ITEM 1. BUSINESS.
Introduction and Company Background
Crystal Rock Holdings, Inc., incorporated in Delaware in 1990, is engaged in the production, marketing and distribution of bottled water (the Crystal Rock® and Vermont Pure® brands) and the distribution of coffee including our Cool Beans® brand, ancillary products and other office refreshment products, and office products under the Crystal Rock Office® brand. We operate primarily as a distribution business to homes and offices, using our own trucks for distribution throughout New England, New York, and New Jersey.
Our distribution sales and services evolved from our initial business, sales of bottled water and cooler rentals. We bottle our water and also have it bottled for us. All of our water products are still, non-sparkling waters as opposed to sparkling waters. In addition to water and related services, our other significant food and drink offerings have grown to include distribution of coffee and ancillary products, and other refreshment products including soft drinks and snacks. To a lesser extent, we distribute these products through third party distributors and directly through vending machines.
Water
Bottled water is a mainstream beverage and the centerpiece of many consumers’ healthy living lifestyles. Sales of bottled water accounted for 37% of our total sales in fiscal year 2014 and 41% in 2013. We believe that the development of the bottled water industry has for many years reflected public awareness of the potential contamination and unreliability of some municipal water supplies. Conversely, bottled water has been the recent focus of publicity regarding concerns about the possibly adverse environmental effects of using plastic bottles, as well as the effect on the environment of water extraction and the production and disposal of plastic bottles. See Item 1A, “Risk Factors” for more information.
Coffee
Coffee, a product that is counter seasonal to water, is the second leading product in the distribution channel, accounting for 19% of our total sales in fiscal year 2014 and 23% of our total sales in fiscal year 2013. We sell different brands and sizes of coffee products. We continue to promote our Cool Beans® brand coffee in an effort to increase profitability and create brand equity in the coffee category. Because coffee is a commodity, coffee sales are affected by volatility in the world commodity markets. An interruption in supply or a dramatic increase in pricing could have an adverse effect on our business.
A large proportion of our coffee sales are single-serve coffee products. These products have revolutionized the marketplace over the last decade and changes in distribution play a significant role in the profitability of these products.
Refreshment and Equipment Rental
Ancillary products, such as soft drinks and snacks, accounted for 15% of our total revenues in fiscal year 2014 and 16% in fiscal year 2013. Equipment rentals, primarily water coolers, made up 11% and 12% of our total revenues in each of those fiscal years, respectively.
Office Products
While the contribution of water, coffee, refreshment products and cooler rentals to our revenues have declined over the past two fiscal years, we are now growing our revenues from sales of office products, as discussed more fully below. In fiscal 2013, we modified our long-term strategy in this regard from mainly pursuing organic growth to endeavoring to increase office products revenues through acquisitions, in addition to by organic growth. We completed the acquisition of Universal Business Equipment Corp. in 2013 and have largely completed integrating it into our systems and operations in 2014. The contribution to total revenues from office products increased in fiscal year 2014 to 15% from 5% in fiscal 2013.
Other Revenue
Fees that are charged to offset energy costs for delivery and freight, raw materials, and bottling operations primarily make up the balance of our revenue. This comprised 3% of our total sales in fiscal years 2014 and 2013.
Water Sources, Treatment, and Bottling Operations
Water from local municipalities is the primary source for the Crystal Rock Waters® brand in 3 and 5 gallon bottles. This accounts for 70% of our water bottled in these types of containers. Municipal water is purified through a number of processes beginning with filtration. Utilizing carbon and ion exchange filtration systems, we remove chlorine and other volatile compounds and dissolved solids. After the filtration process, impurities are removed by reverse osmosis and/or distillation. Prior to bottling, we add pharmaceutical grade minerals to the water, including calcium, potassium, and magnesium for taste. The water is ozonated (by injecting ozone into the water as an agent to prohibit the formation of bacteria) and bottled in a fully enclosed clean room with a high efficiency particulate air, or HEPA, filtering system designed to prevent any airborne contaminants from entering the bottling area, in order to create a sanitary filling environment.
If for any reason the municipal sources for Crystal Rock® water were curtailed or eliminated, we could, though probably at greater expense, purchase water from other sources and have it shipped to our manufacturing facilities.
The primary source of our natural spring water (primarily sold under the Vermont Pure® brand) is a spring owned by a third party in Stockbridge, Vermont that is subject to a 50-year water supply contract, approximately 40 years of which remain. We also obtain water, under similar agreements with third parties, from springs in Bennington and Tinmouth, Vermont. These three springs are approved by the State of Vermont as sources for natural spring water. The contractual terms for these springs provide spring water in excess of our current needs and within the apparent capacity of the springs, and accordingly we believe that we can readily meet our bulk water supply needs for the foreseeable future. Water from these springs account for 30% of our total water bottled.
Percolation through the earth's surface is nature's best filter of water. We believe that the age and extended percolation period of our natural spring water provides the natural spring water with certain distinct attributes: a purer water, noteworthy mineral characteristics (including the fact that the water is sodium free and has a naturally balanced pH), and a light, refreshing taste.
An interruption in or contamination of any of our spring sites would materially affect our business. We believe that we could find adequate supplies of bulk spring water from other sources, but that we might suffer inventory shortages or inefficiencies, such as increased purchase or transportation costs, in obtaining such supplies.
We are highly dependent on the integrity of the sources and processes by which we derive our products. Natural occurrences beyond our control, such as drought, flood, earthquake or other geological changes, a change in the chemical or mineral content or purity of the water, or environmental pollution may affect the amount and quality of the water available from the springs or municipal sources that we use. There is a possibility that characteristics of the product could be changed either inadvertently or by tampering before consumption. Even if such an event were not attributable to us, the product’s reputation could be irreparably harmed. Consequently, we would experience economic hardship. Occurrence of any of these events could have an adverse impact on our business. We are also dependent on the continued functioning of our bottling processes. An interruption could result in an inability to meet market demand and/or negatively impact the cost to bottle the products.
We have no material contractual commitments to the owners of our outside sources and bottling facilities other than for the products and services we receive.
We use outside trucking companies to transport bulk spring water from the source site to our bottling facilities.
Products
We sell our Crystal Rock® and Vermont Pure® water brands in three- and five-gallon bottles to homes and offices throughout New England, New York, and New Jersey. In general, Crystal Rock® is distributed in southern New England and New York, while Vermont Pure® is primarily distributed throughout northern New England and secondarily in southern New England and New York. We rent and sell water coolers to customers to dispense bottled water. Our coolers are available in various consumer preferences such as cold, or hot and cold, dispensing units. In addition, we sell and rent units to commercial accounts that filter water from the existing source on site. We also rent and sell coffee brewing equipment and distribute a variety of coffee, tea and other hot beverage products and related supplies, as well as other consumable products used around the office. We offer vending services in some locations. We own the Cool Beans® brand of coffee which we distribute throughout our market area. In addition to Cool Beans®, we sell other brands of coffee, most notably, Baronet and Green Mountain Coffee Roasters.
Our extensive distribution system and large customer lists afford us the opportunity to introduce new products that may benefit our current customers or appeal to new customers. From time to time we may capitalize on these opportunities by expanding our product lines or replacing existing products with new ones. In response to the increasingly competitive sales environment, we will consider distributing new products that we believe may enhance our sales and profitability.
Office Products Line
In 2011, we began to distribute office products under the Crystal Rock Office® brand. Recognizing the value inherent in our distribution system, we do not maintain large inventories of office products. Rather, we primarily purchase office products from large national vendors such as S. P. Richards that provide just-in-time delivery, with the result that the introduction of our office product line has not resulted, and is not expected to result, in a material outlay of resources to accommodate increased inventory. The broader range of office products has contributed significantly to our sales as this product line has become a growing portion of our total sales.
Our original strategy contemplated growing this portion of our business by, in part, improving our information technology (IT) infrastructure in order to facilitate online sales. Our strategy also contemplated growth by acquisition. In 2011, we introduced office products sold under the Crystal Rock Office® brand throughout Connecticut. We had significant IT expenditures in fiscal 2011 and fiscal 2012, devoted in large measure toward developing the web-based and personnel aspects of selling the Crystal Rock Office® brand. However, in fiscal 2013 and subsequently, we decided to re-focus our strategy. We reduced our sales force, curtailed the major portion of our IT development expenses, and acquired the assets of Universal Business Equipment Corp. in fiscal 2013. The acquisition increased our distribution in portions of our core market areas, enhanced our internet sales presence and increased our sales significantly in this product category in fiscal 2014.
Despite the advantage of not having to maintain a significant inventory for office products, this line of products does not yield as much margin as our traditional lines, so that incremental sales have not been and are not expected to be proportionately as profitable as our traditional lines have been. No assurance can be given that we will achieve the anticipated sales and profitability in the future.
In addition to barriers to entry in this market such as establishing our brand name in the marketplace and developing our information technology systems, we face significant competition from other office products suppliers that have considerably greater assets and resources than we do and may be better known for office products sales in our markets. We believe that we have a well-established distribution system and that the Crystal Rock® family of brands is well known in the regions in which we operate, and we hope to successfully leverage those advantages. Nevertheless, price competition in the office product market can be robust, and there can be no assurance that our office products strategy will be successful. See Item 1A, “Risk Factors,” for more information.
Marketing and Sales of Branded Products
Crystal Rock products are marketed and distributed under four house brands: Crystal Rock Waters, Vermont Pure Natural Spring Water, Cool Beans Coffee and Crystal Rock Office. Through this combination of brands - and resale of other manufactured brands - we provide a choice of high quality products and value-added services to homes and offices.
Both our water brands feature three- and five-gallon premium bottled water in addition to a small pack case offerings. Our coffee line includes over 70 varieties in many different types of packaging. Additionally, we also re-sell other coffee and tea selections. Our office products line features over 40,000 products, including supplies, equipment, and furniture, targeted for small and medium-sized business.
