DILUTED
    
    
    21,624,381
    
    
    
    21,630,739
    
    
    
    21,625,683
  F-4




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##### Table of Contents



VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY  AND COMPREHENSIVE INCOME (LOSS)
 AccumulatedCommon
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    Treasury
    
    
    
    
    
    
    OtherShares
    
    
    Stock
    
    
    Paid in
    
    
    Unearned
    
    
    Treasury
    
    
    Stock
    
    
    Accumulated
    
    
    Comprehensive
    
    
    
    
    
    
    ComprehensiveIssued
    
    
    Par Value
    
    
    Capital
    
    
    Compensation
    
    
    Shares
    
    
    Amount
    
    
    Deficit
    
    
    Income (Loss)
    
    
    Total
    
    
    Income (Loss)Balance, October 31, 2004
    
    
    21,569,711
    
    
    
    21,569
    
    
    $
    57,869,411
    
    
    $
    
    
    
    
    71,550
    
    
    $
    (264,735
    )
    
    $
    (6,460,816
    )
    
    $
    103,100
    
    
    $
    51,268,529
    
    
    $
    798,949Shares issued under employee
stock purchase plan
    
    
    97,047
    
    
    
    97
    
    
    
    150,646
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,743Restricted stock grants
    
    
    75,000
    
    
    
    76
    
    
    
    134,174
    
    
    
    (134,250
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock compensation
    
    
    3,059
    
    
    
    2
    
    
    
    5,747
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,749Deferred compensation
    
    
    
    
    
    
    
    
    
    
    47,667
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,667Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    870,593
    
    
    
    
    
    
    
    870,593
    
    
    $
    870,593Unrealized gain on derivatives, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65,482
    
    
    
    65,482
    
    
    
    65,482Balance, October 31, 2005
    
    
    21,744,817
    
    
    
    21,744
    
    
    
    58,207,645
    
    
    
    (134,250
    )
    
    
    71,550
    
    
    
    (264,735
    )
    
    
    (5,590,223
    )
    
    
    168,582
    
    
    
    52,408,763
    
    
    $
    936,075Shares issued under employee
stock purchase plan
    
    
    82,315
    
    
    
    82
    
    
    
    124,349
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124,431Non cash compensation
    
    
    
    
    
    
    
    
    
    
    14,064
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,064Restricted stock forfeiture
    
    
    (75,000
    )
    
    
    (75
    )
    
    
    (134,175
    )
    
    
    134,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    5,000
    
    
    
    5
    
    
    
    8,995
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,000Share retirements
    
    
    (9,560
    )
    
    
    (9
    )
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares repurchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,100
    
    
    
    (104,927
    )
    
    
    
    
    
    
    
    
    
    
    (104,927
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,670,118
    )
    
    
    
    
    
    
    (20,670,118
    )
    
    $
    (20,670,118
    )Unrealized loss on derivatives, net
of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (91,922
    )
    
    
    (91,922
    )
    
    
    (91,922
    )Balance, October 31, 2006
    
    
    21,747,572
    
    
    
    21,747
    
    
    
    58,220,887
    
    
    
    
    
    
    
    138,650
    
    
    
    (369,662
    )
    
    
    (26,260,341
    )
    
    
    76,660
    
    
    
    31,689,291
    
    
    $
    (20,762,040
    )Shares issued under employee
stock purchase plan
    
    
    52,983
    
    
    
    53
    
    
    
    86,508
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    86,561Shares repurchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,600
    
    
    
    (104,779
    )
    
    
    
    
    
    
    
    
    
    
    (104,779
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,076,364
    
    
    
    
    
    
    
    2,076,364
    
    
    $
    2,076,364Unrealized loss on derivatives, net
of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (143,796
    )
    
    
    (143,796
    )
    
    
    (143,796
    )Balance, October 31, 2007
    
    
    21,800,555
    
    
    $
    21,800
    
    
    $
    58,307,395
    
    
    $
    
    
    
    
    194,250
    
    
    $
    (474,441
    )
    
    $
    (24,183,977
    )
    
    $
    (67,136
    )
    
    $
    33,603,641
    
    
    $
    1,932,568
  F-5




---



##### Table of Contents



VERMONT
PURE HOLDINGS, LTD. AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Fiscal Year Ended October 31,2007
    
    
    2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    2,076,364
    
    
    $
    (20,670,118
    )
    
    $
    870,593Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation
    
    
    4,118,134
    
    
    
    4,041,448
    
    
    
    4,802,387Provision for bad debts
    
    
    326,435
    
    
    
    300,811
    
    
    
    316,667Amortization
    
    
    846,160
    
    
    
