sv1za
As filed with
the Securities and Exchange Commission on October 18,
2010
Registration
No. 333-165452
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment No. 8
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
PRIMO WATER
CORPORATION
(Exact name of registrant as
specified in its charter)
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Delaware
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5149
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30-0278688
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(State or other jurisdiction
of
incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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104 Cambridge Plaza Drive
Winston-Salem, North Carolina 27104
(336) 331-4000
(Address, including zip code,
and telephone number,
including area code, of
registrants principal executive offices)
Mark Castaneda
Chief Financial Officer
Primo Water Corporation
104 Cambridge Plaza Drive
Winston-Salem, North Carolina 27104
(336) 331-4000
(Name, address, including zip
code, and telephone number,
including area code, of agent
for service)
Please send copies of all communications to:
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D. Scott Coward
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Rachel W. Sheridan
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K&L Gates LLP
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Latham & Watkins LLP
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4350 Lassiter at North Hills Avenue
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555 Eleventh Street, NW
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Suite 300
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Suite 1000
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Raleigh, NC 27609
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Washington, DC 20004-1036
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(919) 743-7328
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(202) 637-2200
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as
the Commission, acting pursuant to Section 8(a), may
determine.
The information in
this preliminary prospectus is not complete and may be changed.
These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is
effective. This preliminary prospectus is not an offer to sell
nor does it seek to buy these securities in any jurisdiction
where the offer or sale is not permitted.
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SUBJECT TO COMPLETION, DATED
OCTOBER 18, 2010
IPO PRELIMINARY
PROSPECTUS
8,333,333
Shares
Primo Water
Corporation
Common Stock
$
per share
This is an initial public offering of common stock of Primo
Water Corporation. We are offering 8,333,333 shares of
common stock. We currently expect the initial public offering
price to be between $11.00 and $13.00 per share.
Prior to this offering, there has been no public market for our
common stock. We have applied for approval to list our common
stock on the Nasdaq Global Market under the symbol
PRMW.
We plan to use $60.0 million from both the proceeds of this
offering and from borrowings under our new senior revolving
credit facility and to issue an additional 3,750,000 shares
of our common stock (assuming an initial public offering price
of $12.00 per share and no exercise of the underwriters
over-allotment
option) directly to Culligan Store Solutions, LLC in a private
placement to pay the purchase price for the Culligan Refill
Acquisition promptly following the closing of this offering.
This offering, the Culligan Refill Acquisition and our new
senior revolving credit facility are all effectively conditioned
upon each other such that we will not close any of these
transactions unless we are going to close all of them. The
underwriting agreement for this offering will provide that the
following are both conditions to the closing of the initial
public offering:
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the satisfaction of all conditions to the Culligan Refill
Acquisition; and
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the satisfaction of all conditions to the new senior revolving
credit facility and the Company receiving proceeds thereunder in
an amount sufficient to consummate the transactions described in
Use of Proceeds.
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The amount of our initial borrowings under our new senior
revolving credit facility will increase or decrease depending
upon the price at which we sell shares in our initial public
offering. If our initial public offering price is $12.00 per
share, we will borrow approximately $15.0 million under our
new senior revolving credit facility. Our new senior revolving
credit facility will restrict us from borrowing more than
$20.0 million in connection with the closing of this
offering. See Use of Proceeds.
Investing in our common stock
involves risks. See Risk Factors beginning on
page 15.
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Per Share
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Total
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Initial price to public
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$
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$
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Underwriting discount and commissions
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$
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$
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Proceeds, before expenses, to Primo Water Corporation
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$
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$
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The underwriters may also purchase up to an additional 1,250,000
shares from us, at the public offering price, less the
underwriting discount, within 30 days of the date of this
prospectus to cover overallotments, if any.
Neither the Securities and Exchange Commission nor any
state securities commission has approved or disapproved of these
securities or passed upon the adequacy or accuracy of this
prospectus. Any representation to the contrary is a criminal
offense.
The date of this prospectus
is ,
2010.
TABLE OF
CONTENTS
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Page
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1
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15
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33
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34
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35
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36
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38
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41
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47
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50
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66
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85
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93
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99
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106
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129
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133
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141
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147
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150
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153
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158
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158
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158
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159
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F-1
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EX-16.1 |
EX-23.1 |
EX-23.2 |
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized anyone to provide you with information that is
different from that contained in this prospectus. This
prospectus is not an offer to sell, nor is it seeking an offer
to buy, these securities in any state where the offer or sale is
not permitted. The information in this prospectus speaks only as
of the date of this prospectus unless the information
specifically indicates that another date applies, regardless of
the time of delivery of this prospectus or of any sale of our
common stock.
Primo®,
Taste
Perfection®,
Zero Waste. Perfect
Tastetm,
www.primowater.com, the Primo logo and other trademarks
or service marks of Primo Water Corporation appearing in this
prospectus are the property of Primo Water Corporation. Trade
names, trademarks and service marks of other companies appearing
in this prospectus are the property of the respective owners.
Industry
and Market Data
We obtained the industry and market data used throughout this
prospectus through our research, surveys and studies conducted
by third-parties and industry and general publications. Some
data are also based on our good faith estimates, which are
derived from our review of internal surveys, as well as
independent industry publications, government publications,
reports by market research firms or other published sources.
None of the independent industry publications referred to in
this prospectus were prepared on our behalf or at our expense.
The foregoing discussion does not, in any manner, disclaim our
responsibilities with respect to the disclosures contained in
this prospectus.
Dealer
Prospectus Delivery Obligation
Until ,
2010 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
PROSPECTUS
SUMMARY
This summary highlights information about our Company and
this offering contained elsewhere herein and is qualified in its
entirety by the more detailed information and financial
statements included elsewhere in this prospectus. You should
read this entire prospectus carefully, including Risk
Factors, Managements Discussion and Analysis
of Financial Condition and Results of Operations,
Culligan Refill Acquisition Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the financial statements and related notes
included elsewhere herein, before making an investment decision.
In this prospectus, unless otherwise specified or the context
otherwise requires, the terms Primo, we,
us, our, our Company, or
ours refer to Primo Water Corporation and its
consolidated subsidiaries but do not refer to or include
information about (a) our former subsidiary, Prima Bottled
Water, Inc., which was spun off to our stockholders effective
December 31, 2009, or (b) the business and assets we
propose to acquire from Culligan Store Solutions, LLC and
Culligan of Canada, Ltd. that are described below under
Culligan Refill Acquisition.
Our
Business
We are a rapidly growing provider of three- and five-gallon
purified bottled water and water dispensers sold through major
retailers nationwide. We believe the market for purified water
is growing due to evolving taste preferences, perceived health
benefits and concerns regarding the quality of municipal tap
water. Our products provide an environmentally friendly,
economical, convenient and healthy solution for consuming
purified water. Our business is designed to generate recurring
demand for Primo purified bottled water through the initial sale
of our innovative water dispensers. This business strategy is
commonly referred to as razor-razorblade because the
initial sale of a product creates a base of users who frequently
purchase complementary consumable products. We believe dispenser
owners consume an average of 35 multi-gallon bottles of water
annually. Once our bottled water is consumed using a water
dispenser, empty bottles are exchanged at our recycling center
displays where consumers receive a recycling ticket that offers
a discount toward the purchase of a full bottle of Primo
purified water. Each of our three- and five-gallon water bottles
can be sanitized and reused up to 40 times before being taken
out of use, crushed and recycled, substantially reducing
landfill waste compared to consumption of equivalent volumes of
single-serve bottled water. As of June 30, 2010, our water
bottle exchange service and water dispensers were offered in
each of the contiguous United States and located in
approximately 7,200 and 5,500 retail locations respectively,
including Lowes Home Improvement, Sams Club, Costco,
Walmart, Target, Kroger, Albertsons and Walgreens.
We have created a new nationwide single-vendor water bottle
exchange solution for our retail customers, addressing a market
demand that we believe was previously unmet. Our water bottle
exchange solution is easy for retailers to implement, requires
minimal management supervision and store-based labor and
provides centralized billing and detailed performance reports.
Our solution offers retailers attractive financial margins and
the ability to optimize typically unused retail space with our
displays. Additionally, due to the recurring nature of water
consumption and water bottle exchange, retailers benefit from
year-round customer traffic and highly predictable revenue.
We deliver our solution to retailers utilizing our current
relationships with 55 independent bottlers and
27 independent distributors and our two Company-owned
distribution operations, which
Company-owned
operations accounted for approximately 23.5% of our water bottle
exchange volume in 2009. We refer to these independent bottlers
and distributors together with our Company-owned distribution
operations as our national network. Our independent
bottlers and distributors typically have already made the
capital investment required to deliver our solution, including
investment in bottling facilities and storage and distribution
assets. Our independent bottlers are responsible for the water
purification and bottling process and use their own equipment to
complete this process.
We focus our capital expenditures on developing new retail
relationships, installing displays at store locations, raising
brand awareness, research and development for new products and
maintaining our management information system (MIS)
tools. We are able to manage our national network on a real-time
basis through our MIS tools, which provide resource planning and
delivery schedule tracking, thus enabling us to optimize our
networks assets and respond to customer needs. In
addition, our national network benefits from the recurring
nature of water
1
consumption and water bottle exchange that generates year-round
demand and optimizes utilization of existing production and
distribution assets. We believe our solution and national
network provide us a significant competitive advantage in
servicing our retail customers.
We currently source three- and five-gallon water bottles from
multiple independent vendors for use in our exchange service and
all of our water dispensers are manufactured by independent
suppliers in China.
We benefit significantly from management experience gained over
the last 15 years in exchange-based businesses, which
enables us to implement best practices and develop and maintain
key business relationships. Prior to founding Primo, our Chief
Executive Officer founded Blue Rhino Corporation, a propane
cylinder exchange business, in 1994 and, with several of our
other key executive officers, led its initial public offering in
1998 and successful sale in 2004. At the time of the sale, we
believe Blue Rhino was a market leader in propane grill cylinder
exchange with over 29,000 retail locations in 49 states.
Culligan
Refill Acquisition
On June 1, 2010, we entered into an asset purchase
agreement with Culligan Store Solutions, LLC and Culligan of
Canada, Ltd. (together with Culligan International Company,
Culligan) to purchase certain of Culligans
assets related to its business of providing reverse osmosis
water filtration systems that generate filtered water for refill
vending machines and store-use water services in the United
States and Canada at approximately 4,500 retail locations. This
business also sells empty reusable water bottles for use at
refill vending machines (such businesses are together referred
to as the Culligan Refill Business). Pursuant to the
asset purchase agreement, we will purchase these assets (the
Culligan Refill Acquisition) for a total purchase
price of $105.0 million, consisting of a cash payment of
$60.0 million and the issuance of shares of our common
stock with a value of $45.0 million.
We have structured the Culligan Refill Acquisition such that its
closing will occur promptly following the closing of this
offering, and we will not consummate this offering on the terms
described in this prospectus unless we believe the Culligan
Refill Acquisition will close promptly thereafter.
Additionally, we will not be able to consummate this offering
unless we are concurrently entering into and closing our new
$40.0 million senior revolving credit facility with Wells
Fargo Bank, National Association and a group of other lenders on
substantially the terms described in this prospectus.
We have structured the transactions in this manner because the
proceeds of this offering and the new senior revolving credit
are together necessary to fund the cash portion of the purchase
price in the Culligan Refill Acquisition and to take the other
actions described in Use of Proceeds. The
underwriting agreement for this offering will provide that
(i) the satisfaction of all conditions precedent to the new
senior revolving credit facility (other than the closing of this
offering) and the Company receiving gross proceeds in initial
borrowings under the new senior revolving credit facility
simultaneously with payment for the shares of our common stock
offered hereby in an amount sufficient to consummate the
transactions described in Use of Proceeds herein and
(ii) the satisfaction of all conditions precedent to the
Culligan Refill Acquisition (other than the closing of this
offering) are both conditions to the closing of the initial
public offering. In addition, the asset purchase agreement
relating to the Culligan Refill Acquisition provides that the
closing of this offering is a condition precedent to the closing
of the Culligan Refill Acquisition. We have entered into a
commitment letter with Wells Fargo Bank, National Association
and Wells Fargo Securities, LLC and a group of other lenders
with respect to the new senior revolving credit facility that is
subject to certain closing conditions, including the execution
of definitive documentation and other customary conditions
precedent. We expect these closing conditions will be satisfied
concurrently with and will not delay the consummation of the
initial public offering. Additionally, we expect all conditions
precedent set forth in the asset purchase agreement relating to
the Culligan Refill Acquisition other than the consummation of
this offering will be satisfied prior to the consummation of
this offering such that the Culligan Refill Acquisition will
close promptly after the consummation of this offering. As a
result of these interrelationships, we expect this offering, the
new senior revolving credit facility and the Culligan Refill
Acquisition will all close contemporaneously. If we are unable
to close our new senior revolving credit facility on
substantially the terms described in this prospectus, we will be
unable to consummate this offering.
2
The Culligan Refill Business provides filtered water through the
installation and servicing of reverse osmosis water filtration
systems. Retailers benefit from the reverse osmosis water
filtration systems as they ensure water used throughout a store
is clean and safe for self-serve refill vending and store-use
services, such as food preparation and hydration of produce.