Over the last several years we refocused our efforts on sales and marketing in order to better serve all of our product lines and enhance the value of our distribution system and customer base. With the intent of increasing sales over the long term, we have hired and trained an expanded sales force. In addition, we have incurred significant expenditures to build an IT infrastructure designed to enhance sales administration and run our business more efficiently. However, late in 2013 we decided to shift the infrastructure platform that we had been constructing to one we had acquired during the year. During this transition period, we contracted our sales force while we stabilize our customer relationship software. For more information, see Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis.” In 2014, while stabilizing our IT and e-commerce platform, we again began to expand our sales force to capitalize on our order processing and distribution capabilities.
We support this marketing and sales effort through a number of methods, including e-commerce, direct mail, internet advertising, traditional advertising, social media, sales collateral, email marketing, digital/internet technologies, referrals and public relations. We also sponsor local area sporting events, participate in trade shows, maintain high community visibility, and donate to many charitable events.
We market our home and office delivery service throughout most of New England, New York and parts of New Jersey. A combination of telemarketers and sales personnel sell our products and services, and a professional marketing agency develops and manages our brands and market position. Our goal is to optimize our marketing and sales returns through efficient technology investments, personal customer interactions and maintaining consistent visibility.
Advertising and Promotion
We advertise our products through a digital, online strategy focused on promoting expanded product and services, and we look to collect customer data in order to engage and market customer relationships both on and offline. Through a combination of websites, social platforms and internet advertising, we are centralizing and transitioning our marketing efforts to offer and incentivize current and new customers through a larger online presence while providing customers direct purchasing capability. We also promote our products through sales collateral, direct mail, various public relations and sponsorship opportunities. We endeavor to be highly visible in the communities that we serve. We have been a significant sponsor of a United Way giving campaign to support Live United through the Greater Waterbury Connecticut United Way, and we feature local giving options to support the United Way throughout our entire market area.
Sales and Distribution
We sell and deliver products directly to our customers using our own employees and route delivery trucks. Deliveries to customers are made on a regularly scheduled basis for water, coffee, and ancillary products. We accommodate our customers with next day delivery when they run out of those products and for office products. We bottle our water at our facilities in Watertown, Connecticut, White River Junction, Vermont, and Halfmoon, New York and have water bottled for us in Buffalo and Clayton, New York. We maintain numerous distribution locations throughout our market area. From these locations we also distribute dispensing equipment, a variety of coffee, tea and other refreshment products, and related supplies. We receive office supplies, equipment, and furniture on a “just-in-time” basis from our vendors at our distribution locations. We ship between our production and distribution sites using both our own and contracted carriers.
Supplies
We currently source all of our raw materials from outside vendors. As one of the largest Home and Office distributors in the country, we are able to capitalize on volume to continue to reduce costs.
We rely on trucking to receive raw materials and transport and deliver our finished products. Consequently, the price of fuel significantly impacts the cost of our products. We purchase our own fuel for our Home and Office delivery and use third parties for transportation of raw materials and finished goods between our warehouses. While volume purchases can help control erratic fuel pricing, market conditions ultimately determine the price. In the past, we have experienced substantial market fluctuation of fuel prices. However, when fuel prices have increased, we have been able to establish a fuel adjustment charge for our customers that covered the incremental rising cost of fuel. When fuel prices have decreased, they have not decreased enough to offset the incremental fuel cost over what we considered our “base” level for fuel cost. The risk remains that we may not be able to use fuel price adjustments to cover the cost of fuel increases in a volatile market for petroleum products, which could adversely affect our profitability.
Our principal coffee suppliers are Green Mountain Coffee Roasters and Baronet Coffee. Our principal bottle supplier is Parker Plastics.
No assurance can be given that we will be able to obtain the supplies we require on a timely basis or that we will be able to obtain them at prices that allow us to maintain the profit margins we have had in the past. We believe that we will be able to either renegotiate contracts with these suppliers when they expire or, alternatively, if we are unable to renegotiate contracts with our key suppliers, we believe that we could replace them. Any raw material disruption or price increase may result in an adverse impact on our financial condition and prospects. For instance, we could incur higher costs in renegotiating contracts with existing suppliers or replacing those suppliers, or we could experience temporary dislocations in our ability to deliver products to our customers, either of which could have a material adverse effect on our results of operations.
Seasonality
Our business is seasonal. The period from June to September, when we have our highest water sales, represents the peak period for sales and revenues due to increased consumption of cold beverages during the summer months in our core Northeastern United States market. Conversely, coffee has a peak sales period from November to March. Sales of office products and supplies fluctuate based on traditional peak and off-peak usage periods.
Competition
We believe that bottled water historically has been a regional business in the United States. The market includes several large regional brands owned by multi-national companies that operate throughout contiguous states. We also compete with smaller, locally-owned bottlers that operate in specific cities or market areas within single states.
With our Crystal Rock® and Vermont Pure® brands, we compete on the basis of pricing, customer service, the quality of our products, attractive packaging, and brand recognition. We consider our trademarks, trade names and brand identities to be very important to our competitive position and defend our brands vigorously.
We feel that installation of filtration units in the home or commercial setting poses a competitive threat to our business. To address this, we have continued to develop our plumbed-in filtration business expanding it internally and through acquisitions and actively offering it as an alternative product to our bottled water.
Traditionally, the rental of water coolers for offices and homes has been a very profitable business for us. As coolers have become cheaper and more readily available at retail outlets and competitors have used pricing as a promotional opportunity, our cooler rental revenue has declined. Although this rental revenue is very profitable for us, it may continue to decline or become less profitable in the future as a result of retail competition.
As discussed above, coffee is another significant component of our overall sales. The growth of this product line has been driven by single serve packages. Increased competition has developed for these products, not only from other food and beverage distributors, but office products distributors and retail outlets as well. In addition, internet availability has increased. Machines to brew these packages are different from traditional machines and packages ideally need to be brewed in machines that accommodate the specific package. As a result, the popularity of a certain machine often dictates what products are successful in the marketplace. We have developed our own Cool Beans® pod in order to create brand equity in this category. Our success, both from a sales and profitability perspective, may be affected by our access to distribution rights for certain products and machines, our decisions concerning which equipment to invest in and our ability to develop brand awareness.
We believe that it has become increasingly important to our competitive advantage to decrease the impact of our business on the environment. We traditionally use five gallon containers that are placed on coolers and are reused many times. To further “green” our business we generate solar electricity in our Watertown, Connecticut facility, use high efficiency lighting and vehicles and have instituted no-idling and other driving policies in all of our locations.
The office products business is highly competitive. Companies like Staples, Office Max, Office Depot and W.B. Mason are larger and better capitalized than Crystal Rock and compete with us on price as well as level of service. Moreover, the evolution of modern business practices towards the “paperless office” could have the effect of reducing the available market for some office products. If the overall market for office products contracts, price competition can be expected to exert pressure on our margins for office products, with potential adverse effects on our earnings or cash flow, even if we are able to continue increasing revenues from this product line. See Item 1A, “Risk Factors,” for more information.
Trademarks
We own the trade names of the principal water brands that we sell, Vermont Pure Natural Spring Water® and Crystal Rock®. We also own the Cool Beans® coffee brand, Crystal Rock Office® products brand and own or have rights to other trade names that currently are not a significant part of our business. Our trademarks as well as label designs are, in general, registered with the United States Patent and Trademark Office.
Government Regulation
The Federal Food and Drug Administration (FDA) regulates bottled water as a “food.” Accordingly, our bottled water must meet FDA requirements of safety for human consumption, of processing and distribution under sanitary conditions and of production in accordance with the FDA “good manufacturing practices.” To assure the safety of bottled water, the FDA has established quality standards that address the substances that may be present in water which may be harmful to human health as well as substances that affect the smell, color and taste of water. These quality standards also require public notification whenever the microbiological, physical, chemical or radiological quality of bottled water falls below standard. The labels affixed to bottles and other packaging of the water is subject to FDA restrictions on health and nutritional claims for foods under the Fair Packaging and Labeling Act. In addition, all drinking water must meet Environmental Protection Agency standards established under the Safe Drinking Water Act for mineral and chemical concentration and drinking water quality and treatment that are enforced by the FDA.
We are subject to the food labeling regulations required by the Nutritional Labeling and Education Act of 1990. We believe we are in compliance with these regulations.
We are subject to periodic, unannounced inspections by the FDA. Upon inspection, we must be in compliance with all aspects of the quality standards and good manufacturing practices for bottled water, the Fair Packaging and Labeling Act, and all other applicable regulations that are incorporated in the FDA quality standards. We believe that we meet the current regulations of the FDA, including the classification as spring water. All of our plants and distribution locations are registered with the FDA under the Public Health Security and Bioterrorism Preparedness and Response Act of 2002. Most recently, the FDA put into effect the Bottled Water Microbial Rule to monitor water sources for E. coli bacteria. We have been in compliance with the testing requirements for this rule prior to and since its inception in December 2009.
We also must meet state regulations in a variety of areas to comply with purity, safety, and labeling standards. From time to time, our facilities and sources are inspected by various state departments and authorities.
Our product labels are subject to state regulation (in addition to federal requirements) in each state where the water products are sold. These regulations set standards for the information that must be provided and the basis on which any therapeutic claims for water may be made.
We use a comprehensive program of self-regulation and use third party auditors for testing and inspections to evaluate our compliance with federal and various state regulations.
In recent years, there has been legislative and executive action in state and local governments that has or would ban the use of bottled water in municipal buildings, enact local taxes on bottled water, and limit the sale by municipalities of water supplies to private companies for resale. Such regulation could adversely affect our business and financial results. For additional information, see Item 1A, “Risk Factors,” below.
The laws that regulate our activities and properties are subject to change. As a result, there can be no assurance that additional or more stringent requirements will not be imposed on our operations in the future. Although we believe that our water supply, products and bottling facilities are in substantial compliance with all applicable governmental regulations, failure to comply with such laws and regulations could have a material adverse effect on our business.
Employees
As of January 5, 2015, we had 356 full-time employees and 18 part-time employees. None of the employees belong to a labor union. We believe that our relationships with our employees are good.
Additional Available Information
Our principal website is www.crystalrock.com. We make our annual, quarterly and current reports, and amendments to those reports, available free of charge on www.crystalrock.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Reports of beneficial ownership of our common stock, and changes in that ownership, by directors, officers and greater-than-10% shareholders on Forms 3, 4 and 5, are likewise available free of charge on our website.
