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
– 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 is measured as the excess of the carrying value over the implied fair value.
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 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.
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). These approaches provide a reasonable estimation of the value of the Company and take 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 the Company's equity value. If the estimated fair value exceeds the Company's equity value, there is no impairment. If the Company's equity value exceeds the estimated fair value, potential impairment is indicated and step two is necessary. If impairment had been indicated, we would have then allocated the estimated fair value to all of the assets and liabilities of the Company (including unrecognized intangible assets) as if the Company had been acquired in a business combination and the estimated fair value was the price paid. We then would recognize impairment in the amount by which the carrying value of goodwill exceeded the implied value of goodwill as determined in this allocation.
Management reviewed qualitative factors relative to the carrying value of goodwill as of October 31, 2016 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. The Company conducted a step-one assessment of the carrying value of its goodwill as of October 31, 2015 and determined that goodwill was not impaired.
Intangible Assets and Impairment for Long-Lived and Intangible Assets
– 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. Intangible assets consist primarily of customer lists and covenants not to compete, with estimated lives ranging from 3 to 5 years. Trademarks have estimated lives of 30 years. 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, 2016 and 2015, 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. There were no stock options granted under these plans during the years ended October 31, 2016 and 2015. Prior to 2015, the Company has only issued options to purchase 51,250 shares of the Company's stock 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.
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 designed as cash flow hedges to hedge variable rate interest payments on its long-term debt. 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 fair 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 renting water coolers and coffee brewers. These rentals are generally for 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 the agreed to number of months. In general, the customer does not renew the agreement after the initial term, 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 rental agreement. After the initial rental agreement 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 $12,550,000 and $13,390,000 for fiscal years 2016 and 2015, respectively.
Reclassification
– Certain amounts have been reclassified in 2015 financial statements to conform with the 2016 presentation.
Adopted Accounting Standards Updates
Effective August 1, 2016, we elected to early adopt Financial Accounting Standards Board ("FASB") Accounting Standards Update ASU 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
on a prospective basis. This guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as non-current on the balance sheet. Prior reporting periods were not retrospectively adjusted. The adoption of ASU 2015-17 had no impact on our results of operations or cash flows for the year ended October 31, 2016.
Effective August 1, 2016, we elected to early adopt FASB ASU 2015-05,
Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
. This guidance clarifies that if a cloud computing arrangement includes a software license, the customer should account for the license consistent with its accounting for other software licenses. If the arrangement does not include a software license, the customer should account for the arrangement as a service contract. We elected to adopt the amendments prospectively for all arrangements entered into or materially modified after August 1, 2016. The adoption of ASU 2015-05 does not have a significant impact on our consolidated financial statements. We record the qualified cloud-based software license fees as software intangible assets instead of prepaid expenses, and amortize them over the contract length as software amortization expense instead of service expense. Both amortization expense and service expense are included in the selling, general and administrative expense line of our consolidated statements of operations, resulting in no significant impact on our income from operations, net income or cash flows.
3.
|
MERGERS AND ACQUISITIONS
|
The Company had no acquisitions in fiscal year 2016.
In fiscal year 2015 the Company purchased certain assets of Old Mill Pond Springs in Massachusetts. The purchase price paid for the acquisition is as follows:
|
|
Old Mill
|
|
Fiscal Year 2015
|
|
|
Pond Springs
|
|
Month Acquired
|
|
March
|
|
Cash
|
|
$
|
66,196
|
|
Accounts Receivable
|
|
|
|
1,304
|
|
Debt
|
|
|
7,500
|
|
Purchase Price
|
|
$
|
75,000
|
|
There were no acquisition-related costs in fiscal years 2016 and 2015.
The allocation of purchase price to the corresponding line item on the financial statements related to the acquisition for fiscal 2015 year is as follows:
|
|
2015
|
|
Property and Equipment, net
|
|
$
|
11,512
|
|
Accounts receivable
|
|
|
1,304
|
|
Other Intangible Assets
|
|
|
62,184
|
|
Purchase Price
|
|
$
|
75,000
|
|
The following table summarizes the pro forma consolidated condensed results of operations (unaudited) of the Company for the fiscal year ended October 31, 2015 as though the acquisition had been consummated at the beginning of fiscal year 2015.
|
|
2015
|
|
Net Sales
|
|
$
|
73,970,099
|
|
Net Income (Loss)
|
|
$
|
(588,673
|
)
|
Net Income (Loss) Per Share-Diluted
|
|
$
|
(.03
|
)
|
Weighted Average Common Shares Outstanding-Diluted
|
|
|
21,358,411
|
|
The operating results of the acquired entity has been included in the accompanying statements of operations since the respective date of acquisition.