Customers of the Culligan Refill Business include Walmart,
Safeway, Meijer, Sobeys, Target,
Hy-Vee and
Kroger. For the year ended December 31, 2009, the Culligan
Refill Business generated revenues of $26.0 million and net
income of $4.3 million. Approximately 84% of the Culligan
Refill Businesss revenues were generated in the United
States, with operations in 48 states, and approximately 16%
of its revenues were generated in Canada across 10 provinces.
The Culligan Refill Businesss revenues are driven by
self-serve refill vending services and empty reusable water
bottle sales, which account for approximately 76% and 16% of its
revenues, respectively, and to a lesser extent by store-use
services.
The Culligan Refill Business provides us with an established
platform to expand into the self-serve drinking water refill
business. We believe the Culligan Refill Business is highly
complementary to our water bottle exchange business from both a
product and operational perspective. We believe the Culligan
Refill Acquisition will:
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provide additional consumer value and convenience;
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augment our environmentally friendly product offering;
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allow us to leverage our marketing and increase the sales of our
water dispensers;
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enhance our ability to provide retail customers a broad range of
hydration solutions;
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deepen our retail customer relationships through a more
extensive product offering;
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expand our retail customer base and geographic presence;
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strengthen our distribution network;
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increase our knowledge base of the refill segment and add
experienced personnel; and
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provide a source of stable, dependable cash flows to fund future
growth.
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Upon consummation of the Culligan Refill Acquisition, we will
report Refill as a third reportable segment in our consolidated
financial statements for periods following the closing of the
acquisition. The table below sets forth on a pro forma basis our
net sales (total and by segment), loss from operations and net
loss for the periods presented:
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Pro Forma
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For Year Ended
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For Six Months
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December 31, 2009
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Ended June 30, 2010
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(In thousands)
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Segment Net Sales:
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Exchange
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$
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22,638
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$
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12,022
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Products
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22,824
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8,177
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Refill
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26,017
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12,569
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Other
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1,611
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811
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Inter-company elimination
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(92
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(8
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Total Net Sales
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$
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72,998
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$
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33,571
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Loss from Operations
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$
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(131
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$
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(830
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Net Loss
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$
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(3,145
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$
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(2,414
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We will not close this offering unless we believe the Culligan
Refill Acquisition will close promptly thereafter. However, if
this offering is consummated and we are unable to consummate the
Culligan Refill Acquisition, then the portion of the net
proceeds anticipated to be used in the acquisition will instead
be available for general corporate purposes, including
investment in our operations or to further our business or
growth strategies. Management will retain broad discretion over
the use of these proceeds. Stockholders may disagree with our
use of these proceeds and our use of these proceeds may not
yield a significant return or any return at all.
3
Culligan
Asset Purchase Agreement
On June 1, 2010, we entered into an asset purchase
agreement with Culligan to purchase the assets related to the
Culligan Refill Business for a total purchase price of
$105.0 million consisting of:
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a cash payment of $60.0 million; and
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the issuance of shares of our common stock with a value of
$45.0 million based upon the price that we issue shares in
this offering (or 3,750,000 shares, assuming an initial
public offering price of $12.00 per share, the midpoint of the
range set forth on the cover page of this prospectus).
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The purchase price for the Culligan Refill Business is subject
to a working capital adjustment that is to be finally determined
after the closing of the transaction. There will be a
dollar-for-dollar adjustment to the purchase price if the actual
working capital amount is above or below the target working
capital of approximately $2.0 million. The cash portion of
the purchase price will be increased and the number of shares of
common stock we will issue will be decreased by an amount equal
to the net cash proceeds we receive from any exercise of the
underwriters over-allotment option. We will also assume
certain specifically identified liabilities in connection with
the Culligan Refill Acquisition.
The asset purchase agreement contains customary representations,
warranties, covenants and conditions to closing, including a
condition related to the closing of the initial public offering.
In connection with the closing of the Culligan Refill
Acquisition, we have entered or will enter into a trademark
license agreement, two transition services agreements, a dealer
services agreement, a non-compete agreement, a supply agreement,
a lock-up
agreement, a registration rights agreement and employment
agreements with two senior managers. See Managements
Discussion and Analysis of Financial Condition and Results of
Operations of the Culligan Refill Business Culligan
Refill Acquisition Agreements for a more detailed
description of each of these agreements.
Recent
Developments
Operational
Developments
In our water bottle exchange business segment, we estimate
revenues for the quarter ended September 30, 2010 will be
between $6.8 million and $7.0 million representing an
approximate increase of between 8% and 11% over the prior year.
We believe the increase is primarily due to accelerated growth
in same store unit sales. Same store unit sales increased by
4.0% for the six months ended June 30, 2010 compared to the
six months ended June 30, 2009. We expect same store unit
sales for the three months ended September 30, 2010 to
increase more than 7.0% compared to the three months ended
September 30, 2009. In addition, we added approximately 700
exchange locations during the quarter ended September 30,
2010, bringing the total number of our exchange locations as of
September 30, 2010 to approximately 7,900. We have
increased our rate of exchange location growth as we added
approximately 700 new locations during the quarter ended
September 30, 2010 compared to approximately 200 locations
for the six months ended June 30, 2010 and approximately
600 locations for all of 2009. Additionally, we added Walmart as
a customer for our exchange business during the third quarter
and, as a result of this new relationship and other retail
relationships, expect to continue to add exchange locations over
the near term.
In our products business segment, our revenues are based on
sales of water dispenser products to our retail customers and
not to end-use consumers. We estimate revenues for the quarter
ended September 30, 2010 will be between $3.1 million
and $3.3 million representing a decrease of between 58% and
60% compared to the prior year. We believe this decline in 2010
is attributable to retailers initially building their inventory
levels in 2009 and then reducing their inventory levels in 2010
in anticipation of our new product line to be introduced in the
fourth quarter of 2010. Based on sales data received from our
retail customers relating to their sales to end-use consumers,
we believe that unit sales of our water dispensers by our retail
customers to end-consumers have increased by approximately 15%
for the nine month period ended September 30, 2010 compared
to the same period in the prior year.
4
The foregoing information is based on data obtained to date, is
unaudited and is subject to adjustment based upon, among other
things, additional data becoming available and the finalization
of our quarter-end closing and reporting processes.
Private
Placement of Subordinated Notes
On October 5, 2010, we issued additional
14% subordinated convertible notes due March 31, 2011
with a total principal amount of $3,418,167 to
22 investors, all of which were existing stockholders,
affiliates of existing stockholders and senior management. The
terms of these 14% subordinated convertible notes are
substantially identical to the terms of the
14% subordinated convertible notes we issued in December
2009 and we refer to both throughout this prospectus as the
2011 Notes. The proceeds of the October 2010
issuance of the 2011 Notes will be used to fund the continued
expansion of our bottled water exchange and water dispenser
businesses, to fund offering costs and for working capital
purposes. We intend to use proceeds of this offering to repay
the 2011 Notes. Additionally, warrants to purchase
24,265 shares of our common stock were issued in connection
with the October 2010 issuance of the 2011 Notes.
Industry
Overview
We believe there are several trends that support consumer demand
for our water bottle exchange service, water dispensers and,
following the Culligan Refill Acquisition, refill vending
services, including the following:
Emphasis
on Health and Wellness
As part of a desire to live a healthier lifestyle, we believe
consumers are increasingly focused on drinking more water
relative to consumption of high caloric beverages, carbonated
soft drinks and beverages containing artificial sweeteners.
Concerns
Regarding Quality of Municipal Tap Water
Many consumers purchase purified water not only due to better
taste, but also because of concerns regarding municipal tap
water quality. Municipal water is typically surface water that
is treated centrally and pumped to homes, which can allow
additional contaminants to dissolve into the water through
municipal or household pipes impacting taste and quality.
Growing
Preference for Purified Water
We believe consumer preference toward purified water relative to
tap water continues to grow as purified water has become
accepted on a mainstream basis. While it is difficult to
quantify purified water consumption in all of its forms,
according to an April 2010 report by independent market analyst
Datamonitor, Bottled Water in the United States, the
U.S. bottled water market generated revenues of
$17.1 billion in 2009.
Increasing
Demand for Products with Lower Environmental Impact
We believe that consumers are increasingly favoring products
with a lower environmental impact with a reuse, recycle,
reduce mindset becoming a common driver of consumer
behavior. Most single-serve polyethylene terephthalate
(PET) water bottles are produced using fossil fuels
and contribute to landfill waste given that only 27% of PET
bottles are recycled according to a November 2009 Environmental
Protection Agency report. Governmental legislation also reflects
these concerns with numerous initiatives enacted to either tax
purchases of beverages in plastic bottles or prohibit their use
within government facilities or disposal in community landfills.
Availability
of an Economical Water Bottle Exchange Service and Innovative
Water Dispensers
Based on estimates derived from industry data, we believe the
current household penetration rate of multi-gallon water
dispensers is approximately 4%, with the vast majority of these
households utilizing traditional home delivery services. We
believe the lack of innovation, design enhancement and
functionality and the retail pricing structure of our
competitors dispenser models have prevented greater
household adoption. Compounding these issues, we
5
believe there previously was no economical water bottle exchange
service with major retailer relationships nationwide to promote
dispenser usage beyond the traditional home delivery model. We
believe there are over 200,000 major retail locations throughout
the United States and Canada that we can target to sell our
dispensers or offer our water bottle exchange service and,
following the Culligan Refill Acquisition, refill vending
services.
Our
Competitive Strengths
We believe that Primos competitive strengths include the
following:
Appeal to
Consumer Preferences
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Environmental Awareness. Our water bottle exchange
service incorporates reuse of existing bottles, recycles water
bottles when their lifecycle is complete and reduces landfill
waste and fossil fuel usage compared to alternative methods of
bottled water consumption.
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Value. We provide consumers the opportunity for cost
savings when consuming our bottled water compared to both
single-serve bottled water and typical home and office delivery
services. Our water dispensers are sold at attractive retail
prices in order to enhance consumer awareness and adoption of
our water bottle exchange service, increase household
penetration and drive sales of our bottled water.
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Convenience. Our water bottle exchange service and
water dispensers are available at major retail locations
nationwide. In addition, our water bottle exchange service
provides consumers the convenience of exchanging empty bottles
and purchasing full bottles at any participating retailer. We
offer three- and five-gallon water bottle options to address
different consumer volume preferences.
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Taste. We have dedicated significant time and effort
to develop our water purification process and formulate the
proprietary blend of mineral ingredients included in Primo
purified water. We believe that Primo purified water has a silky
smooth taste and in an independent taste test that we
commissioned, four out of five participants preferred Primo
purified water over municipal tap water and three out of four
participants preferred Primo purified water over their
regions market-leading bottled water.
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Health and Wellness. As part of a desire to live a
healthier lifestyle, we believe that consumers are increasingly
focused on drinking more water relative to consumption of other
beverages. As we raise our brand awareness, we believe consumers
will recognize that our water bottle exchange service is an
effective option for their purified water consumption needs.
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Key
Retail Relationships Served by Nationwide Single-Vendor
Solution
We believe we are the only water bottle exchange provider with a
single-vendor solution for retailers nationwide. Our national
network utilizes our MIS tools and processes to optimize their
production and distribution assets while servicing our retail
customers. We believe the combination of our major retail
relationships, unique single-vendor solution for retail
customers, national network and our MIS tools is difficult to
replicate. We anticipate these factors will facilitate our
introduction of new purified water-related products in the
future.
Ability
to Attract and Retain Consumers
We offer razor-razorblade products designed to
generate recurring demand for Primo purified bottled water (the
razorblade) through the initial sale of our innovative water
dispensers (the razor), which include a coupon for a free three-
or five-gallon bottle of Primo purified water. We acquire new
consumers and enhance recycling efforts by accepting most
dispenser-compatible water bottles in exchange for a recycle
ticket discount toward the purchase of a full bottle of Primo
purified water. In addition, we believe our offering
high-quality water dispensers enhances consumer awareness and
adoption of our water bottle exchange service, increases
household penetration and drives sales of our bottled water.
Efficient
Business Model
Our business model allows us to efficiently offer our solution
to our retail partners and centrally manage our national network
without a substantial capital investment. We believe our
business processes and MIS tools enable
6
us to manage the bottling and distribution of our water, our
product quality, retailer inventory levels and the return of
used bottles on a centralized basis, leveraging our invested
capital and personnel. We believe our water bottle exchange
service is unique in that we are not required to make a
significant portion of the capital investment required to
operate our exchange service nationwide and our independent
bottlers and distributors often are able to augment their
current production capacity and leverage their existing bottling
and distribution assets. In addition, the flow of payments
between the retailer and our bottlers and distributors is
controlled efficiently through electronic data interchange.
Benefit
from Managements Proven Track Record
We benefit greatly from management experience gained over the
last 15 years in exchange businesses to implement and
refine best practices and develop and maintain key business
relationships. In addition to our Chief Executive Officer, our
Chief Financial Officer, Senior Vice President of Operations,
Vice President of Product Development and Vice President of
National Accounts all held comparable positions within the Blue
Rhino organization during its rapid sales and location growth.