The information on our website is not incorporated by reference in this Annual Report on Form 10-K or in any other report, schedule, notice or registration statement filed with or submitted to the SEC.
The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically at www.sec.gov. You may also read and copy the materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
ITEM 1A.
ITEM 1A. RISK FACTORS.
We operate in a competitive business environment that is influenced by conditions some of which are controllable and others are beyond our control. These conditions include, but are not limited to, the regional economy, monetary policy, and the political and regulatory environment. The following summarizes important risks and uncertainties that may materially affect our business in the future.
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.
The Baker family group, consisting of former director Henry Baker and three current directors Peter Baker (CEO), John Baker (Executive Vice President) and Ross Rapaport (Chairman), as trustee, together own a majority of our common stock. Accordingly, these stockholders, acting together, can exert a controlling influence over the outcome of matters requiring stockholder approval, such as the election of directors, amendments to our certificate of incorporation, mergers and various other matters. The concentration of ownership could also have the effect of delaying or preventing a change of control of the company.
As permitted under the corporate governance rules of the NYSE MKT, we have, at the direction of the Baker family group, elected “controlled company” status under those rules. A controlled company is exempted from these NYSE MKT corporate governance rules: (1) the requirement that a listed company have a majority of independent directors, (2) the requirement that nominations to the company’s board of directors be either selected or recommended by a nominating committee consisting solely of independent directors, and (3) the requirement that officers’ compensation be either determined or recommended by a compensation committee consisting solely of independent directors. We do not currently utilize exemption (3) as we have a compensation committee consisting solely of three independent directors.
The personal interests of our directors and officers create conflicts.
As mentioned above, the Baker family group owns a majority of our common stock. In addition, in connection with the acquisition of the 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. As of October 31, 2014, the balance on these notes is $10,000,000. We also lease important facilities in Watertown and Stamford, Connecticut from Baker family interests. These interests of the Baker family create various conflicts of interest. Transactions between the Company and related parties are subject to review and approval by the Audit Committee, which consists entirely of independent directors.
Our office products business is significantly different from our traditional business and accordingly presents us with new challenges. Integrating the office products business with our legacy business has been difficult in certain respects. Moreover, profit margins on products in this line are lower than profit margins in our water and office refreshment business. These factors have resulted in some operating inefficiencies and have negatively affected our earnings and cash flow. We are working to resolve these issues, but there is no assurance that we can manage the necessary changes in an optimal way so as to increase revenues and net income, and improve our cash flow.
In 2011, we began to distribute office products under the Crystal Rock Office® brand and commenced a hiring effort to increase our sales force substantially. Initial sales were relatively modest. In 2013, we acquired an office products business in our market area that had higher annual sales in that line of business than we did. This acquisition resulted in significantly improved revenues, but maintaining gross margins on our office products has been challenging. In addition, we must address compatibility issues between our legacy software and software we obtained in the office products business acquisition described above. Other integration issues related to the 2013 acquisition include managing route delivery systems so that the greater cost of overnight deliveries and deliveries outside our regular distribution routes will not adversely affect total delivery costs and thereby diminish margins on our office products. We continue to work to enhance our e-commerce system and to facilitate the distribution integration of our traditional product lines with office products.
There can be no assurance that we can manage the growth and expansion of our office products business in an optimal way so as to increase revenues while maintaining acceptable gross margins and improving our net income and cash flow. If we are unable to achieve this growth, or if we have difficulties integrating our office products business with our legacy business, our financial condition and results of operations could be materially and adversely affected.
The office products business is highly competitive. Many of our competitors are larger and better capitalized than we are. In addition, the evolution of modern business practices towards the “paperless office” may tend to reduce the available market for some office products. If we are unable to compete successfully in this market, our office products business may be harmed and our revenues and profits may be materially and adversely affected.
Competition in this area is robust. Companies like Staples, Office Max, Office Depot and W.B. Mason are larger and better capitalized than Crystal Rock and compete with us on price as well as level of service. Further, if the overall market for office products contracts, price competition can be expected to exert pressure on our margins for office products, with potential adverse effects on our earnings or cash flow, even if we are able to continue increasing revenues from this product line. There can be no assurance that we can continue to increase revenues from office products. Even if we do increase such revenues, there can be no assurance that gross margins and profits from this product line will be adequate to support this part of our business as we endeavor to expand it.
Acquisitions may disrupt our operations or adversely affect our results.
We regularly evaluate opportunities to acquire other businesses. The expenses we incur evaluating and pursuing acquisitions could have a material adverse effect on our results of operations. If we acquire a business, we may be unable to manage it profitably or successfully integrate its operations with our own. Moreover, we may be unable to realize the financial, operational, and other benefits we anticipate from these acquisitions. Competition for future acquisition opportunities in our markets could increase the price we pay for businesses we acquire and could reduce the number of potential acquisition targets. Further, acquisitions may involve a number of special financial and business risks, such as:
·
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;
·
integration into our business of new personnel, or 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 interest.
We also face significant competition in the water and office refreshment business from companies with greater resources than we have. 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.
We operate in highly competitive markets in the water and refreshment businesses. The principal methods of competition in the markets in which we compete are distribution capabilities, brand recognition, quality, reputation, and price. We have a significant number of competitors in our traditional water market, some of which have far greater resources than us. Among our principal competitors are Nestlé Waters North America, large regional brands owned by private groups, and local competitors in the markets that we serve. As we have expanded our product lines, most notably single serve coffee, we have become competitive with other businesses. These include large national and regional office supply companies and retail store chains. Price reductions and the introduction of new products by our competitors can adversely affect our revenues, gross margins, and profits.
Our industry has also been affected by the increasing availability of water coolers in discount retail outlets. This has negatively affected our rental revenue stream in recent years as more customers choose to purchase coolers rather than rent them. The reduction of rental revenue has been somewhat offset by the increase in coolers that we sell, although not to the extent that rentals have declined. We do not expect retail sales to replace rentals completely because we believe that the purchase option does not provide the quality and service that many customers want. However, third party retail cooler sales may continue to negatively impact our rental revenues in the future.
We rely upon a single software vendor that supplies the software for our route accounting system, which exposes us to risk from interruption of service. In addition, the vendor that supports the software for our online storefront ordering system is ending support for this system, which could render our online portal less effective or ineffective if we do not efficiently execute the transition to other software or other methods of support.
Our route accounting system is essential to our overall administrative function and success. An extended interruption in servicing the system could result in the inability to access information. Limited or no access to this information would likely inhibit the distribution of our products and the availability of management information, and could even affect our compliance with public reporting requirements. Our software vendor has a limited number of staff possessing the proprietary information pertaining to the operation of the software. Changes in personnel or ownership in the firm might result in disruption of service. Such changes would be addressed by retaining a new vendor to service the existing software or purchasing a new system. However, any of these events could have a material adverse impact on our operations and financial condition.
Our portal for customer online orders, which are primarily for the purchase of office supplies, is vital to our sales operations and integrates with our primary supplier to facilitate next day delivery. The vendor that developed and supports this software recently has announced that it will no longer support the current software we use for this system. We are considering alternative methods to support or replace this software, including internal programming, third party support, or new software. While this transition provides us an opportunity to enhance our online ordering, our business could be adversely affected, our expenses increased, or our online portal rendered less effective or ineffective if we do not execute the transition efficiently.
We depend upon maintaining the integrity of our water sources and manufacturing process. If our water sources or bottling processes were contaminated for any reason, our business would be seriously harmed.
Our ability to retain customers and the goodwill associated with our brands is dependent upon our ability to maintain the integrity of our water resources and to guard against defects in, or tampering with, our manufacturing process. The loss of integrity in our water sources or manufacturing process could lead to product recalls and/or customer illnesses that could materially adversely affect our goodwill, market share and revenues. Because we rely upon natural spring sites for sourcing some of our water supply, acts of God, such as earthquakes, could alter the geologic formation of the spring sites, constricting or even contaminating water flow.
In addition, we do not own any of our water sources. Although we believe the long term rights to our spring and municipal sources are well secured, any dispute over these rights that resulted in prolonged disruption in supply could cause an increase in cost of our product or shortages that would not allow us to meet the market demand for our product.
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.
The FDA regulates bottled water as a food. Our bottled water must meet FDA requirements of safety for human consumption, labeling, processing and distribution under sanitary conditions and production in accordance with FDA “good manufacturing practices.” In addition, all drinking water must meet Environmental Protection Agency standards established under the Safe Drinking Water Act for mineral and chemical concentration and drinking water quality and treatment, which are enforced by the FDA. We also must meet state regulations in a variety of areas. These regulations set standards for approved water sources and the information that must be provided and the basis on which any therapeutic claims for water may be made. We have received approval for our drinking water in Connecticut, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont. However, we can give no assurance that we will receive such approvals in the future.
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.
Recent initiatives have taken place in several major cities regarding bottled water, principally the smaller sizes sold in stores to retail consumers. Regulations have been proposed in some localities that would ban the use of public funds to purchase bottled water, enact local taxes on bottled water or water extraction, and restrict the withdrawal of water from public and private sources. These actions are purportedly designed to discourage the use of bottled water due in large part to concerns about the environmental effects of producing and discarding large numbers of plastic bottles. In developing these stories, local and national media have reported on the growth of the bottled water industry and on the pros and cons of consuming bottled water as it relates to solid waste disposal and energy consumption in manufacturing, as well as conserving the supply of water available to the public.
We believe that the adverse publicity associated with these reports is generally aimed at the retail, small bottle segment of the industry that is now a minimal part of our business, and that our customers can readily distinguish our products from the retail bottles that are currently the basis for concern in some areas. Our customers typically buy their water in reusable five-gallon containers that are placed on coolers and reused many times. Only approximately 4% of our total sales is from water sold in single serve packages. In addition, we continue to take steps to “green” our business by means of solar electricity generation, high efficiency lighting, no-idling and other driving policies, and the use of biodiesel.
