CRVP Crystal Rock Holdings Class A

PROPOSAL ONE:

ELECTION OF DIRECTORS

 

The Board has nominated the seven incumbent directors to serve as candidates for election as director, to serve until the next Annual Meeting of Stockholders and until their respective successors have been duly elected and qualified.  In case any of these nominees should become unavailable for election to the Board, an event which is not anticipated, then the Board may fix the number of directors at a lesser number or leave a vacancy to be filled by the Board of Directors at a later date.

 

Unless otherwise specified in the form of proxy, the proxies solicited by the management will be voted "FOR" the election of the seven candidates.

 

The Board of Directors unanimously recommends a vote "FOR" the election

of all of the nominees listed below.

 

The business experience during at least the last five years for each of these individuals is as follows: 

Ross S. Rapaport became a director in October 2000.  Since June 2002, Mr. Rapaport has been of counsel to Pepe & Hazard LLP, and its successor McElroy, Deutch, Mulvaney & Carpenter, LLP, a law firm with offices throughout the United States, that we employ from time to time.  He has practiced in the area of corporate and general business law for more than 35 years.  Mr. Rapaport has provided legal advice to Crystal Rock since 1974 and serves as trustee of certain Baker family trusts.

Mr. Rapaport brings to the Board over four decades of experience dealing with business owners in the creation of business entities and subsequent issues of business succession planning, utilizing employment, purchase, and shareholder agreements. A major shareholder of our Company in his capacity as trustee, he has also represented fiduciaries in highly complex estate and trust administration matters, including contested probate matters and estate tax return preparation. Mr. Rapaport has been Chairman of the Board since 2005 and brings to the Board the sound perspective of an experienced business attorney.

Peter K. Baker became a director and our president in October 2000.  In November 2005, he was named our Chief Executive Officer while retaining his other positions.  From 1977 to October 2000, he was employed at Crystal Rock, serving as its co-president from 1993 to 2000. He is a past President, director and executive committee member of the International Bottled Water Association, or IBWA. 

Peter K. Baker has been an employee of the Company for over 35 years and currently serves as its Chief Executive Officer. A major shareholder of the Company, Mr. Baker enters his ninth year as CEO and offers the Board a well informed understanding of operations and strategy in the water and distribution businesses.

John B. Baker became our executive vice president in October 2000 and a director in September 2004.  From 1975 to October 2000, he was employed at Crystal Rock, serving as its co-president from 1993 to 2000.

John B. Baker, a major shareholder of the Company, has been an employee of the Company for over 35 years and currently serves as its Executive Vice President. Mr. Baker has been a vital innovator on the technical side of our business, working to optimize production in our water bottling lines, developing the Water Safe System, and creating dispensing and packaging systems. He brings years of practical and executive experience to the Board.

 

John M. LaPides became a director in November 2005 and serves on our Audit and Compensation Committees.  He served as the President of Snow Valley, Inc. from 1987 to 2009, a home and office refreshment company located in Maryland that he established.  He is a past President of the IBWA, where he served over 15 years as a director and over ten years as a member of the IBWA executive committee.  Since 2001, Mr. LaPides has been an Entrepreneur in Residence at the Dingman Center for Entrepreneurship at the Robert Smith School of Business at the University of Maryland and in 2010 was appointed as Senior Advisor to the Dean on China.  Since 2009, he has served as the principal in Shadow Point Capital, an investment banking and consulting business.

One of our three independent directors, Mr. LaPides was for nearly 30 years owner and operator of a bottled water and distribution company prominent in the Baltimore and Washington D.C. areas. His background in the water business enables him to provide an outsider's informed perspective on our management, operations and strategies. He also has previous public company audit committee experience.

 

Martin A. Dytrych became a director in November 2005 and serves on our Audit and Compensation Committees.  He is a certified public accountant and since 1981 has been with the accounting firm Lamn, Krielow, Dytrych & Co., P.A.  He has been a stockholder of that firm since 1985.  Mr. Dytrych is a member of the AICPA, the Florida Institute of CPAs and the Association of Certified Fraud Examiners.  He is also a Diplomat of the American Board of Forensic Accounting Examiners.

Mr. Dytrych, who is also an independent director, is a certified public accountant who has been designated by the Board as the "financial expert" on the Company's audit committee. For over 30 years, he has assisted businesses with audit, tax and financial planning issues. He brings to the Board a keen understanding of the relationship between the Company and its independent auditors, as well as the responsibilities of a public company audit committee. Mr. Dytrych also leads our compensation committee.