We believe this experience combined with our nationwide
single-vendor solution contributed to Walmarts recent
decision to name Primo category manager for water bottle
exchange and water dispensers.
Growth
Strategy
We seek to increase our market share and drive further growth in
our business by pursuing the following strategies:
Increase
Penetration with Existing Retail Relationships and Develop New
Retail Relationships
We believe we have significant opportunities to increase store
penetration with our existing retail relationships. As of
June 30, 2010, our water bottle exchange service was
offered at 5,600 of our top ten retailers nationwide
locations. Such retailers present us an opportunity of
approximately 13,900 additional nationwide locations.
There is minimal overlap of fewer than 100 locations where our
water bottle exchange service is offered and the Culligan Refill
Business is operated. Following the Culligan Refill Acquisition,
we intend to further penetrate our other existing retail
customers with our hydration solutions which collectively
provide us the opportunity to be present in more than 26,600
additional locations.
Our long-term strategy includes targeting more than 50,000 total
retail store locations (which includes new locations with our
existing retail customers) within our primary retail categories
of home centers, hardware stores, mass merchants, membership
warehouses, grocery stores, drug stores and discount general
merchandise stores for our water bottle exchange service or the
Culligan Refill Business. We believe that the introduction of
additional hydration solutions to our product portfolio will
allow us to cross-sell products to our existing and
newly-acquired retail customers.
Drive
Consumer Adoption Through Innovative Water Dispenser
Models
We intend to continue to develop and sell innovative water
dispensers at attractive retail prices, which we believe is
critical to increasing consumer awareness and driving consumer
adoption of our water bottle exchange service. We believe our
water dispensers have appealing features that will continue to
drive consumer adoption. Since we first began selling our water
dispensers in 2005, we have sold over 590,000 units and
have expanded our retail network from four locations as of
December 31, 2007, to our current network of approximately
5,500 locations. Our long term strategy is to provide multiple
purified water-based-beverages from a single Primo water
dispenser, with consistent promotion of our water bottle
exchange and, following the Culligan Refill Acquisition, refill
vending services to supply the purified water.
Increase
Same Store Sales
We sell our water dispensers at minimal margin and provide a
coupon for a free three- or five-gallon bottle of water with the
sale of various water dispensers at certain retailers to drive
consumer demand for our water bottle
7
exchange and, following the Culligan Refill Acquisition, refill
vending services. We believe increasing unit sales of Primo
purified bottled water is dependent on generating greater
consumer awareness of the environmentally friendly and
economical aspects of and the convenience associated with our
purified bottled water and our water bottle exchange and,
following the Culligan Refill Acquisition, refill vending
services. We expect that our branding, marketing and sales
efforts will result in greater usage of our water bottle
exchange and, following the Culligan Refill Acquisition, refill
vending services.
Develop
and Install Other Hydration Solutions
We believe we have significant opportunities to leverage our
national network and our systems and processes to offer other
environmentally friendly, economical, convenient and healthy
hydration solutions to our retail partners without significant
increases in our centralized costs. For example, the Culligan
Refill Business will provide us an established platform to offer
our retail partners self-service refill vending machines that
dispense drinking water into empty reusable bottles. In
addition, we intend to offer our retail partners automated,
self-bagging purified ice dispensers.
Pursue
Strategic Acquisitions to Augment Geographic and Retail
Relationships
In addition to the Culligan Refill Acquisition, we believe
opportunities exist to expand through selective acquisitions,
including smaller water bottle exchange businesses with
established retail accounts, other on-premises self-service
water refill vending machine networks and retail accounts, ice
dispenser machine networks and retail accounts and water
dispenser companies.
Risk
Factors
Our business is subject to numerous risks, as more fully
described in the section entitled Risk Factors
beginning on page 15. You should carefully consider these
risks before deciding to invest in our common stock. These risks
include, among others:
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We have incurred operating losses in the past and may incur
operating losses in the future.
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We depend on a small number of large retailers for most of our
consumer sales. Our arrangements with these retailers for our
bottled water exchange services and sales of our water
dispensers are nonexclusive and may be terminated at will.
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The loss of one or more of the largest retail customers of the
Culligan Refill Business could materially adversely affect our
business after the completion of the Culligan Refill Acquisition.
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The success of our business depends on retailer and consumer
acceptance of our water bottle exchange service and water
dispensers.
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In our bottled water business, we depend on independent
bottlers, distributors and suppliers for our business to operate.
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We may experience difficulties in integrating the Culligan
Refill Business with our current business and may not be able to
fully realize all of the anticipated synergies from the Culligan
Refill Acquisition.
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We operate in a highly competitive industry, face competition
from companies with far greater resources than we have and could
encounter significant competition from these companies in our
niche market of water bottle exchange services and related
products.
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If our bottled water became contaminated, our business could be
seriously harmed.
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While many members of our senior management have experience as
executives of a products and exchange services business, there
can be no assurances that this experience and past success will
result in our business becoming profitable.
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Interruption or disruption of our supply chain, distribution
channels or national network could adversely affect our
business, financial condition and results of operations.
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If we lose key personnel, in particular our Chairman, President
and Chief Executive Officer, Billy D. Prim, or are unable
to recruit qualified personnel, our ability to implement our
business strategies could be delayed or hindered.
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We depend on key management information systems.
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8
Our
Corporate Information
We were incorporated as a Delaware corporation on
October 20, 2004. Our headquarters are located at
104 Cambridge Plaza Drive, Winston-Salem, North Carolina
27104 and our telephone number is
(336) 331-4000.
Our website is www.primowater.com. Information on, or
accessible through, our website is not a part of and is not
incorporated into this prospectus and the inclusion of our
website address in this prospectus is an inactive textual
reference only.
9
THE
OFFERING
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Issuer |
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Primo Water Corporation |
Common stock offered by us |
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8,333,333 shares (9,583,333 shares if the underwriters
exercise in full their option to purchase additional shares to
cover overallotments, if any) |
Common stock to be outstanding after this offering and giving
effect to the Culligan Refill Acquisition |
|
19,023,887 shares (19,111,387 shares if the
underwriters exercise in full their option to purchase
1,250,000 additional shares to cover overallotments, if
any, and the cash portion of the purchase price payable to
Culligan in the Culligan Refill Acquisition is increased and the
number of shares we issue to Culligan is decreased by 1,162,500)
assuming an initial public offering price of $12.00 per share,
the midpoint of the range set forth on the cover page of this
prospectus. If the initial public offering price is $13.00 per
share, 18,448,892 shares of common stock will be
outstanding (18,536,392 shares if the underwriters exercise
their overallotment option in full), and if the initial public
offering price is $11.00 per share, 19,705,917 shares of
common stock will be outstanding (19,793,417 shares if the
underwriters exercise their overallotment option in full). |
Use of proceeds |
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We estimate that the net proceeds to us from this offering will
be approximately $90.7 million (or approximately
$104.7 million if the underwriters exercise in full their
option to purchase additional shares to cover overallotments, if
any), assuming an initial public offering price of $12.00 per
share, the midpoint of the range set forth on the cover page of
this prospectus. |
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We intend to use the net proceeds from this offering together
with approximately $15.0 million in borrowings under our
new senior revolving credit facility for the following purposes: |
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$60.0 million to pay the cash portion of the
purchase price for the Culligan Refill Acquisition;
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$18.6 million to repay our 14% subordinated
convertible notes due March 31, 2011;
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$15.7 million to redeem a portion of our
outstanding Series B preferred stock and to pay accrued and
unpaid dividends on all of our outstanding Series B
preferred stock;
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$8.5 million to repay borrowings under our
current senior revolving credit facility; and
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$2.9 million to pay fees and expenses in
connection with all of the foregoing items.
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If the underwriters exercise in full their option to purchase
additional shares to cover overallotments, if any, the cash
portion of the purchase price for the Culligan Refill
Acquisition will be increased and the number of shares of common
stock we will issue to |
10
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Culligan will be decreased by an amount equal to the net cash
proceeds we receive as a result of such exercise. See Use
of Proceeds for a more complete description of our
anticipated use of proceeds from this offering, including a
discussion of how increases or decreases in our initial public
offering price will impact our anticipated use of proceeds. |
Dividend policy |
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We currently do not intend to pay any cash dividends on our
common stock. |
Risk factors |
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You should carefully read and consider the information set forth
under Risk Factors, together with all of the other
information set forth in this prospectus, before deciding to
invest in shares of our common stock. |
Proposed Nasdaq Global Market symbol |
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We have applied to list our common stock on the Nasdaq Global
Market under the symbol PRMW. |
Unless otherwise indicated, all information in this prospectus,
including the number of shares that will be outstanding after
this offering and other share-related information:
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assumes an initial public offering price of $12.00 per share,
the midpoint of the range set forth on the cover page of this
prospectus;
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reflects a 1-for-10.435 reverse stock split of our common stock
that will occur immediately prior to the closing of this
offering;
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reflects the conversion of our Series A convertible
preferred stock and our Series C convertible preferred
stock into common stock immediately prior to the closing of this
offering;
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reflects the conversion of 50% of our Series B preferred
stock into common stock immediately prior to the closing of this
offering at a ratio of 1:0.0926, which is calculated by dividing
the liquidation preference of the Series B preferred stock
by 90% of an assumed initial public offering price of $12.00 per
share, which is the midpoint of the range set forth on the cover
page of this prospectus;
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reflects the redemption of the remaining 50% of our
Series B preferred stock and the payment of all accrued and
unpaid dividends on our Series B Preferred Stock
immediately following this offering;
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reflects our issuance of shares of our common stock with a value
of $45.0 million (or 3,750,000 shares assuming an initial public
offering price of $12.00 per share, the midpoint of the range
set forth on the cover page of this prospectus) to fund a
portion of the purchase price for the Culligan Refill
Acquisition;
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excludes 595,666 shares of common stock issuable upon the
exercise of warrants to purchase common stock issued in
connection with our Series B preferred stock that will,
subject to certain exceptions, expire between April 28,
2016 and January 10, 2017;
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excludes 119,980 shares of common stock issuable upon the
exercise of warrants to purchase common stock issued in
connection with our Series C convertible preferred stock
that will, subject to certain exceptions, expire between
December 14, 2017 and June 2, 2018;
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excludes 9,583 shares of common stock issuable upon the exercise
of warrants to purchase common stock issued to a third party
that will expire 15 days after the closing of this offering;
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excludes an aggregate of 130,747 shares of common stock
issuable upon the exercise of warrants to purchase common stock
issued in connection with our 14% subordinated convertible
notes due March 31, 2011 that will expire in either
December 2019 or October 2020;
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excludes an aggregate of 5,305 shares of common stock
issuable under our 2004 Stock Plan;
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excludes an aggregate of 718,735 shares of common stock
issuable under our 2010 Omnibus Long-Term Incentive Plan, which
we have adopted in connection with this offering;
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excludes an aggregate of 23,958 shares of common stock
issuable under our 2010 Employee Stock Purchase Plan, which we
have adopted in connection with this offering;
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excludes any shares that Mr. Prim may purchase from the
underwriters in this offering at the initial public offering
price per share; and
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assumes no exercise of the underwriters over-allotment
option to purchase up to 1,250,000 additional shares of our
common stock.
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11
SUMMARY
HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL AND OTHER
DATA
The following tables set forth, for the periods and dates
indicated, our summary historical and pro forma consolidated
financial and other data. The summary historical consolidated
financial data as of and for the three years ended
December 31, 2009 was derived from our audited historical
consolidated financial statements included elsewhere in this
prospectus. The summary historical consolidated financial data
as of and for the six months ended June 30, 2009 and 2010
was derived from our unaudited consolidated financial statements
included elsewhere in this prospectus. The unaudited
consolidated financial statements have been prepared on the same
basis as our audited consolidated financial statements and, in
the opinion of our management, reflect all adjustments,
consisting only of normal recurring adjustments, necessary for a
fair presentation of the results for those periods. The results
for any interim period are not necessarily indicative of the
results that may be expected for a full year. The historical
results included here and elsewhere in this prospectus are not
necessarily indicative of future performance or results of
operations.
The summarized unaudited pro forma financial data for the year
ended December 31, 2009 and as of and for the six months
ended June 30, 2010 have been prepared to give pro forma
effect to (1) a 1-for-10.435 reverse stock split of our
common stock, (2) the conversion of our Series A and
Series C convertible preferred stock into common stock,
(3) the conversion of 50% of our Series B preferred
stock into common stock at a ratio of 1:0.0926, which is
calculated by dividing the liquidation preference of the
Series B preferred stock by 90% of an assumed initial
public offering price of $12.00 per share, which is the
midpoint of the range set forth on the cover page of this
prospectus, (4) the redemption of the remaining 50% of our
Series B preferred stock and the payment of all accrued and
unpaid dividends on our Series B preferred stock,
(5) the sale of shares in this offering at an assumed
initial public offering price of $12.00 per share, the
midpoint of the range set forth on the cover page of this
prospectus, (6) the consummation of the Culligan Refill
Acquisition and our issuance of shares of common stock with a
value of $45.0 million (or 3,750,000 shares assuming an
initial public offering price of $12.00 per share, the
midpoint of the range set forth on the cover page of this
prospectus), (7) our entry into and making of borrowings
under our new senior revolving credit facility and (8) the
application of the net proceeds from this offering and
borrowings under our new senior revolving credit facility for
the purposes described herein, in each case as if they had
occurred on January 1, 2009 with respect to statement of
operations data and on June 30, 2010 with respect to
balance sheet data. This data is subject, and gives effect, to
the assumptions and adjustments described in the notes
accompanying the unaudited pro forma financial statements
included elsewhere in this prospectus. The summary unaudited pro
forma financial data is presented for informational purposes
only and should not be considered indicative of actual results
of operations that would have been achieved had the Culligan
Refill Acquisition and this offering been consummated on the
dates indicated, and do not purport to be indicative of balance
sheet data or results of operations as of any future date or for
any future period.