While we believe that to date we have not directly experienced any adverse effects from these concerns, and that our products are sufficiently different from those under scrutiny, there is no assurance that adverse publicity about any element of the bottled water industry will not affect consumer behavior by discouraging buyers from buying bottled water products generally. In that case, our sales and other financial results could be adversely affected.
Our Company is significantly leveraged. Over the 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.
At October 31, 2014 and 2013, our outstanding senior debt was $9,072,000 and $10,083,000, respectively, and our outstanding subordinated debt was $10,000,000 on both of those dates. The underlying loans are secured by substantially all of our assets. If we do not repay our indebtedness in a timely fashion, our secured creditors could declare a default and foreclose upon our assets, which would result in harmful disruption to our business, the sale of assets for less than their fully realizable value, and possible bankruptcy. We must generate enough cash flow to service this indebtedness until maturity.
Fluctuations in interest rates could significantly increase our expenses. We will have significant interest expense for the foreseeable future, which in turn may increase or decrease due to interest rate fluctuations. To partially mitigate this risk, we have used swaps to establish fixed interest rates on 75% of our outstanding senior term debt.
As a result of our large amount of debt, we may be perceived by banks and other lenders to be highly leveraged and close to our borrowing ceiling. Until we repay some of our debt, our ability to access additional capital may be limited. In turn, that may limit our ability to finance transactions and to grow our business. In addition, our senior credit agreement limits our ability to incur incremental debt without our lender’s permission.
Our senior credit agreement contains numerous covenants and restrictions that affect how we conduct our business.
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.
Bottle manufacturers use plastic and other petroleum-based products for the manufacturing of our bottles. Increases in the cost of petroleum will likely have an impact on our bottle costs.
We rely on trucking to receive raw materials and transport and deliver our finished products. Consequently, the price of fuel significantly impacts the cost of our products. We purchase our own fuel for our Home and Office delivery and use third parties for transportation of raw materials and finished goods between our warehouses. While volume purchases can help control erratic fuel pricing, market conditions ultimately determine the price. In the past, we have experienced substantial market fluctuation of fuel prices. However, when fuel prices have increased, we have been able to establish a fuel adjustment charge for our customers that covered the incremental rising cost of fuel. When fuel prices have decreased, they have not decreased enough to offset the incremental fuel cost over what we considered our “base” level for fuel cost. The risk remains that we may not be able to use fuel price adjustments to cover the cost of fuel increases in a volatile market for petroleum products, which could adversely affect our profitability. Further, limitations on the supply or availability of fuel could inhibit our ability to get raw materials and distribute our products, which in turn could have an adverse affect on our business.
A significant portion of our sales is derived from coffee. The supply and price of coffee may be limited by climate, by international political and economic conditions, and by access to transportation, combined with consumer demand. An increase in the wholesale price of coffee could result in a reduction in our profitability. If our ability to purchase coffee were impaired by a market shortage, our sales might decrease, which would also result in a reduction of profitability.
Our success depends on the continued services of key personnel.
Our continued success will depend in large part upon the expertise of our senior management and their ability to execute our strategic planning. Peter Baker, our Chief Executive Officer and President, John Baker, our Executive Vice President, and Bruce MacDonald, our Chief Financial Officer, Treasurer and Secretary, have entered into employment agreements with Crystal Rock Holdings, Inc. These “at will” employment agreements do not prevent these employees from resigning. The departure or loss of any of these executives individually could have an adverse effect on our business and operations and could contribute to disruption of our business while we searched for replacement personnel with appropriate skills.
We have a limited amount of bottling capacity. Significant interruptions of our bottling facilities could adversely affect our business.
We own three bottling facilities, and also contract with third parties, to bottle our water. If any of these facilities were incapacitated for an extended period of time, we would likely have to relocate production to an alternative facility. The relocation and additional transportation could increase the cost of our products or result in product shortages that would reduce sales. Higher costs and lower sales would reduce profitability.
Our business has been and may continue to be affected from time to time by extremes of weather, which may adversely affect our business.
While changing weather is a constant in our market area, we have experienced extreme weather events that affected sales in the years in which they occurred and beyond. For example, in late August 2011, Tropical Storm Irene caused considerable, widespread damage in parts of our market area. Flooding and resulting road damage reduced our ability to service customers in Vermont and Northern New York. In addition, our costs increased to access our springs and ship products. Parts of Connecticut and Massachusetts experienced a major snowstorm in late October 2011, shutting off power and reducing access in some parts of those states for more than a week, with resulting service interruptions and operating cost increases in those areas. In late October 2012, Hurricane Sandy caused significant destruction in the coastal Connecticut, New York City, and northern New Jersey portions of our market area. Again, our customer service was interrupted, and we incurred extra costs. In the winter of 2013-2014, several snow and ice storms in our market area forced us to close some of our facilities and stop distributing our products for short periods of time. The effects of extreme weather like these storms are difficult to quantify because of other variables, but in general these disruptions were temporary and without permanent effects on our business. However, the cumulative effect of extremely adverse weather is not favorable to our business.
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.
Essentially all of our sales are derived from New England, New York and New Jersey. We believe that the economic recession experienced in these areas, particularly in 2008 and 2009, adversely affected our financial results, and these regions are still experiencing a variety of adverse effects from the recession. Continued adverse effects in the regional economies, or a significant negative change in the economy of any of these regions, changes in consumer spending in these regions, or the entry of new competitors into these regional markets, among other factors, could result in a decrease in our sales and, as a result, reduced profitability.
Our business is seasonal, which may cause fluctuations in our stock price.
Historically, the period from June to September represents the peak period for sales and revenues due to increased consumption of cold beverages during the summer months in our core Northeastern United States markets. Warmer weather in our geographic markets tends to increase water sales, and cooler weather tends to decrease water sales. To the extent that our quarterly results are affected by these patterns, our stock price may fluctuate to reflect them.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
ITEM 2.
PROPERTIES.
As part of our Home and Office delivery operations, we have entered into or assumed various lease agreements for properties used as distribution points and office space. The following table summarizes these arrangements and includes our bottling facilities:
All locations are used primarily for warehousing and distribution and have limited office space for location managers and support staff. The exception is our headquarters in Watertown, Connecticut location, which has a substantial amount of office space for sales, accounting, information systems, customer service, and general administrative staff. We expect to renew leases that are expiring over the next twelve months with similar terms.
The landlord for the buildings in Stamford and the headquarters in Watertown, Connecticut is a trust with which Henry, John, and Peter Baker, and Ross Rapaport are affiliated. We believe that the rent charged under these leases is not more than fair market rental value.
We expect that these facilities will meet our needs for the next several years.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS.
None.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURE
None.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our Common Stock is traded on the NYSE MKT under the symbol CRVP. The table below indicates the range of the high and low daily closing prices per share of Common Stock as reported by the exchange.
Fiscal Year Ended October 31, 2014
Fiscal Year Ended October 31, 2013
The last reported sale price of our Common Stock on the NYSE MKT on January 5, 2015 was $.76 per share.
As of that date, we had approximately 280 record owners and believe that there were approximately 1,500 beneficial holders of our Common Stock.
No dividends have been declared or paid to date on our Common Stock. Our senior credit agreement prohibits us from paying dividends without the prior consent of the lender. It is unlikely that we will pay dividends in the foreseeable future.
Issuer Purchases of Equity Securities
The following table summarizes the stock repurchases, by month, that were made during the fourth quarter ended October 31, 2014.
(1)
Includes transaction costs.
(2)
On May 14, 2012 we announced a program to repurchase up to $500,000 of our common stock. There is no expiration date for the plan to repurchase additional shares and the dollar limit may not be reached.
ITEM 7.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following Management’s Discussion and Analysis (MD&A) is intended to help the reader understand our Company. The MD&A should be read in conjunction with our consolidated financial statements and the accompanying notes. This overview provides our perspective on the individual sections of the MD&A, as well as a few suggestions for reading these pages. The MD&A includes the following sections:
§
Business Overview - a brief description of fiscal year 2014.
§
Results of Operations - an analysis of our consolidated results of operations for the two 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
Sales were higher but our business was less profitable in fiscal 2014 compared to fiscal 2013. This continued a trend of lower operating income, net income and cash flow from fiscal 2010 to fiscal 2014. Among the factors that have contributed to this continuing trend are competition and our response to competitive factors, as well as ongoing operational changes including the introduction of new product lines. Our results were also affected by less controllable factors such as adverse weather conditions and environmental and political issues. The 2014 increase in sales was largely due to an increase in the sales of office supplies which was accomplished primarily as a result of an acquisition in late 2013. This increase in sales offset a decline in sales of our traditional product lines.
However, the increased sales did not produce more profit since office products generally have lower margins than our legacy businesses, including water and equipment rental. Our gross profit declined by 2% while our operating expenses increased by 1%, both of which affected our net income. Continued competitive pressures were an important contributor to our lower profitability in 2014.
In fiscal 2014 we continued to de-leverage the Company, decreasing debt $1 million in 2014. We continued to have adequate cash on hand and borrowing capacity as of October 31, 2014.
The market area in which we operate has an uncertain economic environment. While we have created opportunities that have resulted in increased sales, we anticipate cost pressures related to commodities affecting our business, most notably fuel and coffee, as we continue to build our brands.
Results of Operations
Fiscal Year Ended October 31, 2014 Compared to Fiscal Year Ended October 31, 2013
Sales
Sales for fiscal year 2014 were $75,155,000 compared to $70,981,000 for 2013, an increase of $4,174,000 or 6%. Sales attributable to acquisitions in fiscal year 2014 were $7,080,000. Net of acquisitions, sales decreased 4%.
The comparative breakdown of sales is as follows:
Water -Water sales volume decreased 4% as a result of adverse weather in the Company’s market area in January through March 2014 while sales decreased 1% as a result of lower pricing which is attributable to increased competition. Net of the acquisition, sales would have decreased 7%.
Coffee - Sales of single-serve coffee declined to $10,013,000 from $10,962,000, despite an increase of 24% in our Cool Beans® pod sales. Cool Beans® made up 11% of the category in 2014 compared to 8% in 2013. There was also a 10% decrease in sales of our traditional coffee products for office and food service brewers. The overall decrease in coffee sales was attributable to lower volume as a result of increased competition. The increase in pod sales is primarily a result of being a lower price, high quality substitute for other single serve coffee products. Net of acquisitions coffee sales decreased in 2014 compared to 2013.
