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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
  þ
    
    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended October 31, 2008.
 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
    
    03-0366218State or other jurisdiction of incorporation
 or organization
    
    I.R.S. Employer Identification Number
 (Address of principal executive offices and zip code)
 (860) 945-0661
 Securities registered pursuant to Section 12(b) of the Act:
    
    Common Stock, par value $.001 per share
    
    NYSE Alternext USTitle of each class
    
    Name of exchange on which registered
  o þ
 o þ
 þ o
 þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if smaller reporting company)
    
    Smaller Reporting Company þ
 o þ
   Documents Incorporated by Reference
 Form 10-K.




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Table of Contents
 PagePart IItem 1.
    
    Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    9Item 1B.
    
    Unresolved Staff Comments
    
    
    14Item 2.
    
    Properties
    
    
    15Item 3.
    
    Legal Proceedings
    
    
    16Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    17Part IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    18Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 8.
    
    Financial Statements and Supplementary Data
    
    
    30Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    31Item 9A(T).
    
    Controls and Procedures
    
    
    31Item 9B.
    
    Other Information
    
    
    32Part IIIItem 10.
    
    Directors, Executive Officers and Corporate Governance
    
    
    33Item 11.
    
    Executive Compensation
    
    
    33Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    33Item 13.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    34Item 14.
    
    Principal Accountant Fees and Services
    
    
    34Part IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    35SignaturesEX-21.1 SUBSIDIARYEX-23.1 CONSENT OF WOLF & COMPANYEX-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 Company Background
      Water Sources, Treatment, and Bottling Operations
 ®
 3




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®
 ®
 ®
       4




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Products
 ® ® ®
 Marketing and Sales of Branded Products
    Advertising and Promotion
  Sales and Distribution
  5




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Supplies
    Seasonality
  Competition
  ® ®
   6




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
    
    Completed an extensive solar electricity generation installation in our Watertown
facility 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.
    
    Upgraded many of our older vehicles to new, more energy efficient vehicles.
 Trademarks
 ® ®
 Government Regulation
   7




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Employees
  Additional Available Information
   8




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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.
  9




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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.
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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.
    Various media outlets have reported that a chemical, bisphenol A, used in packaging and other
products can possibly have adverse health effects on consumers, particularly on young children.
Bisphenol A is contained in the three- and five- gallon polycarbonate plastic bottles that we use
to bottle our water. Any significant change in perception by our customers or government
regulation of polycarbonate plastic in food and beverage products could adversely affect our
operations and financial results.
  11




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
    
    Increased publicity that changes perception regarding packaging that uses bisphenol A,
so that significant numbers of consumers stop purchasing products that are packaged in
polycarbonate plastic.
    
    The emergence of new scientific evidence that proves polycarbonate plastic is unsafe, or
interpretations of existing evidence by regulatory agencies that lead to prohibitions on
the use of polycarbonate plastic as packaging for consumable products.
    
    Inability of sellers of consumable products to find an adequate supply of alternative
packaging if polycarbonate plastic becomes an undesirable package.
   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.
   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.
   12




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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.
  Our business is seasonal, which may cause fluctuations in our stock price.
  13




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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 control in
accordance with Section 404 could have a material adverse effect on our business and our stock
price.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS.
  14




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ITEM 2. PROPERTIES.
  Location
    
    Lease expiration
    
    Sq. Ft.
    
    Annual RentWilliston, VT
    
    June 2009
    
    
    10,000
    
    
    $
    70,936Southborough, MA
    
    December 2013
    
    
    15,271
    
    
    $
    114,533Bow, 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
    
    
    $
    76,647Watertown, CT
    
    May 2013
    
    
    15,000
    
    
    $
    57,960Groton, CT
    
    June 2009
    
    
    7,500
    
    
    $
    56,375
    Years 1-2
    
    $
    452,250Years 3-4
    
    $
    461,295Years 4-5
    
    $
    475,521
    15




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ITEM 3. LEGAL PROCEEDINGS.
    quantum meruit
    16




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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, 2008First Quarter
    
    $
    1.72
    
    
    $
    1.38Second Quarter
    
    $
    1.60
    
    
    $
    1.36Third Quarter
    
    $
    1.41
    
    
    $
    1.27Fourth Quarter
    
    $
    1.41
    
    
    $
    .94Fiscal Year Ended October 31, 2007First Quarter
    
    $
    1.75
    
    
    $
    1.38Second Quarter
    
    $
    1.98
    
    
    $
    1.75Third Quarter
    
    $
    1.94
    
    
    $
    1.79Fourth Quarter
    
    $
    1.93
    
    
    $
    1.61
    18




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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
    
    
    0
    
    
    $
    
    
    
    
    0
    
    
    
    207,000September 1-30
    
    
    0
    
    
    $
    
    
    
    
    0
    
    
    
    207,000October 1-31
    
    
    8,700
    
    
    $
    1.16
    
    
    
    8,700
    
    
    
    198,300Total
    
    
    8,700
    
    
    $
    1.16
    
    
    
    8,700
 
 (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. We completed the repurchase of 250,000
shares in June 2008. On July 16, 2008 we announced that we would continue to repurchase
shares up to an additional 250,000 shares. There is no expiration date for the plan to
repurchase additional shares and the share limit may not be reached. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
  
    
    Business Overview a brief description of fiscal year 2008.
    
    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
  19




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Results of Operations
 Fiscal Year Ended October 31, 2008 Compared to Fiscal Year Ended October 31, 2007
 Sales
   Product Line
    
    2008
    
    
    2007
    
    
    Difference
    
    
    % Diff.(in 000s $)
    
    
    (in 000s $)
    
    
    (in 000s $)Water
    
    $
    29,250
    
    
    $
    29,560
    
    
    $
    (310
    )
    
    
    (1
    %)Coffee and Related
    
    
    21,197
    
    
    
    19,341
    
    
    
    1,856
    
    
    
    10
    %Equipment Rental
    
    
    8,909
    
    
    
    9,143
    
    
    
    (234
    )
    
    
    (3
    %)Other
    
    
    9,881
    
    
    
    7,187
    
    
    
    2,694
    
    
    
    37
    %Total
    
    $
    69,237
    
    
    $
    65,231
    
    
    $
    4,006
    
    
    
    6
    %
 Water
 Coffee
 20




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Equipment Rental
 Other
 Gross Profit/Cost of Goods Sold
   (Loss) Income from Operations/Operating Expenses
   
    
    Route sales costs increased 5%, or $669,000, to $14,227,000 in fiscal year 2008 from
$13,558,000 in fiscal year 2007, primarily related to labor for commission-based sales
from increased sales and higher fuel costs. Total direct distribution related costs
increased $596,000, or 5%, to $13,526,000 in fiscal year 2008 from $12,930,000 in
fiscal year 2007;
 21




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
    
    Selling costs increased 19%, or $453,000, to $2,825,000 in fiscal year 2008 from
$2,732,000 in fiscal year 2007, as a result of an increase in labor for
commission-based sales from increased sales; and
    
    Administrative costs increased 12%, or $1,401,000, to $13,080,000 in fiscal year
2008 from $11,679,000 in fiscal year 2007, as a result of higher health insurance
costs, professional fees related to compliance and litigation, and a provision for bad
debts of $532,043 on notes receivable that more than offset a reduction of accounting
and computer-related fees.
     
 1
    
    These companies were: Company Name
    
    Exchange
    
    SymbolCoca Cola Bottling Co. Consolidated
    
    NYSE
    
    COKEFarmer Bros. Co.
    
    NASDAQ
    
    FARMGreen Mountain Coffee Roasters, Inc.
    
    NASDAQ
    
    GMCRHansen Natural, Corp.
    
    NASDAQ
    
    HANSCoca Cola Inc.
    
    NYSE
    
    CCENational Beverage Corp.
    
    NASDAQ
    
    FIZZPepsiAmericas, Inc.
    
    NYSE
    
    PASPepsi Bottling Group, Inc.
    