12
The summary historical consolidated financial data presented
below represent portions of our consolidated financial
statements and are not complete. You should read this
information in conjunction with Use of Proceeds,
Capitalization, Selected Historical
Consolidated Financial and Other Data, Unaudited Pro
Forma Consolidated Financial Data, Managements
Discussion and Analysis of Financial Condition and Results of
Operations, Culligan Refill Acquisition
Managements Discussion and Analysis of Financial Condition
and Results of Operations and the consolidated financial
statements and related notes included elsewhere in this
prospectus.
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Pro Forma
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Historical
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Six Months
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Six Months Ended
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Year Ended
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Ended
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Year Ended December 31,
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June 30,
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December 31,
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June 30,
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2007
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2008
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2009
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2009
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2010
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2009
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2010
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(Unaudited)
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(Unaudited)
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(In thousands, except per share data)
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Consolidated statements of operations data:
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Net sales
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$
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13,453
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$
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34,647
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$
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46,981
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$
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24,500
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$
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21,002
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$
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72,998
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$
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33,571
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Operating costs and expenses:
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Cost of sales
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11,969
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30,776
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38,771
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20,368
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16,672
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|
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52,414
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23,326
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Selling, general and administrative expenses
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10,353
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13,791
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9,922
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5,041
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5,814
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12,799
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7,209
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Depreciation and amortization
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3,366
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3,618
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4,205
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2,078
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2,010
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7,916
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3,866
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Total operating costs and expenses
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25,688
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48,185
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52,898
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27,487
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24,496
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73,129
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34,401
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Loss from operations
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(12,235
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)
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(13,538
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)
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(5,917
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)
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|
|
(2,987
|
)
|
|
|
(3,494
|
)
|
|
|
(131
|
)
|
|
|
(830
|
)
|
Interest (expense) and other income, net
|
|
|
65
|
|
|
|
(70
|
)
|
|
|
(2,257
|
)
|
|
|
(1,037
|
)
|
|
|
(1,464
|
)
|
|
|
(1,004
|
)
|
|
|
(582
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(12,170
|
)
|
|
|
(13,608
|
)
|
|
|
(8,174
|
)
|
|
|
(4,024
|
)
|
|
|
(4,958
|
)
|
|
|
(1,135
|
)
|
|
|
(1,412
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,010
|
)
|
|
|
(1,002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(12,170
|
)
|
|
|
(13,608
|
)
|
|
|
(8,174
|
)
|
|
|
(4,024
|
)
|
|
|
(4,958
|
)
|
|
$
|
(3,145
|
)
|
|
$
|
(2,414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of income taxes
|
|
|
(1,904
|
)
|
|
|
(5,738
|
)
|
|
|
(3,650
|
)
|
|
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(14,074
|
)
|
|
|
(19,346
|
)
|
|
|
(11,824
|
)
|
|
|
(4,381
|
)
|
|
|
(4,958
|
)
|
|
|
|
|
|
|
|
|
Preferred dividends and beneficial conversion
charge(1)
|
|
|
(2,147
|
)
|
|
|
(19,875
|
)
|
|
|
(3,042
|
)
|
|
|
(1,521
|
)
|
|
|
(1,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(16,221
|
)
|
|
$
|
(39,221
|
)
|
|
$
|
(14,866
|
)
|
|
$
|
(5,902
|
)
|
|
$
|
(6,122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to common
stockholders
|
|
$
|
(9.88
|
)
|
|
$
|
(23.06
|
)
|
|
$
|
(7.72
|
)
|
|
$
|
(3.82
|
)
|
|
$
|
(4.21
|
)
|
|
$
|
(0.17
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations attributable to common
stockholders
|
|
|
(1.32
|
)
|
|
|
(3.96
|
)
|
|
|
(2.51
|
)
|
|
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(11.20
|
)
|
|
$
|
(27.02
|
)
|
|
$
|
(10.23
|
)
|
|
$
|
(4.06
|
)
|
|
$
|
(4.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding:
|
|
|
1,448
|
|
|
|
1,452
|
|
|
|
1,453
|
|
|
|
1,453
|
|
|
|
1,455
|
|
|
|
18,915
|
|
|
|
18,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
In 2008, we recorded a non-cash
beneficial conversion charge or deemed dividend of $17.6 million
on our Series C preferred stock. This was a result of the
adjustment of the conversion ratio on the Series C preferred
stock based upon a formula taking into account our net sales for
the year ending December 31, 2008, which resulted in a
conversion ratio of 1:0.184.
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
As of June 30, 2010
|
|
|
|
2009
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Consolidated balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
|
|
|
$
|
760
|
|
|
$
|
760
|
|
Total assets
|
|
|
22,368
|
|
|
|
30,532
|
|
|
|
137,099
|
|
Current portion of
long-term
debt
|
|
|
426
|
|
|
|
23,516
|
|
|
|
2
|
|
Long-term debt, net of current portion
|
|
|
14,403
|
|
|
|
47
|
|
|
|
11,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Six Months
|
|
|
|
December 31,
|
|
|
Ended
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
June 30, 2010
|
|
|
|
(In thousands, except location data)
|
|
|
|
(Unaudited)
|
|
|
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primo water bottle exchange locations at period end
|
|
|
4,700
|
|
|
|
6,400
|
|
|
|
7,000
|
|
|
|
7,200
|
|
Primo water bottle units sold
|
|
|
1,994
|
|
|
|
3,215
|
|
|
|
3,853
|
|
|
|
2,062
|
|
Primo water dispenser units sold
|
|
|
12
|
|
|
|
177
|
|
|
|
272
|
|
|
|
138
|
|
Culligan refill vending locations at period end
|
|
|
4,100
|
|
|
|
4,300
|
|
|
|
4,400
|
|
|
|
4,500
|
|
14
RISK
FACTORS
An investment in our common stock involves a high degree of
risk. You should read and consider carefully each of the risks
and uncertainties described below together with the financial
and other information contained in this prospectus before you
decide to invest in our common stock. Our business, financial
condition, results of operations, cash flows and prospects may
be materially and adversely affected by any of these risks. As a
result, the market price of our common stock could decline and
you could lose all or part of your investment.
Risks
Relating to Our Business and Industry
We have
incurred operating losses in the past and may incur operating
losses in the future.
We have incurred operating losses in the past and expect to
incur operating losses in the future. As of June 30, 2010,
our accumulated deficit was approximately $97.1 million.
Our losses from continuing operations were $12.2 million
for the year ended December 31, 2007, $13.6 million
for the year ended December 31, 2008, $8.2 million for
the year ended December 31, 2009 and $5.0 million for
the six months ended June 30, 2010. We have not been
profitable since our inception, and we may not become profitable
in the future. Our losses may continue as we incur additional
costs and expenses related to branding and marketing, expansion
of operations, product development and development of
relationships with strategic business partners. If our operating
expenses exceed our expectations, our financial performance will
be adversely affected. If our sales do not grow to offset these
increased expenses, we may not become profitable. If we do not
achieve sustained profitability, we may be unable to continue
operations.
In both
our bottled water and water dispenser businesses, we depend on a
small number of large retailers for most of our consumer sales.
Our arrangements with these retailers for our bottled water
exchange services and sales of our water dispensers are
nonexclusive and may be terminated at will.
Certain retailers make up a significant percentage of our retail
sales volume, such that if one or more of these retailers were
to materially reduce or terminate its business with us, our
sales would suffer. For 2009, Lowes Home Improvement,
Sams Club and Walmart represented approximately 33%, 19%
and 15% of our consolidated net sales, respectively. While we
sell a small percentage of our dispensers directly to consumers
through our online store, the vast majority of our sales for
both of our water bottle exchange service and of our water
dispensers are made through our retail partners.
While we have arrangements with certain retailers for our
products and services, we cannot provide any assurance of any
future sales. None of our significant retail accounts are
contractually bound to offer our water dispensers or bottle
exchange service. As a result, retailers can discontinue our
products or services at any time and offer a competitors
products or services, or none at all. Continued positive
relations with a retailer depend upon various factors, including
price, customer service, consumer demand and competition. In
addition, certain of our retailers have multiple vendor policies
and may seek to offer a competitors products or services
at new or existing locations. If any significant retailer
materially reduces, terminates or is unwilling to expand its
relationship with us, or requires price reductions or other
adverse modifications in our selling terms, our sales would
suffer.
The
success of our business depends on retailer and consumer
acceptance of our water bottle exchange service and water
dispensers.
We are a consumer products and services company operating in the
highly-competitive bottled water market and rely on continued
consumer demand or preference for our products and services. To
generate sales and profits, we must sell products that appeal to
retailers and to consumers. Our future success depends on
consumer acceptance, particularly at the household level, of our
bottled water products, water bottle exchange service and water
dispensers. There is no guarantee that there will be significant
market acceptance of our water bottle exchange service or that
we will be successful in selling our water dispensers on a scale
necessary to achieve sustained profitability.
The market for bottled water related products and services is
evolving rapidly and we may not be able to accurately assess the
size of the market or trends that may emerge and affect our
business. Consumer preferences
15
can change due to a variety of factors, including social trends,
negative publicity and economic changes. If we are unable to
convince current and potential retail customers and individual
consumers of the advantages of our products and services, our
ability to sell our bottled water products and water dispensers
will be limited. Consumer acceptance also will affect, and be
affected by, our existing retail partners and potential
new retail partners decision to sell our products and
services and their perception of the likelihood of consumers
purchasing our products and services. Even if retail customers
purchase our products or services, there is no guarantee that
they will be successful in selling our products or services to
consumers on a scale necessary for us to achieve sustained
profitability. Any significant changes in consumer preferences
for purified bottled water could result in reduced demand for
our water bottle exchange service and our water dispensers and
erosion of our competitive and financial position.
In our
bottled water business, we depend on independent bottlers,
distributors and suppliers for our business to
operate.
We are and will continue to be for the foreseeable future,
substantially dependent on independent bottlers, distributors
and suppliers to bottle and deliver our bottled water products
and provide our water bottle exchange service to our retail
customers. We do not have our own manufacturing facilities to
produce bottled water products. We are and will continue to be
for the foreseeable future, entirely dependent on third parties
to supply the bottle pre-forms, bottles, water and other
materials necessary to operate our bottled water business. We
rely on third-party supply companies to manufacture our three-
and five-gallon water bottles and deliver them to our bottlers.
In turn, we rely on bottlers to properly purify the water,
include our mineral enhancements and bottle the finished product
without contamination and pursuant to our quality standards and
preparation procedures. Finally, we rely upon our distributors
to deliver bottled water to our retail partners in a timely
manner, accurately enter information regarding the delivery of
the bottles into our management information system, manage our
recycling center displays and return used bottles to the
bottlers to be sanitized or crushed and recycled.
We can make no assurance that we will be able to maintain these
third-party relationships or establish additional relationships
as necessary to support growth and profitability of our business
on economically viable terms. As independent companies, these
bottlers, distributors and suppliers make their own business
decisions. Suppliers may choose not to do business with us for a
variety of reasons, including competition, brand identity,
product standards and concerns regarding our economic viability.
They may have the right to determine whether, and to what
extent, they produce and distribute our products, our
competitors products and their own products. Some of the
business for these bottlers, distributors and suppliers comes
from producing or selling our competitors products. These
bottlers, distributors and suppliers may devote more resources
to other products or take other actions detrimental to our
brands. In addition, their financial condition could also be
adversely affected by conditions beyond our control and our
business could suffer. In addition, we will face risks
associated with any bottlers or distributors failure
to adhere to quality control and service guidelines we establish
or failure to ensure an adequate and timely supply of product
and services at retail locations. Any of these factors could
negatively affect our business and financial performance. If we
are unable to obtain and maintain a source of supply for
bottles, water and other materials, our business will be
materially and adversely affected.
In our
bottled water business, if our distributors do not perform to
our retailers expectations, if we encounter difficulties
in managing our distributor operations or if we or our
distributors are not able to manage growth effectively, our
retail relationships may be adversely impacted and business may
suffer.