Refreshment - Sales decreased as a result of a decline in sales of all products in this category.
Equipment Rental - The decrease in equipment rental revenue in fiscal year 2014 compared to the prior year was a result of a 2% decrease in average units in the field while average rental price remained stable. Net of the acquisitions, rental income decreased 3%.
Office Products - The increase in sales was a result of the acquisition of an office products business in October 2013 in our southern New England market and resulting increase and re-training of our sales staff.
Other - Commissions earned on brokered sales, an arrangement that was a result of the October 2013 acquisition, accounted for the increase in sales. Fees that are charged to offset energy costs for delivery and freight, raw materials, and bottling operations decreased 4% based on the market price of diesel fuel and the number of customers paying those fees.
Gross Profit/Cost of Goods Sold
Gross profit decreased $861,000 in fiscal year 2014 compared to 2013, to $35,853,000 from $36,714,000. Gross profit as a percentage of sales decreased to 48% from 52%, respectively. The decrease in gross profit and gross profit as a percentage of sales was primarily due to lower water, coffee, and refreshment sales and equipment rental. The increase in office products sales was not enough to offset the decrease because this category generally has lower gross margins.
Cost of goods sold includes all costs to bottle water, costs of purchasing and receiving products for resale (including freight), as well as costs associated with product quality, warehousing and handling costs, internal transfers, and the repair and service of rental equipment, but does not include the costs of distributing our product to our customers. We include distribution costs in selling, general, and administrative expense, and the amount is reported below. Other companies may include distribution costs in their cost of goods sold, in which case, on a comparative basis, such other companies may have a lower gross margin as a result.
Income from Operations/Operating Expenses
Income from operations was $1,698,000 in 2014 compared to $2,790,000 in 2013, a decrease of $1,092,000. The decrease is attributable to lower gross profit as well as higher operating expenses. Total operating expenses increased to $34,156,000 for the year, from $33,924,000 the prior year, an increase of $232,000, or 1%.
Selling, general and administrative (SG&A) expenses were $32,403,000 in fiscal year 2014 compared to $32,185,000 in fiscal year 2013, an increase of $218,000, or 1%. Of total SG&A expenses:
·
Route sales costs decreased 2%, or $315,000, to $14,500,000 in fiscal year 2014 from $14,815,000 in fiscal year 2013, primarily related to lower labor and vehicle lease costs. Included as a component of route sales costs are total direct distribution related costs which decreased $335,000, or 2%, to $13,806,000 in fiscal year 2014 from $14,141,000 in fiscal year 2013, primarily as a result of lower labor and vehicle lease costs;
·
Selling costs increased 11%, or $485,000, to $5,059,000 in fiscal year 2014 from $4,574,000 in fiscal year 2013. The higher costs were attributable to increasing staff and travel to support the growth of the Company’s office products business
·
Administrative costs increased 48,000, or 1%, to $12,844,000 in fiscal year 2014 from $12,796,000 in fiscal year 2013. The decrease was mostly attributable to lower labor costs in support of our IT infrastructure.
Advertising expenses decreased to $750,000 in fiscal year 2014 from $773,000 in 2013, a decrease of $23,000, or 3%. The decrease in advertising costs is primarily related to a decrease in traditional Yellow Pages advertising despite an increase in printed and internet advertising.
Amortization was essentially the same, $1,002,000 in 2014 compared to $999,000 in 2013. Amortization is attributable to intangible assets that were acquired as part of acquisitions in recent years.
There was a net gain from the sale of miscellaneous assets in fiscal year 2013 of $32,000. The net amount of the cumulative transactions in 2014 offset each other. These were sales of miscellaneous assets no longer used in the course of business.
As of October 31, 2014 and 2013, considering qualitative factors, we concluded it is more likely than not that the fair value of the Company is greater than its carrying amount (Step 0); therefore performing the two-step goodwill impairment test was not necessary. In performing this qualitative assessment we considered factors including, but not limited to, the following:
·
Macroeconomic conditions including the general economic conditions, limitations on accessing capital, and other developments in equity and credit markets
·
Industry and market considerations including any deterioration in the environment in which we operate, an increased competitive environment, a decline in market-dependent multiples or metrics, a change in the market for our products or services, or a regulatory or political development
·
Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows
·
Overall financial performance including negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods
·
Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; or litigation
·
Whether a sustained, material decrease in share price had occurred.
Other Expense, Income Taxes, and Income before Income Taxes
Interest expense was $1,498,000 for fiscal year 2014 compared to $1,867,000 for fiscal year 2013, a decrease of $369,000. The decrease is primarily attributable to lower outstanding debt.
Income before income taxes of $199,000 in fiscal year 2014 compared to 917,000 in fiscal year 2013, a decrease of $718,000.
Income tax expense for fiscal year 2014 of $45,000 compared to $346,000 for fiscal year 2013 and resulted in an effective tax rate of 22% in 2014 and 38% in 2013. The decrease in taxes was a result of lower taxable income as well as a lower rate. The lower rate is attributable to state tax credits and deferred tax adjustments.
Net Income
Net income for 2014 was $155,000 compared to $571,000 in fiscal year 2013, a decrease of $416,000. Earnings were lower as a result of lower gross profit despite higher sales and higher operating costs. Lower operating income in 2014 more than offset the decrease in interest expense from 2013 to 2014. The net income in the respective years was completely attributable to continuing operations.
Based on the weighted average number of shares of Common Stock outstanding of 21,360,000 (basic and diluted), net income per share in 2014 was $.01 per share. In 2013, weighted average number of shares of Common Stock outstanding was 21,372,000 (basic and diluted) resulting in net income of $.03 per share. This was a decrease of $.02 per share.
In 2014, there was a $10,000 of unrealized gains related to our swap activity that we have designated as cash flow hedges, net of reclassification adjustments and taxes. We terminated two (one hedged, one unhedged) interest rate hedge swap agreements during 2013 and entered into a new one. The net effect of the resulting swapped transactions was $50,000 in unrealized gains in 2013, net of reclassification adjustments and taxes. The decrease in unrealized gains during the year has been recognized as an adjustment to net income (loss) to arrive at comprehensive income as defined by the applicable accounting standards.
Liquidity and Capital Resources
As of October 31, 2014, we had working capital of $5,957,000 compared to $6,725,000 as of October 31, 2013, a decrease of $768,000. The decrease in working capital is primarily attributable to lower net income and short line borrowings from the Company’s line of credit.
Net cash provided by operating activities was $3,498,000 in 2014 compared to $4,515,000 in 2013, a decrease of $1,017,000. In addition to lower net income, the decrease is reflective of a decrease in deprecation and other net working capital changes that used cash. We use cash provided by operations to repay debt and fund capital expenditures. In fiscal year 2014, we used $1,571,000 for repayment of debt. This was $3,102,000 less than we paid in 2013. Net of the funds borrowed from our line of credit. We used $2,319,000 for capital expenditures in 2014 compared to $2,239,000 in 2013.
Our Credit Agreement with Bank of America (“the Bank”) provides a senior financing facility consisting of term debt and a revolving line of credit. As of October 31, 2014 we had $8,512,000 outstanding on our term loan. Additionally, we had $500,000 outstanding on our line of credit and a letter of credit of $1,400,000 issued as collateral for our liability insurance program resulting in $3,100,000 available to borrow on the line of credit as of that date.
The agreement amortizes the term debt over a five year period with 59 equal monthly installments of $130,952 and a final payment of $3,273,832 due in March 2018. The line of credit matures in March 2016.
Under the Agreement, interest is paid at a rate of one-month LIBOR plus a margin determined by certain leverage ratios specified in the agreement. As of October 31, 2014, the Company had $2,128,000 of the term debt subject to variable interest rates. The one-month LIBOR was .15% on the last business day of October 2014 resulting in total variable interest rates of 2.65% and 2.40%, for the term note and the revolving line of credit, respectively, as of October 31, 2014.
As of October 31, 2014, the Company has an interest rate swap agreement in effect for the purpose of fixing at least 75% of the term loan under the Agreement with Bank of America. The swap fixes the rate on at least 75% of the outstanding balance of the term note at 3.18% (.68% plus the applicable margin under the Agreement, 2.50%) until March 2016.
Our credit facility requires that we be in compliance with certain financial covenants at the end of each fiscal quarter. The covenants include senior debt service coverage as defined of greater than 1.25 to 1, total debt service coverage as defined of greater than 1 to 1, and senior debt to EBITDA of less than 2.50 to 1. As of October 31, 2014, we were in compliance with the financial covenants of our credit facility. The Agreement prohibits us from paying dividends without prior consent of the lender. The Company is prohibited from entering into other debt agreements without the Bank’s consent.
In addition to our senior and subordinated debt commitments, we have significant future cash commitments, primarily in the form of operating leases that are not reported on the balance sheet. These operating leases are described in Note 15 to our Audited Consolidated Financial Statements.
The following table sets forth our contractual commitments as of October 31, 2014:
(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 2.65% and subordinated debt at a rate of 12%.
(2)
Customer deposits have been excluded from the table. Deposit balances vary from period to period with water sales but future increases and decreases in the balances are not accurately predictable. Deposits are excluded because, net of periodic additions and reductions, it is probable that a customer deposit balance will always be outstanding as long as the business operates.
As of the date of this Annual Report on Form 10-K, we have no other material contractual obligations or commitments.
Factors Affecting Future Cash Flow
Generating cash from operating activities and access to credit is integral to the success of our business. We continue to generate cash from operating activities to service scheduled debt repayment and fund capital expenditures. In addition, we have capacity to borrow from our acquisition line of credit for capital expenditures and acquisitions. We also lease a significant amount of our vehicles and all of our buildings.