    NYSE
    
    PBG
 22




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




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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
 Other
 Gross Profit/Cost of Goods Sold
   24




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Income from Operations/Operating Expenses
       Other Income and Expense, Income Taxes, and Income from Operations
   25




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Net Income (Loss)
    26




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Liquidity and Capital Resources
       27




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Payment due by PeriodContractual Obligations
    
    Total
    
    
    2009
    
    
    2010-2011
    
    
    2012-2013
    
    
    After 2013Debt
    
    $
    31,877,000
    
    
    $
    3,315,000
    
    
    $
    6,820,000
    
    
    $
    6,900,000
    
    
    $
    14,842,000Interest on Debt (1)
    
    
    12,961,000
    
    
    
    2,686,000
    
    
    
    4,716,000
    
    
    
    3,862,000
    
    
    
    1,697,000Operating Leases
    
    
    12,728,000
    
    
    
    3,346,000
    
    
    
    4,909,000
    
    
    
    3,062,000
    
    
    
    1,411,000Total
    
    $
    57,566,000
    
    
    $
    9,347,000
    
    
    $
    16,445,000
    
    
    $
    13,824,000
    
    
    $
    17,950,000
 
 (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 5.31%, and subordinated debt at a rate of 12%.   Factors Affecting Future Cash Flow
   28




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Factors Affecting Quarterly Performance
  Critical Accounting Policies
  Accounts Receivable  Allowance for Doubtful Accounts
  Fixed Assets  Depreciation
  Goodwill  Intangible Asset Impairment
  29




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Income Taxes
   Stock Based Compensation
    Off-Balance Sheet Arrangements
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
  30




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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  
 ITEM 9A(T). CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Internal Control Over Financial Reporting
 a) Managements Annual Report on Internal Control Over Financial Reporting
  
    
    pertain to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of the assets of the Company;
    
    provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company; and
    
    provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Companys assets that could have a material effect on
the financial statements.
 31




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b) Changes in Internal Control Over Financial Reporting
  
 ITEM 9B. OTHER INFORMATION.
  32




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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.
  Equity Compensation Plan Information
 (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
    
    
    592,700
    
    
    $
    2.91
    
    
    
    1,631,300Equity compensation
plans not approved
by security holders
    
    
    -0-
    
    
    
    
    
    
    
    -0-Total
    
    
    592,700
    
    
    $
    2.91
    
    
    
    1,631,300
  33




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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  34




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PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
  (1) Financial StatementsReport of Independent Registered Public Accounting Firm
    
    F-1Consolidated Balance Sheets as of October 31, 2008 and 2007
    
    F-2Consolidated Statements of Operations for the years
ended October 31, 2008, 2007 and 2006
    
    F-3Consolidated Statements of Shareholders Equity and
Comprehensive income (loss) for the years ended October
31, 2008, 2007 and 2006
    
    F-4Consolidated Statements of Cash Flows for the years ended
October 31, 2008, 2007 and 2006
    
    F-5Notes to Consolidated Financial Statements
    
    F-6 - F-27
   :
 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

    
    
    Lease of Grounds in Stamford,
Connecticut from Henry E. Baker
    
    
    
    S-4
    
    September 6, 2000
    
    
    10.2410.9

    
    
    Lease of Buildings and Grounds
in Watertown, Connecticut from
the Bakers Grandchildren Trust
    
    
    
    S-4
    
    September 6, 2000
    
    
    10.22
 35




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##### Table of Contents



Filed withExhibit
    
    
    
    this Form
    
    Incorporated by ReferenceNo.
    
    Description
    
    10-K
    
    Form
    
    Filing Date
    
    Exhibit No.10.10
    
    
    Lease of Building in Stamford,
Connecticut from Henry E. Baker
    
    
    
    S-4
    
    September 6, 2000
    
    
    10.2310.11
    
    
    First Amendment to the Lease of
Buildings and Grounds in
Watertown, Connecticut from the
Bakers Grandchildren Trust
    
    
    
    10-Q
    
    September 14, 2007
    
    
    10.410.12
    
    
    Credit Agreement dated April 5,
2005 with Bank of America and
Webster Bank
    
    
    
    10-Q
    
    July 8, 2005
    
    
    10.110.13
    
    
    Form of Term Note dated April 5,
2005 issued to Bank of America
and Webster Bank
    
    
    
    10-Q
    
    July 8, 2005
    
    
    10.210.14
    
    
    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
    
    
    10.310.15
    
    
    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
    
    
    10.410.16
    
    
    Form of Acquisition Note dated
April 5, 2005 issued to Bank of
America and Webster Bank
    
    
    
    10-Q
    
    July 8, 2005
    
    
    10.510.17
    
    
    Form of Revolving Credit Note
dated April 5, 2005 issued to
Bank of America and Webster Bank
    
    
    
    10-Q
    
    July 8, 2005
    
    
    10.610.18
    
    
    First Amendment to the Credit
Agreement dated April 5, 2005
with Bank of America
    
    
    
    10-Q
    
    September 14, 2007
    
    
    10.110.19
    
    
    Second Amendment to the Credit
Agreement dated April 5, 2005
with Bank of America
    
    
    
    10-Q
    
    September 14, 2007
    
    
    10.210.20
    
    
    Third Amendment to the Credit
Agreement dated April 5, 2005
with Bank of America
    
    
    
    10-Q
    
    September 14, 2007
    
    
    10.310.21
    
    
    Form of Indemnification
Agreement dated November 2, 2005
with each of Henry E. Baker,
John B. Baker, Peter K. Baker,
Phillip Davidowitz,David
Jurasek, Bruce S. MacDonald and
Ross S. Rapaport
    
    
    
    10-K
    
    January 30, 2006
    
    
    10.2110.22
    
    
    Form of Indemnification
Agreement dated November 2, 2005
with each of John M. Lapides and
Martin A. Dytrych
    
    
    
    10-K
    
    January 30, 2006
    
    
    10.2210.23
    
    
    Purchase and Sale Agreement
dated March 1, 2004 with
MicroPack Corporation
    
    
    
    10-Q
    
    March 16, 2004
    
    
    10.2710.24
    
    
    Supply and License Agreement
dated March 1, 2004 with
MicroPack Corporation
    
    
    
    10-Q
    
    March 16, 2004
    
    
    10.2910.25
    
    
    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
    
    
    10.110.26
    
    
    Installation Agreement with
American Capital Energy, Inc.
dated August 29, 2007
    
    
    
    10-K
    
    January 29, 2008
    
    
    10.2910.27
    
    
    Financial Assistance Agreement
with Connecticut Innovations
dated August 20, 2007
    
    
    
    10-K
    
    January 29, 2008
    
    
    10.3010.28
    
    
    Fourth Amendment to the Credit
Agreement dated April 5, 2005
with Bank of America
    
    
    
    10-Q
    
    September 15, 2008
    
    
    10.121.1
    
    
    Subsidiary
    
    X23.1
    
    
    Consent of Wolf & Company, P.C.
    
    X31.1
    
    
    Certification of Chief Executive
Officer pursuant to Section 302
of the Sarbanes-Oxley Act of
2002
    
    X
 36




---



##### Table of Contents



Filed withExhibit
    
    
    
    this Form
    
    Incorporated by ReferenceNo.
    
    Description
    
    10-K
    
    Form
    
    Filing Date
    
    Exhibit No.31.2

    
    
    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. 37




---



##### Table of Contents



SIGNATURES
  VERMONT PURE HOLDINGS, LTD.By:
    
    /s/ Peter K. BakerDated: January 29, 2009
    
    
    
    Peter K. Baker, Chief Executive Officer
  Name
    
    Title
    
    Date/s/ Ross S. Rapaport

Ross S. Rapaport
    
    Chairman of the Board of Directors
    
    January 29, 2009/s/ Henry E. Baker

Henry E. Baker
    
    Director, Chairman Emeritus
    
    January 29, 2009/s/ John B. Baker

John B. Baker
    
    Executive Vice President and Director
    
    January 29, 2009/s/ Peter K. Baker

Peter K. Baker
    
    Chief Executive Officer and Director
    
    January 29, 2009/s/ Phillip Davidowitz

Phillip Davidowitz
    
    Director
    
    January 29, 2009/s/ Martin A. Dytrych

Martin A. Dytrych
    
    Director
    
    January 29, 2009/s/ John M. Lapides

John M. Lapides
    
    Director
    
    January 29, 2009/s/ Bruce S. MacDonald

Bruce S. MacDonald
    
    Chief Financial Officer, Chief 
Accounting Officer and Secretary
    
    January 29, 2009
 38




---



##### Table of Contents



PAGEReport of the Independent Registered Public Accounting Firm
    
    F-1Financial Statements:Consolidated Balance Sheets,
October 31, 2008 and 2007
    
    F-2Consolidated Statements of Operations,
Fiscal Years Ended October 31, 2008, 2007, and 2006
    
    F-3Consolidated Statements of Stockholders Equity and
Comprehensive Income Fiscal Years Ended October
31, 2008, 2007, and 2006
    
    F-4Consolidated Statements of Cash Flows,
Fiscal Years Ended October 31, 2008, 2007, and 2006
    
    F-5Notes to Consolidated Financial Statements
    
    F-6 - F-27




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    
 F-1




---



##### Table of Contents



VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS
 October 31,
    
    
    October 31,2008
    
    
    2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    1,181,737
    
    
    $
    1,873,385Accounts receivable, trade  net of reserve of $414,301 and
$354,825 for 2008 and 2007, respectively
    
    
    7,842,819
    
    
    
    7,522,831Inventories
    
    
    1,669,949
    
    
    
    1,711,366Current portion of deferred tax asset
    
    
    744,087
    
    
    
    499,441Other current assets
    
    
    1,612,605
    
    
    
    683,212TOTAL CURRENT ASSETS
    
    
    13,051,197
    
    
    
    12,290,235PROPERTY AND EQUIPMENT  net
    
    
    10,563,388
    
    
    
