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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 Annual Report
Pursuant to Sections 13 or 15(d)
of the Securities Exchange Act of 1934
  þ
    
    Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended October 31, 2006
 or
 o
    
    Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
 to
 Commission File Number 000-31797
 VERMONT PURE HOLDINGS, LTD.
  Delaware
    
    03-0366218(State or other jurisdiction of incorporation
    
    I.R.S. Employer Identification Numberor organization)
 (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
    
    American Stock Exchange(Title of Class)
    
    (Exchange registration)
  o þ
  o þ
 þ o
 o
  o o þ
 o þ
   Documents Incorporated by Reference




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##### 



Table of Contents
    
    PagePart IItem 1.
    
    Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    10Item 1B.
    
    Unresolved Staff Comments
    
    
    15Item 2.
    
    Properties
    
    
    15Item 3.
    
    Legal Proceedings
    
    
    16Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    16Part IIItem 5.
    
    Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    17Item 6.
    
    Selected Financial Data
    
    
    18Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 8.
    
    Financial Statements and Supplementary Data
    
    
    30Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    30Item 9A.
    
    Controls and Procedures
    
    
    30Item 9B.
    
    Other Information
    
    
    31Part IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    32Item 11.
    
    Executive Compensation
    
    
    32Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    32Item 13.
    
    Certain Relationships and Related Transactions
    
    
    32Item 14.
    
    Principal Accountant Fees and Services
    
    
    32Item IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    33SignaturesEX-22.1 SubsidiaryEX-23.1 Consent of Wolf & Company, P.C.EX-23.2 Consent of Deloitte & Touche LLPEX-31.1 Section 302 Certification of C.E.O.EX-31.2 Section 302 Certification of C.F.O.EX-32.1 Section 906 Certification of C.E.O.EX-32.2 Section 906 Certification of C.F.O.
   
  
  2




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




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®
  Other Significant Product Lines
 
 4




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Water Sources, Treatment, and Bottling Operations
        5




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Products
 ® ® ®
 Marketing and Sales of Branded Products
  6




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Advertising and Promotion
  Sales and Distribution
   Suppliers
   7




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Seasonality
  Competition
  ® ®
    8




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Trademarks
  Government Regulation
       9




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Employees
  A dditional Available Information
    
 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.
  10




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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.
   Acquisitions may disrupt our operations or adversely affect our results.
   11




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
    
    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;
    
    difficulties in integrating diverse corporate cultures; and
    
    additional conflicts of interests.
 Our success depends on the continued services of key personnel.
  The personal interests of our directors and officers create a conflict.
  12




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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.
  We depend upon maintaining the integrity of our water resources and manufacturing process. If our
water sources or bottling processes were contaminated for any reason, our business would be
seriously harmed.
   13




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




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Our business is seasonal, which may cause fluctuations in our stock price.
  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
  
 ITEM 2. PROPERTIES.
  Location
    
    Lease expiration
    
    Sq. Ft.
    
    Annual RentWilliston, VT
    
    June 2009
    
    
    10,000
    
    
    $
    69,556Waltham, MA
    
    December 2008
    
    
    11,760
    
    
    $
    108,780Bow, 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
    
    
    $
    38,070Halfmoon, NY
    
    October 2011
    
    
    22,500
    
    
    $
    165,825Plattsburgh, NY
    
    May 2010
    
    
    5,000
    
    
    $
    24,000Watertown, CT
    
    October 2010
    
    
    67,000
    
    
    $
    414,000Stamford, CT
    
    October 2010
    
    
    22,000
    
    
    $
    248,400White River Junction, VT
    
    June 2009
    
    
    12,000
    
    
    $
    69,100Waterbury, CT
    
    June 2007
    
    
    5,000
    
    
    $
    24,200Groton, CT
    
    October 2009
    
    
    7,500
    
    
    $
    56,375
 15




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ITEM 3. LEGAL PROCEEDINGS.
 Vermont Pure Holdings, Ltd. vs. Thomas M. Sobol et al.
 Vermont
Pure Holdings, Ltd. vs. Nestlé Waters North America, Inc.
   Vermont Pure Holdings, Ltd. v Nestlé Waters North America Inc.
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
  16




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PART II
 
 ITEM 5.
    
    MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
  Fiscal
Year Ended October 31, 2006
 High
    
    LowFirst Quarter
    
    $
    2.05
    
    
    $
    1.73Second Quarter
    
    $
    2.04
    
    
    $
    1.69Third Quarter
    
    $
    1.71
    
    
    $
    1.33Fourth Quarter
    
    $
    1.77
    
    
    $
    1.30Fiscal
Year Ended October 31, 2005First Quarter
    
    $
    2.53
    
    
    $
    1.71Second Quarter
    
    $
    2.86
    
    
    $
    1.80Third Quarter
    
    $
    2.16
    
    
    $
    1.68Fourth Quarter
    
    $
    2.26
    
    
    $
    1.71
    Securities Authorized for Issuance Under Equity Compensation Plans.
  17




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(c)Number of Securities(a)
    
    (b)
    
    remaining available forNumber of Securities to be
    
    Weighted-average exercise
    
    future issuance underissued upon exercise of
    
    price of outstanding
    
    equity compensation plansoutstanding options,
    
    options, warrants
    
    (excluding securitiesPlan Category
    
    warrants and rights
    
    and rights
    
    reflected in column (a)).Equity compensation
plans approved by
security holders
    
    
    757,187
    
    
    $
    2.96
    
    
    
    1,564,500Equity compensation
plans not approved
by security holders
    
    
    0
    
    
    
    
    
    
    
    0Total
    
    
    757,187
    
    
    $
    2.96
    
    
    
    1,564,500
 Purchase of Equity Securities
  Total Number of
    
    
    MaximumShares
    
    
    Number ofPurchased as
    
    
    Shares that MayTotal Number of
    
    
    
    
    
    
    Part of a Publicly
    
    
    Yet beShares
    
    
    Average Price
    
    
    Announced
    
    
    Purchased UnderPurchased
    
    
    Paid per Share
    
    
    Program (1)
    
    
    the ProgramAugust 1-31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    203,600September 1-30
    
    
    7,700
    
    
    $
    1.62
    
    
    
    7,700
    
    
    
    195,900October 1-31
    
    
    13,000
    
    
    $
    1.60
    
    
    
    13,000
    
    
    
    182,900Total
    
    
    20,700
    
    
    $
    1.61
    
    
    
    20,700
 
 (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. There is no expiration date for the program
and the share limit may not be reached. 
 ITEM 6. SELECTED FINANCIAL DATA.
  18




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Fiscal Years EndedOctober 31,
    
    October 31,
    
    October 31,
    
    October 31,
    
    October 31,(000s except per share)
    
    2006
    
    2005
    
    2004
    
    2003
    
    2002Net sales
    
    $
    62,774
    
    
    $
    59,835
    
    
    $
    52,473
    
    
    $
    49,854
    
    
    $
    49,068(Loss) income from
continuing operations
    
    $
    (20,670
    )
    
    $
    871
    
    
    $
    500
    
    
    $
    941
    
    
    $
    2,079(Loss) income per share
from continuing operations
    
    $
    (.96
    )
    
    $
    .04
    
    
    $
    .02
    
    
    $
    .04
    
    
    $
    .09Total assets
    
    $
    81,335
    
    
    $
    102,889
    
    
    $
    103,781
    
    
    $
    111,123
    
    
    $
    109,143Long term debt, less
current portion
    
    $
    33,875
    
    
    $
    37,975
    
    
    $
    37,854
    
    
    $
    48,274
    
    
    $
    46,540
 
 ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
  
    
    Business Overview a brief description of fiscal year 2006.
    