    877,855
    
    
    
    787,043Impairment loss  goodwill
    
    
    
    
    
    
    22,950,018
    
    
    
    Non cash interest expense
    
    
    105,783
    
    
    
    103,881
    
    
    
    31,862Deferred tax expense
    
    
    174,594
    
    
    
    1,323,734
    
    
    
    737,768Gain on asset disposal
    
    
    (17,511
    )
    
    
    (74,092
    )
    
    
    (15,067
    )Non cash compensation
    
    
    
    
    
    
    14,064
    
    
    
    53,416Changes in assets and liabilities:Accounts receivable
    
    
    (637,212
    )
    
    
    (262,427
    )
    
    
    (500,938
    )Inventories
    
    
    (519,080
    )
    
    
    (58,971
    )
    
    
    (63,481
    )Other current assets
    
    
    200,819
    
    
    
    211,454
    
    
    
    (203,693
    )Other assets
    
    
    74,073
    
    
    
    
    
    
    
    (39,000
    )Accounts payable
    
    
    96,116
    
    
    
    (576,822
    )
    
    
    (246,683
    )Accrued expenses
    
    
    (30,865
    )
    
    
    423,907
    
    
    
    671,643Customer deposits
    
    
    132,231
    
    
    
    (131,958
    )
    
    
    295,840NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    6,946,041
    
    
    
    8,472,784
    
    
    
    7,498,357CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment  net of debt
    
    
    (3,468,690
    )
    
    
    (4,131,441
    )
    
    
    (3,126,397
    )Proceeds from sale of assets
    
    
    93,722
    
    
    
    190,999
    
    
    
    83,433Cash used for acquisitions
    
    
    (290,540
    )
    
    
    (409,277
    )
    
    
    (414,440
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (3,665,508
    )
    
    
    (4,349,719
    )
    
    
    (3,457,404
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from line of credit borrowings
    
    
    2,610,970
    
    
    
    772,973
    
    
    
    2,000,000Payments on line of credit
    
    
    (2,610,970
    )
    
    
    (772,973
    )
    
    
    (3,500,000
    )Proceeds from long term debt
    
    
    
    
    
    
    
    
    
    
    28,513,852Principal payments on debt
    
    
    (3,509,041
    )
    
    
    (3,927,268
    )
    
    
    (29,908,183
    )Payments of debt issuance costs
    
    
    
    
    
    
    
    
    
    
    (185,000
    )Purchase of treasury stock
    
    
    (104,779
    )
    
    
    (104,927
    )
    
    
    Proceeds from issuance of common stock
    
    
    86,561
    
    
    
    133,431
    
    
    
    150,743NET CASH USED IN FINANCING ACTIVITIES
    
    
    (3,527,259
    )
    
    
    (3,898,764
    )
    
    
    (2,928,588
    )NET (DECREASE) INCREASE  IN CASH
    
    
    (246,726
    )
    
    
    224,301
    
    
    
    1,112,365CASH AND CASH EQUIVALENTS  beginning of year
    
    
    2,120,111
    
    
    
    1,895,810
    
    
    
    783,445CASH AND CASH EQUIVALENTS  end of year
    
    $
    1,873,385
    
    
    $
    2,120,111
    
    
    $
    1,895,810SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION,
EXCLUDING NON-CASH FINANCING AND INVESTING ACTIVITIESCash paid for interest
    
    $
    3,297,499
    
    
    $
    3,239,583
    
    
    $
    2,565,763Cash paid for taxes
    
    $
    895,373
    
    
    $
    182,758
    
    
    $
    246,109NON-CASH FINANCING AND INVESTING ACTIVITIES:Reduction in notes payable for acquisition
    
    $
    
    
    
    $
    23,668
    
    
    $
    Notes payable issued in acquisitions
    
    $
    100,407
    
    
    $
    167,750
    
    
    $
    141,750Note receivable for sale of assets
    
    $
    
    
    
    $
    195,212
    
    
    $
    Equipment purchased by acquisition line
    
    $
    663,678
    
    
    $
    
    
    
    $
    
  F-6




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##### Table of Contents



VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    BUSINESS OF THE COMPANY AND BASIS OF PRESENTATIONVermont Pure Holdings, Ltd. and Subsidiary (collectively, the Company) is engaged in the
production, marketing and distribution of bottled water and distribution of coffee,
ancillary products, and other office refreshment products. Through February, 2004, when the
Company divested the retail segments of its business, the Companys products were sold,
predominantly in the Northeast, as well as in the Mid-Atlantic and Mid-Western United
States. Distribution was accomplished through a network of independent beverage distributors
and with the Companys own trucks and employees. Commencing March 2004, the Company
operated exclusively as a home and office delivery business, using its own trucks to
distribute throughout New England, New York, and New Jersey.The consolidated financial statements of the Company include the accounts of Vermont Pure
Holdings, Ltd. and its wholly-owned subsidiary, Crystal Rock, LLC. All inter-company
transactions and balances have been eliminated in consolidation.The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Such estimates relate
primarily to the estimated lives of property and equipment and other intangible assets, the
values for the purpose of calculating goodwill impairment and the value of equity
instruments issued. Actual results could differ from those estimates.2.
    