    10,697,018OTHER ASSETS:Goodwill
    
    
    32,080,669
    
    
    
    54,423,997Other intangible assets  net
    
    
    2,084,542
    
    
    
    2,653,488Other assets
    
    
    152,333
    
    
    
    696,139TOTAL OTHER ASSETS
    
    
    34,317,544
    
    
    
    57,773,624TOTAL ASSETS
    
    $
    57,932,129
    
    
    $
    80,760,877LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current portion of long term debt
    
    $
    3,315,079
    
    
    $
    3,260,030Accounts payable
    
    
    2,542,711
    
    
    
    2,101,399Accrued expenses
    
    
    2,859,277
    
    
    
    3,454,487Current portion of customer deposits
    
    
    699,921
    
    
    
    755,965Unrealized loss on derivatives
    
    
    531,673
    
    
    
    109,722TOTAL CURRENT LIABILITIES
    
    
    9,948,661
    
    
    
    9,681,603Long term debt, less current portion
    
    
    28,561,928
    
    
    
    31,441,667Deferred tax liability
    
    
    3,403,696
    
    
    
    3,123,091Customer deposits
    
    
    2,666,870
    
    
    
    2,910,875TOTAL LIABILITIES
    
    
    44,581,155
    
    
    
    47,157,236COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock  $.001 par value, 50,000,000 authorized shares,
21,862,739 issued and 21,489,489 outstanding shares as of
October 31, 2008 and 21,800,555 issued and 21,606,305
outstanding as of October 31, 2007
    
    
    21,863
    
    
    
    21,800Additional paid in capital
    
    
    58,395,551
    
    
    
    58,307,395Treasury stock, at cost, 373,250 shares as of October 31, 2008
and 194,250 shares as of October 31, 2007
    
    
    (717,301
    )
    
    
    (474,441
    )Accumulated deficit
    
    
    (44,019,502
    )
    
    
    (24,183,977
    )Accumulated other comprehensive (loss) income
    
    
    (329,637
    )
    
    
    (67,136
    )TOTAL STOCKHOLDERS EQUITY
    
    
    13,350,974
    
    
    
    33,603,641TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    57,932,129
    
    
    $
    80,760,877
  F-2




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##### Table of Contents



VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Fiscal Year Ended October 31,2008
    
    
    2007
    
    
    2006NET SALES
    
    $
    69,237,456
    
    
    $
    65,230,997
    
    
    $
    62,773,812COST OF GOODS SOLD
    
    
    30,327,137
    
    
    
    28,188,533
    
    
    
    26,473,269GROSS PROFIT
    
    
    38,910,319
    
    
    
    37,042,464
    
    
    
    36,300,543OPERATING EXPENSES:Selling, general and administrative expenses
    
    
    30,131,964
    
    
    
    27,968,022
    
    
    
    27,934,390Advertising expenses
    
    
    1,530,000
    
    
    
    1,602,327
    
    
    
    1,082,725Amortization
    
    
    887,813
    
    
    
    846,160
    
    
    
    877,855Gain on disposal of property and equipment
    
    
    (136,204
    )
    
    
    (17,511
    )
    
    
    (74,092
    )Impairment loss  goodwill
    
    
    22,359,091
    
    
    
    
    
    
    
    22,950,018TOTAL OPERATING EXPENSES
    
    
    54,772,664
    
    
    
    30,398,998
    
    
    
    52,770,896INCOME (LOSS) FROM OPERATIONS
    
    
    (15,862,345
    )
    
    
    6,643,466
    
    
    
    (16,470,353
    )OTHER INCOME (EXPENSE):Interest
    
    
    (3,004,626
    )
    
    
    (3,249,999
    )
    
    
    (3,268,192
    )Miscellaneous income (expense)
    
    
    
    
    
    
    
    
    
    
    750,000TOTAL OTHER EXPENSE, NET
    
    
    (3,004,626
    )
    
    
    (3,249,999
    )
    
    
    (2,518,192
    )INCOME (LOSS) BEFORE INCOME TAXES
    
    
    (18,866,971
    )
    
    
    3,393,467
    
    
    
    (18,988,545
    )INCOME TAX EXPENSE
    
    
    968,554
    
    
    
    1,317,103
    
    
    
    1,681,573NET INCOME (LOSS)
    
    $
    (19,835,525
    )
    
    $
    2,076,364
    
    
    $
    (20,670,118
    )NET INCOME (LOSS) PER SHARE  BASIC:
    
    $
    (0.92
    )
    
    $
    0.10
    
    
    $
    (0.96
    )NET INCOME (LOSS) PER SHARE  DILUTED:
    
    $
    (0.92
    )
    
    $
    0.10
    
    
    $
    (0.96
    )WEIGHTED AVERAGE SHARES USED IN COMPUTATION  BASIC
    
    
    21,564,384
    
    
    
    21,624,381
    
    
    
    21,630,739WEIGHTED AVERAGE SHARES USED IN COMPUTATION  DILUTED
    
    
    21,564,384
    
    
    
    21,624,381
    
    
    
    21,630,739
  F-3




---



##### 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, 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
    
    
    $
    1,932,568Shares issued under employee
stock purchase plan
    
    
    62,184
    
    
    
    63
    
    
    
    88,156
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,219Shares repurchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179,000
    
    
    
    (242,860
    )
    
    
    
    
    
    
    
    
    
    
    (242,860
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,835,525
    )
    
    
    
    
    
    
    (19,835,525
    )
    
    $
    (19,835,525
    )Unrealized loss on derivatives, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (262,501
    )
    
    
    (262,501
    )
    
    
    (262,501
    )Balance, October 31, 2008
    
    
    21,862,739
    
    
    $
    21,863
    
    
    $
    58,395,551
    
    
    $
    
    
    
    
    373,250
    
    
    $
    (717,301
    )
    
    $
    (44,019,502
    )
    
    $
    (329,637
    )
    
    $
    13,350,974
    
    
    $
    (20,098,026
    )
  F-4




---



##### Table of Contents



VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Fiscal Year Ended October 31,2008
    
    
    2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (19,835,525
    )
    
    $
    2,076,364
    
    
    $
    (20,670,118
    )Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation
    
    
    4,063,178
    
    
    
    4,118,134
    
    
    
    4,041,448Provision for bad debts
    
    
    345,812
    
    
    
    326,435
    
    
    
    300,811Provision for bad debts on notes receivable
    
    
    532,043
    
    
    
    
    
    
    
    Amortization
    
    
    887,813
    
    
    
    846,160
    
    
    
    877,855Impairment loss  goodwill
    
    
    22,359,091
    
    
    
    
    
    
    
    22,950,018Non cash interest expense
    
    
    110,450
    
    
    
    105,783
    
    
    
    103,881Deferred tax expense
    
    
    195,408
    
    
    
    174,594
    
    
    
    1,323,734Gain on disposal of property and equipment
    
    
    (136,204
    )
    
    
    (17,511
    )
    
    
    (74,092
    )Non cash compensation
    
    
    
    
    
    
    
    
    
    
    14,064Changes in assets and liabilities:Accounts receivable
    
    
    (665,800
    )
    
    
    (637,212
    )
    
    
    (262,427
    )Inventories
    
    
    41,417
    
    
    
    (519,080
    )
    
    
    (58,971
    )Other current assets
    
    
    (929,392
    )
    
    
    200,819
    
    
    
    211,454Other assets
    
    
    11,763
    
    
    
    74,073
    
    
    
    Accounts payable
    
    
    441,312
    
    
    
    96,116
    
    
    
    (576,822
    )Accrued expenses
    
    
    (595,210
    )
    
    
    (30,865
    )
    
    
    423,907Customer deposits
    
    
    (305,049
    )
    
    
    132,231
    
    
    
    (131,958
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    6,521,107
    
    
    
    6,946,041
    
    
    
    8,472,784CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment  net of debt
    
    
    (3,560,014
    )
    
    
    (3,468,690
    )
    
    
    (4,131,441
    )Proceeds from sale of property and equipment
    
    
    253,725
    
    
    
    93,722
    
    
    
    190,999Cash used for acquisitions
    
    
    (429,608
    )
    
    
    (290,540
    )
    
    
    (409,277
    )Cash used for purchase of trademark
    
    
    (40,000
    )
    
    
    
    
    
    
    NET CASH USED IN INVESTING ACTIVITIES
    
    
    (3,775,897
    )
    
    
    (3,665,508
    )
    
    
    (4,349,719
    )CASH FLOWS FROM FINANCING ACTIVITIES:Principal payments on debt
    
    
    (3,282,217
    )
    
    
    (3,509,041
    )
    
    
    (3,927,268
    )Purchase of treasury stock
    
    
    (242,860
    )
    
    
    (104,779
    )
    
    
    (104,927
    )Proceeds from issuance of common stock
    
    
    88,219
    
    
    
    86,561
    
    
    
    133,431NET CASH USED IN FINANCING ACTIVITIES
    
    
    (3,436,858
    )
    