    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, 2006 Compared to Fiscal Year Ended October 31, 2005
 Sales
   Product Line
    
    2006
    
    
    2005
    
    
    Difference
    
    
    % Diff.(in 000s $)
    
    
    (in 000s $)
    
    
    (in 000s $)Water
    
    $
    28,886
    
    
    $
    28,869
    
    
    $
    17
    
    
    
    Coffee and Related
    
    
    17,430
    
    
    
    15,388
    
    
    
    2,042
    
    
    
    13
    %Equipment Rental
    
    
    9,013
    
    
    
    9,337
    
    
    
    (324
    )
    
    
    (3
    %)Other
    
    
    7,445
    
    
    
    6,241
    
    
    
    1,204
    
    
    
    19
    %Total
    
    $
    62,774
    
    
    $
    59,835
    
    
    $
    2,939
    
    
    
    5
    %
 Water
 Coffee
 Equipment Rental
 Other
 Gross Profit/Cost of Goods Sold
  20




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Income from Operations/Operating Expenses
       21




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Other Income and Expense, Income Taxes, and Income from Continuing Operations
    Net (Loss) Income
    22




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Fiscal Year Ended October 31, 2005 Compared to Fiscal Year Ended October 31, 2004
 Sales
   Product Line
    
    2005
    
    
    2004
    
    
    Difference
    
    
    % Diff.(in 000s $)
    
    
    (in 000s $)
    
    
    (in 000s $)Water
    
    $
    28,869
    
    
    $
    25,043
    
    
    $
    3,826
    
    
    
    15
    %Coffee and Other Products
    
    
    21,629
    
    
    
    18,524
    
    
    
    3,105
    
    
    
    17
    %Equipment Rental
    
    
    9,337
    
    
    
    8,906
    
    
    
    431
    
    
    
    5
    %Total
    
    $
    59,835
    
    
    $
    52,473
    
    
    $
    7,362
    
    
    
    14
    %
 Water
 Coffee and Other Products
 Equipment Rental
 Gross Profit/Cost of Goods Sold
  23




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Income from Operations/Operating Expenses
     Other Income and Expense, Income Taxes, and Income from Continuing Operations
    24




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Discontinued Operations
  Net Income
    Liquidity and Capital Resources
   25




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##### Table of Contents



Payment due by PeriodContractual Obligations
    
    Total
    
    
    2007
    
    
    2008-2009
    
    
    2010-2011
    
    
    After 2011Debt
    
    $
    37,459,000
    
    
    $
    3,584,000
    
    
    $
    8,125,000
    
    
    $
    9,000,000
    
    
    $
    16,750,000Interest on Debt (1)
    
    
    14,678,000
    
    
    
    3,116,000
    
    
    
    5,471,000
    
    
    
    4,355,000
    
    
    
    1,736,000Operating Leases
    
    
    8,423,000
    
    
    
    2,623,000
    
    
    
    4,139,000
    
    
    
    1,651,000
    
    
    
    10,000Coffee Purchase
Commitments
    
    
    247,000
    
    
    
    247,000
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    60,807,000
    
    
    $
    9,570,000
    
    
    $
    17,735,000
    
    
    $
    15,006,000
    
    
    $
    18,496,000
 
 (1)
    
    Interest based on 75% of outstanding senior debt at the hedged interest rate discussed
above, 25% of outstanding senior debt at a variable rate of 7.07%, and subordinated debt at a rate
of 12%. 26




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Factors Affecting Future Cash Flow
    Factors Affecting Quarterly Performance
  Critical Accounting Policies
  Accounts Receivable  Allowance for Doubtful Accounts
  27




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Fixed Assets  Depreciation
  Goodwill  Intangible Asset Impairment
  Income Taxes
  Stock Based Compensation
   28




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Off-Balance Sheet Arrangements
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risks
    Commodity Price Risks
 Coffee
  29




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Diesel Fuel
  
 ITEM 8. FINANCIAL STATEMENTS
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
   Changes in Internal Control over Financial Reporting
  30




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ITEM 9B. OTHER INFORMATION
  31




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PART III
 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
  
 ITEM 11. EXECUTIVE COMPENSATION.
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
  
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
  32




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PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
      :
 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*
    
    1993 Performance Equity Plan
    
    
    
    S-8
    
    August 25, 1995
    
    
    10.110.2*
    
    1998 Incentive and Non-Statutory
Stock Option Plan, as amended
    
    
    
    14A
    
    March 10, 2003
    
    
    A10.3*
    
    1999 Employee Stock Purchase Plan
    
    
    
    14A
    
    March 15, 1999
    
    
    A10.4*
    
    2004 Stock Incentive Plan
    
    
    
    14A
    
    March 9, 2004
    
    
    B10.5*
    
    Instrument of Amendment dated
September 22, 2005 amending the
1999 Employee Stock Purchase
Plan
    
    
    
    8-K
    
    September 28, 2005
    
    
    10.110.6*
    
    Employment Agreement dated
January 1, 2005 with Peter K.
Baker
    
    
    
    10-K
    
    January 31, 2005
    
    
    10.610.7*
    
    Employment Agreement dated March
24, 2005 with Bruce S. MacDonald
    
    
    
    10-Q
    
    July 8, 2005
    
    
    10.710.8*
    
    Employment Agreement dated
January 1, 2005 with John B.
Baker
    
    
    
    10-K
    
    January 31, 2005
    
    
    10.710.9*
    
    Employment Agreement dated
January 1, 2005 with Henry E.
Baker
    
    
    
    8-K
    
    June 29, 2005
    
    
    10.110.10*
    
    Severance Agreement dated
December 5, 2005 with Timothy
Fallon
    
    
    
    10-K
    
    January 30, 2006
    
    
    10.1110.11
    
    Lease of Grounds in Stamford,
Connecticut from Henry E. Baker
    
    
    
    S-4
    
    September 6, 2000
    
    
    10.2410.12
    
    Lease of Buildings and Grounds
in Watertown, Connecticut from
the Bakers Grandchildren Trust
    
    
    
    S-4
    
    September 6, 2000
    
    
    10.2210.13
    
    Lease of Building in Stamford,
Connecticut from Henry E. Baker
    
    
    
    S-4
    
    September 6, 2000
    
    
    10.23
 33




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Filed withExhibit
    
    
    
    this Form
    
    
    
    Incorporated by ReferenceNo.
    
    Description
    
    10-K
    
    Form
    
    Filing Date
    
    Exhibit No.10.14
    
    Credit Agreement dated April 5,
2005 with Bank of America and
Webster Bank
    
    
    
    10-Q
    
    July 8, 2005
    
    
    10.110.15
    
    Form of Term Note dated April 5,
2005 issued to Bank of America
and Webster Bank
    
    
    
    10-Q
    
    July 8, 2005
    
    
    10.210.16
    
    Form of Subordination and Pledge
Agreement dated April 5, 2005
between Henry E. Baker, Joan
Baker, John B. Baker, Peter K.
Baker and Bank of America
    
    
    
    10-Q
    
    July 8, 2005
    
    
    10.310.17
    
    Form of Second Amended and
Restated Promissory Note dated
April 5, 2005 issued to Henry E.
Baker, Joan Baker, John B. Baker
and Peter K. Baker
    
    
    
    10-Q
    
    July 8, 2005
    
    
    10.410.18
    
    Form of Acquisition Note dated
April 5, 2005 issued to Bank of
America and Webster Bank
    
    
    
    10-Q
    
    July 8, 2005
    
    
    10.510.19
    
    Form of Revolving Credit Note
dated April 5, 2005 issued to
Bank of America and Webster Bank
    
    
    
    10-Q
    
    July 8, 2005
    
    
    10.610.20
    
    Form of Indemnification
Agreement dated November 2, 2005
with each of Henry E. Baker,
John B. Baker, Peter K. Baker,
Phillip Davidowitz, Martin A.
Dytrych, David Jurasek, John M.
Lapides, Bruce S. MacDonald and
Ross S. Rapaport
    
    
    
    10-K
    
    January 30, 2006
    
    
    10.2110.21
    
    Form of Indemnification
Agreement dated November 2, 2005
with each of John M. Lapides and
Martin A. Dytrych
    
    
    
    10-K
    
    January 30, 2006
    
    
    10.2210.22
    
    Purchase and Sale Agreement
dated March 1, 2004 with
MicroPack Corporation
    
    
    
    10-Q
    
    March 16, 2004
    
    
    10.2710.23
    
    Trademark License Agreement
dated March 1, 2004 with
MicroPack Corporation
    
    
    
    10-Q
    
    March 16, 2004
    
    
    10.2810.24
    
    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
    
    
    10.122.1
    
    Subsidiary
    
    X23.1
    
    Consent of Wolf & Company, P.C.
    