The activity in the allowance for doubtful accounts for the years ended October 31, 2016 and 2015 is as follows:
|
|
2016
|
|
|
2015
|
|
Balance, beginning of year
|
|
$
|
306,140
|
|
|
$
|
273,346
|
|
Provision
|
|
|
273,822
|
|
|
|
270,421
|
|
Write-offs
|
|
|
(311,251
|
)
|
|
|
(237,627
|
)
|
Balance, end of year
|
|
$
|
268,711
|
|
|
$
|
306,140
|
|
Inventories consisted of the following at:
|
|
October 31,
|
|
|
October 31,
|
|
|
|
2016
|
|
|
2015
|
|
Finished Goods
|
|
$
|
2,117,241
|
|
|
$
|
2,453,974
|
|
Raw Materials
|
|
|
178,134
|
|
|
|
157,707
|
|
Inventory reserve
|
|
|
(233,662
|
)
|
|
|
-
|
|
Total Inventories
|
|
$
|
2,061,713
|
|
|
$
|
2,611,681
|
|
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 and is not included in inventory. The Company estimates that value as of October 31, 2016 and October 31, 2015 to be $47,000 and $65,000, respectively. This value includes the cost of allocated overhead. Bottles are accounted for as fixed assets (see note 7). The inventory reserve relates to unsaleable items held in inventory.
At October 31, the balance of other current assets is itemized as follows:
|
|
2016
|
|
|
2015
|
|
Notes Receivable – Current
|
|
$
|
83,339
|
|
|
$
|
59,811
|
|
Prepaid Insurance
|
|
|
282,952
|
|
|
|
306,812
|
|
Prepaid Software
|
|
|
74,121
|
|
|
|
18,780
|
|
Prepaid Property Taxes
|
|
|
170,522
|
|
|
|
190,721
|
|
Prepaid Fees
|
|
|
46,100
|
|
|
|
46,100
|
|
Security Deposits
|
|
|
165,428
|
|
|
|
170,097
|
|
Miscellaneous
|
|
|
78,912
|
|
|
|
144,636
|
|
Total Other Current Assets
|
|
$
|
901,374
|
|
|
$
|
936,957
|
|
7.
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment at October 31 consisted of:
|
Useful Life
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
Shorter of useful life
|
|
$
|
2,062,643
|
|
|
$
|
2,062,643
|
|
|
of asset or lease term
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
3 - 10 yrs.
|
|
|
23,666,239
|
|
|
|
22,841,505
|
|
Bottles, racks and vehicles
|
3 - 7 yrs.
|
|
|
5,419,346
|
|
|
|
5,262,900
|
|
Furniture, fixtures and office equipment
|
3 - 7 yrs.
|
|
|
3,202,424
|
|
|
|
3,142,355
|
|
Construction in progress
|
|
|
|
338,373
|
|
|
|
-
|
|
Property and equipment before accumulated depreciation
|
|
|
|
34,689,025
|
|
|
|
33,309,403
|
|
Less accumulated depreciation
|
|
|
|
27,920,840
|
|
|
|
26,439,417
|
|
Property and equipment, net of accumulated depreciation
|
|
|
$
|
6,768,185
|
|
|
$
|
6,869,986
|
|
Depreciation expense for the fiscal years ended October 31, 2016 and 2015 was $2,688,413 and $2,724,855, respectively.
The construction in progress relates to capitalized costs related to software not yet placed in service.
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:
|
|
2016
|
|
|
2015
|
|
Original Cost
|
|
$
|
3,739,467
|
|
|
$
|
3,308,958
|
|
Accumulated Depreciation
|
|
|
2,974,412
|
|
|
|
2,599,679
|
|
Carrying Cost
|
|
$
|
765,055
|
|
|
$
|
709,279
|
|
We expect to have revenue of $330,000 from the rental of equipment under contract at the end of the year over the next twelve months. After the twelve month period customer contracts convert to a month-to month basis.
9.
|
GOODWILL AND OTHER INTANGIBLE ASSETS
|
Major components of other intangible assets consisted of:
|
|
October 31, 2016
|
|
|
October 31, 2015
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Wgt.
Avg.
Amort.
Years
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Wgt.
Avg.
Amort.