Bruce S. MacDonald became a director on May 1, 2015.  He has been the Chief Operating Officer of Verilux, Inc., based in Waitsfield, VT, a company that markets and sells lighting products since August 2016.  Prior to that, from April 2015 to July 2016, he was the Chief Financial Officer of Koffee Kup Bakery, Inc., based in Burlington Vermont.  Until he joined the Board of Directors in May of 2015, Mr. MacDonald was our Chief Financial officer and Treasurer since May 1993.  He has also served, and continues to serve, as our Corporate Secretary since June 1999.  From 1987 to May 1993, Mr. MacDonald was the Controller of Cabot Cooperative Creamery Incorporated.

 

Mr. MacDonald served for 22 years as our chief financial officer, and his presence on the Board enables the Company to continue to benefit from his wide knowledge of our financial systems, business operations and the markets in which we operate. He brings years of practical and executive experience to our Board.

CORPORATE GOVERNANCE

 

We believe that good corporate governance and fair and ethical business practices are crucial not only to our proper operation, but also to building and maintaining confidence in the integrity, reliability and transparency of the securities markets.  We take our responsibilities in this area very seriously.

 

Independent Directors

 

Board of Directors.   Crystal Rock is a "controlled company" under the Corporate Governance Rules of the New York Stock Exchange MKT market (NYSE MKT), which means that a majority of our issued and outstanding voting stock is controlled by a single person or related group of persons, and that the company has elected controlled company status.

 

A controlled company is exempted from certain rules otherwise applicable to companies whose securities are listed on NYSE MKT, including (i) the requirement that a company have a majority of independent directors, (ii) the requirement that nominations to the company's Board be either selected or recommended by a nominating committee consisting solely of independent directors, and (iii) the requirement that officers' compensation be either determined or recommended by a compensation committee consisting solely of independent directors.

 

Under NYSE MKT rules, no director qualifies as independent until the Board makes an affirmative determination to that effect.  In making this determination, the Board must affirmatively conclude that the director does not have a material relationship with us that would interfere with the exercise of his or her independent judgment in carrying out the responsibilities of a director.  The Board considers, among other factors, the director's current and historic relationships with us and our competitors, suppliers, customers and auditors, including compensation directly or indirectly paid to the director; the director's professional and family relationships with management and other directors; the relationships that the director's current and former employers may have with us; and the relationships between us and other companies of which the director may be a director or executive officer.

 

We have three independent directors on our Board.  After considering the factors described in the previous paragraph, the Board has determined that Mr. Dytrych, Mr. LaPides and Ms. Schafer are independent.  NYSE MKT rules require that the independent directors meet on a regular basis as often as necessary to fulfill their responsibilities, including at least annually in executive session.  In addition to their meetings as members of the Audit and Compensation Committees, of which they are the sole members, Mr. Dytrych, Mr. LaPides, and Ms. Schafer met once in person in fulfillment of this NYSE MKT requirement during fiscal year 2017, in executive session each time.

 

Chairman and Chief Executive Officer.   The Chairman of the Board is Ross Rapaport, and the Chief Executive Officer is Peter Baker.  Although it is common for major companies in the United States to have CEOs who also hold the position of chairman of the board, a number of studies on corporate governance have recommended that the positions be held by two different persons, and the Board currently considers that to be better practice.  Neither Mr. Rapaport nor Mr. Baker is an independent director.

 

Board Leadership Structure and Role in Risk Oversight

Management is responsible for the day-to-day management of the risks that we face, while the Board, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, the Board is responsible for satisfying itself that the risk management processes are adequate and functioning as designed. The Board's involvement in risk oversight includes receiving regular reports from members of senior management and evaluating areas of material risk to the Company, including operational, financial, legal, regulatory, strategic and reputational risks.

Attendance at Board, Committee and Stockholder Meetings

 

NYSE MKT rules require that our Board of Directors meet at least quarterly.  During the fiscal year ended October 31, 2016, the Board met three times in person and four times by telephone conference.  The Audit Committee met three times in person and five times by telephone conference, and the Compensation Committee met once by telephone conference, in 2016. No incumbent director attended fewer than 75% of the total number of meetings of the Board and committees of the Board on which he or she served.