    X23.2
    
    Consent of Deloitte & Touche LLP
    
    X31.1
    
    Certification of Chief Executive
Officer pursuant to Section 302
of the Sarbanes-Oxley Act of
2002
    
    X31.2
    
    Certification of Chief Financial
Officer pursuant to Section 302
of the Sarbanes-Oxley Act of
2002
    
    X32.1
    
    Certification of Chief Executive
Officer pursuant to Section 906
of the Sarbanes-Oxley Act of
2002
    
    X32.2
    
    Certification of Chief Financial
Officer pursuant to Section 906
of the Sarbanes-Oxley Act of
2002
    
    X
 
 *
    
    Management contract or compensatory plan. 34




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##### Table of Contents



SIGNATURES
  VERMONT PURE HOLDINGS, LTD.By:
    
    /s/ Peter K. BakerDated: February 13, 2007
    
    Peter K. Baker, Chief Executive Officer
  Name
    
    Title
    
    Date/s/ Ross S. Rapaport
    
    Chairman of the Board of Directors
    
    February 13, 2007Ross S. Rapaport/s/ Henry E. Baker
    
    Director, Chairman Emeritis
    
    February 13, 2007Henry E. Baker/s/ John B. Baker
    
    Executive Vice President and Director
    
    February 13, 2007John B. Baker/s/ Peter K. Baker
    
    Chief Executive Officer and Director
    
    February 13, 2007Peter K. Baker/s/ Phillip Davidowitz
    
    Director
    
    February 13, 2007Phillip Davidowitz/s/ Martin A. Dytrych
    
    Director
    
    February 13, 2007Martin A. Dytrych/s/ John M. Lapides
    
    Director
    
    February 13, 2007John M. Lapides/s/ Bruce S. MacDonald
    
    Chief Financial Officer and Chief
    
    February 13, 2007Bruce S. MacDonald
    
    Accounting
Officer and Secretary
 35




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##### Table of Contents



PAGEReport of the Independent Registered Public Accounting Firms
    
    
    F-1 - F-2Financial Statements:Consolidated Balance Sheets, October 31, 2006 and 2005
    
    
    F-3Consolidated Statements of Operations,
Fiscal Years Ended October 31, 2006, 2005, and 2004
    
    
    F-4Consolidated Statements of Stockholders Equity
and Comprehensive Income
Fiscal Years Ended October 31, 2006, 2005, and 2004
    
    
    F-5Consolidated Statements of Cash Flows,
Fiscal Years Ended October 31, 2006, 2005, and 2004
    
    
    F-6Notes to Consolidated Financial Statements
    
    
    F-7 - F-27




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    
 F-1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 F-2




---



##### Table of Contents



VERMONT
PURE HOLDINGS, LTD. AND SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS
 October 31,
    
    
    October 31,2006
    
    
    2005ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    2,120,111
    
    
    $
    1,895,810Accounts receivable, trade  net of reserve of $352,844 and
$289,837 for 2006 and 2005, respectively
    
    
    7,212,054
    
    
    
    7,249,801Inventories
    
    
    1,192,286
    
    
    
    1,133,315Current portion of deferred tax asset
    
    
    683,509
    
    
    
    796,662Other current assets
    
    
    884,031
    
    
    
    1,699,370Unrealized gain on derivatives
    
    
    134,737
    
    
    
    168,582TOTAL CURRENT ASSETS
    
    
    12,226,728
    
    
    
    12,943,540PROPERTY AND EQUIPMENT  net
    
    
    10,718,834
    
    
    
    10,890,376OTHER ASSETS:Goodwill
    
    
    54,421,662
    
    
    
    74,755,851Other intangible assets  net
    
    
    3,197,575
    
    
    
    3,569,818Deferred tax asset
    
    
    
    
    
    
    654,729Other assets
    
    
    770,212
    
    
    
    75,000TOTAL OTHER ASSETS
    
    
    58,389,449
    
    
    
    79,055,398TOTAL ASSETS
    
    $
    81,335,011
    
    
    $
    102,889,314LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current portion of long term debt
    
    $
    3,583,564
    
    
    $
    3,266,750Accounts payable
    
    
    2,005,283
    
    
    
    2,582,105Accrued expenses
    
    
    3,414,036
    
    
    
    2,990,129Current portion of customer deposits
    
    
    706,401
    
    
    
    732,835TOTAL CURRENT LIABILITIES
    
    
    9,709,284
    
    
    
    9,571,819Long term debt, less current portion
    
    
    33,875,000
    
    
    
    37,975,000Deferred tax liability
    
    
    3,233,228Customer deposits
    
    
    2,828,208
    
    
    
    2,933,732TOTAL LIABILITIES
    
    
    49,645,720
    
    
    
    50,480,551COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock  $.001 par value, 50,000,000 authorized shares,
21,747,572 issued and 21,608,922 outstanding shares as of
October 31, 2006 and 21,744,817 issued and 21,673,267
outstanding as of October 31, 2005
    
    
    21,747
    
    
    
    21,744Additional paid in capital
    
    
    58,220,887
    
    
    
    58,207,645Treasury stock, at cost, 138,650 shares as of October 31, 2006
and 71,550 shares as of October 31, 2005
    
    
    (369,662
    )
    
    
    (264,735
    )Unearned compensation
    
    
    
    
    
    
    (134,250
    )Accumulated deficit
    
    
    (26,260,341
    )
    
    
    (5,590,223
    )Accumulated other comprehensive income
    
    
    76,660
    
    
    
    168,582TOTAL STOCKHOLDERS EQUITY
    
    
    31,689,291
    
    
    
    52,408,763TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    81,335,011
    
    
    $
    102,889,314
  F-3




---



##### Table of Contents



VERMONT
PURE HOLDINGS, LTD. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 Fiscal Year Ended October 312006
    
    
    2005
    
    
    2004NET SALES
    
    $
    62,773,812
    
    
    $
    59,834,575
    
    
    $
    52,473,401COST OF GOODS SOLD
    
    
    26,473,269
    
    
    
    24,842,247
    
    
    
    22,777,542GROSS PROFIT
    
    
    36,300,543
    
    
    
    34,992,328
    
    
    
    29,695,859OPERATING EXPENSES:Selling, general and administrative expenses
    
    
    27,934,390
    
    
    
    27,790,539
    
    
    
    23,748,088Advertising expenses
    
    
    1,082,725
    
    
    
    1,193,905
    
    
    
    1,033,601Amortization
    
    
    877,855
    
    
    
    787,043
    
    
    
    409,380Gain on disposal of property and equipment
    
    
    (74,092
    )
    
    
    (15,067
    )
    
    
    (9,649
    )Impairment loss  goodwill
    
    
    22,950,018
    
    
    
    
    
    
    
    TOTAL OPERATING EXPENSES
    
    
    52,770,896
    
    
    
    29,756,420
    
    
    
    25,181,420(LOSS) INCOME FROM OPERATIONS
    
    
    (16,470,353
    )
    
    
    5,235,908
    
    
    
    4,514,439OTHER INCOME (EXPENSE):Interest
    
    
    (3,268,192
    )
    
    
    (3,364,902
    )
    
    
    (3,506,769
    )Miscellaneous income (expense)
    
    
    750,000
    
    
    
    (260,647
    )
    
    
    (152,838
    )TOTAL OTHER EXPENSE, NET
    
    
    (2,518,192
    )
    
    
    (3,625,549
    )
    
    
    (3,659,607
    )(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES
    
    
    (18,988,545
    )
    
    
    1,610,359
    
    
    
    854,832INCOME TAX EXPENSE
    
    
    1,681,573
    
    
    
    739,766
    
    
    