    SIGNIFICANT ACCOUNTING POLICIESCash Equivalents The Company considers all highly liquid temporary cash
investments with an original maturity of three months or less to be cash equivalents.Inventories Inventories primarily consist of products that are purchased for
resale and are stated at the lower of cost or market on a first in, first out basis.Property and Equipment  Property and equipment are stated at cost net of
accumulated depreciation. Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets, which range from three to ten years for machinery and
equipment, and from seven to thirty years for buildings and improvements, and three to seven
years for other fixed assets.Goodwill and Other Intangibles  Intangible assets with lives restricted by
contractual, legal, or other means are amortized over their useful lives. Based on Statement
of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets,
the Company defines an assets useful life as the period over which the asset is expected to
contribute to the future cash flows of the entity. Goodwill and other
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##### Table of Contents



intangible assets not subject to amortization are tested for impairment annually or more
frequently if events or changes in circumstances indicate that the asset might be impaired.
The amount of impairment for goodwill and other intangible assets is measured as the excess
of their carrying values over their implied fair values. The Company conducted assessments
of the carrying value of its goodwill as required by SFAS No. 142, using an independent
third party valuation, and concluded that goodwill was not impaired as of October 31, 2007
and 2005. As of October 31, 2006, we conducted a similar valuation process, and determined
that goodwill was impaired. Other than goodwill, intangible assets consist primarily of
customer lists and covenants not to compete, with estimated lives ranging from 3 to 10
years.
 Stock-Based Compensation
   F-8




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For the Year EndedOctober 31, 2005Net Income  As Reported
    
    $
    870,593Add: Stock based employee compensation expense
included in net income, net of related tax effects
    
    
    28,123Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects
    
    
    (336,444
    )Pro Forma Net Income
    
    $
    562,272Basic  As Reported
    
    $
    .04Basic  Pro Forma
    
    $
    .03Diluted  As Reported
    
    $
    .04Diluted  Pro Forma
    
    $
    .03
   2005Expected Dividend Yield
    
    
    0
    %Expected Life
    
    5 YearsRisk free Interest Rate
    
    
    3.0
    %Volatility
    
    
    36
    %
 Net Income (Loss) Per Share
 Advertising Expenses
 Customer Deposits
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##### Table of Contents



Income Taxes
 Fair Value of Financial Instruments
 Impairment for Long-Lived and Intangible Assets
 Accounts Receivable
 Revenue Recognition
 F-10




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##### Table of Contents



Shipping and Handling Costs The Company distributes its home and office products
directly to its customers on its own trucks. The delivery costs related to the Companys
route system, which are reported under selling, general, and administrative expenses, were
approximately $12,930,000, $12,741,000, and $12,563,000 for fiscal years 2007, 2006, and
2005 respectively.3.
    
    RECENT ACCOUNTING PRONOUNCEMENTSIn December 2007, the Financial Accounting Standards Board (FASB) issued Statement No. 141
(revised) (No. 141 R), Business Combinations. This Statement replaces FASB Statement No.
141, and applies to all business entities that previously used the pooling-of-interests
method of accounting for some business combinations. Under Statement No. 141R, an acquirer
is required to recognize, at fair value, the assets acquired, liabilities assumed, and any
non-controlling interest in the entity acquired at the acquisition date. Further, it
requires that acquisition costs and expected restructuring costs be recognized separately
form the acquisition, and that the acquirer, in a business combination executed in stages,
recognize the identifiable assets and liabilities as well as the non-controlling interest in
the entity acquired, at the full amounts of their fair values. SFAS No. 141R also requires
an acquirer to recognize the assets acquired and liabilities assumed arising from
contractual contingencies as of the acquisition date. Also under this statement, an
acquirer is required to recognize contingent consideration as of the acquisition date and
eliminates the concept of negative goodwill and requires gain recognition in instances in
which the fair value of the identifiable net assets exceeds the fair value of the
consideration plus any non-controlling interest in the entity acquired as of the acquisition
date. SFAS No. 141R makes significant amendments to other Statements and other authoritative
guidance, and applies prospectively to business combinations on or after the acquiring
entities first fiscal year that begins after December 15, 2008, which is fiscal year 2010
for the Company. It may not be applied prior to that date.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115. 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. SFAS No. 159 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 reviewing the impact, if any,
that this new accounting standard will have on their financial statements.
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##### Table of Contents