 

It is our policy that all members of the Board of Directors attend the Annual Meeting of stockholders in person or by telephone, although we recognize that directors occasionally may be unable to attend for personal or professional reasons.  We generally hold a meeting of the Board on the same date as the annual stockholder meeting.  In 2016, all incumbent directors attended the Annual Meeting in person or by telephone.

 

Code of Ethics

 

Our Board of Directors has adopted a code of ethics that applies to all of our employees, officers and directors.  The code covers compliance with law; fair and honest dealings with us, with competitors and with others; fair and honest disclosure to the public; and procedures for compliance with the code.  Our code of ethics is available in the Investor Relations section (under Directors and Officers) of our website located at ir.crystalrock.com .  A copy of the code of ethics is also available to stockholders upon request, addressed to Crystal Rock Holdings, Inc., Attn: David Jurasek, 1050 Buckingham Street, Watertown, Connecticut 06795.

 

Stockholder Communications

 

Our stockholders may communicate directly with the members of the Board of Directors or the chair of Board committees by writing directly to those individuals c/o Crystal Rock Holdings, Inc. at the following address: 1050 Buckingham Street, Watertown, Connecticut 06795.  Our policy is to forward, and not to intentionally screen, any mail received at our corporate office that is sent directly to an individual.

 

Director Candidates and Nominating Process

 

Nominations.   As previously noted, Crystal Rock is a "controlled company" under NYSE MKT Corporate Governance Rules, which means that a majority of its issued and outstanding voting stock is controlled by a single person or related group of persons, and that the Company has elected controlled company status.  A controlled company is exempted from the requirement that nominations to the Company's Board be either selected or recommended by a nominating committee consisting solely of independent directors.  Accordingly, nominations to our Board were made by the full Board.  The Board has nominated the seven incumbent directors to serve as candidates for election as director, to serve until the next Annual Meeting of Stockholders and until their respective successors have been elected and qualified.

Although we do not have a formal diversity policy, to foster and maintain a diversity of viewpoints, backgrounds and experience, the Board evaluates the mix of skills and experience of the directors and assesses nominees and potential candidates in the context of the current composition of the Board and the requirements of the Company.

 

Nominations by Stockholders.   We have a by-law provision that authorizes a stockholder of record to submit to us the name of any person whom the stockholder wishes to nominate as a candidate for election to the Board.  In general, such a submission must be received by our corporate secretary at our principal office in Watertown, Connecticut at least 90 days prior to the "specified date" (as defined; generally March 27) of the Annual Meeting, and must contain all information about the candidate that would be required to be disclosed in a proxy statement prepared and filed under federal and state law, as well as the proposed nominee's consent to be named as a nominee and to serve if elected.  The stockholder must also provide information about his or her identity and the number of shares owned.  If the nomination is made by a stockholder holding shares in "street name," then the identity and ownership information must be furnished about the beneficial owner of the shares.  A candidate submitted by a stockholder as a nominee need not be nominated by the independent directors or by the full Board.

Our by-laws do not obligate us to include information about the candidate in our proxy materials, nor do the by-laws require us to permit the stockholder to solicit proxies for the candidate using our proxy materials.  The by-laws relate only to the procedure by which a stockholder may nominate a candidate for director.  To date, no stockholder has proposed a candidate pursuant to our by-laws.  If a stockholder should propose a candidate, we anticipate that the full Board, including the independent directors, would evaluate that candidate on the basis of criteria reasonably determined by the Board to be relevant to the requirements of the position.  For additional information, please refer to Section 4.5 of our by-laws and the section entitled "Stockholder Proposals for the Next Annual Meeting" in this Proxy Statement.

Policies and Procedures for the Review and Approval of Transactions with Related Parties

 

Our Board has no formal policies and procedures for the review and approval of transactions with related parties.  However, the Audit Committee has the responsibility of reviewing and approving transactions with related parties.  In connection with the review of any related party transactions, the Audit Committee considers, among other matters, the nature, timing and duration of the transactions, the relationships of the parties to the transactions, whether the transactions are in the ordinary course of the Company's business, the dollar value of the transactions and whether the transactions are in the interest of the Company.  The Audit Committee ratified the related party transactions described below, to the extent they occurred or were materially modified in fiscal 2016.