    354,708(LOSS) INCOME FROM CONTINUING OPERATIONS
    
    
    (20,670,118
    )
    
    
    870,593
    
    
    
    500,124DISCONTINUED OPERATIONS:Loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (78,555
    )Gain on disposal of segments of business
    
    
    
    
    
    
    
    
    
    
    352,535Income tax expense from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (113,759
    )INCOME FROM DISCONTINUED OPERATIONS
    
    
    
    
    
    
    
    
    
    
    160,221NET (LOSS) INCOME
    
    $
    (20,670,118
    )
    
    $
    870,593
    
    
    $
    660,345NET (LOSS) INCOME PER SHARE  BASIC:Continuing Operations
    
    $
    (0.96
    )
    
    $
    0.04
    
    
    $
    0.02Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    0.01NET (LOSS) INCOME
    
    $
    (0.96
    )
    
    $
    0.04
    
    
    $
    0.03NET (LOSS) INCOME PER SHARE  DILUTED:Continuing Operations
    
    $
    (0.96
    )
    
    
    0.04
    
    
    
    0.02Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    0.01NET (LOSS) INCOME
    
    $
    (0.96
    )
    
    $
    0.04
    
    
    $
    0.03WEIGHTED AVERAGE SHARES USED IN COMPUTATION  BASIC
    
    
    21,630,739
    
    
    
    21,619,863
    
    
    
    21,497,251WEIGHTED AVERAGE SHARES USED IN COMPUTATION  DILUTED
    
    
    21,630,739
    
    
    
    21,625,683
    
    
    
    21,574,515
  F-4




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##### Table of Contents



VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS)
 AccumulatedCommon
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    Treasury
    
    
    
    
    
    
    OtherShares
    
    
    Stock
    
    
    Paid in
    
    
    Unearned
    
    
    Treasury
    
    
    Stock
    
    
    Accumulated
    
    
    Comprehensive
    
    
    
    
    
    
    ComprehensiveIssued
    
    
    Par Value
    
    
    Capital
    
    
    Compensation
    
    
    Shares
    
    
    Amount
    
    
    Deficit
    
    
    Gain (Loss)
    
    
    Total
    
    
    Income (Loss)Balance, October 31, 2003
    
    
    21,430,987
    
    
    $
    21,431
    
    
    $
    57,535,069
    
    
    $
    
    
    
    
    71,550
    
    
    $
    (264,735
    )
    
    $
    (7,121,161
    )
    
    $
    (35,504
    )
    
    $
    50,135,100Stock compensation
    
    
    7,484
    
    
    
    7
    
    
    
    56,350
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,357Exercise of stock options
    
    
    33,200
    
    
    
    33
    
    
    
    82,967
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    83,000Restricted stock grants
    
    
    26,000
    
    
    
    26
    
    
    
    57,174
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,200Shares issued under
employee stock purchase plan
    
    
    72,040
    
    
    
    72
    
    
    
    179,777
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179,849Officer share purchases
    
    
    
    
    
    
    
    
    
    
    5,741
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,741Deferred compensation
    
    
    
    
    
    
    
    
    
    
    (47,667
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47,667
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    660,345
    
    
    
    
    
    
    
    660,345
    
    
    $
    660,345Unrealized gain on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    138,604
    
    
    
    138,604
    
    
    
    138,604Balance, October 31, 2004
    
    
    21,569,711
    
    
    
    21,569
    
    
    
    57,869,411
    
    
    
    
    
    
    
    71,550
    
    
    
    (264,735
    )
    
    
    (6,460,816
    )
    
    
    103,100
    
    
    
    51,268,529
    
    
    $
    798,949Shares issued under employee
stock purchase plan
    
    
    97,047
    
    
    
    97
    
    
    
    150,646
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    150,743Restricted stock grants
    
    
    75,000
    
    
    
    76
    
    
    
    134,174
    
    
    
    (134,250
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock compensation
    
    
    3,059
    
    
    
    2
    
    
    
    5,747
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,749Deferred compensation
    
    
    
    
    
    
    
    
    
    
    47,667
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47,667Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    870,593
    
    
    
    
    
    
    
    870,593
    
    
    $
    870,593Unrealized gain on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65,482
    
    
    
    65,482
    
    
    
    65,482Balance, October 31, 2005
    
    
    21,744,817
    
    
    
    21,744
    
    
    
    58,207,645
    
    
    
    (134,250
    )
    
    
    71,550
    
    
    
    (264,735
    )
    
    
    (5,590,223
    )
    
    
    168,582
    
    
    
    52,408,763
    
    
    $
    936,075Shares issued under employee
stock purchase plan
    
    
    82,315
    
    
    
    82
    
    
    
    124,349
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124,431Non cash compensation
    
    
    
    
    
    
    
    
    
    
    14,064
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,064Restricted stock forfeiture
    
    
    (75,000
    )
    
    
    (75
    )
    
    
    (134,175
    )
    
    
    134,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercise of stock options
    
    
    5,000
    
    
    
    5
    
    
    
    8,995
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,000Share retirements
    
    
    (9,560
    )
    
    
    (9
    )
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares repurchased
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,100
    
    
    
    (104,927
    )
    
    
    
    
    
    
    
    
    
    
    (104,927
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,670,118
    )
    
    
    
    
    
    
    (20,670,118
    )
    
    $
    (20,670,118
    )Unrealized gain (loss) on derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (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
    )
  F-5




---



##### Table of Contents



VERMONT
PURE HOLDINGS, LTD. AND SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Fiscal Year Ended October 31,2006
    
    
    2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net (loss) income
    
    $
    (20,670,118
    )
    
    $
    870,593
    
    
    $
    660,345Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation
    
    
    4,041,448
    
    
    
    4,802,387
    
    
    
    5,091,470Provision for bad debts
    
    
    300,811
    
    
    
    316,667
    
    
    
    366,844Amortization
    
    
    877,855
    
    
    
    787,043
    
    
    
    409,380Impairment loss  goodwill
    
    
    22,950,018
    
    
    
    
    
    
    
    Non cash interest expense
    
    
    103,881
    
    
    
    31,862
    
    
    
    Deferred tax expense
    
    
    1,323,734
    
    
    
    737,768
    
    
    
    150,283Gain on asset disposal
    
    
    (74,092
    )
    
    
    (15,067
    )
    
    
    (9,649
    )Gain on the sale of segments of business
    
    
    
    
    
    
    
    
    
    
    (352,535
    )Non cash compensation
    
    
    14,064
    
    
    
    53,416
    
    
    
    34,234Loss on investment in CDS
    
    
    
    
    
    
    
    
    
    
    152,838Changes in assets and liabilities:Accounts receivable
    
    
    (262,427
    )
    
    
    (500,938
    )
    
    
    (154,303
    )Inventories
    
    
    (58,971
    )
    
    
    (63,481
    )
    
    
    (594,561
    )Other current assets
    
    
    211,454
    
    
    
    (203,693
    )
    
    
    30,402Other assets
    
    
    
    
    
    
    (39,000
    )
    
    
    (136,027
    )Accounts payable
    
    
    (576,822
    )
    
    
    (246,683
    )
    
    
    178,516Accrued expenses
    
    
    423,907
    
    
    
    671,643
    
    
    
    (477,290
    )Customer deposits
    
    
    (131,958
    )
    
    
    295,840
    
    
    
    235,867NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    8,472,784
    
    
    
    7,498,357
    
    
    
    5,585,814CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (4,131,441
    )
    
    
    (3,126,397
    )
    
    
    (3,231,338
    )Proceeds from the sale of segments of business  net of transaction costs
    
    
    
    
    
    
    
    
    
    
    8,921,693Proceeds from sale of assets
    
    
    190,999
    
    
    
    83,433
    
    
    
    584,565Cash used for acquisitions
    
    
    (409,277
    )
    
    
    (414,440
    )
    
    
    (4,448,477
    )NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
    
    
    (4,349,719
    )
    
    
    (3,457,404
    )
    
    
    1,826,443CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from line of credit borrowings
    
    
    772,973
    
    
    
    2,000,000
    
    
    