We rely on our distributors to deliver our three- and
five-gallon bottled water and provide our water bottle exchange
service to retailers. Accordingly, our success depends on our
ability to manage our retail relationships through the
performance of our distributor partners. The majority of our
current distributors are independent and we exercise only
limited influence over the resources they devote to delivery and
exchange of our three- and five-gallon water bottles. Our
success depends on our ability to establish and maintain
distributor relationships and on the distributors ability
to operate viable businesses. We can provide no assurance that
we will be able to maintain such relationships or establish
additional relationships as necessary to support growth and
profitability of our business on economically viable terms. Our
retailers impose demanding service requirements on us and we
could suffer a loss of consumer or retailer goodwill if our
distributors do not adhere to our quality control and service
guidelines or fail to
16
ensure an adequate and timely supply of bottled water at retail
locations. The poor performance of a single distributor to a
national retailer could jeopardize our entire relationship with
that retailer and cause our bottled water sales and exchange
service to suffer. In addition, the number of retail locations
offering our water bottle exchange service and our corresponding
sales have grown significantly over the past several years along
with our national distributor network. Accordingly, our
distributors must be able to adequately service an increasing
number of retail accounts. If we or our distributors fail to
manage our growth effectively, our bottled water sales and
exchange service may suffer.
We
operate in a highly competitive industry, face competition from
companies with far greater resources than we have and could
encounter significant competition from these companies in our
niche market of water bottle exchange services and related
products.
We participate in the highly competitive bottled water segment
of the nonalcoholic beverage industry. While the industry is
dominated by large and well-known international companies,
numerous smaller firms are also seeking to establish market
niches. In our business model, we not only offer three- and
five-gallon bottled water but also provide consumers the ability
to exchange their used containers as part of our exchange
service. While we are aware of a few direct competitors that
operate water bottle exchange networks at retail, we believe
they operate on a much smaller scale than we do and we believe
they do not have equivalent MIS tools or bottling and
distribution capabilities to effectively support major retailers
nationwide. Competitive factors with respect to our business
include pricing, taste, advertising, sales promotion programs,
product innovation, increased efficiency in production and
distribution techniques, the introduction of new packaging and
brand and trademark development and protection.
Our primary competitors in our bottled water business include
Nestlé, The
Coca-Cola
Company, PepsiCo, Dr Pepper Snapple Group and DS Waters of
America. While none of these companies currently offers a
nationwide water bottle exchange service at retail, Nestlé
and DS Waters of America offer this service on a regional basis.
Many of these competitors are leading consumer products
companies, have substantially greater financial and other
resources than we do, have established a strong brand presence
with consumers and have established relationships with
retailers, manufacturers, bottlers and distributors necessary to
start an exchange business at retail locations nationwide should
they decide to do so. In addition to competition between
companies within the bottled water industry, the industry itself
faces significant competition from other non-alcoholic
beverages, including carbonated and non-carbonated soft drinks
and waters, juices, sport and energy drinks, coffees, teas and
spring and tap water.
We also compete directly and indirectly in the water dispenser
marketplace. While we have had recent success in our sales of
water dispensers to retailers, there are many large consumer
products companies with substantially greater financial and
other resources than we do, a larger brand presence with
consumers and established relationships with retailers that
could decide to enter the marketplace. Should any of these
consumer products companies so decide to enter the water
dispenser marketplace, sales of our water dispensers could be
materially and adversely impacted, which, in turn, could
materially and adversely affect our sales of bottled water.
Finally, our water bottle exchange service faces competition
from other methods of purified water consumption such as
countertop filtration systems, faucet mounted filtration
systems, in-line whole-house filtration systems, water
filtration dispensing products such as pitchers and jugs,
standard and advanced feature water coolers and
refrigerator-dispensed filtered and unfiltered water.
If we are
unable to build and maintain our brand image and corporate
reputation, our business may suffer.
We are a relatively new company, having been formed in late 2004
and commenced operations in June 2005. Our success depends on
our ability to build and maintain the brand image for our
existing bottled water products and services and effectively
build the brand image for any new products. We cannot assure
you, however, that any additional expenditures on advertising
and marketing will have the desired impact on our products
brand image and on consumer preferences. Actual or perceived
product quality issues or allegations of product contamination,
even if false or unfounded, could tarnish the image of our brand
and may cause consumers to choose other products. Allegations of
product defects or product contamination, even if untrue, may
require us from time to time to recall a product from all of the
markets in which the affected product was distributed. Product
recalls would negatively affect our profitability and brand
image. Also, adverse publicity surrounding water usage and any
campaigns by
17
activists attempting to connect our system to environmental
issues, water shortages or workplace or human rights violations
in certain developing countries in which we or our business
partners operate, could negatively affect our overall reputation
and our products acceptance by consumers.
Interruption
or disruption of our supply chain, distribution channels or
national network could adversely affect our business, financial
condition and results of operations.
Our ability and that of our business partners, including
suppliers, bottlers, distributors and retailers, to manufacture,
sell and deliver products and services is critical to our
success. Interruption or disruption of our supply chain,
distribution channels or service network due to unforeseen
events, including war, terrorism and other international
conflicts, public health issues, natural disasters such as
earthquakes, fires, hurricanes or other adverse weather and
climate conditions, strikes and other labor disputes, whether
occurring in the United States or abroad, could impair our
ability to manufacture, sell or deliver our products and
services.
If our
bottled water became contaminated, our business could be
seriously harmed.
We have adopted various quality, environmental, health and
safety standards. However, our products may still not meet these
standards or could otherwise become contaminated. A failure to
meet these standards or contamination could occur in our
operations or those of our bottlers, distributors or suppliers.
Such a failure or contamination could result in expensive
production interruptions, recalls and liability claims.
Moreover, negative publicity could be generated even from false,
unfounded or nominal liability claims or limited recalls. Any of
these failures or occurrences could negatively affect our
business and financial performance.
In our
water dispenser business, because all of our dispensers are
manufactured by three manufacturers in China, a significant
disruption in the operations of these manufacturers or political
unrest in China could materially adversely affect us.
We have only three manufacturers of water dispensers. Any
disruption in production or inability of our manufacturers to
produce quantities of water dispensers adequate to meet our
needs could significantly impair our ability to operate our
water dispenser business on a
day-to-day
basis. Our manufacturers are located in China, which exposes us
to the possibility of product supply disruption and increased
costs in the event of changes in the policies of the Chinese
government, political unrest or unstable economic conditions in
China or developments in the U.S. that are adverse to
trade, including enactment of protectionist legislation. In
addition, our dispensers are shipped directly from the
manufacturer to our retail partners. Although we routinely
inspect and monitor our manufacturing partners activities
and products, we rely heavily upon their quality controls when
producing and delivering the dispensers to our retail partners.
Any of these matters could materially adversely affect our water
dispenser business and, as a result, our profitability.
If we
lose key personnel or are unable to recruit qualified personnel,
our ability to implement our business strategies could be
delayed or hindered. In addition, we may not be able to attract
and retain the highly skilled employees we need to support our
planned growth.
We are highly dependent upon the services of our senior
management because of their experience, industry relationships
and knowledge of the business. We are particularly dependent on
the services of Billy D. Prim, our Chairman, President and Chief
Executive Officer. We do not have a formal succession plan in
place for Mr. Prim. While our employment agreements with members
of our senior management include customary confidentiality,
non-competition and non-solicitation covenants, there can be no
assurance that such provisions will be enforceable or adequately
protect us. The loss of one or more of our key employees could
seriously harm our business and we may not be able to attract
and retain individuals with the same or similar level of
experience or expertise. We face competition for qualified
employees from numerous sources and there can be no assurance
that we will be able to attract and retain qualified personnel
on acceptable terms. Our ability to recruit and retain such
personnel will depend upon a number of factors, such as our
results of operations, prospects and the level of competition
then prevailing in the market for qualified personnel. Failure
to recruit and retain such personnel could materially adversely
affect our business, financial condition and results of
operations.
18
While
many members of our senior management have experience as
executives of a products and exchange services business, there
can be no assurances that this experience and past success will
result in our business becoming profitable.
Many members of our senior management have had experience as
senior managers of a company engaged in the supply, distribution
and exchange of propane gas cylinders. While the business model
for that company and the model for our business are similar, the
propane gas industry and the bottled water industry are very
different. For example, there are no assurances that consumer
demand will exist for our bottled water products, water bottle
exchange service or water dispensers sufficient to enable us to
be profitable. While we believe our business model will be
successful, any similarity between our business model and that
of our senior managements predecessor employer should not
be viewed as an indication that we will be profitable.
The
consolidation of retail customers may adversely impact our
operating margins and profitability.
Our customers, such as mass merchants, supermarkets, warehouse
clubs, food distributors and drug and pharmacy stores, have
consolidated in recent years and consolidation may continue. As
a result of these consolidations, our large retail customers may
seek lower pricing or increased promotions from us. If we fail
to respond to these trends in our industry, our volume growth
could slow or we may need to lower prices or increase trade
promotions and consumer marketing for our products and services,
both of which would adversely affect our financial results.
These retailers may use floor or shelf space currently used for
our products and services for their own private label products
and services. In addition, retailers are increasingly carrying
fewer brands in any one category and our results of operations
will suffer if we are not selected by our significant customers
to remain a vendor. In the event of consolidation
involving our current retailers, we may lose key business if the
surviving entities do not continue to purchase products or
services from us.
Adverse
weather conditions could negatively impact our
business.
Unseasonable or unusual weather may negatively impact demand for
our products. The sales of our bottled water products and water
dispensers are influenced to some extent by weather conditions
in the markets in which we operate. Unusually cool or rainy
weather may reduce temporarily the demand for our products and
contribute to lower sales, which would have an adverse effect on
our results of operations for such periods.
We depend
on key management information systems.
We depend on our management information systems (MIS) to process
orders, manage inventory and accounts receivable, maintain
distributor and customer information, maintain cost-efficient
operations and assist distributors in delivering products and
services on a timely basis. Any disruption in the operation of
our MIS tools, the loss of employees knowledgeable about such
systems, the termination of our relationships with third-party
MIS partners or our failure to continue to effectively modify
such systems as business expands could require us to expend
significant additional resources or to invest additional capital
to continue to manage our business effectively, and could even
affect our compliance with public reporting requirements.
Additionally, our MIS tools are vulnerable to interruptions or
other failures resulting from, among other things, natural
disasters, terrorist attacks, software, equipment or
telecommunications failures, processing errors, computer
viruses, hackers, other security issues or supplier defaults.
Security, backup and disaster recovery measures may not be
adequate or implemented properly to avoid such disruptions or
failures. Any disruption or failure of these systems or services
could cause substantial errors, processing inefficiencies,
security breaches, inability to use the systems or process
transactions, loss of customers or other business disruptions,
all of which could negatively affect our business and financial
performance.
Water
scarcity and poor quality could negatively impact our long-term
profitability.
Water is a limited resource facing unprecedented challenges from
overexploitation, population growth, increasing pollution, poor
management and climate change. As demand for water continues to
increase and as water becomes scarcer and the quality of
available water deteriorates, our business may incur increasing
costs or face capacity constraints which could adversely affect
our profitability or net sales in the long run.
19
We may
pursue acquisitions and investments in new product lines,
businesses or technologies that involve numerous risks, which
could disrupt our business or adversely affect our financial
condition and results of operations.
In addition to the Culligan Refill Acquisition, we may in the
future acquire or invest in new product lines, businesses or
technologies to expand our current bottled water products and
services. Acquisitions present a number of potential risks and
challenges that could disrupt our business operations, increase
our operating costs or capital expenditure requirements and
reduce the value of the acquired product line, business or
technology. For example, if we identify an acquisition
candidate, we may not be able to successfully negotiate or
finance the acquisition on favorable terms or at all. The
process of negotiating acquisitions and integrating acquired
products, services, technologies, personnel or businesses might
result in significant transaction costs, operating difficulties
or unexpected expenditures and might require significant
management attention that would otherwise be available for
ongoing development of our business. If we are successful in
consummating an acquisition, we may not be able to integrate the
acquired product line, business or technology into our existing
business and products and we may not achieve the anticipated
benefits of any acquisition. Furthermore, potential
acquisitions and investments may divert our managements
attention, require considerable cash outlays and require
substantial additional expenses that could harm our existing
operations and adversely affect our results of operations and
financial condition. To complete future acquisitions, we may
issue equity securities, incur debt, assume contingent
liabilities or incur amortization expenses and write-downs of
acquired assets, any of which could dilute the interests of our
stockholders or adversely affect our profitability or cash flow.
Changes
in taxation requirements could affect our financial
results.
We are subject to income tax in the numerous jurisdictions in
which we generate net sales. In addition, our water dispensers
are subject to certain import duties and sales taxes in certain
jurisdictions in which we operate. Increases in income tax rates
could reduce our after-tax income from affected jurisdictions,
while increases in indirect taxes could affect our
products and services affordability and therefore
reduce demand for our products and services.
Our
ability to use net operating loss carryforwards in the United
States may be limited.
As of December 31, 2009, we had net operating losses of
approximately $55.0 million for federal income tax
purposes, which expire at various dates through 2029. To the
extent available and not otherwise utilized, we intend to use
any net operating loss carryforwards to reduce the
U.S. corporate income tax liability associated with our
operations. Section 382 of the Internal Revenue Code of
1986, as amended, generally imposes an annual limitation on the
amount of net operating loss carryforwards that may be used to
offset taxable income when a corporation has undergone certain
changes in stock ownership. Our ability to utilize net operating
loss carryforwards may be limited, under this section or
otherwise, by the issuance of common stock in this offering. To
the extent our use of net operating loss carryforwards is
significantly limited, our income could be subject to
U.S. corporate income tax earlier than it would if we were
able to use net operating loss carryforwards, which could result
in lower profits.