In September 2006 the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements. The
pronouncement is applicable in cases when assets or liabilities are to be measured at fair
value. It does not establish new circumstances in which fair value would be used to measure
assets or liabilities. The provisions of SFAS No.157 are effective for the Companys fiscal
year commencing November 1, 2008. The Company is currently evaluating the potential impact,
if any, the adoption of SFAS No. 157 will have on its consolidated financial statements.In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48). FIN 48 requires the use of a two-step approach for recognizing and
measuring tax benefits taken or expected to be taken in a tax return and disclosures
regarding uncertainties in income tax positions. FIN 48 is effective in fiscal years
beginning after December 15, 2006. The cumulative effect of initially adopting FIN 48 will
be recorded as an adjustment to opening retained earnings in the year of adoption and will
be presented separately. Only tax positions that meet the more likely than not recognition
threshold at the effective date may be recognized upon adoption of FIN 48. The Company is
currently evaluating the potential impact, if any, that the adoption of FIN 48 will have on
its consolidated financial statements.4.
    
    MERGERS AND ACQUISITIONSDuring fiscal years 2007, 2006 and 2005, Vermont Pure Holdings, Ltd. made four acquisitions
in each year. The purchase price paid for the acquisitions for the respective years is as
follows:
 2007
    
    
    2006
    
    
    2005Cash (including acquisition costs)
    
    $
    290,540
    
    
    $
    409,277
    
    
    $
    511,570Notes Payable
    
    
    100,407
    
    
    
    167,750
    
    
    
    141,750$
    390,947
    
    
    $
    577,027
    
    
    $
    653,320
  2007
    
    
    2006
    
    
    2005Accounts Receivable
    
    $
    
    
    
    $
    637
    
    
    $
    Inventories
    
    
    
    
    
    
    
    
    
    
    70,532Equipment
    
    
    40,161
    
    
    
    40,307
    
    
    
    Identifiable Intangible Assets
    
    
    343,200
    
    
    
    523,206
    
    
    
    546,398Goodwill
    
    
    7,586
    
    
    
    12,877
    
    
    
    36,390Purchase Price
    
    $
    390,947
    
    
    $
    577,027
    
    
    $
    653,320
  F-12




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##### Table of Contents



2007
    
    
    2006
    
    
    2005Net Sales
    
    $
    65,597,106
    
    
    $
    63,396,121
    
    
    $
    61,250,658Net Income (Loss)
    
    $
    2,108,786
    
    
    $
    (20,621,514
    )
    
    $
    978,558Net Income (Loss) Per
Share-Diluted
    
    $
    .10
    
    
    $
    (.95
    )
    
    $
    .05Weighted Average Common
Shares
Outstanding-Diluted
    
    
    21,624,381
    
    
    
    21,630,739
    
    
    
    21,625,683
 The operating results of the acquired entities have been included in the accompanying
statements of operations since their respective dates of acquisition.5.
    
    EQUIPMENT LEASESThe carrying cost of the equipment rented to customers, which is included in property and
equipment in the consolidated balance sheets, is calculated as follows:
 Original Cost
    
    $
    3,152,378Accumulated Depreciation
    
    
    2,072,695Carrying Cost
    
    $
    1,079,683
 We expect to have revenue of $792,000 from the rental of such equipment over the next twelve
months.6.
    
    ACCOUNTS RECEIVABLEThe activity in the allowance for doubtful accounts for the years ended October 31,
2007, 2006, and 2005 is as follows:
 2007
    
    
    2006
    
    
    2005Balance, beginning of year
    
    $
    352,844
    
    
    $
    289,837
    
    
    $
    303,304Provision
    
    
    326,435
    
    
    
    300,811
    
    
    
    316,667Write-offs
    
    
    (324,454
    )
    
    
    (237,804
    )
    
    
    (330,134
    )Balance, end of year
    
    $
    354,825
    
    
    $
    352,844
    
    
    $
    289,837
 F-13




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##### Table of Contents



7.
    
    INVENTORIESInventories at October 31 consisted of:
 2007
    
    
    2006Finished Goods
    
    $
    1,546,168
    
    
    $
    1,057,580Raw Materials
    
    
    165,198
    
    
    
    134,706Total Inventories
    
    $
    1,711,366
    
    
    $
    1,192,286
 Finished goods inventory consists of products that the Company sells such as, but not
limited to, coffee, cups, soft drinks, and snack foods. Raw material inventory consists
primarily of bottle caps.8.
    