    6,689,248Payments on line of credit
    
    
    (772,973
    )
    
    
    (3,500,000
    )
    
    
    (1,443,248
    )Proceeds from long term debt
    
    
    
    
    
    
    28,513,852
    
    
    
    Principal payments on debt
    
    
    (3,927,268
    )
    
    
    (29,908,183
    )
    
    
    (13,313,723
    )Payments of debt issuance costs
    
    
    
    
    
    
    (185,000
    )
    
    
    Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    83,000Purchase of treasury stock
    
    
    (104,927
    )
    
    
    
    
    
    
    Proceeds from issuance of common stock
    
    
    133,431
    
    
    
    150,743
    
    
    
    185,590NET CASH USED IN FINANCING ACTIVITIES
    
    
    (3,898,764
    )
    
    
    (2,928,588
    )
    
    
    (7,799,133
    )NET INCREASE (DECREASE) IN CASH
    
    
    224,301
    
    
    
    1,112,365
    
    
    
    (386,876
    )CASH AND CASH EQUIVALENTS  beginning of year
    
    
    1,895,810
    
    
    
    783,445
    
    
    
    1,170,321CASH AND CASH EQUIVALENTS  end of year
    
    $
    2,120,111
    
    
    $
    1,895,810
    
    
    $
    783,445SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION,
EXCLUDING NON-CASH FINANCING AND INVESTING ACTIVITIESCash paid for interest
    
    $
    3,239,583
    
    
    $
    2,565,763
    
    
    $
    3,715,739Cash paid for taxes
    
    $
    182,758
    
    
    $
    246,109
    
    
    $
    72,079NON-CASH FINANCING AND INVESTING ACTIVITIES:Reduction in notes payable for acquisition
    
    $
    23,668
    
    
    $
    
    
    
    $
    Notes payable issued in acquisitions
    
    $
    167,750
    
    
    $
    141,750
    
    
    $
    640,000Note receivable for sale of assets
    
    $
    195,212
    
    
    $
    
    
    
    $
    Note receivable for sale of segment of business
    
    $
    
    
    
    $
    
    
    
    $
    (500,000
    )
  F-6




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##### Table of Contents



VERMONT
PURE HOLDINGS, LTD. AND SUBSIDIARY
 
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
 1.
    
    BUSINESS OF THE COMPANY AND BASIS OF PRESENTATIONVermont Pure Holdings, Ltd. and Subsidiary (collectively, the Company) is engaged in the
production, marketing and distribution of bottled water and distribution of coffee,
ancillary products, and other office refreshment products. Through February, 2004, when the
Company divested the retail segments of its business, the Companys products were sold,
predominantly in the Northeast, as well as in the Mid-Atlantic and Mid-Western United
States. Distribution was accomplished through a network of independent beverage distributors
and with the Companys own trucks and employees. Commencing March 2004, the Company
operated exclusively as a home and office delivery business, using its own trucks to
distribute throughout New England, New York, and New Jersey.The consolidated financial statements of the Company include the accounts of Vermont Pure
Holdings, Ltd. and its wholly-owned subsidiary, Crystal Rock, LLC. All material
inter-company profits, 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
valuation reserve on deferred taxes, the values for the purpose of calculating goodwill
impairment, and the value of equity instruments issued. Actual results could differ from
those estimates.2.
    
    SIGNIFICANT ACCOUNTING POLICIESCash Equivalents The Company considers all highly liquid temporary cash
investments with an original maturity of three months or less to be cash equivalents.Inventories Inventories primarily consist of products that are purchased for
resale and are stated at the lower of cost or market on a first in, first out basis.Property and Equipment  Property and equipment are stated at cost net of
accumulated depreciation. Depreciation is calculated on the straight-line method over the
estimated useful lives of the assets, which range from three to ten years for machinery and
equipment, and from seven to thirty years for buildings and improvements, and three to seven
years for other fixed assets.Goodwill and Other Intangibles  Intangible assets with lives restricted by
contractual, legal, or other means are amortized over their useful lives. Based on Statement
of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets,
the Company defines an assets useful life as the period over which the asset is
 F-7




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##### Table of Contents



Stock-Based Compensation
   F-8




---



##### Table of Contents



For the Years EndedOctober 31,2005
    
    
    2004Net Income  As Reported
    
    $
    870,593
    
    
    $
    660,345Add: Stock based employee compensation expense
included in net income, net of related tax
effects
    
    
    28,123
    
    
    
    5,577Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects
    
    
    (336,444
    )
    
    
    (353,203
    )Pro Forma Net Income
    
    $
    562,272
    
    
    $
    312,719Basic  As Reported
    
    $
    .04
    
    
    $
    .03Basic  Pro Forma
    
    $
    .03
    
    
    $
    .01Diluted  As Reported
    
    $
    .04
    
    
    $
    .03Diluted  Pro Forma
    
    $
    .03
    
    
    $
    .01
   2005
    
    2004Expected Dividend Yield
    
    
    0
    %
    
    
    0
    %Expected Life
    
    5 Years
    
    5 YearsRisk free Interest Rate
    
    
    3.0
    %
    
    
    3.0
    %Volatility
    
    
    36
    %
    
    
    39
    %
 Net (Loss) Income Per Share
 Advertising Expenses
 Customer Deposits
 F-9




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##### Table of Contents



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




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##### Table of Contents



Shipping and Handling Costs The Company distributes its Home and Office products
directly to its customers on its own trucks. The delivery costs related to the Companys
route system, which are reported under selling, general, and administrative expenses, were
approximately $12,741,000, $12,563,000, and $10,940,000 for fiscal years 2006, 2005, and
2004 respectively.Reclassification  Certain amounts in the 2005 financial statements have been
reclassified to conform to the 2006 presentation.3.
    
    RECENT ACCOUNTING PRONOUNCEMENTSIn May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154 Accounting
Changes and Error Corrections, to amend APB Opinion 20 and SFAS No. 3 and change the
requirements for the accounting for and reporting of a change in accounting principle. This
Statement provides guidance on the accounting for and reporting of accounting changes and
error corrections. It establishes, unless impracticable, retrospective application as the
required method for reporting a change in accounting principle in the absence of explicit
transition requirements specific to the newly adopted accounting principle. This Statement
also provides guidance for determining whether retrospective application of a change in
accounting principle is impracticable and for reporting a change when retrospective
application is impracticable. The correction of an error in previously issued financial
statements is not an accounting change. However, the reporting of an error correction
involves adjustments to previously issued financial statements similar to those generally
applicable to reporting an accounting change retrospectively. Therefore, the reporting of a
correction of an error by restating previously issued financial statements is also addressed
by this Statement. SFAS No. 154 is effective for accounting changes and correction of errors
made is fiscal years beginning after December 15, 2005. This pronouncement is not expected
to have a material effect on our financial statements.In February 2006, FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments as an amendment to SFAS No. 133 and 140. This Statement:
 
    
    Permits fair value re-measurement for any hybrid financial instrument that
contains an embedded derivative that otherwise would require bifurcation;
    
    Clarifies which interest-only strips and principal-only strips are not subject
to the requirements of Statement 133;
    
    Establishes a requirement to evaluate interests in securitized financial assets
to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation;
    
    Clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives; and
    
    Amends Statement 140 to eliminate the prohibition on a qualifying
special-purpose entity from holding a derivative financial instrument that pertains
to a beneficial interest other than another derivative financial instrument.
 
 F-11




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F-12




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##### Table of Contents



Commission has issued, to improve the efficiency of the Section 404(b) auditor attestation
report process.4.
    