Our
financial results may be negatively impacted by the recent
global financial events.
The recent global financial events have resulted in the
consolidation, failure or near failure of a number of
institutions in the banking, insurance and investment banking
industries and have substantially reduced the ability of
companies to obtain financing. These events also led to a
substantial reduction in stock market valuations during 2008 and
the first few months of 2009, although stock market valuations
have rebounded since then. These events could have a number of
different effects on our business, including:
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a reduction in consumer spending, which could result in a
reduction in our sales volume;
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a shift in the purchasing habits of our target consumers;
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a negative impact on the ability of our retail customers to
timely pay their obligations to us, thus reducing our cash flow;
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a negative impact on the ability of our vendors to timely supply
materials; and
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an increased likelihood that our lender may be unable to honor
its commitments under our new senior revolving credit facility.
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Other events or conditions may arise directly or indirectly from
the global financial events that could negatively impact our
business.
Risks
Relating to Regulatory and Legal Issues
Our
products and services are heavily 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 or
they could be recalled, and our business could be seriously
harmed.
The production, distribution and sale in the United States of
our products are subject to the Federal Food, Drug and Cosmetic
Act; the Occupational Safety and Health Act; the Lanham Act;
various environmental statutes; and various other federal, state
and local statutes and regulations applicable to the production,
transportation, sale, safety, advertising, promotion, labeling
and ingredients of such products. For example, measures have
been enacted in various localities and states that require a
deposit to be charged for certain non-refillable beverage
containers. The precise requirements imposed by these measures
vary. Other deposit, recycling or product stewardship proposals
have been introduced in various jurisdictions. We anticipate
that similar legislation or regulations may be proposed in the
future at the local, state and federal levels.
The U.S. Food and Drug Administration (the FDA)
regulates bottled water as a food under the federal Food, Drug
and Cosmetic Act. Our bottled water must meet FDA requirements
of safety for human consumption, identity, quality and labeling.
Further, any claims we make in marketing our products, such as
claims related to the beneficial health effects of drinking
water, are subject to FDAs advertising and promotion
requirements and restrictions. In addition, the FDA has
established current good manufacturing practices, regulations
which govern the facilities, methods, practices and controls
used for the processing, bottling and distribution of bottled
drinking water. We and our third-party bottling and distribution
partners are subject to these requirements. In addition,
all public 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. We also must comply with overlapping and,
in some cases, inconsistent state regulations in a variety of
areas. These state-level regulations, among other things, 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 must expend resources to continuously
monitor state legislative and regulatory activities in order to
identify and ensure compliance with laws and regulations that
apply to our bottled water business in each state in which we
operate.
Additionally, the manufacture, sale and use of resins used to
make water bottles are subject to regulation by the FDA. These
regulations relate to substances used in food packaging
materials, not with specific finished food packaging products.
Our beverage containers are deemed to be in compliance with FDA
regulations if the components used in the containers:
(i) are approved by the FDA as indirect food additives for
their intended uses and comply with the applicable FDA indirect
food additive regulations; or (ii) are generally recognized
as safe for their intended uses and are of suitable purity for
those intended uses.
The Consumer Product Safety Commission, FDA or other applicable
regulatory bodies may require the recall, repair or replacement
of our products if those products are found not to be in
compliance with applicable standards or regulations. The failure
of our third party manufacturers or bottlers to produce
merchandise that adheres to our quality control standards could
damage our reputation and lead to customer litigation against
us. If our manufacturers or distributors are unable or unwilling
to recall products failing to meet our quality standards, we may
be required to remove merchandise or recall those products at a
substantial cost to us. We may be unable to recover costs
related to product recalls.
We believe that our self-imposed standards meet or exceed those
set by federal, state and local regulations. Nevertheless, our
failure or the failure of our suppliers, bottlers or
distributors to comply with federal or state laws, rules or
regulations could subject us to potential governmental
enforcement action for violation of such regulations, which
could result in warning letters, fines, product recalls or
seizures, civil or criminal penalties
and/or
temporary or permanent injunctions, each of which could
materially harm our business, financial condition and results of
operations. In addition, our failure, or even our perceived
failure, to comply with applicable laws, rules or regulations
could cause retailers and others to determine not to do business
with us or reduce the amount of business they do with us.
21
In
January 2010, the U.S. Food and Drug Administration issued an
updated report regarding bisphenol A, or BPA, a chemical used in
food and beverage packaging and other products that can possibly
have adverse health effects on consumers, particularly on young
children. The three- and five- gallon polycarbonate plastic
bottles that we use to bottle our water contain BPA. Any
significant change in perception by our customers or government
regulation of polycarbonate plastic in food and beverage
products could adversely affect our operations and financial
results.
In January 2010, the U.S. Food and Drug Administration
issued an updated report regarding its current perspective on
the safety of BPA in food packaging materials, asserting the
need for additional studies on BPA and issuing its interim
public health recommendations. BPA is an industrial chemical
used to make hard, clear plastic known as polycarbonate, which
is currently used in our three- and five-gallon water bottles.
BPA is regulated by the FDA as an indirect food additive. While
the FDA notes that studies employing standardized toxicity tests
support the safety of human exposure to BPA at the low levels
currently experienced by consumers, the FDAs report
additionally acknowledges the results of certain recent studies
which suggest some concern regarding potential developmental and
behavioral effects of BPA exposure, particularly on infants and
young children.
The FDA is continuing to evaluate these low dose toxicity
studies, as well as other recent peer-reviewed studies related
to BPA, and has solicited public comment and inter-agency
scientific input in connection with updating its formal
assessment of the safety of BPA for use in food contact
applications. In the interim, the FDAs public health
recommendations include taking reasonable steps to reduce
exposure of infants to BPA in the food supply and working with
industry to support and evaluate manufacturing practices and
alternative substances that could reduce exposure in other
populations. Further, the FDA indicates that it plans to review
its existing authority to shift to a more robust regulatory
framework for oversight of BPA.
Consistent with the findings of numerous international
regulatory bodies, we believe that the scientific evidence
suggests that polycarbonate plastic made with BPA is a safe
packing material for all consumers. Nonetheless, media reports
and the FDA report have prompted concern in our marketplace
among existing and potential customers. It is possible that
developments surrounding this issue could lead to adverse
effects on our business. Such developments could include:
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Increased publicity that changes public or regulatory perception
regarding packaging that uses BPA, so that significant numbers
of consumers stop purchasing products that are packaged in
polycarbonate plastic.
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The emergence of new scientific evidence that suggests that the
low doses of BPA to which consumers may be exposed when using
polycarbonate plastic is unsafe.
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Interpretations of existing evidence by the FDA or other
regulatory agencies that lead to prohibitions on the use of
polycarbonate plastic as packaging for consumable products.
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The listing of BPA by Californias Office of Environmental
Health Hazard Assessment on the states Proposition 65
list, which would require us to label our products with
information about BPA content and could obligate us to evaluate
the levels of exposure to BPA associated with the use of our
products.
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The inability of sellers of consumable products to find an
adequate supply of alternative packaging if polycarbonate
plastic containing BPA becomes an undesirable or prohibited
packaging material.
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In addition, federal, state and local governmental authorities
have and continue to introduce, and in certain states enact,
proposals intended to restrict or ban the use of BPA in food and
beverage packaging materials. Additionally, a food safety bill
is currently pending in the U.S. Senate which may be amended to
include a provision that would override the FDAs ongoing
assessment of BPA, ban the use of BPA in certain food and
beverage containers and change the way in which BPA is
regulated. At this juncture, we cannot predict with certainty
whether or when any such proposals may be enacted or what impact
they may have on our business.
If any of these events were to occur, our sales and operating
results could be materially adversely affected.
22
Our
inability to protect our intellectual property, or our
involvement in damaging and disruptive intellectual property
litigation, could adversely affect our business, results of
operations and financial condition or result in the loss of use
of products or services.
We have filed certain patent applications and trademark
registration applications and intend to seek additional patents,
to develop additional trademarks and seek federal registrations
for such trademarks and to develop other intellectual property.
We consider our Primo name and related trademarks and our other
intellectual property to be valuable to our business and the
establishment of a national branded bottled water exchange
program. We rely on a combination of patent, copyright,
trademark and trade secret laws and other arrangements to
protect our proprietary rights and could incur substantial
expense to enforce our rights under such laws. A number of other
companies, however, use trademarks similar or identical to the
Primo®
mark to identify their products, and we may not be able to stop
these other companies from using such trademarks. The
requirement to change any of our trademarks, service marks or
trade names could entail significant expense and result in the
loss of any goodwill associated with that trademark, service
mark or trade name. While we have filed, and intend to file in
the future, patent applications, where appropriate, and to
pursue such applications with the patent authorities, we cannot
be sure that patents will be issued on such applications or that
any issued patents will not be successfully contested by third
parties. Also, since issuance of a patent does not prevent other
companies from using alternative, non-infringing technology or
designs, we cannot be sure that any issued patents, or patents
that may be issued to others and licensed to us, will provide
significant or any commercial protection, especially as new
competitors enter the market.
In addition to patent protection, we also rely on trade secrets
and other non-patented proprietary information relating to our
product development, business processes and operating
activities. We seek to protect this information through
appropriate efforts to maintain its secrecy, including
confidentiality agreements. We cannot be sure that these efforts
will be successful or that confidentiality agreements will not
be breached. We also cannot be sure that we would have adequate
remedies for any breach of such agreements or other
misappropriation of our trade secrets, or that our trade secrets
and proprietary know-how will not otherwise become known or be
independently discovered by others. Where necessary, we may
initiate litigation to enforce our patent or other intellectual
property rights. Any such litigation may require us to spend a
substantial amount of time and money and could distract
management from its
day-to-day
operations. Moreover, there is no assurance that we will
be successful in any such litigation or that such litigation
will not result in successful counterclaims or challenges to the
validity of our intellectual property rights. Our failure to
successfully develop intellectual property, or to successfully
obtain, maintain and enforce patents, trademarks and other
intellectual property, could affect our ability to distinguish
our products and services from those of our competitors and
could cause our sales to suffer.
Our business and our ability to provide products and services
may be impaired by claims that we infringe the intellectual
property rights of others. Vigorous protection and pursuit of
intellectual property rights characterize the consumer products
industry. These traits can result in significant, protracted and
materially expensive litigation. In addition, parties making
infringement and other claims may be able to obtain injunctive
or other equitable relief that could effectively block our
ability to provide our products, services or utilize our
business methods and could cause us to pay substantial damages.
In the event of a successful claim of infringement, we may need
to obtain one or more licenses from third parties, which may not
be available at a reasonable cost, or at all. It is possible
that our intellectual property rights may not be valid or that
we may infringe existing or future proprietary rights of others.
Any successful infringement claims could subject us to
significant liabilities, require us to seek licenses on
unfavorable terms, prevent us from manufacturing or selling
products, providing services and utilizing business methods and
require us to redesign or, in the case of trademark claims,
re-brand our Company, products or services, any of which could
have a material adverse effect on our business, results of
operations or financial condition.
Legislative
and executive action in state and local governments enacting
local taxes on bottled water to include multi-gallon bottled
water could adversely affect our business and financial
results.
Regulations have been enacted or proposed in some localities
where we operate to enact local taxes on bottled water. 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. While we have not to date directly
experienced any adverse effects from these concerns, and we
believe that our products are sufficiently different from those
affected by recent enactments, there is no assurance that our
products will not be subject to
23
future legislative and executive action by state and local
governments, which could have a material adverse effect on our
business, results of operations or financial condition.
Litigation
or legal proceedings could expose us to significant liabilities,
including product liability claims, and damage our
reputation.
We are from time to time party to various litigation claims and
legal proceedings. We evaluate these claims and proceedings to
assess the likelihood of unfavorable outcomes and estimate, if
possible, the amount of potential losses. If our products are
not properly manufactured or designed, personal injuries or
property damage could result, which could subject us to claims
for damages. The costs associated with defending product
liability and other claims, and the payment of damages, could be
substantial. Our reputation could also be adversely affected by
such claims, whether or not successful.
We may establish a reserve as appropriate based upon assessments
and estimates in accordance with our accounting policies. We
base our assessments, estimates and disclosures on the
information available to us at the time and rely on legal and
management judgment. Actual outcomes or losses may differ
materially from assessments and estimates. Actual settlements,
judgments or resolutions of these claims or proceedings may
negatively affect our business and financial performance. A
successful claim against us that is not covered by insurance or
is in excess of our available insurance limits could require us
to make significant payments of damages and could materially
adversely affect our results of operations and financial
condition.
It is
possible that our spin-off of Prima may not have complied with
Section 5 of the Securities Act of 1933.