Years
|
|
Amortized Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covenants Not to Compete
|
|
$
|
2,536,488
|
|
|
$
|
2,444,293
|
|
|
|
1.80
|
|
|
$
|
2,536,488
|
|
|
$
|
2,382,570
|
|
|
|
2.54
|
|
Customer Lists
|
|
|
10,313,819
|
|
|
|
9,217,143
|
|
|
|
2.02
|
|
|
|
10,313,819
|
|
|
|
8,639,685
|
|
|
|
2.95
|
|
Other Identifiable Intangibles
|
|
|
608,393
|
|
|
|
303,570
|
|
|
|
23.04
|
|
|
|
608,393
|
|
|
|
271,211
|
|
|
|
24.00
|
|
Total
|
|
$
|
13,458,700
|
|
|
$
|
11,965,006
|
|
|
|
|
|
|
$
|
13,458,700
|
|
|
$
|
11,293,466
|
|
|
|
|
|
Amortization expense for the fiscal years ending October 31, 2016 and 2015 was $671,540 and $740,456, respectively. There were no changes in the carrying amount of goodwill for the fiscal years ending October 31, 2016 and 2015.
Estimated amortization expense for the next five years is as follows:
Fiscal Year Ending October 31,
|
|
|
|
2017
|
|
$
|
660,000
|
|
2018
|
|
|
518,000
|
|
2019
|
|
|
75,000
|
|
2020
|
|
|
18,000
|
|
2021
|
|
|
12,000
|
|
An assessment of the carrying value of goodwill was conducted as of October 31, 2016 and 2015.
In both years it was determined that goodwill was not impaired. There were no changes in the carrying amount of goodwill for the fiscal years ended October 31, 2016 and 2015.
The Company elected to perform a qualitative (Step 0) assessment of goodwill as of October 31, 2016. 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 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.
The Company elected to forgo the qualitative assessment of its goodwill as of October 31, 2015 and transitioned directly to Step 1.
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 provided a reasonable estimation of the value of the Company and took into consideration the Company's thinly traded stock and concentrated holdings, market comparable valuations, and expected results of operations. The Company compared the resulting estimated fair value to its equity value as of October 31, 2015 and determined there was no impairment of goodwill. Step 2, which involves allocation of the fair value of the Company's assets and liabilities, was not necessary because impairment was not indicated in Step 1.
The Company is a single reporting unit as it does not have separate management of product lines and shares its sales, purchasing and distribution resources among the lines.
Other assets as of October 31 are as follows:
|
|
2016
|
|
|
2015
|
|
Non-current portion of notes receivable
|
|
$
|
239,633
|
|
|
$
|
167,916
|
|
Equity in ownership interests
|
|
|
39,000
|
|
|
|
39,000
|
|
Total
|
|
$
|
278,633
|
|
|
$
|
206,916
|
|
The Company has issued trade notes receivable. As of October 31, 2016 and 2015, these have been paid timely and no reserves have been established for non payment.
Accrued expenses as of October 31 are as follows:
|
|
2016
|
|
|
2015
|
|
Payroll and Vacation
|
|
$
|
1,935,030
|
|
|
$
|
1,363,393
|
|
Interest
|
|
|
304,675
|
|
|
|
298,728
|
|
Health Insurance
|
|
|
257,271
|
|
|
|
252,097
|
|
Accounting and Legal
|
|
|
193,000
|
|
|
|
303,508
|
|
Income Taxes
|
|
|
249,633
|
|
|
|
49,993
|
|
Miscellaneous
|
|
|
147,957
|
|
|
|
223,033
|
|
Total
|
|
$
|
3,087,566
|
|
|
$
|
2,490,752
|
|
Senior Debt
On May 20, 2015 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 $12,000,000 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 $133,333 and a final payment of $4,133,333 due in May 2020. The revolving line of credit matures in May 2018. 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.
At October 31, 2016, there was no balance outstanding on the line of credit and a letter of credit has been issued for $1,415,000 to collateralize the Company's liability insurance program as of that date. Consequently, as of October 31, 2016, there was $3,585,000 available to borrow from the revolving line of credit. There was $9,733,000 outstanding on the term note as of October 31, 2016.
Effective September 12, 2016, the Company amended its Credit Agreement with the Bank of America (as so amended, the "Second Amendment"). Under the Second Amendment, 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, 2016, 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 a portion of its term debt by entering into an interest rate swap. As of October 31, 2016, the Company had $4,866,000 of the term debt subject to variable interest rates. The one-month LIBOR was 0.53% on October 31, 2016 resulting in total variable interest rates of 3.03% and 2.78%, for the term note and the revolving line of credit, respectively, as of October 31, 2016.