 

Related Party Transactions

 

Subordinated Notes Held by Significant Stockholders.   In October 2000, we issued certain stockholders of Crystal Rock (members of the Baker family and related family trusts) subordinated promissory notes in the original principal amount of $22,600,000.  In fiscal 2004, we paid $5,000,000 in principal on these notes with part of the proceeds from the sale of the assets of our retail business.  In fiscal 2005, we paid $3,600,000 in principal on the notes in conjunction with the refinancing of our senior debt facility.  As part of the refinancing, we restructured the terms of the subordinated notes.  In 2009 and 2010, we paid an additional $500,000 in principal on the notes each year.   In 2013, we paid down $3,000,000 of principal on the notes.

On May 20, 2015, with the consent of all three of the subordinated debt holders, we paid $500,000 to each of John Baker and Peter Baker as a payment of principal on their respective notes.  At that time, the remaining principal balances were Henry Baker, $3,600,000; John Baker, $2,700,000; and Peter Baker, $2,700,000.  In connection with the contemporaneous refinancing of our senior debt, the term of the subordinated notes was extended to May 2020.

On August 18, 2015, in connection with the negotiation of certain modifications to our senior debt, the subordinated notes were modified so that, as so modified, the interest payments on the notes scheduled for August 20, 2015 were not paid but were instead added to principal and not considered overdue.  At that time, the remaining principal balances were Henry Baker, $3,708,000; John Baker, $2,781,000, and Peter Baker, $2,781,000.

On September 16, 2015, the Company further amended its subordinated notes held by the related parties.  Future interest payments on the notes will not be paid but will be added to the principal balance of the subordinated notes until such time that the terms of the amendment allow cash payments of interest on its subordinated notes.

Giving effect to all of the foregoing transactions, all of which were considered and approved by the Company's Audit Committee, the following table shows the holder, the remaining principal amount on October 31, 2016 and the amount paid each holder for interest during the fiscal year.

 

Henry Baker is a former director and his sons John and Peter Baker are directors and executive officers.

 

In general, the subordinated notes bear interest at 12%, compounded quarterly, with payments due on the 20th of February, May, August and November.  The notes mature in 2020 and we are required to pay interest only until maturity.  There is a balloon payment of the full principal amount at maturity.  The subordinated notes become due and payable in case of liquidation, dissolution, insolvency, sale of the business or acceleration of the senior debt. Our senior debt facility makes funds available for repayment of the subordinated notes if we attain certain financial criteria.  There is no prepayment penalty for repaying the subordinated notes.

 

The subordinated notes are secured by all of our assets, but the subordinated notes and security interest are junior and subordinated to the senior debt owed to and the security interest in favor of Bank of America and its successors.  Under the related subordination agreement, we may pay, and the holders of the subordinated notes may accept, quarterly interest payments so long as there is no default on the senior debt and the payment would not cause such a default.  The holders of the subordinated notes can accrue unpaid interest, and we may pay those amounts, if such payments would not result in a default on the senior debt.  The holders of the subordinated notes have pledged a continuing security interest in the subordinated notes to Bank of America.

 

Related Party Leases.   We lease a 67,000 square foot facility in Watertown, Connecticut from Henry E. Baker, as trustee of the Baker Grandchildren's Trust, and a 22,000 square foot facility in Stamford, Connecticut from Henry E. Baker.  Future annual rent payments for these leases will be as follows:

 

The Watertown, Connecticut facility contains a water purification and bottling plant, warehouse space, a truck garage and office space.  We lease this property on a "triple net" basis, originally for a 10-year term that began in October 2000, with an option to extend the lease for five more years.  In fiscal 2016, we paid $470,521 in rent.

 

The future rent obligations under Watertown lease are set forth in the table above.  The lease term runs to 2021, with a Company option to extend the lease for five more years for a rent to be negotiated or determined by appraisers selected by the parties.  We believe that the rent we pay for this facility is at least as favorable as we could have obtained in an arm's-length transaction.

The Stamford property includes warehouse space, a truck garage and office space.  We originally entered a lease for this property in October 2000 and on September 29, 2010 we entered into a new lease for the facility which runs for a term of ten years, until 2020.  Annual lease payments are $256,668 per year for the next three years and $235,279 for the last year.  We believe that the rent we pay for this facility is at least as favorable as we could have obtained in an arm's-length transaction.  In fiscal 2016, we paid $248,400 in rent.