    MERGERS AND ACQUISITIONSDuring fiscal years 2006, 2005 and 2004, Vermont Pure Holdings, Ltd. made four, four and
seven acquisitions, respectively. The purchase price paid for the acquisitions for the
respective years is as follows:
 2006
    
    
    2005
    
    
    2004Cash (including acquisition costs)
    
    $
    409,277
    
    
    $
    511,570
    
    
    $
    4,883,476Notes Payable
    
    
    167,750
    
    
    
    141,750
    
    
    
    640,000$
    577,027
    
    
    $
    653,320
    
    
    $
    5,523,476
  2006
    
    
    2005
    
    
    2004Accounts Receivable
    
    $
    637
    
    
    $
    
    
    
    $
    296,189Inventories
    
    
    
    
    
    
    70,532
    
    
    
    1,048,320Equipment
    
    
    40,307Identifiable Intangible Assets
    
    
    523,206
    
    
    
    546,398
    
    
    
    2,613,500Goodwill
    
    
    12,877
    
    
    
    36,390
    
    
    
    1,875,263Bottle Deposits
    
    
    
    
    
    
    
    
    
    
    (309,796
    )Purchase Price
    
    $
    577,027
    
    
    $
    653,320
    
    
    $
    5,523,476
   2006
    
    
    2005
    
    
    2004Net Sales
    
    $
    63,030,012
    
    
    $
    60,884,549
    
    
    $
    59,051,910Net (Loss) Income
    
    $
    (20,653,936
    )
    
    $
    952,542
    
    
    $
    984,884Net (Loss) Income Per
Share-Diluted
    
    $
    (.95
    )
    
    $
    .04
    
    
    $
    .05Weighted Average Common
Shares
Outstanding-Diluted
    
    
    21,630,739
    
    
    
    21,625,683
    
    
    
    21,574,515
  F-13




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##### Table of Contents



5.
    
    LEASESThe carrying cost of the equipment rented to customers, which is included in property and
equipment in the consolidated balance sheets, is calculated as follows:
 Original Cost
    
    $
    3,048,933Accumulated Depreciation
    
    
    1,967,521Carrying Cost
    
    $
    1,081,412
 We expect to have revenue of $832,000 from the rental of such equipment over the next twelve
months.6.
    
    ACCOUNTS RECEIVABLEThe activity in the allowance for continuing operations for the years ended October 31,
2006, 2005, and 2004 is as follows:
 2006
    
    
    2005
    
    
    2004Balance, beginning of year
    
    $
    289,837
    
    
    $
    303,304
    
    
    $
    335,321Provision
    
    
    300,811
    
    
    
    316,667
    
    
    
    366,844Write-offs
    
    
    (237,804
    )
    
    
    (330,134
    )
    
    
    (398,861
    )Balance, end of year
    
    $
    352,844
    
    
    $
    289,837
    
    
    $
    303,304
 7.
    
    INVENTORIESInventories at October 31 consisted of:
 2006
    
    
    2005Finished Goods
    
    $
    1,057,580
    
    
    $
    994,240Raw Materials
    
    
    134,706
    
    
    
    139,075Total Inventories
    
    $
    1,192,286
    
    
    $
    1,133,315
  F-14




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##### Table of Contents



8.
    
    PROPERTY AND EQUIPMENT, NETProperty and equipment at October 31 consisted of:
 UsefulLife
    
    
    2006
    
    
    2005Buildings and improvements
    
    7 - 30 yrs.
    
    $
    752,907
    
    
    $
    386,960Machinery and equipment
    
    3 - 10 yrs.
    
    
    17,984,393
    
    
    
    17,131,869Bottles, racks and vehicles
    
    3 - 7 yrs.
    
    
    7,600,860
    
    
    
    9,070,823Furniture, fixtures and
office equipment
    
    3 - 7 yrs.
    
    
    1,985,958
    
    
    
    1,774,60628,324,118
    
    
    
    28,364,258Less accumulated depreciation
    
    
    
    
    
    
    17,605,284
    
    
    
    17,473,882$
    10,718,834
    
    
    $
    10,890,376
 Depreciation expense for the fiscal years ended October 31, 2006, 2005 and 2004 was
$4,041,448, $4,802,387, and $5,091,470, respectively.9.
    
    GOODWILL AND OTHER INTANGIBLE ASSETSComponents of other intangible assets at October 31 consisted of:
 2006
    
    
    2005Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortized Intangible Assets:Customer Lists and CovenantsNot to Compete
    
    $
    5,141,123
    
    
    $
    2,383,443
    
    
    $
    4,655,238
    
    
    $
    1,527,060Other Identifiable Intangibles
    
    
    633,172
    
    
    
    193,277
    
    
    
    633,168
    
    
    
    191,528Total
    
    $
    5,774,295
    
    
    $
    2,576,720
    
    
    $
    5,288,406
    
    
    $
    1,718,588
   Fiscal Year Ending
    
    AmountOctober 31, 2007
    
    $795,743October 31, 2008
    
    755,357October 31, 2009
    
    578,660October 31, 2010
    
    297,577October 31, 2011
    
    163,423
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##### Table of Contents



2006
    
    
    2005Beginning balance
    
    $
    74,755,851
    
    
    $
    74,772,591Goodwill acquired during the year
    
    
    12,877
    
    
    
    36,390Goodwill disposed of during the year
    
    
    (16,347
    )
    
    
    (53,130)Adjustment of goodwill related to deferred
tax liability
    
    
    2,619,299
    
    
    
    Impairment loss
    
    
    (22,950,018
    )
    
    
    Balance as of October 31
    
    $
    54,421,662
    
    
    $
    74,755,851
  OTHER ASSETS
  2006
    
    
    2005Note receivable, unsecured, due March 1, 2008,
interest 5% per annum
    
    $
    500,000
    
    
    $
    Note receivable, unsecured, due August 8, 2011,
interest 0% per annum
    
    
    195,212
    
    
    
    Ownership interests
    
    
    75,000
    
    
    
    75,000Total
    
    $
    770,212
    
    
    $
    75,000
 ACCRUED EXPENSES
  2006
    
    
    2005Payroll and Vacation
    
    $
    1,877,689
    
    
    $
    1,501,402Interest
    
    
    530,446
    
    
    
    524,545Severance
    
    
    194,459
    
    
    
    250,000Accounting and Legal
    
    
    189,335
    
    
    
    211,501Legal Settlements
    
    
    
    
    
    
    100,000Miscellaneous
    
    
    622,107
    
    
    
    402,681Total
    
    $
    3,414,036
    
    
    $
    2,990,129
 12.
    
    DEBTSenior DebtOn April 6, 2005, the Company refinanced its senior credit facility with Bank of America.
The new facility refinanced $28 million of existing senior debt in the form of a seven year
term loan, provides a revolving credit facility of $6 million for working capital and
letters of credit for a term of three years, and makes available up to $7.5 million to be
used for acquisitions for a period of three years. 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.With the $28 million of term debt, the Company repaid its borrowings under its former senior
credit facility with Webster Bank, including $17.5 million under the old term loan
 F-16




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##### Table of Contents



Subordinated Debt
   Annual Maturities
  F-17




---



##### Table of Contents



Senior
    
    
    Credit Lines
    
    
    Subordinated
    
    
    Other
    
    
    TotalFiscal year ending
October 31,2007
    
    $
    3,500,000
    
    
    $
    
    
    
    $
    
    
    
    $
    83,564
    
    
    $
    3,583,5642008
    
    
    3,875,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,875,0002009
    
    
    4,250,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,250,0002010
    
    
    4,250,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,250,0002011 and after
    
    
    7,500,000
    
    
    
    
    
    
    
    14,000,000
    
    
    
    
    
    
    
    21,500,000Total Debt
    
    $
    23,375,000
    
    
    $
    
    
    
    $
    14,000,000
    
    
    $
    83,564
    
    
    $
    37,458,564
 13.
    