    PROPERTY AND EQUIPMENT, NETProperty and equipment at October 31 consisted of:
 UsefulLife
    
    
    2007
    
    
    2006Leasehold improvements
    
    3  30 yrs.
    
    $
    813,486
    
    
    $
    752,907Machinery and equipment
    
    3  10 yrs.
    
    
    19,518,020
    
    
    
    17,984,393Bottles, racks and vehicles
    
    3  7 yrs.
    
    
    6,913,808
    
    
    
    7,600,860Furniture, fixtures and
office equipment
    
    3  7 yrs.
    
    
    2,029,532
    
    
    
    1,985,958Construction in progress
    
    
    
    
    
    
    330,296
    
    
    
    29,605,142
    
    
    
    28,324,118Less accumulated depreciation
    
    
    
    
    
    
    18,908,124
    
    
    
    17,605,284$
    10,697,018
    
    
    $
    10,718,834
 Depreciation expense for the fiscal years ended October 31, 2007, 2006 and 2005 was
$4,118,134, $4,041,448, and $4,802,387, respectively.9.
    
    GOODWILL AND OTHER INTANGIBLE ASSETSComponents of other intangible assets at October 31 consisted of:
 2007
    
    
    2006Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortized Intangible Assets:Customer Lists and Covenants
Not to Compete
    
    $
    5,477,663
    
    
    $
    3,227,854
    
    
    $
    5,141,123
    
    
    $
    2,383,443Other Identifiable Intangibles
    
    
    598,705
    
    
    
    195,026
    
    
    
    633,172
    
    
    
    193,277Total
    
    $
    6,076,368
    
    
    $
    3,422,880
    
    
    $
    5,774,295
    
    
    $
    2,576,720
  F-14




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##### Table of Contents



Fiscal Year Ending
    
    AmountOctober 31, 2008
    
    $
    823,000October 31, 2009
    
    
    643,000October 31, 2010
    
    
    369,000October 31, 2011
    
    
    229,000October 31, 2012
    
    
    83,000
   2007
    
    
    2006Beginning balance
    
    $
    54,421,662
    
    
    $
    74,755,851Goodwill acquired during the year
    
    
    7,586
    
    
    
    12,877Goodwill disposed of during the year
    
    
    (5,251
    )
    
    
    (16,347
    )Adjustment of goodwill related to deferred
tax liability
    
    
    
    
    
    
    2,619,299Impairment loss
    
    
    
    
    
    
    (22,950,018
    )Balance as of October 31
    
    $
    54,423,997
    
    
    $
    54,421,662
  OTHER ASSETS
  2007
    
    
    2006Note receivable, unsecured, due March 1, 2011,
interest 10% per annum
    
    $
    475,000
    
    
    $
    500,000Note receivable, unsecured, due August 8, 2011,
interest 0% per annum
    
    
    179,830
    
    
    
    195,212Ownership interests
    
    
    39,000
    
    
    
    75,000Accrued interest
    
    
    2,309
    
    
    
    Total
    
    $
    696,139
    
    
    $
    770,212
 F-15




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##### Table of Contents



ACCRUED EXPENSES
  2007
    
    
    2006Payroll and Vacation
    
    $
    1,606,748
    
    
    $
    1,877,689Interest
    
    
    516,652
    
    
    
    530,446Income Taxes
    
    
    557,832
    
    
    
    184,102Severance
    
    
    
    
    
    
    194,459Accounting and Legal
    
    
    160,000
    
    
    
    189,335Miscellaneous
    
    
    613,255
    
    
    
    438,005Total
    
    $
    3,454,487
    
    
    $
    3,414,036
 DEBT
 Senior
Debt
    F-16




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##### Table of Contents



Subordinated
Debt
   F-17




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##### Table of Contents



Annual
Maturities
  Senior
    
    
    Credit Lines
    
    
    Subordinated
    
    
    Other
    
    
    TotalFiscal year ending
October 31,2008
    
    $
    3,250,000
    
    
    $
    
    
    
    $
    
    
    
    $
    10,000
    
    
    $
    3,260,0002009
    
    
    3,250,000
    
    
    
    65,000
    
    
    
    
    
    
    
    
    
    
    
    3,315,0002010
    
    
    3,250,000
    
    
    
    130,000
    
    
    
    
    
    
    
    
    
    
    
    3,380,0002011
    
    
    3,250,000
    
    
    
    130,000
    
    
    