The Second Amendment requires the Company to be in compliance with certain financial covenants as follows: (i) a maximum annual limit for capital expenditures of $4,000,000 each fiscal year, (ii) consolidated adjusted operating cash flows to consolidated total debt service ratio, as defined, to be no less than 1.5 to 1 for any reference period ending on or after October 31, 2016 and (iii) senior funded debt to consolidated adjusted EBITDA, as defined, to be no greater than 2.5 to 1 as of the end of any fiscal quarter ending on or after October 31, 2016. As of October 31, 2016, the Company was in compliance with these financial covenants.
Subordinated Debt
In addition to the senior debt, as of October 31, 2016, the Company has subordinated debt owed to Henry, Peter and John Baker in the aggregate principal amount of $9,000,000 that is due November 20, 2020. The interest rate on each of these notes is 12% per annum.
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 March 2015, the Company completed the Old Mill Pond Springs acquisition that resulted in the Company issuing a promissory note to the seller in the principal amount of $7,500. Payment in full was made on the note in August 2015.
Annual Maturities
Annual maturities of debt as of October 31, 2016 are summarized as follows:
|
|
Senior
|
|
|
Subordinated
|
|
|
Total
|
|
Fiscal year ending October 31,
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
1,600,000
|
|
|
$
|
-
|
|
|
$
|
1,600,000
|
|
2018
|
|
|
1,600,000
|
|
|
|
-
|
|
|
|
1,600,000
|
|
2019
|
|
|
1,600,000
|
|
|
|
-
|
|
|
|
1,600,000
|
|
2020
|
|
|
4,933,000
|
|
|
|
-
|
|
|
|
4,933,000
|
|
2021
|
|
|
-
|
|
|
|
9,000,000
|
|
|
|
9,000,000
|
|
Total Debt
|
|
$
|
9,733,000
|
|
|
$
|
9,000,000
|
|
|
$
|
18,733,000
|
|
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 also 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.
This interest rate swap agreement is considered a cash flow hedge to hedge against the variability of interest rates on outstanding debt. The net unrealized loss relating to interest rate swaps was recorded in current and long term liabilities with an offset to other comprehensive income for the effective portion of the hedge. At October 31, 2016, these cash flow hedges were deemed 100% effective. The portion of the net unrealized loss in current liabilities is the amount expected to be reclassified to income within the next twelve months.
The followin information pertains to the Company's outstanding interest rate swap at October 31, 2016. The pay rate is fixed and the receive rate is one month LIBOR.
Instrument
|
|
Notional Amount
|
|
|
Pay Rate
|
|
|
Receive Rate
|
|
Interest rate swap
|
|
$
|
4,866,668
|
|
|
|
1.25
|
%
|
|
|
0.53
|
%
|
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, 2016 and 2015.
|
|
|
|
|
Tax Benefit
|
|
|
|
|
|
|
Before-Tax
|
|
|
(Expense)
|
|
|
Net-of-Tax
|
|
Fiscal Year Ended October 31, 2015
|
|
|
|
|
|
|
|
|
|
Loss on interest rate swap
|
|
$
|
(9,556
|
)
|
|
$
|
3,823
|
|
|
$
|
(5,733
|
)
|
Reclassification adjustment for loss in income
|
|
|
29,160
|
|
|
|
(11,665
|
)
|
|
|
17,495
|
|
Net unrealized gain
|
|
$
|
19,604
|
|
|
$
|
(7,842
|
)
|
|
$
|
11,762
|
|
Fiscal Year Ended October 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on interest rate swap
|
|
$
|
(56,203
|
)
|
|
$
|
22,481
|
|
|
$
|
(33,722
|
)
|
Reclassification adjustment for loss in income
|
|
|
32,662
|
|
|
|
(13,065
|
)
|
|
|
19,597
|
|
Net unrealized loss
|
|
$
|
(23,541
|
)
|
|
$
|
9,416
|
|
|
$
|
(14,125
|
)
|
The reclassification adjustments of $32,662 and $29,160 represent interest the Company paid in excess of the amount that would have been paid without the interest rate swap agreement during the fiscal years ended October 31, 2016 and 2015, respectively. These amounts were reclassified from accumulated other comprehensive loss and recorded in the consolidated statements of operations as interest expense. No other material amounts were reclassified during the fiscal years ended October 31, 2016 and 2015.