On December 31, 2009, we distributed all of the issued and
outstanding shares of common stock of our wholly-owned
subsidiary, Prima Bottle Water, Inc. (Prima), to the
holders of our Series A and Series C convertible
preferred stock and common stock on a pro rata basis assuming
the conversion of all Series A and Series C
convertible preferred stock into common stock (the
Spin-Off). The business purpose of the Spin-Off was
to divest the Company of certain of its non-core assets and
operations related to the sale of bottled water in single-serve
containers. The Companys strategic focus had shifted since
it originally determined to pursue this line of business and
management of the Company did not believe it was appropriate for
the Company to divert further time, energy or resources to the
sale of bottled water in single-serve containers. The
stockholders of the Company did not provide any cash
consideration for their shares of Prima common stock nor did
they have the right to vote on or consent to the Spin-Off.
The shares of Prima common stock were not registered under the
Securities Act and may not have been exempt from its
registration requirements. As a result, it is possible that a
third party could assert that the Spin-Off did not comply with
Section 5 of the Securities Act and corresponding
provisions of applicable state securities laws. If we failed to
comply with the registration requirements of Section 5 of
the Securities Act and these state securities laws, the
Securities and Exchange Commission, or SEC, and state securities
regulators could impose monetary fines or other sanctions. The
SEC and such state regulators could also require us to make a
rescission offer, which is an offer to repurchase, to the
holders of shares of Prima common stock. A finding that the
issuance of the shares of Prima common stock was in violation of
federal or state securities law could also give holders of
shares of Prima common stock a private right of action to seek a
rescission remedy under Section 12(a)(2) of the Securities
Act. In general, this remedy would allow a successful claimant
to sell its Prima shares back to Primo in return for the
purchase price paid for such Prima shares.
We are unable to quantify the extent of any monetary damages
that we might incur if a third party were to successfully assert
that the Spin-off did not comply with the Securities Act or
applicable state securities laws and monetary fines were
imposed, rescission were required or one or more other claims
were successful.
24
Risks
Relating to This Offering and Our Common Stock
There has
not been a public market for our shares and an active market may
not develop or be maintained, which could limit your ability to
sell shares of our common stock.
Prior to this offering, there has been no public market for our
common stock. Although we have applied to list the common stock
on the Nasdaq Global Market, an active public market for our
shares may not develop or be sustained after this offering. The
initial public offering price for our common stock will be
determined through our negotiations with the underwriters and
may not be indicative of the market price of our common stock
after this offering. If you purchase shares of our common stock,
you may not be able to resell those shares at or above the
initial public offering price, or at all. We cannot predict the
extent to which investor interest in our Company will lead to
the development of an active trading market on the Nasdaq Global
Market or otherwise or how liquid that market might become. An
active public market for our common stock may not develop or be
sustained after this offering. If an active public market does
not develop or is not sustained, it may be difficult for you to
sell your shares of common stock at a price that is attractive
to you, or at all.
The value
of our common stock could be volatile.
The overall market and the price of our common stock may
fluctuate greatly. The trading price of our common stock may be
significantly affected by various factors, including:
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quarterly fluctuations in our operating results;
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changes in investors and analysts perception of the
business risks and conditions of our business;
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our ability to meet the earnings estimates and other performance
expectations of financial analysts or investors;
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unfavorable commentary or downgrades of our stock by equity
research analysts;
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termination of
lock-up
agreements or other restrictions on the ability of our existing
stockholders to sell their shares after this offering;
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fluctuations in the stock prices of our peer companies or in
stock markets in general; and
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general economic or political conditions.
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If
securities or industry analysts do not publish research or
publish inaccurate or unfavorable research about our business,
our stock price and trading volume could decline.
The trading market for our common stock will depend in part on
the research and reports that securities or industry analysts
publish about us or our business. We do not currently have and
may never obtain research coverage by securities and industry
analysts. If no securities or industry analysts commence
coverage of our Company, the trading price for our stock would
be negatively impacted. If we obtain securities or industry
analyst coverage and if one or more of the analysts who covers
us downgrades our stock or publishes inaccurate or unfavorable
research about our business, our stock price would likely
decline. If one or more of these analysts ceases coverage of us
or fails to publish reports on us regularly, demand for our
stock could decrease, which could cause our stock price and
trading volume to decline.
Future
sales of our common stock, or the perception in the public
markets that these sales may occur, may depress our stock
price.
Sales of a large number of our shares of common stock in the
public market after this offering, or the perception that such
sales could occur, could adversely affect the market price of
our common stock and could impair our ability to sell equity
securities in the future at a time and at a price that we deem
appropriate. After the closing of this offering, we will have
19,023,887 shares of common stock (19,111,387 shares
if the underwriters exercise in full their option to purchase
additional shares to cover overallotments, if any) outstanding.
The shares of common stock offered in this offering will be
freely tradable without restriction under the Securities Act of
1933, as amended (the Securities Act), except for
any shares of our common stock that may be held or acquired by
our directors, executive officers and other affiliates, as that
term is defined in the Securities Act, which will be restricted
securities under the Securities Act. Restricted securities may
not be sold in the public market unless the sale is registered
under the Securities Act or an exemption from registration is
available.
25
We, our executive officers, directors and certain stockholders
(including Culligan) have agreed, subject to certain exceptions,
with the underwriters not to offer, sell, contract to sell or
otherwise dispose of any common stock or securities convertible
into or exchangeable for shares of common stock during the
period from the date of this prospectus continuing through the
date 180 days after the date of this prospectus. These
shares will represent approximately 91.1% of our common stock
outstanding after the Culligan Refill Acquisition (including
shares issuable upon the exercise of options and warrants) but
excluding shares issued in this offering. Shares representing
the remaining 8.9% of our common stock outstanding after the
Culligan Refill Acquisition (including shares issuable upon the
exercise of options and warrants) but excluding the shares
issued in this offering are subject to comparable lock-up
arrangements with the Company. As restrictions on resale end,
the market price of our common stock could decline if the
holders of the restricted shares sell them or are perceived by
the market as intending to sell them. Thomas Weisel Partners
LLC, an affiliate of Stifel, Nicolaus & Company,
Incorporated may, in its sole discretion, release any of these
shares from these restrictions at any time without notice. See
Shares Eligible for Future Sale and
Underwriting.
All of our shares of common stock outstanding as of the date of
this prospectus may be sold in the public market by existing
stockholders 180 days after the date of this prospectus,
subject to applicable volume and other limitations imposed under
federal securities laws. We have agreed with Culligan to use our
commercially reasonable efforts to register for resale within
181 days of the closing of the Culligan Refill Acquisition
all shares of our common stock we are issuing to Culligan in
payment of a portion of the purchase price for the Culligan
Refill Business. See Shares Eligible for Future
Sale for a more detailed description of the restrictions
on selling shares of our common stock after this offering.
In the future, we may also issue our securities in connection
with investments or acquisitions or in order to raise capital
for other purposes. The amount of shares of our common stock
issued in connection with these matters could constitute a
material portion of our then-outstanding shares of our common
stock.
Purchasers
in this offering will experience immediate and substantial
dilution in net tangible book value.
The initial public offering price per share is expected to be
substantially higher than the net tangible book value per share
of our outstanding common stock. Purchasers of shares in this
offering will experience immediate dilution in the net tangible
book value of their shares. Based on an assumed initial public
offering price of $12.00 per share, the mid-point of the range
set forth on the cover of this prospectus, and assuming no
exercise of the underwriters over-allotment option,
dilution per share in this offering will be $7.50 per share
(or 62.5% of the price). Stockholders will be further diluted by
our consummation of the Culligan Refill Acquisition. Based on an
assumed initial public offering price of $12.00 per share,
the mid-point of the range set forth on the cover of this
prospectus, and assuming no exercise of the underwriters
over-allotment option, dilution per share resulting from both
this offering and the Culligan Refill Acquisition will be a
total of $10.87 per share (or 90.6% of the price). Further,
if we issue additional equity securities to raise additional
capital, your ownership interest in our Company may be diluted
and the value of your investment may be reduced. See
Dilution.
Concentration
of ownership among our existing executive officers, directors
and their affiliates may prevent new investors from influencing
significant corporate decisions.
Upon completion of this offering and the Culligan Refill
Acquisition, our executive officers, directors and their
affiliates will beneficially own, in the aggregate,
approximately 20.8% of our outstanding shares of common stock.
In particular, Billy D. Prim, our Chairman, Chief Executive
Officer and President, will beneficially own approximately 10.3%
of our outstanding shares of common stock upon completion of
this offering and the Culligan Refill Acquisition. In addition,
Culligan will own approximately 19.7% of our outstanding shares
of common stock upon completion of this offering and the
Culligan Refill Acquisition. As a result, these stockholders
will be able to exercise a significant level of control over all
matters requiring stockholder approval, including the election
of directors, amendment of our certificate of incorporation and
approval of significant corporate transactions. This control
could have the effect of delaying or preventing a change of
control of our Company or changes in management and will make
the approval of certain transactions difficult or impossible
without the support of these stockholders.
26
Anti-takeover
provisions in our charter documents and Delaware law might
discourage or delay acquisition attempts for us that you might
consider favorable.
Our amended and restated certificate of incorporation and
amended and restated bylaws will contain provisions that may
make the acquisition of our Company more difficult without the
approval of our Board of Directors. These provisions:
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authorize the issuance of undesignated preferred stock, the
terms of which may be established and the shares of which may be
issued without stockholder approval, and which may include super
voting, special approval, dividend, or other rights or
preferences superior to the rights of the holders of common
stock;
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eliminate the ability of our stockholders to act by written
consent in most circumstances;
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establish advance notice requirements for nominations for
elections to our Board of Directors or for proposing matters
that can be acted upon by stockholders at stockholder meetings;
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provide that the Board of Directors is expressly authorized to
make, alter or repeal our amended and restated bylaws; and
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establish a classified board of directors the members of which
will serve staggered three-year terms.
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As a Delaware corporation, we are also subject to provisions of
Delaware law, including Section 203 of the Delaware General
Corporation Law, which prevents some stockholders holding more
than 15% of our outstanding common stock from engaging in
certain business combinations without approval of the holders of
substantially all of our outstanding common stock.
These anti-takeover provisions and other provisions under
Delaware law could discourage, delay or prevent a transaction
involving a change in control of our Company, including actions
that our stockholders may deem advantageous, or negatively
affect the trading price of our common stock. These provisions
could also discourage proxy contests and make it more difficult
for you and other stockholders to elect directors of your
choosing and to cause us to take other corporate actions you
desire.
Since we
have no current plans to pay cash dividends on our common stock
for the foreseeable future, you may not receive any return on
investment unless you sell your common stock for a price greater
than that which you paid for it.
We do not anticipate paying any dividends to our stockholders
for the foreseeable future. The agreements governing our
indebtedness also restrict our ability to pay dividends. Any
determination to pay dividends in the future will be made at the
discretion of our Board of Directors and will depend on our
results of operations, financial conditions, contractual
restrictions, restrictions imposed by applicable law and other
factors our Board of Directors deems relevant. Accordingly, you
may have to sell some or all of your common stock in order to
generate cash flow from your investment. You may not receive a
gain on your investment when you sell our common stock and may
lose some or all of the amount of your investment. Investors
seeking cash dividends in the foreseeable future should not
purchase our common stock.
We will
incur increased costs as a result of being a publicly-traded
company.
As a company with publicly-traded securities, we will incur
significant legal, accounting and other expenses not presently
incurred. In addition, the Sarbanes-Oxley Act of 2002, as well
as rules promulgated by the SEC and The Nasdaq Stock Market,
require us to adopt corporate governance practices applicable to
U.S. public companies. These rules and regulations may
increase our legal and financial compliance costs.
If we do
not timely satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act of 2002, the trading price of our common
stock could be adversely affected.
As a company with publicly-traded securities, we will be subject
to Section 404 of the Sarbanes-Oxley Act of 2002. This law
requires us to document and test the effectiveness of our
internal control over financial reporting in accordance with an
established internal control framework and to report on our
conclusion as to the effectiveness of our internal control over
financial reporting. The cost to comply with this law will
affect our net income adversely. Any delays or difficulty in
satisfying the requirements of Section 404 could, among
other things, cause investors to
27
lose confidence in, or otherwise be unable to rely on, the
accuracy of our reported financial information, which could
adversely affect the trading price of our common stock. In
addition, failure to comply with Section 404 could result
in The Nasdaq Stock Market imposing sanctions on us, which could
include the delisting of our common stock.
Risks
Relating to the Culligan Refill Acquisition
We may
not be able to consummate the Culligan Refill
Acquisition.
We have entered into an asset purchase agreement with Culligan
to acquire the Culligan Refill Business. The closing of this
acquisition is subject to the consummation of this offering
(which is subject to the satisfaction of all conditions
precedent to the new senior revolving credit facility and
initial funding thereunder) and the satisfaction of customary
closing conditions. In addition, the asset purchase agreement is
subject to termination by either party under certain
circumstances, such as if the closing has not occurred on or
before December 31, 2010. We cannot assure you that we will
consummate the Culligan Refill Acquisition on favorable terms,
or at all.