    
    (3,527,259
    )
    
    
    (3,898,764
    )NET (DECREASE) INCREASE IN CASH
    
    
    (691,648
    )
    
    
    (246,726
    )
    
    
    224,301CASH AND CASH EQUIVALENTS  beginning of year
    
    
    1,873,385
    
    
    
    2,120,111
    
    
    
    1,895,810CASH AND CASH EQUIVALENTS  end of year
    
    $
    1,181,737
    
    
    $
    1,873,385
    
    
    $
    2,120,111SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION, EXCLUDING NON-CASH FINANCING AND INVESTING ACTIVITIESCash paid for interest
    
    $
    2,922,374
    
    
    $
    3,297,499
    
    
    $
    3,239,583Cash paid for taxes
    
    $
    2,354,300
    
    
    $
    895,373
    
    
    $
    182,758NON-CASH FINANCING AND INVESTING ACTIVITIES:Reduction in notes payable for acquisition
    
    $
    
    
    
    $
    
    
    
    $
    23,668Notes payable issued in acquisitions
    
    $
    36,000
    
    
    $
    100,407
    
    
    $
    167,750Note receivable for sale of assets
    
    $
    
    
    
    $
    
    
    
    $
    195,212Equipment purchased by acquisition line
    
    $
    421,527
    
    
    $
    663,678
    
    
    $
    
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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. The Company operates 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.Accounts Receivable  Accounts receivable are carried at original invoice amount
less an estimate made for doubtful accounts. Management establishes the allowance for
doubtful accounts by regularly evaluating past due balances, collection history as well as
general economic and credit conditions. Individual accounts receivable are written off when
deemed uncollectible, with any future recoveries recorded as income when received.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. Leasehold improvements are depreciated over the shorter of the
estimated useful life of the leasehold improvement or the term of the lease.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
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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 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 as of October 31, 2008 and 2006, and determined that goodwill was impaired. A
similar valuation was conducted and concluded that goodwill was not impaired as of October
31, 2007. Other than goodwill, intangible assets consist primarily of customer lists and
covenants not to compete, with estimated lives ranging from 3 to 10 years.Impairment for Long-Lived and Intangible Assets  The Company reviews long-lived
assets and certain identifiable intangible assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying amounts may not be
recovered. Recoverability is assessed based on estimated undiscounted future cash flows.
As of October 31, 2008 and 2007, the Company believes that there has been no impairment of
its long-lived and intangible assets, other than goodwill as described above.Stock-Based Compensation  The Company has several stock-based compensation plans
under which incentive and non-qualified stock options and restricted shares are granted, and
an Employee Stock Purchase Plan (ESPP). Effective November 1, 2005, the Company adopted the
provisions of SFAS No. 123, Share-Based Payments (revised 2004), (SFAS No. 123R) which
requires the Company to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant date fair value of the award. That cost is
recognized over the period during which an employee is required to provide services in
exchange for the award, the requisite service period (usually the vesting period). Under
SFAS No. 123R, the Company provides an estimate of forfeitures at initial grant date. The
Company elected the modified prospective transition method under SFAS No. 123R and
accordingly has not restated periods prior to adoption. The pronouncement had no material
impact on the Companys 2006, 2007, or 2008 results of operations since no options were
issued or vested during those years.Prior to the adoption of SFAS No. 123R, the Company followed the accounting treatment
prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations when accounting for stock-based compensation granted to employees and
directors. Accordingly, no compensation expense was recognized for stock option awards
because the exercise price of the Companys stock options equaled or exceeded the market
price of the underlying stock on the date of the grant.Net Income (Loss) Per Share Net income (loss) per share is based on the weighted
average number of common shares outstanding during each period. Potential common shares are
included in the computation of diluted per share amounts outstanding during each period that
income is reported. In periods in which the Company reports a loss,
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potential common shares are not included in the diluted earnings per share calculation since
the inclusion of those shares in the calculation would be anti-dilutive. As required by
SFAS No. 128, Earnings per Share, the Company considers outstanding in-the-money stock
options, if any, as potential common stock in its calculation of diluted earnings per share
and uses the treasury stock method to calculate the applicable number of shares.Advertising Expenses  The Company expenses advertising costs at the commencement of
an advertising campaign.Customer Deposits  Customers receiving home or office delivery of water pay the
Company a deposit for the water bottle that is refunded when the bottle is returned. Based
on historical experience, the Company uses an estimate of the deposits it expects to refund
over the next twelve months to determine the current portion of the liability, and
classifies the remainder of the deposit obligation as a long term liability.Income Taxes The Company applies the provisions of SFAS No. 109, Accounting for
Income Taxes, when calculating its tax expense and the value of tax related assets and
liabilities. This requires that the tax impact of future events be considered when
determining the value of assets and liabilities in its financial statements and tax returns.
The Company accounts for income taxes under the liability method. Under the liability
method, a deferred tax asset or liability is determined based upon the tax effect of the
differences between the financial statement and tax basis of assets and liabilities as
measured by the enacted rates that will be in effect when these differences reverse. A
valuation allowance is recorded if realization of the deferred tax assets is not likely.Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, is an interpretation of FASB Statement 109 (FIN 48). This
statement clarifies the criteria that an individual tax position must satisfy for some or
all of the benefits of that position to be recognized in a companys financial statements.
FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement
attribute for all tax positions taken or expected to be taken on a tax return in order for
those tax positions to be recognized in the financial statements. The Company adopted the
provisions of FIN 48 at the beginning of fiscal year 2008.Derivative Financial Instruments The Company accounts for derivative instruments
in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities,which requires that the Company record all derivatives on the balance sheet at
fair value.The Company utilizes interest rate swap agreements to hedge variable rate interest payments
on its long-term debt. The interest rate swaps are recognized on the balance sheet at their
fair value as stated by the bank and are designated as cash flow hedges. Accordingly, the
resulting changes in fair value of the Companys interest rate swaps are recorded as a
component of other comprehensive income. The Company assesses, both at a hedges inception
and on an ongoing basis, whether the derivatives that are used in hedging transactions are
highly effective in offsetting changes in cash flows of the related
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hedged items. Gains and losses that are related to the ineffective portion of a hedge or
terminated hedge are recorded in earnings.Fair Value of Financial Instruments The carrying amounts reported in the
consolidated balance sheet for cash equivalents, trade receivables, and accounts payable
approximate fair value based on the short-term maturity of these instruments. The carrying
value of senior debt approximates its fair value since it provides for variable market
interest rates. The Company uses a swap agreement to hedge the interest rates on its long
term debt. The swap agreement is carried at its estimated settlement value based on
information from the financial institution. Subordinated debt is carried at its approximate
market value based on periodic comparisons to similar instruments in the market place.Revenue Recognition  Revenue is recognized when products are delivered to
customers. A certain amount of the Companys revenue is derived from leasing water coolers
and coffee brewers. These leases are generally for the first 12 months of service and are
accounted for as operating leases. To open an account that includes the rental of
equipment, a customer is required to sign a contract that recognizes the receipt of the
equipment, outlines the Companys ownership rights, the customers responsibilities
concerning the equipment, and the rental charge for twelve months. In general, the customer
does not renew the agreement after twelve months, and the rental continues on a month to
month basis until the customer returns the equipment in good condition. The Company
recognizes the income ratably over the life of the lease. After the initial lease term
expires, rental revenue is recognized monthly as billed.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 $13,526,000, $12,930,000, and $12,741,000 for fiscal years 2008, 2007, and
2006 respectively.3.
    