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:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
October 31, 2016
|
|
|
|
|
|
|
|
|
|
Unrealized loss on derivative
|
|
$
|
-
|
|
|
$
|
32,453
|
|
|
$
|
-
|
|
|
|
|
|
October 31, 2015
|
|
|
|
Unrealized loss on derivative
|
|
$
|
-
|
|
|
$
|
8,912
|
|
|
$
|
-
|
|
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 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 2016 and 2015.
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:
Fiscal Year Ending October 31,
|
|
|
|
2017
|
|
$
|
2,831,000
|
|
2018
|
|
|
2,349,000
|
|
2019
|
|
|
1,964,000
|
|
2020
|
|
|
1,415,000
|
|
2021
|
|
|
994,000
|
|
Thereafter
|
|
|
117,000
|
|
Total
|
|
$
|
9,670,000
|
|
Rent expense was $3,418,000 and $3,784,000 for the fiscal years ended October 31, 2016 and 2015, respectively.
16.
|
STOCK BASED COMPENSATION
|
Stock Option and Incentive Plans
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 the initial date of grant.
In April 2004, the Company's shareholders approved the 2004 Stock Incentive 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, no options are outstanding and 26,000 restricted shares have been granted at October 31, 2016. 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, 2016.
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:
|
|
Outstanding Options
(Shares)
|
|
|
Weighted Average
Exercise Price
|
|
Balance at October 31, 2014
|
|
247,750
|
|
|
2.07
|
|
Expired
|
|
(201,500
|
)
|
|
2.33
|
|
Forfeited
|
|
(36,250
|
)
|
|
.90
|
|
Balance at October 31, 2015
|
|
10,000
|
|
|
.90
|
|
Forfeited
|
|
(10,000
|
)
|
|
.90
|
|
Balance at October 31, 2016
|
|
-
|
|
|
|
|
There were no exercisable stock options as of October 31, 2016.
Outstanding options were granted with lives of 10 years and provide for vesting over a term of 5 years. There is no unrecognized future compensation cost to be recorded. 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. No shares were purchased during fiscal years ending October 31, 2016 and 2015.
The following is the composition of income tax (benefit) expense:
|
|
2016
|
|
|
2015
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
374,551
|
|
|
$
|
(79,333
|
)
|
State
|
|
|
84,270
|
|
|
|
138
|
|
Total current
|
|
$
|
458,821
|
|
|
$
|
(79,195
|
)
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
216,202
|
|
|
$
|
(5,411
|
)
|
State
|
|
|
29,095
|
|
|
|
(174,270
|
)
|
Total deferred
|
|
|
245,297
|
|
|
|
(179,681
|
)
|
Total income tax expense (benefit)
|
|
$
|
704,118
|
|
|
$
|
(258,876
|
)
|
Deferred tax assets (liabilities) at October 31, 2016 and 2015, are as follows:
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
102,110
|
|
|
$
|
116,333
|
|
Accrued compensation
|
|
|
217,064
|
|
|
|
212,284
|
|
Accruals and reserves
|
|
|
269,868
|
|
|
|
126,192
|
|
Charitable contributions
|
|
|
14,064
|
|
|
|
79,903
|
|
Interest rate swaps
|
|
|
12,981
|
|
|
|
3,565
|
|
Subpart F Income
|
|
|
9,595
|
|
|
|
-
|
|
State credits and NOLs
|
|
|
66,691
|
|
|
|
68,383
|
|
Total deferred tax assets
|
|
|
692,373
|
|
|
|
606,660
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(1,711,018
|
)
|
|
|
(1,715,035
|
)
|
Amortization
|
|
|
(2,761,082
|
)
|
|
|
(2,435,471
|
)
|
Total deferred tax liabilities
|
|
|
(4,472,100
|
)
|
|
|
(4,150,506
|
)
|
Net deferred tax liability
|
|
$
|
(3,779,727
|
)
|
|
$
|
(3,543,846
|
)
|
Income tax expense differs from the amount computed by applying the statutory tax rate to net income (loss) before income tax expense as follows:
|
|
2016
|
|
|
2015
|
|
Income tax (benefit) expense computed at the statutory rate
|
|
|
648,022
|
|
|
$
|
(300,028
|
)
|
State income taxes (benefit) expense, net of federal benefit
|
|
|
70,354
|
|
|
|
(29,615
|
)
|
|
|
|
|
|
|
|
|
|
Subpart F income
|
|
|
-
|
|
|
|
85,975
|
|
Meals and entertainment
|
|
|
28,592
|
|
|
|
33,738
|
|
Other differences
|
|
|
(42,850
|
)
|
|
|
(48,946
|
)
|
Income tax expense (benefit)
|
|
$
|
704,118
|
|
|
$
|
(258,876
|
)
|
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, 2016 and 2015.