Adverse economic conditions in recent years have negatively impacted many businesses financial performance and restricted credit availability. In addition, we do not think that the economy in our region has fully recovered from the recession that started in 2008. The competitive landscape created by the economic environment has eroded our margin over that time. This has resulted in expansion of our product lines and our distribution scheduling. We anticipate that changes to our business will be successfully implemented. However, no assurance can be given that we will be profitable in the future and that the economic environment will not adversely affect our cash flow and results of operations or that we will have adequate access to credit.
Factors Affecting Quarterly Performance
Our business and financial trends vary from quarter to quarter based on, but not limited to, seasonal demands for our products, climate, and economic and geographic trends. Consequently, results for any particular fiscal quarter are not necessarily indicative, through extrapolation, or otherwise, of results for a longer period. In the past year we have experienced weather related events that have influenced quarterly performance. Although weather is always variable, we feel this year’s extremes, and their far reaching effects, are an aberration in the region.
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles. Preparation of the statements in accordance with these principles requires that we make estimates, using available data and our judgment for such things as valuing assets, accruing liabilities, and estimating expenses. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies and estimates. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. We base our ongoing estimates on historical experience and other various assumptions that we believe to be reasonable under the circumstances.
Accounts Receivable - Allowance for Doubtful Accounts
We routinely review our accounts receivable, by customer account aging, to determine if the amounts due are collectible based on information we receive from the customer, past history, and economic conditions. In doing so, we adjust our allowance accordingly to reflect the cumulative amount that we feel is uncollectible. This estimate may vary from the proceeds that we actually collect. If the estimate is too low, we may incur higher bad debt expenses in the future resulting in lower net income. If the estimate is too high, we may experience lower bad debt expense in the future resulting in higher net income.
Fixed Assets - Depreciation
We maintain buildings, machinery and equipment, and furniture and fixtures to operate our business. We estimate the life of individual assets to allocate the cost over the expected life. The basis for such estimates is use, technology, required maintenance, and obsolescence. We periodically review these estimates and adjust them if necessary. Nonetheless, if we overestimate the life of an asset or assets, at a point in the future, we would have to incur higher depreciation costs and consequently, lower net income. If we underestimate the life of an asset or assets, we would absorb too much depreciation in the early years resulting in higher net income in the later years when the asset is still in service.
Goodwill - Intangible Asset Impairment
We have acquired a significant number of companies. The excess of the purchase price over the fair value of the assets and liabilities acquired has been recorded as goodwill. If goodwill is not impaired, it would remain as an asset on our balance sheet at the value assigned in the acquisitions. If it is impaired, we would be required to write down the asset to an amount that accurately reflects its estimated implied value. If we elect not to perform a Step 0 assessment, the assessment of the carrying value of goodwill is a two step process. In step one, the fair value of the Company is determined, using a weighted average of three different approaches - quoted stock price (a market approach), value comparisons to publicly traded companies believed to have comparable reporting units (a market approach), and discounted net cash flow (an income approach). This approach provides a reasonable estimation of the value of the Company and takes into consideration the Company’s thinly traded stock and concentrated holdings, market comparable valuations, and expected results of operations. The resulting estimated fair value is then compared to our equity value.
We performed a qualitative assessment (Step 0) to determine if a similar approach was required as of October 31, 2014 and 2013. In conducting the assessment we considered what adverse or positive mitigating events and circumstances would significantly influence the valuation. Qualitative factors that we considered in the Step 0 assessment included, but were not limited to, macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other relevant entity-specific events and sustained declines in our share price. We determined that is not more likely than not that the fair value of our reporting unit was less than the carrying value for both the years that the assessment was conducted for.
Income Taxes
We recognize deferred tax assets and liabilities based on temporary differences between the financial statement carrying amount of assets and liabilities and their corresponding tax basis. The valuation of these deferred tax assets and liabilities is based on estimates that are dependent on rate and time assumptions. If these estimates do not prove to be correct in the future, we may have over or understated income tax expense and, as a result, earnings.
Financial Accounting Standards Board (“FASB”) guidance 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. The guidance 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.
Off-Balance Sheet Arrangements
We lease various facilities and equipment under cancelable and non-cancelable short and long term operating leases, which are described in Item 2 of this Annual Report on Form 10-K.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our Consolidated Financial Statements and their footnotes are set forth on pages through.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer, and other members of our senior management team, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were adequate and effective to provide reasonable assurance that information required to be disclosed by us, including our consolidated subsidiary, in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive and Chief Financial officers, as appropriate to allow timely decisions regarding required disclosure.
The effectiveness of a system of disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of internal controls, and fraud. Due to such inherent limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud, or in making all material information known in a timely manner to the appropriate levels of management.
Internal Control Over Financial Reporting
a) Management's Annual Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
·
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.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of October 31, 2014. In making this assessment, the Company's management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO 1992) in Internal Control-Integrated Framework.
Based on our assessment, management concluded that, as of October 31, 2014, the Company's internal control over financial reporting is effective based on those criteria.
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.
b) Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting occurred during the fiscal quarter ended October 31, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The information required by this Item is incorporated by reference to the sections captioned “Directors,” “Our Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance” and “Committees of the Board of Directors” in our 2015 proxy statement to be filed with the SEC within 120 days after the end of our fiscal year ended October 31, 2014.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the sections captioned “Compensation of Executive Officers” and “Compensation of Non-Employee Directors” in our 2015 proxy statement to be filed with the SEC within 120 days after the end of our fiscal year ended October 31, 2014.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
Securities Authorized for Issuance Under Equity Compensation Plans.
The following table sets forth certain information as of October 31, 2014 about shares of our Common Stock that may be issued upon the exercise of options and other rights under our existing equity compensation plans and arrangements, divided between plans approved by our stockholders and plans or arrangements that were not required to be and were not submitted to our stockholders for approval.
Equity Compensation Plan Information
Additional information required by this Item is incorporated by reference to the section captioned “Security Ownership of Certain Beneficial Owners and Management” in our 2015 proxy statement to be filed with the SEC within 120 days after the end of our fiscal year ended October 31, 2014.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The information required by this Item is incorporated by reference to the section captioned “Corporate Governance” in our 2015 proxy statement to be filed with the SEC within 120 days after the end of our fiscal year ended October 31, 2014.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by this Item is incorporated by reference to the sections captioned “Independent Registered Public Accounting Firm Fees” and “Pre-Approval Policies and Procedures” in our 2015 proxy statement to be filed with the SEC within 120 days after the end of our fiscal year ended October 31, 2014.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
a)
The following documents are filed as part of this report:
(1) Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of October 31, 2014 and 2013
Consolidated Statements of Operations for the years ended October 31, 2014 and 2013
Consolidated Statements of Comprehensive Income for the years ended October 31, 2014 and 2013
Consolidated Statements of Changes in Stockholders’ Equity for the years ended October 31, 2014 and 2013
Consolidated Statements of Cash Flows for the years ended October 31, 2014 and 2013
Notes to the Consolidated Financial Statements -
(2) Schedules
None
(3) Exhibits:
* Management contract or compensatory plan.
** Exhibits filed as Amendments to Exhibit 10.8, our Credit Agreement, are filed for completeness and not necessarily because any particular Amendment, considered alone, was material to the Company.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Crystal Rock Holdings, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CRYSTAL ROCK HOLDINGS, INC.
Dated: January 27, 2015 By: /s/ Peter K. Baker
Peter K. Baker, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Date
/s/ Ross S. Rapaport
Ross S. Rapaport
Chairman of the Board of Directors
January 27, 2015
/s/ John B. Baker
John B. Baker
Executive Vice President and Director
January 27, 2015
/s/ Peter K. Baker
Peter K. Baker
Chief Executive Officer and Director
January 27, 2015
/s/ Martin A. Dytrych
Martin A. Dytrych
Director
January 27, 2015
/s/ John M. Lapides
John M. Lapides
Director
January 27, 2015
/s/ Lori J. Schafer
Lori J. Schafer
Director
January 27, 2015
/s/ Bruce S. MacDonald
Bruce S. MacDonald
Chief Financial Officer, Chief Accounting Officer and Secretary
January 27, 2015
EXHIBITS TO CRYSTAL ROCK HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2014
Exhibits Filed Herewith
Exhibit
Number
Description
10.33
Fourth Amendment to the Credit Agreement with Bank of America dated September 30, 2013
10.34
Fifth Amendment to the Credit Agreement with Bank of America dated January 14, 2015
21.1 Subsidiary
23.1 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.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of
Crystal Rock Holdings, Inc.
Watertown, Connecticut
We have audited the accompanying consolidated balance sheets of Crystal Rock Holdings, Inc. and subsidiary as of October 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Crystal Rock Holdings, Inc. and subsidiary as of October 31, 2014 and 2013, and the results of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
January 27, 2015
See the accompanying notes to the consolidated financial statements.
See the accompanying notes to the consolidated financial statements.
See the accompanying notes to the consolidated financial statements.
See the accompanying notes to the consolidated financial statements.
See the accompanying notes to the consolidated financial statements.
CRYSTAL ROCK HOLDINGS, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.
BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION
Crystal Rock Holdings, Inc. and Subsidiary (collectively, the “Company”) is engaged in the production, marketing and distribution of bottled water and the distribution of coffee, ancillary products, various other refreshment products and office 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. In addition, it offers its products for sale over the internet and shipping through third parties.
The consolidated financial statements of the Company include the accounts of Crystal Rock Holdings, Inc. 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. Actual results could differ from those estimates.
2.
SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents - The Company considers all highly liquid temporary cash investments with a maturity of three months or less at date of purchase 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. 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. To test goodwill, we first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the applicable reporting unit is less than its carrying value. If, after assessing these events or circumstances, we determine that it is not more likely than not that the fair value of such reporting unit is less than its carrying amount, we will proceed to perform a two-step impairment analysis. For other separately recognized intangible assets with indefinite lives, we use a qualitative approach to test such assets for impairment if certain conditions are met. Management reviewed qualitative factors relative to the carrying value of goodwill as of October 31, 2014 and 2013 and determined, without a two-step impairment assessment, that it was more likely than not that the fair value of the Company is greater than its carrying amount. 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, 2014 and 2013, the Company believes that there has been no impairment of its long-lived and intangible assets.