    RECENT ACCOUNTING PRONOUNCEMENTSIn September 2006, the Financial Accounting Standards Board (FASB) issued Statement
No. 157, Fair Value Measurements. This Statement defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted accounting
principles, and expands disclosures about fair value measurements. The definition of fair
value retains the exchange price notion in earlier definitions of fair value. This
Statement clarifies that the exchange price is the price in an orderly transaction between
market participants to sell the asset or transfer the liability in the market in which the
reporting entity would transact for the asset or liability, that is, the principal or most
advantageous market for the asset or liability. Emphasis is placed on fair value being a
market-based measurement, not an entity-specific measurement, and therefore a fair value
measurement should be determined based on the assumptions that market participants would use
in pricing the asset or liability. As a basis for considering these market participant
assumptions, a fair value hierarchy has been established to distinguish between (1) market
participant assumptions developed based on market data obtained from sources independent of
the reporting entity (observable inputs) and (2) the
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reporting entitys own assumptions about market participant assumptions developed based on
the best information available in the circumstances (unobservable inputs). In February
2008, the FASB issued a Staff Position which delays the effective date of Statement No. 157
for non-financial assets and non-financial liabilities, except for items that are recognized
or disclosed at fair value in the financial statements on a recurring basis, to fiscal years
beginning after November 15, 2008 which is fiscal year 2010 for the Company. The provisions
of SFAS No.157 are effective for the Companys fiscal year commencing after November 15,
2008 which is fiscal 2010 for the Company.In October, 2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair
Value of a Financial Asset When the Market for That Asset Is Not Active (FSP 157-3). FSP
157-3 clarifies the application of SFAS No. 157 in a market that is not active and provides
an example to illustrate key considerations in determining the fair value of a financial
asset when the market for that financial asset is not active. FSP 157-3 was effective
immediately upon issuance and adoption of SFAS No. 157, and includes prior periods for which
financial statements have not been issued. The provisions of SFAS No.157 are effective for
the Companys fiscal year commencing November 1, 2009. The Company is currently evaluating
the potential impact, if any, the adoption of SFAS No. 157 will have on its consolidated
financial statements.In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115. This
Statement permits entities to choose to measure many financial instruments and certain other
items at fair value. It has the objective of improving 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. The pronouncement is expected to expand the use of fair value
measurement. An entity will report unrealized gains and losses on items for which the fair
value option has been elected in earnings at each subsequent reporting date. The fair value
option may generally be applied instrument by instrument and is irrevocable. This Statement
is effective as of the beginning of an entitys first fiscal year that begins after
November 15, 2007, which is fiscal year 2009 for the Company. The Company is currently
reviewing the impact, if any, that this new accounting standard will have on their financial
statements.In December 2007, the FASB issued Statement No. 141 (revised 2007), Business Combinations
(Statement No. 141(R)). Statement No. 141(R) establishes principles and requirements for
how the acquirer in a business combination recognizes and measures identifiable assets
acquired, liabilities assumed, and noncontrolling interests in the acquired company.
Statement No. 141(R) further addresses how goodwill acquired or a gain from a bargain
purchase is to be recognized and measured and determines what disclosures are needed to
enable users of the financial statements to evaluate the effects of the business
combination. Statement No. 141(R) is effective prospectively for business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008, which is fiscal 2010 for the Company. Earlier
application is not permitted.
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In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements  An amendment of ARB No. 51. Statement No. 160 amends
ARB No. 51 to establish accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a
noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements. SFAS No. 160 is
effective for fiscal years, and interim periods within those fiscal years, beginning on or
after December 15, 2008, which is fiscal 2010 for the Company.In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments
and Hedging Activities  an amendment of FASB Statement No. 133. This Statement changes
the disclosure requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are accounted for under
SFAS 133 and its related interpretations, and (c) how derivative instruments and related
hedged items affect an entitys financial position, financial performance, and cash flows.
This Statement is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged. The Company
is currently assessing the impact, if any, this pronouncement will have on its reporting and
when, if necessary, to implement enhanced reporting.In May 2008, the FASB issued Statement No. 162, The Hierarchy of Generally Accepted
Accounting Principles. This Statement identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States. The FASB believes that the GAAP
hierarchy should be directed to entities because it is the entity (not its auditor) that is
responsible for selecting accounting principles for financial statements that are presented
in conformity with GAAP. The FASB does not believe this Statement will result in a change in
current practice. Statement No. 162 is effective 60 days following the SECs approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of
Presents Fairly in Conformity With Generally Accepted Accounting Principles.In December 2008, the FASB issued FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public
Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable
Interest Entities. This FSP amends FASB Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, to require public
entities to provide additional disclosures about transfers of financial assets. It also
amends FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable
Interest Entities, to require public enterprises, including sponsors that have a variable
interest in a variable interest entity, to provide additional disclosures about their
involvement with variable interest entities. Additionally, this FSP requires certain
disclosures to be provided by a public enterprise that is (a) a sponsor of a qualifying
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special purpose entity (SPE) that holds a variable interest in the qualifying SPE but was
not the transferor (nontransferor) of financial assets to the qualifying SPE and (b) a
servicer of a qualifying SPE that holds a significant variable interest in the qualifying
SPE but was not the transferor (nontransferor) of financial assets to the qualifying SPE.
This FSP was effective upon issuance and did not have a material impact on the Companys
consolidated financial statements.4.
    
    MERGERS AND ACQUISITIONSDuring fiscal years 2008, 2007 and 2006, Vermont Pure Holdings, Ltd. made four acquisitions
in each year. The purchase price paid for the acquisitions for the respective years is as
follows:
 2008
    
    
    2007
    
    
    2006Cash (including acquisition costs)
    
    $
    429,608
    
    
    $
    290,540
    
    
    $
    409,277Notes Payable
    
    
    36,000
    
    
    
    100,407
    
    
    
    167,750$
    465,608
    
    
    $
    390,947
    
    
    $
    577,027
 The allocation of purchase price related to these acquisitions for the respective years is
as follows:
 2008
    
    
    2007
    
    
    2006Accounts Receivable
    
    $
    
    
    
    $
    
    
    
    $
    637Equipment
    
    
    65,528
    
    
    
    40,161
    
    
    
    40,307Identifiable Intangible Assets
    
    
    389,317
    
    
    
    343,200
    
    
    
    523,206Goodwill
    
    
    15,763
    
    
    
    7,586
    
    
    
    12,877Customer deposits
    
    
    (5,000
    )
    
    
    
    
    
    
    Purchase Price
    
    $
    465,608
    
    
    $
    390,947
    
    
    $
    577,027
 During fiscal year 2007, $5,251 of intangible assets was written off related to price
adjustments of previous acquisitions. During fiscal year 2006, $37,317 of intangible
assets, and $19,723 of accumulated amortization, was written off related to price
adjustments of previous acquisitions.The following table summarizes the pro forma consolidated condensed results of operations
(unaudited) of the Company for the fiscal years ended October 31, 2008, 2007, and 2006 as
though all the acquisitions had been consummated at the beginning of fiscal year 2006:
 2008
    
    
    2007
    
    
    2006Net Sales
    
    $
    69,705,846
    
    
    $
    65,805,496
    
    
    $
    63,864,511Net Income (Loss)
    
    $
    (19,801,096
    )
    
    $
    2,113,651
    
    
    $
    (20,587,113
    )Net Income (Loss) Per
Share-Diluted
    
    $
    (.92
    )
    
    $
    .10
    
    
    $
    (.95
    )Weighted Average Common
Shares
Outstanding-Diluted
    
    
    21,564,384
    
    
    
    21,624,381
    
    
    
    21,630,739
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The operating results of the acquired entities have been included in the accompanying
statements of operations since their respective dates of acquisition.5.
    
    EQUIPMENT RENTALThe 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
    
    $
    3,125,883Accumulated Depreciation
    
    $
    2,130,685Carrying Cost
    
    $
    995,198
 We expect to have revenue of $683,000 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, 2008,
2007, and 2006 is as follows:
 2008
    
    
    2007
    
    
    2006Balance, beginning of year
    
    $
    354,825
    
    
    $
    352,844
    
    
    $
    289,837Provision
    
    
    345,812
    
    
    
    326,435
    
    
    
    300,811Write-offs
    
    
    (286,336
    )
    
    
    (324,454
    )
    
    
    (237,804
    )Balance, end of year
    
    $
    414,301
    
    
    $
    354,825
    
    
    $
    352,844
 7.
    
    INVENTORIESInventories at October 31 consisted of:
 2008
    
    
    2007Finished Goods
    
    $
    1,557,914
    
    
    $
    1,546,168Raw Materials
    
    
    112,035
    
    
    
    165,198Total Inventories
    
    $
    1,669,949
    
    
    $
    1,711,366
 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.
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8.
    
    PROPERTY AND EQUIPMENT, NETProperty and equipment at October 31 consisted of:
 UsefulLife
    
    2008
    
    
    2007Leasehold improvements
    
    Shorter of useful life of
    
    $
    1,812,689
    
    
    $
    813,486asset or lease termMachinery and equipment
    
    3  10 yrs.
    
    
    20,467,805
    
    
    
    19,518,020Bottles, racks and vehicles
    
    3  7 yrs.
    
    
    6,125,618
    
    
    
    6,913,808Furniture, fixtures and office equipment
    
    3  7 yrs.
    
    
    2,235,166
    
    
    
    2,029,532Construction in progress
    
    
    
    
    
    
    136,005
    
    
    
    330,296Property and equipment before
accumulated depreciation
    
    
    
    
    
    
    30,777,283
    
    
    
    29,605,142Less accumulated depreciation
    
    
    
    
    
    
    20,213,895
    
    
    
    18,908,124Property and equipment,
net of accumulated depreciation
    
    
    
    
    
    $
    10,563,388
    
    
    $
    10,697,018
 During 2008, the Company completed an extensive solar electricity generation installation in
its Watertown facility to supply a significant amount of the energy for that facility. The
expenditures of the solar project are net of $1,159,000 received from a grant for the
project through October 31, 2008. The total cost of the project was $2,092,000 and the
Company anticipates receiving an additional $128,000 in related grant revenue in the next
fiscal year subject to certain conditions that management anticipates being able to comply
with completely.Depreciation expense for the fiscal years ended October 31, 2008, 2007 and 2006 was
$4,063,178, $4,118,134, and $4,041,448, respectively.
 9.
    