Generally, the Company is subject to federal and state tax examinations by tax authorities for years after October 31, 2013.
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:
|
|
2016
|
|
|
2015
|
|
Net Income (Loss)
|
|
$
|
1,201,830
|
|
|
$
|
(601,090
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Basic Weighted Average Shares Outstanding
|
|
|
21,358,411
|
|
|
|
21,358,411
|
|
Effect of Stock Options
|
|
|
-
|
|
|
|
-
|
|
Diluted Weighted Average Shares Outstanding
|
|
|
21,358,411
|
|
|
|
21,358,411
|
|
|
|
|
|
|
|
|
|
|
Basic Net Income (Loss) Per Share
|
|
$
|
0.06
|
|
|
$
|
(.03
|
)
|
|
|
|
|
|
|
|
|
|
Diluted Net Income (Loss) Per Share
|
|
$
|
0.06
|
|
|
$
|
(.03
|
)
|
As of October 31, 2016, there were no outstanding options. As of October 31, 2015, there were 10,000 options outstanding that were not included in the dilution calculation because the options' exercise price exceeded the market price of the underlying common shares.
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 $100,000, and $143,000, for the fiscal years ended October 31, 2016 and 2015, 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 Company common stock. In addition, in connection with the acquisition of Crystal Rock Spring Water Company in 2000, the Company 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, 2016 is $9,000,000.
John Baker and Peter Baker have employment agreements with the Company.
The agreements provide for annual salaries of $320,000 for each and other bonuses and perquisites. Effective November 1, 2016, new employment agreements were finalized. See Note 24, "Subsequent Event."
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 2021 and the lease in Stamford expires in September 2020.
Future minimum rental payments under these leases are as follows:
Fiscal year ending October 31,
|
|
Stamford
|
|
|
Watertown
|
|
|
Total
|
|
2017
|
|
$
|
256,668
|
|
|
$
|
470,521
|
|
|
$
|
727,189
|
|
2018
|
|
|
256,668
|
|
|
|
470,521
|
|
|
|
727,189
|
|
2019
|
|
|
256,668
|
|
|
|
470,521
|
|
|
|
727,189
|
|
2020
|
|
|
235,279
|
|
|
|
470,521
|
|
|
|
705,800
|
|
2021
|
|
|
-
|
|
|
|
470,521
|
|
|
|
470,521
|
|
Totals
|
|
$
|
1,005,283
|
|
|
$
|
2,352,605
|
|
|
$
|
3,357,888
|
|
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 2016 and 2015 the Company paid approximately $27,000 and $65,000, respectively, for services provided by McElroy, Deutsch, Mulvaney & Carpenter LLP.
The Company's Chief Financial Officer, David Jurasek, is husband of Cheryl Jurasek, the Company's Vice President of Human Resources. During fiscal 2016 and 2015 her compensation, including the value of a Company-provided automobile, was approximately $132,000 each year.
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 May 2014, the FASB issued Accounting Standards Update ("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. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of the ASU to fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2016. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. The Company is currently evaluating the transition methods and the impact of the standard on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, "Interest-Imputation of Interest" (Topic 835-30), that requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. ASU 2015-05 will be effective in the first quarter of fiscal 2017. The adoption of this guidance by the Company is not expected to have a material impact on its consolidated balance sheets.
In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory". The ASU requires entities using the first-in, first-out (FIFO) inventory costing method to subsequently value inventory at the lower of cost and net realizable value. This ASU defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This ASU requires prospective application and is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years, with early adoption permitted. The adoption of this guidance by the Company is not expected to have a material impact on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, "Leases", which is intended to improve financial reporting about leasing transactions. This ASU requires that leased assets be recognized as assets on the balance sheet and the liabilities for the obligations under the lease also be recognized on the balance sheet. This ASU requires disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The required disclosures include qualitative and quantitative requirements. This ASU is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are currently in the process of evaluating our adoption timing and the impact of this new pronouncement on our consolidated financial position and results of operations.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), which addresses eight specific cash flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), which addresses presentations of
total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows.
The guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this guidance is not expected to have a material impact on its consolidated financial statements.
On November 1, 2016 the Company finalized new employment agreements with its three executive officers, Peter Baker, John Baker, and David Jurasek. Each agreement expires on December 31, 2019 unless terminated earlier.
The compensation and terms are defined in the agreements.