Stock-Based Compensation - The Company has three stock-based compensation plans under which incentive and non-qualified stock options and restricted shares may be granted. During 2014 there were no stock options granted under these plans. During 2013, options to purchase 51,250 shares of the Company’s stock were issued under one of these plans. Prior to 2013, there had been no grants under these plans since 2005. The Company measures 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). The Company provides an estimate of forfeitures at initial grant date. This policy did not have a material impact on the Company’s results of operations as a result of no options being issued in 2014 and the relatively small number of options issued in 2013.
Net Income Per Share - Net income 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, 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. 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 - When calculating its tax expense and the value of tax related assets and liabilities the Company considers the tax impact of future events when determining the value of assets and liabilities in its financial statements and tax returns. Accordingly, a deferred tax asset or liability is calculated and reported 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.
In accordance with the guidance pertaining to the accounting for uncertainty in income taxes, the Company uses a more-likely-than-not 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.
Derivative Financial Instruments - The Company records 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 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 (loss). 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 hedged items. Gains and losses that are related to the ineffective portion of a hedge or de-designated 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 senior debt. The swap agreement is carried at its estimated settlement value. Subordinated debt is carried at its approximate market value based on periodic comparisons to similar instruments in the market place.
Fair Value Hierarchy - The Company groups its assets and liabilities, generally measured at fair value, in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine the fair value.
Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 - Valuation is based on observable inputs other than level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using unobservable inputs to pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
The level of fair value hierarchy in which the fair value measurement falls is determined by the lowest level input that is significant to the fair value measurement.
Transfers between levels are recognized at the end of a reporting period, if applicable.
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 $13,806,000 and $14,141,000 for fiscal years 2014 and 2013, respectively.
3.
MERGERS AND ACQUISITIONS
In fiscal year 2014 the Company purchased certain assets of Esio in Connecticut, DS Waters in New York, and Acqua Fresca in Rhode Island. In fiscal year 2013, the Company purchased assets of Ralan, a company based in Connecticut; Health Waters based in New Jersey; and Universal Business Equipment Corp. based in Connecticut. The purchase price paid for the acquisitions for the respective years is as follows:
Acquisition-related costs (included in selling, general and administrative expenses in the consolidated statements of operations) were $1,764 in fiscal year 2014 and $22,313 in fiscal year 2013.
The allocation of purchase price to the corresponding line item on the financial statements related to these acquisitions for the respective years is as follows:
The following table summarizes the pro forma consolidated condensed results of operations (unaudited) of the Company for the fiscal years ended October 31, 2014 and 2013 as though all the acquisitions had been consummated at the beginning of fiscal year 2013.
The operating results of the acquired entities have been included in the accompanying statements of operations since their respective dates of acquisition.
4.
ACCOUNTS RECEIVABLE
The activity in the allowance for doubtful accounts for the years ended October 31, 2014 and 2013 is as follows:
5.
INVENTORIES
Inventories consisted of the following at:
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. The amount of raw and bottled water on hand does not represent a material amount of inventory. The Company estimates that value as of October 31, 2014 and October 31, 2013 to be $70,000 and $50,000, respectively. This value includes the cost of allocated overhead. Bottles are accounted for as fixed assets.
6.
OTHER CURRENT ASSETS
At October 31, the balance of other current assets is itemized as follows:
7.
PROPERTY AND EQUIPMENT, NET
Property and equipment at October 31 consisted of:
Depreciation expense for the fiscal years ended October 31, 2014 and 2013 was $2,742,320 and $3,024,328, respectively.
8.
EQUIPMENT RENTAL
The carrying cost of the equipment rented to customers under contract, which is included in property and equipment in the consolidated balance sheets, is calculated as follows:
We expect to have revenue of $583,000 from the rental of equipment under contract at the end of the year over the next twelve months. After twelve months customer contracts convert to a month-to month basis.
9.
GOODWILL AND OTHER INTANGIBLE ASSETS
Major components of other intangible assets consisted of:
Amortization expense for the fiscal years ending October 31, 2014 and 2013 was $1,001,914 and $998,942, respectively. There were no changes in the carrying amount of goodwill for the fiscal years ending October 31, 2014 and 2013.
Estimated amortization expense for the next five years is as follows:
An assessment of the carrying value of goodwill was conducted as of October 31, 2014 and 2013. Both years the Company elected to perform a qualitative (Step 0) assessment of goodwill. Qualitative factors that we considered in the Step 0 assessment included, but were not limited to, macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, other relevant entity-specific events and sustained declines in our share price. At the conclusion of the Step 0 assessment, the Company determined that is not more likely than not that the fair value of our reporting unit was less than the carrying value. Therefore, goodwill was not impaired.
10.
OTHER ASSETS
At October 31, 2014 and 2013 the entire balance of Other Assets was related to equity in ownership interests.
11.
ACCRUED EXPENSES
Accrued expenses as of October 31 are as follows:
12.
DEBT
Senior Debt
On March 13, 2013, the Company amended its Credit Agreement (the “Agreement”) with Bank of America to provide a senior financing facility consisting of term debt and a revolving line of credit. Under the Agreement, the Company became obligated on $11,000,000 of debt in the form of a term note to refinance the previous senior term debt and to fund repayment of a portion of its outstanding subordinated debt. Additionally, the Agreement includes a $5,000,000 revolving line of credit that can be used for the purchase of fixed assets, to fund acquisitions, to collateralize letters of credit, and for operating capital.
The Agreement amortizes the term debt over a five year period with 59 equal monthly installments of $130,952 and a final payment of $3,273,832 due in March 2018. The revolving line of credit matures in March 2016. There are various restrictive covenants under the Agreement, and the Company is prohibited from entering into other debt agreements without the bank’s consent. The Agreement also prohibits the Company from paying dividends without the prior consent of the bank.
There was $500,000 outstanding on the line of credit and a letter of credit issued for $1,400,000 to collateralize the Company’s liability insurance program as of October 31, 2014. Consequently, as of that date, there was $3,100,000 available to borrow from the revolving line of credit. There was $8,512,000 outstanding on the term note as of October 31, 2014.
Under the Agreement, interest is paid at a rate of one-month LIBOR plus a margin based on the achievement of a specified leverage ratio. As of October 31, 2014, the margin was 2.50% for the term note and 2.25% for the revolving line of credit. The Company fixed the interest rate on 75% of its term debt by purchasing an interest rate swap as of the date of the Agreement. As of October 31, 2014, the Company had $2,128,000 of the term debt subject to variable interest rates. The one-month LIBOR was .15% on the last business day of October 2014 resulting in total variable interest rates of 2.65% and 2.40%, for the term note and the revolving line of credit, respectively, as of October 31, 2014.
The Agreement requires the Company to be in compliance with certain financial covenants at the end of each fiscal quarter. The covenants include senior debt service coverage as defined of greater than 1.25 to 1, total debt service coverage as defined of greater than 1 to 1, and senior debt to EBITDA of less than 2.50 to 1. As of October 31, 2014, the Company was in compliance with these covenants and terms of the Agreement.
Subordinated Debt
In addition to the senior debt, as of October 31, 2014, the Company has subordinated debt owed to Henry, Peter and John Baker in the aggregate principal amount of $10,000,000 that is due October 5, 2018. The interest rate on each of these notes is 12% per annum. In each of December 2012 and March 2013 the Company made separate discretionary payments of $1,500,000 to the subordinated debt holders.
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.
Notes Payable
In April 2014, the Company completed a small acquisition that resulted in the Company issuing a promissory note to the seller in the principal amount of $60,000. Payment is contingent on performance related items and due in full by November 20, 2014.
A note for $19,000 issued in conjunction with an acquisition in 2012 was paid in full in August 2013.
Also in 2012, the Company made an acquisition that resulted in the issuance of a note for $101,000 to the seller. The note was due on March 20, 2013 but was not paid because certain contingencies in the acquisition agreement that were required to be met for payment were not met subsequent to the transaction. The resolution of the note payable was recognized as an offset to Selling, General, and Administrative expenses in fiscal year 2013.
Annual Maturities
Annual maturities of debt as of October 31, 2014 are summarized as follows:
13.
ON-BALANCE SHEET DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Derivative Financial Instruments
The Company has stand-alone derivative financial instruments in the form of interest rate swap agreements, which derive their value from underlying interest rates. These transactions involve both credit and market risk. The notional amount is an amount on which calculations, payments, and the value of the derivative are based. The notional amount does not represent direct credit exposure. Direct credit exposure is limited to the net difference between the calculated amount to be received and paid, if any. Such difference, which represents the fair value of the derivative instrument, is reflected on the Company’s consolidated balance sheet as an unrealized gain or loss on derivatives.
The Company is exposed to credit-related losses in the event of nonperformance by the counterparties to these agreements. The Company controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and currently has no reason to believe that any counterparties will fail to fulfill their obligations.
Risk Management Policies - Hedging Instruments
The Company uses long-term variable rate debt as a source of funds for use in the Company’s general business purposes. These debt obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense decreases. Management believes it is prudent to limit the variability of a portion of its interest payments and, therefore, generally hedges a portion of its variable-rate interest obligations. To meet this objective, management enters into interest rate swap agreements whereby the Company receives variable interest rate payments and makes fixed interest rate payments on a portion of its debt.
On October 5, 2007, the Company entered into an interest rate swap agreement (old swap) in conjunction with an amendment to its credit facility with Bank of America. The intent of the instrument was to fix the interest rate on at least 75% of the outstanding balance on the term loan (the swapped amount) with Bank of America as required by the facility. The old swap fixed the interest rate for the swapped amount related to the previous facility at 4.87% and was to mature in January 2014.
On April 5, 2010, the Company entered into an interest rate swap agreement (offsetting swap) to offset the old swap for which it receives 1.40% of the scheduled balance of the old term loan. The offsetting swap effectively removed any exposure to change in the fair value of the old swap and set a fixed net payment schedule based on the scheduled balance of the old term loan until January 2014 when both swaps were to mature. In addition, the Company entered into a swap agreement (new swap) to fix the interest rate of up to 75% of the outstanding balance of the term note at 4.76% (2.01% plus the applicable margin, 2.75%). The term note was re-financed in March 2013 and the new swap matured in April 2013.