    INTEREST RATE SWAP AGREEMENTSThe Company uses interest rate swaps to fix certain long term interest rates. The swap rates
are based on the floating 30-day LIBOR rate and are structured such that if the loan rate
for the period exceeds the fixed rate of the swap, then the bank pays the Company to lower
the effective interest rate. Conversely, if the rate is lower than the fixed rate, the
Company pays the bank additional interest.On May 3, 2005, the Company entered into an interest rate hedge (swap) agreement in
conjunction with its new senior financing. The new credit agreement requires that the
Company fix the interest rate on its term debt for the life of the loan. The swap fixes the
interest rate at 4.66%, plus the applicable margin, 1.75% at October 31, 2006, and amortizes
concurrently with the loan principal to fix the interest rate with respect to 75% of the
outstanding principal. As of October 31, 2006, the total notional amount of the swap
agreement was $17,531,000.As of October 31, 2005, the Company had two swap agreements for a total notional amount of
$19,900,000.Based on the floating rate for years ended October 31, 2006 and 2005, the Company paid
$199,000 and $44,000 less in interest, respectively, than it would have without the swaps.These swaps are considered 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. The net unrealized (loss) gain, net of income
taxes, for the years ended October 31, 2006, 2005 and 2004 was ($91,922), $65,482, and
$138,604, respectively. The accumulated other comprehensive gain as of October 31, 2006 and
2005 was $76,660 and $168,582, respectively.14.
    
    STOCK BASED COMPENSATIONStock Option and Incentive PlansIn November 1993, the Company adopted the 1993 Performance Equity Plan (the 1993 Plan).
The 1993 Plan authorizes the granting of awards for up to 1,000,000 shares of
 F-18




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##### Table of Contents



Outstanding Options
    
    
    Weighted Average(Shares)
    
    
    Exercise PriceBalance at October 31, 2003
    
    
    2,478,821
    
    
    $
    2.98Granted
    
    
    265,000
    
    
    
    2.96Exercised
    
    
    (33,200
    )
    
    
    2.50Expired
    
    
    (47,831
    )
    
    
    2.77Balance at October 31, 2004
    
    
    2,662,790
    
    
    
    2.96Granted
    
    
    414,500
    
    
    
    2.28Expired
    
    
    (450,800
    )
    
    
    2.50Balance at October 31, 2005
    
    
    2,626,490
    
    
    
    2.96Exercised
    
    
    (5,000
    )
    
    
    1.80Expired
    
    
    (1,864,303
    )
    
    
    2.96Balance at October 31, 2006
    
    
    757,187
    
    
    
    2.96
   F-19




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##### Table of Contents



WeightedAverage
    
    
    WeightedExercise
    
    Outstanding
    
    
    Remaining
    
    
    AveragePrice
    
    Options
    
    
    Contractual
    
    
    Exercise
    
    
    IntrinsicRange
    
    (Shares)
    
    
    Life
    
    
    Price
    
    
    Value$1.80 - $2.60
    
    
    299,500
    
    
    
    6.64
    
    
    $
    2.36
    
    
    $
    $2.81 - $3.38
    
    
    382,687
    
    
    
    3.52
    
    
    
    3.21
    
    
    
    $3.50 - $4.25
    
    
    70,000
    
    
    
    3.71
    
    
    
    3.99
    
    
    
    $4.28 - $4.98
    
    
    5,000
    
    
    
    5.17
    
    
    
    4.98
    
    
    
    757,187
    
    
    
    4.78
    
    
    $
    2.96
    
    
    $
    
  WeightedAverageGrant DateNon-Vested Shares
    
    Shares
    
    Fair ValueNon-vested at October 31, 2005
    
    
    65,000
    
    
    $
    1.83Vested
    
    
    (25,000
    )
    
    $
    1.82Expired
    
    
    (40,000
    )
    
    $
    1.83Non-vested at October 31, 2006
    
    
    
    
    
    
    
   Employee Stock Purchase Plan
  F-20




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##### Table of Contents



Shares Issued Under the 2004 Stock Incentive PlanOn September 17, 2004, the Company issued 26,000 restricted shares in connection with two
awards to employees under the 2004 plan. These awards vest one year from the anniversary
date. The total value of the awards was $57,174. The Company recognized compensation over
the vesting period resulting in expense of $47,667 and $9,507 in fiscal years 2005 and 2004,
respectively.On January 1, 2005, the Company issued 75,000 restricted shares as an award to an employee
under the 2004 plan. The total value of the award was $134,250. The Company did not
recognize compensation related to this award in fiscal year 2005 since these shares were
forfeited in connection with the resignation of the employee on November 2, 2005.15.
    
    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 $123,000,
$116,000, and $107,000, for the fiscal years ended October 31, 2006, 2005, and 2004,
respectively.16.
    
    COMMITMENTS AND CONTINGENCIESOperating LeasesThe Companys operating leases consist of trucks, office equipment and rental property.Future minimum rental payments over the terms of various lease contracts are approximately
as follows:
 Fiscal Year Ending October 31,2007
    
    
    2,622,6012008
    
    
    2,348,7952009
    
    
    1,790,4532010
    
    
    1,385,5652011
    
    
    265,392Thereafter
    
    
    9,708Total
    
    $
    8,422,514
  Contingencies
  F-21




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##### Table of Contents



as a miscellaneous expense in the accompanying statement of operations for the fiscal year
ended October 31, 2005. The judgment was paid in December 2005.17.
    
    RELATED PARTY TRANSACTIONSDirectors and OfficersThree of the Companys major shareholders (Henry Baker, John Baker and Peter Baker) have
employment contracts with the Company through December 31, 2006. They are also directors.
One contract entitles the shareholder to annual compensation of $47,000 as well as a leased
Company vehicle. The other two contracts entitle the respective shareholders to annual
compensation of $200,000 each and other bonuses and prerequisites.The Company leases a 67,000 square foot facility in Watertown, CT and a 22,000 square foot
facility in Stamford, CT from a Baker family trust. These leases expire in October 2010.
Future minimum rental payments under these leases are as follows:
 Fiscal year ending October 31,
    
    Stamford
    
    
    Watertown
    
    
    Total2007
    
    
    248,400
    
    
    
    414,000
    
    
    
    662,4002008
    
    
    248,400
    
    
    
    414,000
    
    
    
    662,4002009
    
    
    248,400
    
    
    
    414,000
    
    
    
    662,4002010
    
    
    248,400
    
    
    
    414,000
    
    
    
    662,400Totals
    
    $
    993,600
    
    
    $
    1,656,000
    
    
    $
    2,649,600
  Investment in Voyageur
   F-22




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##### Table of Contents



was impaired and wrote off the remaining carrying value of $152,838 which is reflected as a
charge to operations as a miscellaneous expense in the accompanying statement of operations
for the fiscal year ended October 31, 2004. Since the Company has written off its entire
interest in CDS as of that date, it did not recognize its share of the loss for CDS
amounting to $61,000 and $8,000 in fiscal year 2006 and 2005, respectively.18.
    
    INCOME TAXESDeferred tax assets (liabilities) at October 31, 2006 and October 31, 2005, are as follows:
 October 31,2006
    
    
    2005Deferred tax assets:Allowance for doubtful accounts
    
    $
    134,081
    
    
    $
    110,138Amortization
    
    
    
    
    
    
    (67,518
    )Accrued compensation
    
    
    494,222
    
    
    
    350,945Net operating losses
    
    
    76,832
    
    
    
    2,185,374Sale of business segment
    
    
    
    
    
    
    962,515Accrued liabilities and reserves
    
    
    163,492
    
    
    
    448,126Total deferred tax assets
    
    
    868,627
    
    
    
    3,989,580Deferred tax liabilities:Depreciation
    
    
    (2,116,513
    )
    
    
    (2,538,189
    )Amortization
    
    
    (1,243,756
    )
    
    
    Interest rate swap
    
    
    (58,077
    )
    
    
    Total deferred tax liabilities
    
    
    (3,418,346
    )
    
    
    (2,538,189
    )Net deferred tax (liability) asset
    
    $
    (2,549,719
    )
    
    $
    1,451,391
   Fiscal Year Ended October 31,2006
    
    
    2005
    
    
    2004Income tax (benefit)
expense computed at the
statutory rate
    
    $
    (6,456,105
    )
    
    $
    547,522
    
    
    $
    384,071Goodwill impairment
    
    
    7,803,000
    
    
    
    
    
    
    
    Other permanent differences
    
    
    99,326
    
    
    
    120,959
    
    
    
    22,661State income taxes
    
    
    235,352
    
    
    
    71,285
    
    
    