    
    
    
    
    
    
    
    
    3,380,0002012 and after
    
    
    7,042,000
    
    
    
    325,000
    
    
    
    14,000,000
    
    
    
    
    
    
    
    21,367,000Total Debt
    
    $
    20,042,000
    
    
    $
    650,000
    
    
    $
    14,000,000
    
    
    $
    10,000
    
    
    $
    34,702,000
 INTEREST RATE SWAP AGREEMENTS
      F-18




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##### Table of Contents



STOCK BASED COMPENSATION
 Stock
Option and Incentive Plans
    Outstanding Options
    
    Weighted Average(Shares)
    
    Exercise PriceBalance at October 31, 2004
    
    
    2,662,790
    
    
    $
    2.96Granted
    
    
    414,500
    
    
    
    2.28Expired
    
    
    (450,800
    )
    
    
    2.50Balance at October 31, 2005
    
    
    2,626,490
    
    
    
    2.96Exercised
    
    
    (5,000
    )
    
    
    1.80Expired
    
    
    (1,864,303
    )
    
    
    2.96Balance at October 31, 2006
    
    
    757,187
    
    
    
    2.96Expired
    
    
    (97,687
    )
    
    
    2.61Balance at October 31, 2007
    
    
    659,500
    
    
    
    3.01
    F-19




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##### Table of Contents



Weighted Average
    
    
    WeightedOutstanding
    
    
    Remaining
    
    
    AverageOptions
    
    
    Contractual
    
    
    Exercise
    
    
    IntrinsicExercise Price Range
    
    (Shares)
    
    
    Life
    
    
    Price
    
    
    Value$1.80  $2.60
    
    
    234,500
    
    
    
    7.24
    
    
    $
    2.32
    
    
    $
    $2.81  $3.38
    
    
    350,000
    
    
    
    2.81
    
    
    
    3.25
    
    
    
    $3.50  $4.25
    
    
    70,000
    
    
    
    2.71
    
    
    
    3.99
    
    
    
    $4.28  $4.98
    
    
    5,000
    
    
    
    4.17
    
    
    
    4.98
    
    
    
    659,500
    
    
    
    4.38
    
    
    $
    3.01
    
    
    $
    
    Employee
Stock Purchase Plan (ESPP)
  Shares
Issued Under the 2004 Stock Incentive Plan
  F-20




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##### Table of Contents



RETIREMENT PLAN
  COMMITMENTS AND CONTINGENCIES
 Commitment
  Operating
Leases
   Fiscal Year Ending October 31,2008
    
    $
    2,784,4382009
    
    
    2,289,9262010
    
    
    1,795,5892011
    
    
    1,018,7642012
    
    
    596,566Thereafter
    
    
    1,874,115Total
    
    $
    10,359,398
  Contingencies
  F-21




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##### Table of Contents



RELATED PARTY TRANSACTIONS
 Directors
and Officers
     Fiscal year ending October 31,
    
    Stamford
    
    
    Watertown
    
    
    Total2008
    
    $
    248,400
    
    
    $
    414,000
    
    
    $
    662,4002009
    
    
    248,400
    
    
    
    414,000
    
    
    
    662,4002010
    
    
    248,400
    
    
    
    414,000
    
    
    
    662,4002011
    
    
    
    
    
    
    452,250
    
    
    
    452,2502012
    
    
    
    
    
    
    452,250
    
    
    
    452,2502013
    
    
    
    
    
    
    461,295
    
    
    
    461,2952014
    
    
    
    
    
    
    461,295
    
    
    
    461,2952015
    
    
    
    
    
    
    475,521
    
    
    
    475,5212016
    
    
    
    
    
    
    475,521
    
    
    
    475,521Totals
    
    $
    745,200
    
    
    $
    4,020,132
    
    
    $
    4,765,332
  Investment in Voyageur
  F-22




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##### Table of Contents



INCOME TAXES
  Fiscal Year Ended October 31,2007
    
    
    2006
    
    
    2005Current:Federal
    
    $
    960,353
    
    
    $
    147,239
    
    
    $
    208State
    
    
    182,156
    
    
    
    210,600
    
    
    
    1,790Total current
    
    
    1,142,509
    
    
    
    357,839
    
    
    
    1,998Deferred:Federal
    
    
    169,588
    
    
    
    1,177,739
    
    
    
    667,664State
    
    
    5,006
    
    
    
    145,995
    
    
    
    70,104Total deferred
    
    
    174,594
    
    
    
    1,323,734
    
    
    