    GOODWILL AND OTHER INTANGIBLE ASSETSComponents of other intangible assets at October 31 consisted of:
 2008
    
    
    2007Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortized Intangible Assets:Customer Lists and Covenants
Not to Compete
    
    $
    5,866,981
    
    
    $
    4,113,807
    
    
    $
    5,477,663
    
    
    $
    3,227,854Other Identifiable Intangibles
    
    
    528,254
    
    
    
    196,886
    
    
    
    598,705
    
    
    
    195,026Total
    
    $
    6,395,235
    
    
    $
    4,310,693
    
    
    $
    6,076,368
    
    
    $
    3,422,880
 Amortization expense for amortizable intangible assets for fiscal years 2008, 2007, and 2006
was $887,813, $846,160, and $877,855, respectively.
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Estimated amortization expense for the next five years is as follows:
 Fiscal Year Ending
    
    AmountOctober 31, 2009
    
    $
    722,000October 31, 2010
    
    
    447,000October 31, 2011
    
    
    308,000October 31, 2012
    
    
    161,000October 31, 2013
    
    
    82,000
 The average remaining term of identifiable intangible assets with balances remaining to be
amortized is 33 months.An assessment of the carrying value of goodwill was conducted as of October 31, 2008, 2007,
and 2006. In 2008 and 2006, based on the analysis, it was determined at that time that
goodwill was impaired. In the second phase of the assessment process it was determined that
goodwill on the Companys books was overvalued by $22,359,091 and $22,950,018 on the
assessment date for the respective years, resulting in a non-cash impairment loss of those
amounts for the respective years. In 2007 it was determined that goodwill was not impaired.
The changes in the carrying amount of goodwill for the fiscal years ended October 31, 2008
and 2007 are as follows:
 2008
    
    
    2007Beginning balance
    
    $
    54,423,997
    
    
    $
    54,421,662Goodwill acquired during the year
    
    
    15,763
    
    
    
    7,586Goodwill disposed of during the year
    
    
    
    
    
    
    (5,251
    )Impairment loss
    
    
    (22,359,091
    )
    
    
    Balance as of October 31
    
    $
    32,080,669
    
    
    $
    54,423,997
 The Company recognized an impairment charge for the year ended October 31, 2008 as a result
of our annual impairment test of goodwill as of that date. In determining the impairment, it
followed the two step approach provided in paragraphs 19-22 of SFAS No.142. In step one and
in determining the fair value of the Company, we used a weighted average of three different
market approaches  quoted stock price, value comparisons to publicly traded companies
believed to have comparable reporting units, and discounted net cash flow. This approach
provided a reasonable estimation of the value of the Company and took into consideration the
Companys thinly traded stock, market comparable valuations, and expected results of
operations. The Company compared the resulting estimated fair value to its equity value as
of October 31, 2008 and determined that there was an impairment of goodwill. In step two,
the Company then allocated the estimated fair value to all of its assets and liabilities
(including unrecognized intangible assets) as if the Company had been acquired in a business
combination and the estimated fair value was the price paid. It then recognized an
impairment in the amount by which the carrying value of goodwill exceeded the implied value
of goodwill as determined in this allocation. The company is a single reporting unit as it
does not have separate management of product lines and shares sales, purchasing and
distribution resources among the lines.
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Impairment was primarily the result of a decline in the quoted market prices of the
Companys stock at year-end below its book carrying value, and was not due to any changes in
the core business. There was no event or change in circumstance that would more likely than
not reduce the fair value of our underlying net assets below their carrying amount prior to
the annual impairment test.10.
    
    OTHER ASSETSAt October 31 the balance of other assets is itemized as follows:
 2008
    
    
    2007Note receivable, unsecured, due March 1, 2011
    
    $
    
    
    
    $
    475,000Note receivable, unsecured, due August 8,
2011, interest 0% per annum (net of an
allowance for bad debt of $57,043 for 2008)
    
    
    113,333
    
    
    
    179,830Ownership interests
    
    
    39,000
    
    
    
    39,000Accrued interest
    
    
    
    
    
    
    2,309Total
    
    $
    152,333
    
    
    $
    696,139
 In fiscal year 2008, the Company recorded a provision for bad debt expense on an unsecured,
subordinated note receivable from Trident LLC. The note, which was due in full in 2011 and
had a principal balance of $475,000, represented the remaining portion of the sales price
that was receivable from the sale of our retail operations in March, 2004. The note was
considered fully impaired primarily based on advice from Trident that it had closed its
principal facility and generally ceased its operations due to cash flow problems. The
provision for bad debt expense is reflected in selling, general and administrative expenses
for the year ended October 31, 2008.11.
    
    ACCRUED EXPENSESAccrued expenses as of October 31 are as follows:
 2008
    
    
    2007Payroll and Vacation
    
    $
    1,575,787
    
    
    $
    1,606,748Interest
    
    
    491,875
    
    
    
    516,652Income Taxes
    
    
    
    
    
    
    557,832Health Insurance
    
    
    403,325
    
    
    
    341,000Accounting and Legal
    
    
    160,500
    
    
    
    160,000Miscellaneous
    
    
    227,790
    
    
    
    272,255Total
    
    $
    2,859,277
    
    
    $
    3,454,487
 12.
    
    DEBTSenior DebtThe Company has a senior credit facility with Bank of America that provides a Term Loan, a
Revolving Credit Loan of $6 million for working capital and letters of credit, and up to $10
million in an Acquisition Loan to be used for acquisitions and capital
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expenditures. The Term Loan may also provide funds for future principal payment of the
Companys subordinated debt if certain financial covenants are met after the first two years
of the loan.On July 5, 2007 the Company and the Bank amended the facility. The amendment extended the
working capital and acquisition lines of credit by changing the Acquisition Loan termination
date and Revolving Credit Loan maturity date to April 5, 2010 from April 5, 2008 and
extended the Term Loan maturity date to January 5, 2014. In conjunction with the extension
of the maturity date, the monthly amortization amount on the Term Loan was fixed at $270,833
for the duration of the loan. Prior to the amendment, the Term Loan maturity date was May
5, 2012 and the remaining amortization was scheduled to be monthly amounts, increasing from
year to year, ranging from $312,500 to $395,833. In addition, the amendment increased the
Acquisition Loan availability to $10,000,000 and made up to $3,000,000 available from the
Revolving Credit Loan for repurchase of Company stock or for repayment of subordinated debt
and $2,200,000 available from the Acquisition Loan for installation of solar panels for
electricity generation at the Companys leased property in Watertown, Connecticut. The
amendment has provisions for amortization of the additional borrowed amounts over the
remaining life of the loans starting approximately two years after disbursement. It also
alters some of the financial covenant calculations to provide for the additional borrowing.Interest on the loans is based on the 30-day LIBOR plus an applicable margin based on the
Companys financial performance. The applicable margin may vary from 125 to 225 basis
points for the Acquisition and Revolving Credit Loans and 150 to 250 basis points for the
Term Loan based on the level of senior debt to earnings before interest, taxes,
depreciation, and amortization (EBITDA). The applicable margins as of October 31, 2008 were
1.75% for the Term Loan and 1.5% for the Acquisition and Revolving Credit Loans, resulting
in total variable interest rates of 5.56% and 5.31%, respectively. The facility is secured
by substantially all of the Companys assets. As of October 31, 2008, there was $16,792,000
outstanding on the Term Loan, and $1,000,000 outstanding on the Acquisition Loan. There
were no borrowings outstanding but there was an outstanding letter of credit of $1,485,000
issued against the Revolving Credit Loan availability as of the end of the fiscal year.The facility with Bank of America requires that the Company be in compliance with certain
financial covenants at the end of each fiscal quarter. The covenants include senior debt
service coverage as defined of greater than 1.25 to 1, total debt service coverage as
defined of greater than 1 to 1, and senior debt to EBITDA as defined of no greater than 2.50
to 1. As of October 31, 2008 and 2007, the Company was in compliance with all of the
financial covenants of the facility.Subordinated Debt
As part of the acquisition agreement in 2000 with the former shareholders of Crystal Rock
Spring Water Company, the Company issued subordinated notes in the amount of $22,600,000.
The notes have an effective date of October 5, 2000, were for an original term of seven
years (subsequently extended to 2012 as part of the senior credit facility refinancing
described above) and bear interest at 12% per year. Scheduled repayments
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are made quarterly and are interest only for the life of the note unless specified financial
targets are met. In April 2004, the Company repaid $5,000,000 of the outstanding principal.
In April, 2005, the Company repaid an additional $3,600,000 of this principal. As of
October 31, 2008, payments of interest only of $420,000 are due quarterly with a principal
payment of $14,000,000 due at maturity.The notes are secured by all of the assets of the Company but specifically subordinated,
with a separate agreement between the debt holders, to the senior credit facility described
above.Annual MaturitiesAnnual maturities of debt as of October 31, 2008 are summarized as follows:
 Senior
    
    
    Credit Lines
    
    
    Subordinated
    
    
    Other
    
    
    TotalFiscal year ending
October 31,
2009
    
    $
    3,250,000
    
    
    
    
    
    
    
    
    
    
    $
    65,000
    
    
    $
    3,315,0002010
    
    
    3,250,000
    
    
    
    100,000
    
    
    
    
    
    
    
    20,000
    
    
    
    3,370,0002011
    
    
    3,250,000
    
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    3,450,0002012
    
    
    3,250,000
    
    
    
    200,000
    
    
    
    
    
    
    
    
    
    
    
    3,450,0002013 and after
    
    
    3,792,000
    
    
    
    500,000
    
    
    $
    14,000,000
    
    
    
    
    
    
    
    18,292,000Total Debt
    
    $
    16,792,000
    
    
    $
    1,000,000
    
    
    $
    14,000,000
    
    
    $
    85,000
    
    
    $
    31,877,000
 13.
    