    61,735Income tax expense
    
    $
    1,681,573
    
    
    $
    739,766
    
    
    $
    468,467
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##### Table of Contents



Fiscal Year Ended October 31,2006
    
    
    2005
    
    
    2004Current:Federal
    
    $
    147,239
    
    
    $
    208
    
    
    $
    199,184State
    
    
    210,600
    
    
    
    1,790
    
    
    
    119,000Total current
    
    
    357,839
    
    
    
    1,998
    
    
    
    318,184Deferred:Federal
    
    
    1,177,739
    
    
    
    667,664
    
    
    
    111,283State
    
    
    145,995
    
    
    
    70,104
    
    
    
    39,000Total deferred
    
    
    1,323,734
    
    
    
    737,768
    
    
    
    150,283Total income tax expense
    
    $
    1,681,573
    
    
    $
    739,766
    
    
    $
    468,467
 In calculating its effective tax rate, the Company has considered the effect of certain
contingent factors involving state and local income taxes. Although it believes that the
tax returns filed accurately reflect operations and financial results, the Company has an
accrued liability as of October 31, 2006 and 2005 of approximately $165,000 and $284,000,
respectively, for the purpose of settling disputes in the event that certain jurisdictions
viewed particular tax laws differently than the Company did when the returns were filed.19.
    
    NET (LOSS) INCOME PER SHAREThe following calculation provides the reconciliation of the denominators used in the
calculation of basic and fully diluted earnings per share:
 Fiscal Year Ended October 31,2006
    
    
    2005
    
    
    2004(Loss) Income from Continuing
Operations
    
    $
    (20,670,118
    )
    
    $
    870,593
    
    
    $
    500,124Income from Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    160,221Net (loss) Income
    
    $
    (20,670,118
    )
    
    $
    870,593
    
    
    $
    660,345Denominator:Basic Weighted Average Shares
Outstanding
    
    
    21,630,739
    
    
    
    21,619,863
    
    
    
    21,497,251Effect of Stock Options
    
    
    
    
    
    
    5,820
    
    
    
    77,264Diluted Weighted Average Shares
Outstanding
    
    
    21,630,739
    
    
    
    21,625,683
    
    
    
    21,574,515Basic Net (Loss) Income Per Share:(Loss) Income from Continuing
Operations
    
    $
    (.96
    )
    
    $
    .04
    
    
    $
    .02Income from Discontinued Operations
    
    $
    .00
    
    
    $
    .00
    
    
    $
    .01Net (Loss) Income
    
    $
    (.96
    )
    
    $
    .04
    
    
    $
    .03Diluted Net (Loss) Income Per Share:(Loss) Income from Continuing
Operations
    
    $
    (.96
    )
    
    $
    .04
    
    
    $
    .02Income from Discontinued Operations
    
    $
    .00
    
    
    $
    .00
    
    
    $
    .01Net (loss) Income
    
    $
    (.96
    )
    
    $
    .04
    
    
    $
    .03
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##### Table of Contents



There were 757,187; 2,561,490; and 1,645,000 options outstanding for the years ended
October 31, 2006, 2005 and 2004, respectively, that were not included in the dilution
calculation because the options exercise price exceeded the market price of the underlying
common shares.20.
    
    SALE OF BUSINESS SEGMENTSOn March 2, 2004, the Company completed the sale of substantially all of the assets related
to its Retail and Retail  Gallons segments. These segments have been accounted for as
discontinued operations.The sale resulted in a gain before income taxes, reported in discontinued operations, of
$352,535. The gain was calculated by deducting the net carrying value of the assets and
liabilities and transaction costs from the net proceeds as follows:
 Selling Price
    
    $
    10,567,998Accounts Receivable
    
    
    (1,147,229
    )Inventory
    
    
    (2,490,181
    )Property, Plant, and Equipment
    
    
    (7,093,641
    )Accounts Payable
    
    
    1,739,347Transaction Costs
    
    
    (1,223,759
    )Gain
    
    $
    352,535
    F-25




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##### Table of Contents



21.
    
    UNAUDITED QUARTERLY FINANCIAL DATAThe Companys unaudited quarterly financial data for the last two fiscal years is as
follows:
 Fiscal
2006
    
    For the quarter ended:January 31,
    
    April 30,
    
    July 31,
    
    October 31,($ in 000s except per share data)
    
    2006
    
    2006
    
    2006
    
    2006Net Sales
    
    $
    14,614
    
    
    $
    15,240
    
    
    $
    16,520
    
    
    $
    16,400Gross Profit
    
    $
    8,214
    
    
    $
    8,765
    
    
    $
    9,854
    
    
    $
    9,468Net (Loss) Income
    
    $
    65
    
    
    $
    475
    
    
    $
    1,252
    
    
    $
    (22,462
    )Earnings per Share:Net (Loss) Income  Basic and
Diluted
    
    $
    
    
    
    $
    .02
    
    
    $
    .06
    
    
    $
    (1.04
    )
 Fiscal
2005
    

    For the quarter ended:January 31,
    
    April 30,
    
    July 31,
    
    October 31,($ in 000s except per share data)
    
    2005
    
    2005
    
    2005
    
    2005Net Sales
    
    $
    13,964
    
    
    $
    14,756
    
    
    $
    15,306
    
    
    $
    15,809Gross Profit
    
    $
    8,032
    
    
    $
    8,588
    
    
    $
    9,048
    
    
    $
    9,324Net Income
    
    $
    7
    
    
    $
    205
    
    
    $
    382
    
    
    $
    277Earnings per Share:Net Income  Basic and Diluted
    
    $
    
    
    
    $
    .01
    
    
    $
    .02
    
    
    $
    .01
 The Companys business is seasonal based on weather. It is typical for sales and net
income to be higher in the warmer months than the balance of the year. Given the Companys
fiscal year, the quarter ending July 31 is typically the strongest financial quarter. In
fiscal year 2006, the results for this quarter were even stronger as a result of a legal
settlement of $750,000 in favor of the Company. The fourth quarter loss was a result of the
Companys annual goodwill analysis and impairment.22.
    
    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, 2006, the Company had cash in
deposits exceeding the insured limit by approximately $1,990,000.23.
    
    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
 F-26




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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
a proposed June 2003 settlement with Nestlé. The complaint includes counts involving
negligence, breach of contract, breach of the implied covenant of good faith and fair
dealing, breach of fiduciary duty, tortuous interference with economic relations, civil
conspiracy, and other counts, and seeks declaratory relief and compensatory and punitive
damages.In June 2006, certain of the defendants filed motions to dismiss the Companys complaint
based on lack of personal jurisdiction and/or failure to state a claim upon which relief
could be granted. Those motions are pending. In July 2006, certain of the defendants filed
a counterclaim against the Company seeking recovery of their fees and expenses in the Nestlé
litigation.Management intends to pursue its claims, and to the extent of the counterclaims, defend
itself vigorously. It is too early in this case to assess a potential outcome.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, related to this settlement.At any point in time there may be various legal proceedings pending against the Company.
Unless specifically mentioned, the Company considers all such proceedings to be in the
normal course of business. Generally such claims are covered by insurance. The Company
believes that the resolution of these types of claims, to the extent not dismissed or
covered by insurance, will not individually or in the aggregate have a material adverse
effect on its financial position or results of operations. To the extent reasonably
estimable, reserves are established regarding pending legal proceedings if there is a
probable outcome that would require a payment by the Company.24.
    
    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. The purchase, in the open
market, of 67,100 shares was completed from July through October 2006, at prices ranging
from $1.38 to $1.67 per share, for an aggregate purchase price of $104,927. The Company
expects to continue to purchase stock in the open market but total purchases may not
ultimately reach the limit established. The Company has used internally generated cash to
fund these purchases.
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##### Table of Contents



EXHIBITS TO VERMONT PURE HOLDINGS, LTD.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2006
Exhibits Filed Herewith
 ExhibitNumber
    
    Description22.1
    
    Subsidiary23.1
    
    Consent of Wolf & Company, P.C.23.2
    
    Consent of Deloitte & Touche LLP31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.