    737,768Total income tax expense
    
    $
    1,317,103
    
    
    $
    1,681,573
    
    
    $
    739,766
  October 31,2007
    
    
    2006Deferred tax assets:Allowance for doubtful accounts
    
    $
    134,834
    
    
    $
    134,081Accrued compensation
    
    
    304,930
    
    
    
    494,222Net operating losses
    
    
    
    
    
    
    76,832Accrued liabilities and reserves
    
    
    17,091
    
    
    
    163,492Interest rate swap
    
    
    42,586
    
    
    
    Total deferred tax assets
    
    
    499,441
    
    
    
    868,627Deferred tax liabilities:Depreciation
    
    
    (1,603,022
    )
    
    
    (2,116,513
    )Amortization
    
    
    (1,520,069
    )
    
    
    (1,243,756
    )Interest rate swap
    
    
    
    
    
    
    (58,077
    )Total deferred tax liabilities
    
    
    (3,123,091
    )
    
    
    (3,418,346
    )Net deferred tax liability
    
    $
    (2,623,650
    )
    
    $
    (2,549,719
    )
  F-23




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##### Table of Contents



Fiscal Year Ended October 31,2007
    
    
    2006
    
    
    2005Income tax expense (benefit)
computed at the statutory
rate
    
    $
    1,153,778
    
    
    $
    (6,456,105
    )
    
    $
    547,522Goodwill impairment
    
    
    
    
    
    
    7,803,000
    
    
    
    Other permanent differences
    
    
    39,799
    
    
    
    99,326
    
    
    
    120,959State income taxes
    
    
    123,526
    
    
    
    235,352
    
    
    
    71,285Income tax expense
    
    $
    1,317,103
    
    
    $
    1,681,573
    
    
    $
    739,766
 In calculating its effective tax rate, the Company has considered the effect of certain
contingent factors involving state and local income taxes. Although it believes that the
tax returns filed accurately reflect operations and financial results, the Company has an
accrued liability as of October 31, 2007 and 2006 of approximately $150,000 and $165,000,
respectively, for the purpose of settling disputes in the event that certain jurisdictions
viewed particular tax laws differently than the Company did when the returns were filed.
 19.
    
    NET INCOME (LOSS) PER SHAREThe following calculation provides the reconciliation of the denominators used in the
calculation of basic and fully diluted earnings per share:
 Fiscal Year Ended October 31,2007
    
    
    2006
    
    
    2005Net Income (Loss)
    
    $
    2,076,364
    
    
    $
    (20,670,118
    )
    
    $
    870,593Denominator:Basic Weighted Average Shares
Outstanding
    
    
    21,624,381
    
    
    
    21,630,739
    
    
    
    21,619,863Effect of Stock Options
    
    
    
    
    
    
    
    
    
    
    5,820Diluted Weighted Average Shares
Outstanding
    
    
    21,624,381
    
    
    
    21,630,739
    
    
    
    21,625,683Basic Net Income (Loss) Per Share
    
    $
    .10
    
    
    $
    (.96
    )
    
    $
    .04Diluted Net Income (Loss) Per Share
    
    $
    .10
    
    
    $
    (.96
    )
    
    $
    .04
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##### Table of Contents



20.
    
    UNAUDITED QUARTERLY FINANCIAL DATAThe Companys unaudited quarterly financial data for the last two fiscal years is as
follows:
 Fiscal 2007
    
    For the quarter ended:January 31,
    
    April 30,
    
    July 31,
    
    October 31,($ in 000s except per share data)
    
    2007
    
    2007
    
    2007
    
    2007Net Sales
    
    $
    15,302
    
    
    $
    15,677
    
    
    $
    17,107
    
    
    $
    17,145Gross Profit
    
    $
    8,569
    
    
    $
    8,668
    
    
    $
    9,938
    
    
    $
    9,867Net Income
    
    $
    291
    
    
    $
    412
    
    
    $
    577
    
    
    $
    796Earnings per Share:Net Income  Basic and Diluted
    
    $
    .01
    
    
    $
    .02
    
    
    $
    .03
    
    
    $
    .04
 Fiscal 2006
    
    For the quarter ended:January 31,
    
    April 30,
    
    July 31,
    
    October 31,($ in 000s except per share data)
    
    2006
    
    2006
    
    2006
    
    2006Net Sales
    
    $
    14,614
    
    
    $
    15,240
    
    
    $
    16,520
    
    
    $
    16,400Gross Profit
    
    $
    8,214
    
    
    $
    8,765
    
    
    $
    9,854
    
    
    $
    9,468Net Income (Loss)
    
    $
    65
    
    
    $
    475
    
    
    $
    1,252
    
    
    $
    (22,462
    )Earnings per Share:Net Income (Loss)  Basic and
Diluted
    
    $
    
    
    