In March 2013, the Company terminated the old and offsetting swaps and settled the remaining liability of $27,670 associated with them. The settlement was expensed during fiscal year 2013. In addition, the Company entered into a new interest rate swap agreement (latest swap) for the purpose of fixing at least 75% of the term loan under the Agreement with Bank of America. The latest swap fixes the rate on at least 75% of the outstanding balance of the term note at 3.18% (.68% plus the applicable margin under the Agreement, 2.50%) until March 2016.
As of October 31, 2014, the total notional amount of the latest swap agreement was $6,384,000. On that date, the variable rate on the remaining portion of the term note was 2.65%.
At October 31, 2014, the net unrealized loss or gain relating to interest rate swap was recorded in current and long-term liabilities. The current portion is the valuation of the hedging instrument over the next twelve months while the balance of the unrealized loss makes up the long term portion. For the effective portion of the hedge, which is the latest swap at October 31, 2014 and October 31, 2013, changes in the fair value of interest rate swaps designated as hedging instruments to mitigate the variability of cash flows associated with long-term debt are reported in other comprehensive income or loss net of tax effects. The amounts relating to the old swap previously reflected in accumulated other comprehensive income were amortized to earnings over the remaining term of the undesignated cash flow hedge. Payments on the old swap, and receipt of income on the offsetting swap, are reported as gain or loss on derivatives and an adjustment to other comprehensive income or loss net of tax effects.
The table below details the adjustments to other comprehensive income (loss), on a before-tax and net-of tax basis, for the fiscal years ended October 31, 2014 and 2013.
The reclassification adjustments of $36,748 and $106,719 represent interest the Company paid in excess of the amount that would have been paid without the interest rate swap agreements during the fiscal years ended October 31, 2014 and 2013, respectively. These amounts were reclassified from accumulated other comprehensive income and recorded in the consolidated statements of operations as interest expense. No other material amounts were reclassified during the fiscal years ended October 31, 2014 and 2013.
During the year ended October 31, 2014 the fair value of the swap changed from an unrealized loss on derivative liability of $44,655 at the beginning of the period to $28,516 at the end of the period. As of October 31, 2014, the estimated net amount of the existing loss that is reported in accumulated other comprehensive loss that is expected to be reclassified into earnings within the next twelve months is $16,488, net of tax.
During fiscal years 2014 and 2013, cash flow hedges were deemed 100% effective. The only interest rate swap in effect was designated as a cash flow hedge for the year ended October 31, 2014 and, therefore, there was no resulting gain or loss for those respective periods for instruments not designated as cash flow hedges. The net loss on interest rate swaps not designated as cash flow hedges, classified as a loss on derivatives on the Company’s statements of operations, amounted to $5,578 for the year ended October 31, 2013.
14.
FAIR VALUES OF ASSETS AND LIABILITIES
Fair Value Hierarchy
The Company’s assets and liabilities measured at fair value on a recurring basis are as follows:
In determining the fair value, the Company uses a model that calculates a present value of the payments as they amortize through the life of the loan (float) based on the variable rate and compares them to the calculated value of the payment based on the fixed rate (fixed) defined in the swap. In calculating the present value, in addition to the term, the model relies on other data - the “rate” and the “discount factor”.
§
In the “float” model, the rate reflects where the market expects LIBOR to be in for the respective period and is based on the Eurodollar futures market.
§
The discount factor is a function of the volatility of LIBOR.
Payments are calculated by applying the rate to the notional amount and adjusting for the term. Then the present value is calculated by using the discount factor.
There were no assets or liabilities measured at fair value on a nonrecurring basis in fiscal years 2014 and 2013.
15.
COMMITMENTS AND CONTINGENCIES
Operating Leases
The 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:
Rent expense was $3,881,000 and $4,155,000 for the fiscal years ended October 31, 2014 and 2013, respectively.
16.
STOCK BASED COMPENSATION
Stock Option and Incentive Plans
In 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 options to purchase 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 awards authorized under this plan, 75,500 options are outstanding. As of April 10, 2013, no further options may be granted under the 1998 Plan.
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 of the Company’s common stock in the form of restricted or unrestricted shares, or incentive or non-statutory stock options for the purchase of the Company’s common stock. Of the total amount of shares authorized under this plan, 172,250 option shares are outstanding and 26,000 restricted shares have been granted at October 31, 2014. As of February 18, 2014, no further options may be granted under the 2004 plan.
In April 2014, the Company’s stockholders approved the 2014 Stock Incentive Plan. The plan provided for issuances of awards of up to 500,000 restricted or unrestricted shares of the Company’s common stock, or incentive or non-statutory stock options to purchase such common stock. Of the total amount of shares authorized under this plan, no options have been granted and 500,000 shares are available for grant at October 31, 2014.
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 two fiscal years:
There were a total of two option grants, for a total of 10,000 shares that expired from the 1998 Plan and one option grant, for 5,000 shares, that were forfeited from the 2004 Plan in fiscal year 2014. During 2013, 51,250 options were issued and 23,000 options expired from the 2004 Plan. In 2013, 35,000 options expired that were originally issued from the 1998 Plan.
The following table summarizes information pertaining to outstanding stock options that are exercisable as of October 31, 2014:
Of the outstanding options as of October 31, 2014, 210,750 were vested and as of October 31, 2013 were 211,500 were vested.
Outstanding options were granted with lives of 10 years and provide for vesting over a term of 5 years. As of October 31, 2014 there is $21,045 of unrecognized future compensation expense that will be recognized over the next four years based on the vesting period of the options. Compensation is determined using the Black-Scholes model and the simplified method to derive the expected term of the options and historical volatility over the past five years.
17.
REPURCHASE OF COMMON STOCK
In May 2012, the Company’s Board of Directors approved the purchase of up to $500,000 of the Company’s common stock. In fiscal year 2014, the Company purchased 6,000 shares for an aggregate purchase price of $5,369. In fiscal year 2013, the Company purchased 16,320 shares for an aggregate purchase price of $16,431. The Company has used internally generated cash to fund these purchases.
18.
INCOME TAXES
The following is the composition of income tax (benefit) expense:
Deferred tax assets (liabilities) at October 31, 2014 and 2013, are as follows:
Income tax expense differs from the amount computed by applying the statutory tax rate to net income before income tax expense as follows:
The Company recognizes interest and penalties related to the unrecognized tax benefits in tax expense. The Company had approximately $41,000 of interest and penalties accrued at October 31, 2014 and 2013.
Generally, the Company is subject to federal and state tax examinations by tax authorities for years after October 31, 2011.
19.
NET INCOME PER SHARE AND WEIGHTED AVERAGE SHARES
The following calculation provides the reconciliation of the denominators used in the calculation of basic and fully diluted earnings per share:
As of October 31, 2014 and 2013, there were 247,750 and 262,750, respectively, options outstanding that were not included in the dilution calculation because the options’ exercise price exceeded the market price of the underlying common shares.
20.
RETIREMENT PLAN
The 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 $147,000, and $140,000, for the fiscal years ended October 31, 2014 and 2013, respectively.
21.
RELATED PARTY TRANSACTIONS
Directors and Officers
The Baker family group, consisting of three current directors Peter Baker (CEO), John Baker (Executive Vice President) and Ross Rapaport (Chairman), as trustee, as well as Henry Baker, a former director, 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 balance on these notes as of October 31, 2014 is $10,000,000.
Henry Baker is 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, 2015. The two contracts entitle the respective shareholders to annual compensation of $320,000 each and other bonuses and perquisites.
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 Watertown expires in October 2016 and the lease in Stamford expires in September 2020.
Future minimum rental payments under these leases are as follows:
The Company’s Chairman of the Board, Ross S. Rapaport, who also acts as Trustee in various Baker family trusts is employed by McElroy, Deutsch, Mulvaney & Carpenter LLP (formerly Pepe & Hazard, LLP) a business law firm that the Company uses from time to time. During fiscal 2014 and 2013 the Company paid approximately $39,000 and $97,000, respectively, for services provided by McElroy, Deutsch, Mulvaney & Carpenter LLP.
22. CONCENTRATION OF CREDIT RISK
The Company maintains its cash accounts at various financial institutions in non-interest bearing accounts. The accounts are covered to $250,000 by the basic limit on federal deposit insurance.
23. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-11, Income Taxes (Topic 740:) amending guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists. The guidance requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented as a reduction of a deferred tax asset when a net operating loss carryforward, similar tax loss, or tax credit carryforward exists, with certain exceptions. This accounting guidance is effective prospectively for the Company beginning in the first quarter of fiscal year 2015, with early adoption permitted. While the Company is currently evaluating the impact, its adoption is not expected to have a material impact on the Company’s consolidated financial statements.
In April 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which raises the threshold for disposals to qualify as discontinued operations. A discontinued operation is defined as: (1) a component of an entity or group of components that has been disposed of or classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results; or (2) an acquired business that is classified as held for sale on the acquisition date. ASU 2014-08 also requires additional disclosures regarding discontinued operations, as well as material disposals that do not meet the definition of discontinued operations. It is effective for annual periods beginning on or after December 15, 2014. Early adoption is permitted but only for disposals that have not been reported in financial statements previously issued. The adoption of ASU 2014-08 is not expected to have a material impact on the Company’s net income, financial position or cash flows.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which stipulates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. This update will be effective for fiscal years beginning after December 15, 2016 which for the Company would be the fiscal year beginning November 1, 2017. Early adoption is not permitted. The Company is currently assessing the impact of this update on its operations.
In August 2014, the FASB issued ASU No. 2014-15 "Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern," which requires management to assess whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern within one year after the financial statements are issued. If substantial doubt exists, additional disclosures are required. ASU 2014-15 will be effective for the Company in the first quarter of 2017. The adoption of ASU 2014-15 is not expected to have a material impact on the Company's disclosures.
24. SUBSEQUENT EVENT
On January 14, 2015 the Company amended its Credit Agreement with Bank of America. The amendment changed the calculation of Consolidated EBITDA to add certain severance costs expensed in fiscal year 2014. No other terms of the agreement were amended.