    INTEREST RATE SWAP AGREEMENTSThe Company uses interest rate swaps to effectively convert variable rate debt to a fixed
rate. The swap rates are based on the floating 30-day LIBOR rate and are structured such
that if the loan rate for the period exceeds the swap rate, then the bank pays the Company
to lower the effective interest rate. Conversely, if the loan rate is lower than the swap
rate, the Company pays the bank additional interest.On October 5, 2007, the Company entered into an interest rate hedge swap agreement in
conjunction with an amendment to its facility with Bank of America. The intent of the
instrument is to fix the interest rate on 75% of the outstanding balance on the Term Loan
with Bank of America as required by the facility. The swap fixes the interest rate for the
swapped amount at 6.62% (4.87% plus the applicable margin, 1.75%). Also on October 5, 2007,
the Company terminated interest rate hedge agreements that it had consummated on July 5,
2007 (the July 2007 swap) and May 3, 2005 (the May 2005 swap). On that date, the
Company was obligated to pay an amount of $99,200 to terminate both swaps.The July 2007 swap was structured to fix the interest rate on 75% of the outstanding balance
on the Term Loan, as amended on the same date, taking into account the May 2005 swap when
the facility was originally entered in to. The July 2007 swap fixed the interest rate at
7.73% (5.98%, plus the applicable margin, 1.75%) for the term debt. The May 2005 swap fixed
the interest rate at 6.41% (4.66%, plus the applicable margin,
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1.75%) and amortized concurrently with the loan principal to fix the interest rate with
respect to 75% of the outstanding principal prior to the July 5, 2007 amendment. As of
October 31, 2008, the total notional amount committed to the swap agreement was $12.6
million. On that date, the variable rate on the remaining 25% of the term debt was 5.56%.Based on the floating rate for respective years ended October 31, 2008 and 2007, the Company
paid $208,000 more and $100,000 less in interest, respectively, than it would have without
the interest rate swap agreements.These swaps are considered cash flow hedges under SFAS No. 133 because they are intended to
hedge, and are effective as a hedge, against variable cash flows. As a result, the changes
in the fair values of the derivatives, net of tax, are recognized as comprehensive income or
loss until the hedged item is recognized in earnings.14.
    
    STOCK BASED COMPENSATIONStock Option and Incentive PlansIn April 1998, the Companys shareholders approved the 1998 Incentive and Non Statutory
Stock Option Plan (the 1998 Plan). In April 2003, the Companys shareholders approved an
increase in the authorized number of shares to be issued under the 1998 Plan from 1,500,000
to 2,000,000. This plan provides for issuance of up to 2,000,000 options to purchase the
Companys common stock under the administration of the compensation committee of the Board
of Directors. The intent of this plan is to issue options to officers, employees,
directors, and other individuals providing services to the Company. Of the total amount of
shares authorized under this plan, 443,700 option shares are outstanding and 1,556,300
option shares are available for grant at October 31, 2008.In April 2004, the Companys shareholders approved the 2004 Stock Incentive Plan (the 2004
Plan). This plan provides for issuances of awards of up to 250,000 restricted or
unrestricted shares, or incentive or non-statutory stock options, of the Companys common
stock. Of the total amount of shares authorized under this plan, 149,000 option shares are
outstanding, 26,000 restricted shares have been granted, and 75,000 shares are available for
grant at October 31, 2008.All incentive and non-qualified stock option grants had an exercise price equal to the
market value of the underlying common stock on the date of grant. The following table
summarizes the activity related to stock options and outstanding stock option balances
during the last three fiscal years:
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Outstanding Options
    
    Weighted Average(Shares)
    
    Exercise PriceBalance 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
    
    
    
    3.01Expired
    
    
    (66,800
    )
    
    
    3.84Balance at October 31, 2008
    
    
    592,700
    
    
    
    2.91
 In 2008, the 66,800 options that expired related to the 1998 Plan.The total shares available for grant under all plans are 1,631,300 at October 31, 2008.The following table summarizes information pertaining to outstanding stock options, all of
which are exercisable, as of October 31, 2008:
 WeightedAverage
    
    
    WeightedOutstanding
    
    
    Remaining
    
    
    AverageOptions
    
    
    Contractual
    
    
    Exercise
    
    
    IntrinsicExercise Price Range
    
    (Shares)
    
    
    Life
    
    
    Price
    
    
    Value$1.80  $2.60
    
    
    234,500
    
    
    
    6.21
    
    
    $
    2.32
    
    
    $
    $2.81  $3.38
    
    
    313,200
    
    
    
    2.05
    
    
    
    3.22
    
    
    
    $3.50  $4.25
    
    
    40,000
    
    
    
    3.25
    
    
    
    3.80
    
    
    
    $4.28  $4.98
    
    
    5,000
    
    
    
    3.17
    
    
    
    4.98
    
    
    
    592,700
    
    
    
    3.79
    
    
    $
    2.91
    
    
    $
    
 All of the outstanding options as of October 31, 2008 and 2007 were vested.The intrinsic value of the options exercised during the fiscal year ended October 31, 2006
was $3,230.Outstanding options were granted with lives of 10 years and provide for vesting over a term
of 0-5 years.Employee Stock Purchase Plan (ESPP)The Company maintains an ESPP, under which, as originally approved, 500,000 shares of common
stock were reserved for issuance. On March 29, 2007 the Companys stockholders approved an
increase in the number of shares available under the plan from 500,000 to 650,000 shares.
The ESPP enables eligible employees to subscribe, through payroll deductions, to purchase
shares of the Companys common stock at a purchase price equal to 95% of the fair market
value on the last day of the payroll payment period. At October 31, 2008, 552,499 shares
have issued since the inception of the plan including 62,184 shares issued for proceeds of
$88,219 in fiscal year 2008. In fiscal years 2007 and 2006, respectively, 52,983 and 82,315
shares were issued from the plan for proceeds of $86,561 and $124,431, respectively.
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15.
    
    RETIREMENT PLANThe Company has a defined contribution plan which meets the requirements of Section 401(k)
of the Internal Revenue Code. All employees of the Company who are at least twenty-one years
of age are eligible to participate in the plan. The plan allows employees to defer a portion
of their salary on a pre-tax basis and the Company contributes 25% of amounts contributed by
employees up to 6% of their salary. Company contributions to the plan amounted to $145,000,
$134,000, and $123,000, for the fiscal years ended October 31, 2008, 2007, and 2006,
respectively.16.
    
    COMMITMENTS AND CONTINGENCIESOperating LeasesThe Companys operating leases consist of trucks, office equipment and rental property.Future minimum rental payments, including related party leases described below, over the
terms of various lease contracts are approximately as follows:
 Fiscal Year Ending October 31,2009
    
    $
    3,346,0002010
    
    
    2,858,0002011
    
    
    2,051,0002012
    
    
    1,574,0002013
    
    
    1,488,000Thereafter
    
    
    1,411,000Total
    
    $
    12,728,000
 Rent expense was $3,586,000, $3,004,000, and $2,898,000 for the fiscal years ended October
31, 2008, 2007, and 2006, respectively.17.
    