    $
    .02
    
    
    $
    .06
    
    
    $
    (1.04
    )
 The Companys business is seasonal based on weather. It is typical for sales and net income
to be higher in the warmer months than the balance of the year. Given the Companys fiscal
year, the quarter ending July 31 is typically the strongest financial quarter. In fiscal
year 2006, the results for this quarter were even stronger as a result of a legal settlement
of $750,000 in favor of the Company. The fourth quarter loss in 2006 was a result of the
Companys annual goodwill analysis and impairment. The higher earnings in the fourth
quarter of 2007 were a result of a sustained level of higher sales as a result of warmer
weather during that period and lower operating expenses.21.
    
    CONCENTRATION OF CREDIT RISKThe Company maintains its cash accounts at various financial institutions. The balances at
times may exceed federally insured limits. At October 31, 2007, the Company had cash in
deposits exceeding the insured limit by approximately $1,513,000.22.
    
    LITIGATIONOn May 1, 2006, the Company filed a lawsuit in the Superior Court Department, County of
Suffolk, Massachusetts, alleging malpractice and other wrongful acts against three law firms
that had been representing the Company in litigation involving Nestlé Waters North America,
Inc.: Hagens Berman Sobol Shapiro LLP, Ivey & Ragsdale, and Cozen OConnor. The case is
Vermont Pure Holdings, Ltd. vs. Thomas M. Sobol et al., Massachusetts Superior Court CA No.
06-1814.
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##### Table of Contents



Until May 2, 2006, when the Company terminated their engagement, the three defendant law
firms represented the Company in litigation in federal district court in Massachusetts known
as Vermont Pure Holdings, Ltd. vs. Nestlé Waters North America, Inc.(the Nestlé
litigation). The Company filed the Nestlé litigation in early August 2003.The Companys lawsuit alleges that the three defendant law firms wrongfully interfered with
a proposed June 2003 settlement with Nestlé. The complaint includes counts involving
negligence, breach of contract, breach of the implied covenant of good faith and fair
dealing, breach of fiduciary duty, tortuous interference with economic relations, civil
conspiracy, and other counts, and seeks declaratory relief and compensatory and punitive
damages.In June 2006, certain of the defendants filed motions to dismiss the Companys complaint
based on lack of personal jurisdiction and/or failure to state a claim upon which relief
could be granted. Those motions are pending. In July 2006, certain of the defendants filed
a counterclaim against the Company seeking recovery of their fees and expenses in the Nestlé
litigation. In August 2007, certain of the defendants filed a counterclaim against the
Company that includes an abuse of process count in which it is alleged that our claims
against them are frivolous and were not advanced in good faith, as well as a quantum meruit
count in which these defendants allege that their services were terminated wrongfully and in
bad faith. The case is in the discovery stage.Management intends to pursue its claims, and to the extent of the counterclaims, defend
itself vigorously.On May 15, 2006, the Company entered into an agreement with Nestlé Waters North America Inc.
to resolve pending litigation known as Vermont Pure Holdings, Ltd. v Nestlé Waters North
America Inc., which was in the United States District Court for the District of
Massachusetts. In this lawsuit, filed in August 2003, the Company had made claims under the
federal Lanham Act against Nestlé. The parties provided mutual releases and have stipulated
to dismissal of the case, with neither side admitting liability or wrongdoing. Nestle paid
the Company $750,000 in June 2006 in connection with the agreement. The Company recorded
$750,000 as other income in the third quarter of 2006, related to this settlement.At any point in time there may be various legal proceedings pending against the Company.
Unless specifically mentioned, the Company considers all such proceedings to be in the
normal course of business. Generally such claims are covered by insurance. The Company
believes that the resolution of these types of claims, to the extent not dismissed or
covered by insurance, will not individually or in the aggregate have a material adverse
effect on its financial position or results of operations. To the extent reasonably
estimable, reserves are established regarding pending legal proceedings if there is a
probable outcome that would require a payment by the Company.
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##### Table of Contents



23.
    
    REPURCHASE OF COMMON STOCKIn January 2006, the Companys Board of Directors approved the
purchase of up to 250,000 of the Companys common shares at the
discretion of management. Subsequently, the Company purchased, in the
open market, 67,100 shares from July through October 2006, for an
aggregate purchase price of $104,927. In fiscal year 2007, the
Company purchased an additional 55,600 shares for an aggregate
purchase price of $104,779. The Company expects to continue to
purchase stock in the open market but total purchases may not
ultimately reach the limit established. The Company has used
internally generated cash to fund these purchases.
 F-27