  

Other Related Party Matters.   During fiscal 2016, Ross Rapaport, a director of the Company, was associated with McElroy, Deutsch, Mulvaney & Carpenter, LLP, a law firm which we engage regularly for various legal matters.  During fiscal 2016 and 2015, we paid the firm $27,000 and $65,432, respectively.  David Jurasek, our Chief Financial Officer, is the husband of Cheryl Jurasek, the Company's Vice President of Human Resources.  Her 2016 fiscal year compensation, including the value of a Company-provided automobile, insurance coverage and 401(k) matching funds, was $139,190.

COMMITTEES OF THE BOARD OF DIRECTORS

Compensation Committee

 

We have standing Compensation and Audit Committees and may establish other committees from time to time.  The Compensation Committee of the Board is currently composed of three directors, Mr. Dytrych, Mr. LaPides and Ms. Schafer.  The Committee is charged with the responsibility of reviewing and approving our executive officers' compensation and has the authority to approve discretionary grants of stock options and restricted stock under our stock option and incentive plans, which it administers.  The Committee also determines the compensation to be paid to Board members.  For fiscal 2016, compensation consultants had no role in determining or recommending the amount or form of executive or director compensation.

 

Although as a controlled company, we are not required to have an independent Compensation Committee, we have decided to maintain that Committee's independence.  For companies other than controlled companies, NYSE MKT rules require that the compensation of the chief executive officer be determined, or recommended to the Board for its determination, by either a majority of independent directors or a wholly-independent Compensation Committee.  We intend to continue to use our existing Compensation Committee, the members of which are independent, for this purpose.  NYSE MKT rules prohibit a CEO from being present during voting or deliberations with respect to his compensation.  Compensation of all other executive officers is required to be determined in the same manner, except that the CEO is permitted to be present during voting or deliberations with respect to the compensation of executive officers other than himself.  NYSE MKT rules do not require the Compensation Committee of a controlled company to have a written charter, and our Compensation Committee does not have a written charter at this time.

Under NYSE MKT rules, the Board is required to make certain findings about the independence and qualifications of the members of the Compensation Committee.  As a result of its review, the Board determined that Mr. Dytrych, Mr. LaPides and Ms. Schafer, as members of the Compensation Committee, are independent.

 

  Audit Committee

 

Our Audit Committee is currently composed of three directors, Mr. Dytrych, Mr. LaPides and Ms. Schafer.  The primary purpose of the Audit Committee is to assist the board in fulfilling its oversight responsibilities relating to (a) the quality and integrity of our financial statements and other financial reports, (b) our system of internal accounting controls, (c) the performance of our independent auditors and (d) our compliance with legal and regulatory requirements.  The Audit Committee meets privately with the independent auditors, has the sole authority to retain and dismiss the independent auditors and reviews their performance and independence from management.  The independent auditors have unrestricted access and report directly to the Audit Committee.  The Audit Committee has the sole authority to approve transactions that may involve actual or apparent conflicts of interest.  Additionally, the Audit Committee has responsibilities and authority necessary to comply with rules under the Securities Exchange Act of 1934, or the Exchange Act, relating to (i) direct responsibility for the appointment, compensation, retention and oversight of our accountants, (ii) treatment of complaints and concerns relating to accounting, internal accounting controls and auditing matters, (iii) the engagement of independent counsel and other advisors, and (iv) determining appropriate funding for audit and audit-committee related expenses.  The Audit Committee has adopted a written charter, a current copy of which is available in the Investor Relations section (under Directors and Officers) of our website at ir.crystalrock.com .  A copy of the Audit Committee charter is also available to stockholders upon request, addressed to Crystal Rock Holdings, Inc., Attn: David Jurasek, 1050 Buckingham Street, Watertown, Connecticut 06795.

 

Under NYSE MKT rules, the Board is required to make certain findings about the independence and qualifications of the members of the Audit Committee.  In addition to assessing the independence of the members under the NYSE MKT rules, the Board also considered the requirements of Section 10A(m)(3) and Rule 10A-3 under the Exchange Act.  As a result of its review, the Board determined that Mr. Dytrych, Mr. LaPides and Ms. Schafer, as the members of the Audit Committee, are independent.  Mr. Dytrych serves as the Chair of the Audit Committee.

In addition, the Board determined that:

·	each member of the Audit Committee is, as required by NYSE MKT rules, able to read and understand fundamental financial statements; and

·	at least one member of the Committee, Mr. Dytrych, is "financially sophisticated" under the NYSE MKT rules and is an "audit committee financial expert" under applicable provisions of the federal securities laws.