    RELATED PARTY TRANSACTIONSDirectors and OfficersThe Baker family group, consisting of four current directors Henry Baker (Chairman
Emeritus), Peter Baker (CEO), John Baker (Executive Vice President) and Ross Rapaport
(Chairman), as trustee, together own a majority of our common stock. In addition, in
connection with the acquisition of Crystal Rock Spring Water Company in 2000, we issued
members of the Baker family group 12% subordinated promissory notes secured by all of our
assets. The current balance on these notes is $14,000,000.Henry Baker, had an employment contract with the Company through July 1, 2008. His contract
entitled him to annual compensation of $47,000 as well as a leased Company vehicle. Since
then he has been employed by the Company as an at-will employee at the discretion of
management. Mr. Bakers sons, John Baker and Peter Baker, have employment contracts with the
Company through December 31, 2009. They are also directors. The two contracts entitle the
respective shareholders to annual compensation of $320,000 each and other bonuses and
prerequisites.
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The Company leases a 67,000 square foot facility in Watertown, Connecticut and a 22,000
square foot facility in Stamford, Connecticut from a Baker family trust. The lease in
Stamford expires in October 2010. On August 29, 2007 the Company finalized an amendment to
our existing lease in Watertown which extended that lease to 2016.Future minimum rental payments under these leases are as follows:
 Fiscal year ending October 31,
    
    Stamford
    
    
    Watertown
    
    
    Total2009
    
    $
    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
    
    $
    496,800
    
    
    $
    3,606,132
    
    
    $
    4,102,932
 The Companys Chairman of the Board, Ross S. Rapaport, who also acts as Trustee in various
Baker family trusts is employed by Pepe & Hazard LLP a business law firm that the Company
uses from time to time. During fiscal 2008, 2007 and 2006, the Company paid approximately
$63,000, $44,000, and $81,000 respectively, for services provided by Pepe & Hazard LLP.Investment in VoyageurThe Company had an equity position in a software company named Voyageur Software, Inc.
(Voyageur) formerly Computer Design Systems, Inc. One of the Companys directors was a
member of the board of directors of Voyageur. The Companys equity investment in Voyageur
represented approximately 24% of the outstanding shares of the company. In 2004, the
Company determined that its investment in Voyageur was impaired and wrote off the carrying
value of its investment. On February 29, 2008, Voyageur sold substantially all of its
assets to another software company and the proceeds were insufficient to provide a return to
Voyageurs shareholders. As a result of the sale, Voyageur ceased its operations. Software
development and maintenance previously provided by Voyageur to the Company will now be
provided by the buyer, an unrelated party.During fiscal years 2008, 2007, and 2006, the Company paid $45,011, $384,997, and $294,649,
respectively, for service, software, and hardware.
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18.
    
    INCOME TAXESThe following is the composition of income tax expense:
 Fiscal Year Ended October 31,2008
    
    
    2007
    
    
    2006Current:Federal
    
    $
    412,009
    
    
    $
    960,353
    
    
    $
    147,239State
    
    
    361,137
    
    
    
    182,156
    
    
    
    210,600Total current
    
    
    773,146
    
    
    
    1,142,509
    
    
    
    357,839Deferred:Federal
    
    
    183,582
    
    
    
    169,588
    
    
    
    1,177,739State
    
    
    11,826
    
    
    
    5,006
    
    
    
    145,995Total deferred
    
    
    195,408
    
    
    
    174,594
    
    
    
    1,323,734Total income tax expense
    
    $
    968,554
    
    
    $
    1,317,103
    
    
    $
    1,681,573
 Deferred tax assets (liabilities) at October 31, 2008 and October 31, 2007, are as follows:
 October 31,2008
    
    
    2007Deferred tax assets:Allowance for doubtful accounts
    
    $
    157,434
    
    
    $
    134,834Accrued compensation
    
    
    296,118
    
    
    
    304,930Accrued liabilities and reserves
    
    
    88,499
    
    
    
    17,091Interest rate swap
    
    
    202,036
    
    
    
    42,586Capital loss carry forward
    
    
    83,057
    
    
    
    Valuation allowance
    
    
    (83,057
    )
    
    
    Total deferred tax assets
    
    
    744,087
    
    
    
    499,441Deferred tax liabilities:Depreciation
    
    
    (1,576,065
    )
    
    
    (1,603,022
    )Amortization
    
    
    (1,827,631
    )
    
    
    (1,520,069
    )Total deferred tax liabilities
    
    
    (3,403,696
    )
    
    
    (3,123,091
    )Net deferred tax liability
    
    $
    (2,659,609
    )
    
    $
    (2,623,650
    )
 During 2008, the Company established a valuation allowance of $83,057 related to the capital
loss carry forward deferred tax asset.
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Income tax expense differs from the amount computed by applying the statutory tax rate to
net (loss) income before income tax expense as follows:
 Fiscal
Year Ended October 31,2008
    
    
    2007
    
    
    2006Income tax expense
(benefit) computed at the
statutory rate
    
    $
    (6,414,770
    )
    
    $
    1,153,778
    
    
    $
    (6,456,105
    )Goodwill impairment
    
    
    7,602,091
    
    
    
    
    
    
    
    7,803,000Energy Credit
    
    
    (508,260
    )
    
    
    
    
    
    
    Other differences
    
    
    43,337
    
    
    
    39,799
    
    
    
    99,326State income taxes
    
    
    246,156
    
    
    
    123,526
    
    
    
    235,352Income tax expense
    
    $
    968,554
    
    
    $
    1,317,103
    
    
    $
    1,681,573
 The Company adopted Financial Accounting Standards Board (FASB) Interpretation 48,
Accounting for Uncertainty in Income Taxes (FIN 48), at the beginning of the fiscal year
ended October 31, 2008. As a result of the implementation of FIN 48, the Company did not
recognize an increase to tax liability for uncertain tax positions. The Company files
income tax returns in the U.S. federal jurisdiction and various state and local
jurisdictions. Generally, the Company is no longer subject to U.S. federal, state and local
tax examinations by tax authorities for years before October 31, 2004.A reconciliation of the beginning and ending amount of unrecognized tax benefits including
interest and penalties is as follows:
 Balance at November 1, 2007
    
    $
    119,000Increases related to current year tax positions
    
    
    Increases related to the prior year tax positions
    
    
    17,000Decreases related to prior year tax positions
    
    
    Settlements
    
    
    Expiration of Statutes
    
    
    Balance at October 31, 2008
    
    $
    136,000
 Included in this balance at October 31, 2008 is a state tax exposure of approximately
$118,000. The Company expects a net decrease to its unrecognized tax benefits of
approximately $118,000 within the next year.The Company recognizes interest and penalties related to the unrecognized tax benefits in
tax expense. During the year ended October 31, 2008, the Company recognized $17,000 of
interest and penalties. The Company had approximately $62,000 of interest and penalties
accrued at October 31, 2008.19.
    
    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:
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##### Table of Contents



Fiscal Year Ended October 31,2008
    
    
    2007
    
    
    2006Net Income (Loss)
    
    $
    (19,835,525
    )
    
    $
    2,076,364
    
    
    $
    (20,670,118
    )Denominator:Basic Weighted Average Shares
Outstanding
    
    
    21,564,384
    
    
    
    21,624,381
    
    
    
    21,630,739Effect of Stock Options
    
    
    
    
    
    
    
    
    
    
    Diluted Weighted Average Shares
Outstanding
    
    
    21,564,384
    
    
    
    21,624,381
    
    
    
    21,630,739Basic Net Income (Loss) Per Share
    
    $
    (.92
    )
    
    $
    .10
    
    
    $
    (.96
    )Diluted Net Income (Loss) Per Share
    
    $
    (.92
    )
    
    $
    .10
    
    
    $
    (.96
    )
 There were 592,700, 659,500 options, and 757,187 options outstanding for the years ended
October 31, 2008, 2007 and 2006, respectively, that were not included in the dilution
calculation because the options exercise price exceeded the market price of the underlying
common shares.20.
    
    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, 2008, the Company had cash in
deposits exceeding the insured limit by approximately $888,000. On October 3, 2008,
President George W. Bush signed the Emergency Economic Stabilization Act of 2008, which
temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to
$250,000 per depositor. The temporary increase in deposit insurance coverage became
effective immediately upon the Presidents signature. The legislation provides that the
basic deposit insurance limit will return to $100,000 after December 31, 2009. In
addition, the Companys deposits are maintained in various financial institutions that are
participating in the Federal Deposit Insurance Corporations Temporary Liquidity Guarantee
Program. This program provides a full guarantee for all noninterest-bearing transaction
accounts maintained at the various financial institutions through December 31, 2009.
Accordingly, all of the Companys cash accounts are fully guaranteed at October 31, 2008.21.
    
    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.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
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##### Table of Contents



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,
and/or negligently failed to take steps to obtain, 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 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 and seek approximately $2.2
million in damages.Discovery of fact witnesses and expert witnesses has been completed. In September 2008, the
defendants in the lawsuit filed summary judgment motions seeking dismissal of the Companys
claims in their entirety, which the Company opposed. The Superior Court Judge denied these
motions in a ruling dated December 26, 2008. No trial date for this lawsuit has been set.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.22.
    
    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. In May 2008, the Companys Board of
Directors approved the purchase of up to an additional 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 years 2008 and 2007, the Company purchased an additional
179,000 and 55,600 shares, respectively, for an aggregate purchase
price of $242,860 and $104,779, respectively. The Company expects to
continue to purchase stock in the open market but total purchases may
not
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ultimately reach the limit established. The Company has used internally generated cash to
fund these purchases.
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EXHIBITS TO VERMONT PURE HOLDINGS, LTD.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2008
Exhibits Filed Herewith
 ExhibitNumber
    
    Description21.1
    
    Subsidiary23.1
    
    Consent of Wolf & Company, P.C.31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.