We will not close this offering unless we believe the Culligan
Refill Acquisition will close promptly thereafter. However, if
this offering is consummated and we are unable to consummate the
Culligan Refill Acquisition, then the portion of the net
proceeds anticipated to be used in the acquisition will instead
be available for general corporate purposes, including
investment in our operations or to further our business or
growth strategies. Management will retain broad discretion over
the use of these proceeds. Stockholders may disagree with our
use of these proceeds and our use of these proceeds may not
yield a significant return or any return at all.
The loss
of one or more of the largest retail customers of the Culligan
Refill Business could materially adversely affect our business
after the completion of the Culligan Refill
Acquisition.
For the year ended December 31, 2009, Walmart accounted for
65% of the net sales of the Culligan Refill Business. The
contractual commitments of the Culligan Refill Business with its
retail customers are not long-term in nature. We could suffer
significant setbacks in our results of operations if the
Culligan Refill Business lost Walmart or any of its other large
retail customers, or if these retail customers plans or
markets were to change significantly. The Culligan Refill
Business faces competition in its industry and for its retail
customers from Glacier Water, which has a strong brand presence
and greater financial and other resources than either the
Culligan Refill Business or we have. Should the Culligan Refill
Business lose Walmart or any of its other large retail
customers, this would likely have a material adverse effect on
its business, financial condition, results of operations and
cash flows.
We may
experience difficulties in integrating the Culligan Refill
Business with our current business and may not be able to fully
realize all of the anticipated synergies from the proposed
Culligan Refill Acquisition.
We may not be able to fully realize all of the anticipated
synergies from the proposed Culligan Refill Acquisition. The
ability to realize the anticipated benefits of the acquisition
will depend, to a large extent, on our ability to successfully
integrate the Culligan Refill Business with our current
business. The integration of two independent businesses is a
complex, costly and time-consuming process. In addition, we will
be integrating a business that is different from the business we
currently operate in several respects, including with respect to
the types of products and services offered, the manner in which
such products and services are provided to retail customers and
pricing dynamics. As a result, we will be required to devote
significant management attention and resources to integrating
our business practices and operations with those of the Culligan
Refill Business. This integration process may disrupt the
Culligan Refill Business or our current business and, if
implemented ineffectively, would preclude realization of the
full benefits we expect to realize. The failure to meet the
challenges involved in integrating successfully the operations
of the Culligan Refill Business with ours or otherwise to
realize the anticipated benefits of the acquisition transaction
could cause an interruption of, or a loss of momentum in, our
business activities or those of the Culligan Refill Business,
and could seriously harm our results of operations. In addition,
the overall integration may result in unanticipated problems,
expenses, liabilities, competitive responses, loss of customer
and supplier relationships, and diversion of managements
attention. The challenges we face in integrating the operations
of the Culligan Refill Business with ours include, among others:
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maintaining employee morale and retaining and hiring key
personnel;
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consolidating corporate and administrative infrastructures and
eliminating duplicative operations;
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minimizing the diversion of managements attention from
ongoing business concerns;
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coordinating geographically dispersed organizations;
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addressing unanticipated issues in integrating information
technology, communications and other systems; and
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managing tax costs or inefficiencies associated with integrating
operations.
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In addition, even if the Culligan Refill Business were to be
integrated successfully with our current business, we may not
realize the full benefits of the acquisition transaction,
including synergies, cost savings or sales or growth
opportunities. These benefits may not be achieved within the
anticipated timeframe, or at all. You should not consider the
pro forma financial data to be indicative of actual results had
the Culligan Refill Acquisition been consummated on the dates
indicated, or indicative of our future operating results or
financial position following the consummation of the Culligan
Refill Acquisition.
The loss
of key employees involved in the Culligan Refill Business could
have a material adverse effect on our business, financial
condition, results of operations and cash flows.
If key employees involved in the Culligan Refill Business were
to leave and it became necessary to hire new employees to manage
this business, we could experience difficulties in finding
qualified personnel. Jeanne Cantu and Carl Werner, the Vice
President and General Manager and the Controller, respectively,
of the Culligan Refill Business have each entered into a
two-year employment agreement with us that is effective upon the
closing of the Culligan Refill Acquisition and contains
customary confidentiality, noncompetition and nonsolicitation
provisions. We cannot guarantee that either of these employees
or any other key employees of the Culligan Refill Business will
not terminate his or her employment with us following the
completion of the Culligan Refill Acquisition, which could have
a materially adverse effect on our business, financial
condition, results of operations and cash flows.
Changes
in the strategies of the retail customers of the Culligan Refill
Business could materially adversely affect our
business.
Most major retailers continually evaluate and often modify their
in-store retail strategies, including product placement, store
set-up and
design and demographic targets. The Culligan Refill Business
could suffer significant setbacks in net sales and operating
income if one or more of its retail customers modified its
current retail strategy resulting in a termination or reduction
of its business relationship with the Culligan Refill Business,
a reduction in store penetration or an unfavorable product
placement within such retailers stores, any or all of
which could materially adversely affect our business, financial
condition, results of operations and cash flows.
We may be
required to make substantial capital expenditures in connection
with maintaining equipment related to the Culligan Refill
Business and growing the Culligan Refill Business.
Maintenance of refill equipment located at the stores of current
and future retail customers of the Culligan Refill Business may
be substantially costlier than we currently anticipate. In
addition, we may incur substantial capital expenditures in
growing the Culligan Refill Business. If we are required to make
greater than anticipated capital expenditures in connection with
either or both of these activities, our business, financial
condition and cash flows could be materially and adversely
effected.
We may
experience difficulties in obtaining required United States and
Canadian permits in order to allow us to operate the Culligan
Refill Business following the closing of the Culligan Refill
Acquisition. Additionally, if we are unable to comply with
current or subsequently enacted regulations and standards in any
jurisdiction, we may not be able to operate the Culligan Refill
Business in that jurisdiction and our business could be
seriously harmed.
The conduct of the Culligan Refill Business and the production,
distribution, advertising, promotion, labeling, safety, sale and
use of its products are subject to various laws and regulations
administered by federal, state, provincial and local
governmental agencies in the United States and Canada. The
precise requirements imposed by these measures vary from
jurisdiction to jurisdiction. In connection with the Culligan
Refill Acquisition, we will be transferring or applying for new
permits to conduct the Culligan Refill Business as required in
the jurisdictions in
29
which it currently operates. The permit application or transfer
process may take significantly longer or be more costly than we
currently anticipate. We will be required to close the Culligan
Refill Acquisition if we obtain permits to operate refill
vending machines representing at least 80% of the revenues of
all of the refill vending machines that are part of the Culligan
Refill Business for the year ended December 31, 2009.
However, we do not currently anticipate such percentage to be
obtained prior to closing and we expect to waive such condition
and close without a minimum percentage of permits. As a result,
we may not be able to operate all of the refill vending machines
that are part of the Culligan Refill Business after the closing
until we obtain the relevant permits.
Additionally, the various current laws and regulations
administered by federal, state, provincial and local
governmental agencies in the United States and Canada which are
applicable to the Culligan Refill Business may change or new
legislation or regulations may be proposed and compliance with
these new measures may be difficult or costly. Our failure or
the failure of our suppliers or service providers to comply with
federal, state, provincial or local laws, rules or regulations
could subject us to potential governmental enforcement action
for violation of such regulations, which could result in warning
letters, fines, product recalls or seizures, civil or criminal
penalties
and/or
temporary or permanent injunctions, each of which could
materially harm our business, financial condition and results of
operations. In addition, our failure, or even our perceived
failure, to comply with applicable laws, rules or regulations
could cause retailers and others to determine not to do business
with us or reduce the amount of business they do with us.
We are
required to rebrand the Culligan Refill Business under our Primo
or another new brand and the rebranding may be more costly than
anticipated or may fail to achieve its intended
result.
We are required to rebrand the Culligan Refill Business within
12 months after the closing of the Culligan Refill
Acquisition. Our rebranding efforts may not achieve their
intended results, which include increasing our retail business.
Our rebranding efforts could turn out to be substantially more
expensive than we currently anticipate, which would materially
adversely affect our results of operations. Additionally, the
rebranding of the Culligan Refill Business could result in the
loss of current Culligan Refill Business retail customers and
consumers, which would prevent us from realizing the full
benefits of the Culligan Refill Acquisition and would negatively
affect our business, financial condition, results of operations
and cash flows.
If the
service providers of the Culligan Refill Business do not perform
to retailer expectations, its retail relationships may be
adversely impacted and business may suffer.
The Culligan Refill Business primarily relies on third-party
service providers to install, maintain and repair the reverse
osmosis water systems at its retail customers locations.
These third-party service providers are also responsible for
providing retail customer training with respect to the reverse
osmosis water systems, submitting water for testing and
conducting monthly meter readings to determine water usage for
billing purposes. Accordingly, the success of the Culligan
Refill Business depends on its ability to manage its retail
relationships through the performance of these service
providers. The significant majority of these service providers
are either third-party franchisees or independent dealers and
the Culligan Refill Business exercises only limited influence
over the resources they devote to their responsibilities with
respect to its retail customers. The success of the Culligan
Refill Business currently depends on its ability to establish
and maintain relationships with these third-party service
providers and on the service providers ability to operate
viable businesses. There can be no assurance that we will be
able to maintain such relationships after the closing of the
Culligan Refill Acquisition. Retail customers of the Culligan
Refill Business impose demanding service requirements and we
could suffer a loss of retailer or consumer goodwill if these
service providers do not perform to the retail customers
expectations. The poor performance of a single service provider
to a major retailer could jeopardize our entire relationship
with that retailer potentially preventing future installations
at additional retail locations and causing sales to suffer.
We will
be dependent on the network of service providers of the Culligan
Refill Business and we may be unable to maintain these
relationships or achieve the cost savings we anticipate creating
with a
post-acquisition
consolidation of this network.
The Culligan Refill Business is dependent on its network of
primarily independent service providers to provide a number of
services with respect to its reverse osmosis water systems.
After the closing of the Culligan Refill Acquisition, we will
have access to this network of service providers pursuant to a
dealer services agreement that we
30
will enter into with Culligan that will extend through December
2011. There can be no assurance that the service providers will
continue to provide these services after the termination of the
dealer services agreement.
Additionally, we anticipate consolidating the current network of
approximately 500 service providers in order to achieve cost
savings. There can be no assurance that we can successfully
consolidate the current network of service providers or that we
will be able to achieve any cost savings if we are able to
consolidate the network. If we are unable to rely on the service
provider network of the Culligan Refill Business to continue
providing the services currently provided or we are unable to
achieve cost savings through a consolidation of this network, we
may not realize the full benefits of the Culligan Refill
Acquisition and our business, financial condition, results of
operations and cash flows could suffer.
The
Culligan Refill Business has substantial Canadian operations and
is exposed to fluctuations in currency exchange rates and
political uncertainties.
The Culligan Refill Business has substantial Canadian
operations, and as a result, we will become subject to risks
associated with doing business internationally upon the
consummation of the Culligan Refill Acquisition. Risks inherent
to operating internationally include:
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changes in a countrys economic or political conditions;
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changes in foreign currency exchange rates; and
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unexpected changes in regulatory requirements.
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To the extent the United States dollar strengthens against the
Canadian dollar, our foreign revenues and profits will be
reduced when translated into United States dollars.
If the
products of the Culligan Refill Business became contaminated,
our business could be seriously harmed.
Culligan has adopted various quality, environmental, health and
safety standards with respect to the Culligan Refill Business.
However, its products may still not meet these standards or
could otherwise become contaminated. A failure to meet these
standards or such a contamination could occur in its operations
or those of its suppliers, dealers or retail customers. Such a
failure or contamination could result in expensive recalls and
liability claims. Moreover, negative publicity could be
generated even from false, unfounded or nominal liability claims
or limited recalls. Any of these failures or occurrences could
negatively affect our business, financial condition, results of
operations and cash flows.
Risks
Relating to Our Indebtedness
If we are unable to close our new senior revolving credit
facility on substantially the terms described in this
prospectus, we will be unable to consummate this offering.
The underwriting agreement for this offering will provide that
(i) the satisfaction of all conditions precedent to the new
senior revolving credit facility (other than the closing of this
offering) and the Company receiving gross proceeds in initial
borrowings under the new senior revolving credit facility
simultaneously with payment for the shares of our common stock
offered hereby in an amount sufficient to consummate the
transactions described in Use of Proceeds herein and
(ii) the satisfaction of all conditions precedent to the
Culligan Refill Acquisition (other than the closing of this
offering) are both conditions to the closing of the initial
public offering. In addition, the asset purchase agreement
relating to the Culligan Refill Acquisition provides that the
closing of this offering is a condition precedent to the closing
of the Culligan Refill Acquisition. We have entered into a
commitment letter with Wells Fargo Bank, National Association
and Wells Fargo Securities, LLC and a group of other lenders
with respect to the new senior revolving credit facility that is
subject to certain closing conditions, including the execution
of definitive documentation and other customary conditions
precedent. If we are unable to satisfy any such closing
conditions or to otherwise close our new senior revolving credit
facility on substantially the terms described in this
prospectus, we will be unable to consummate this offering.
31
Restrictive
covenants in our new senior revolving credit facility will
restrict or prohibit our ability to engage in or enter into a
variety of transactions, which could adversely restrict our
financial and operating flexibility and subject us to other
risks.
Our new senior revolving credit facility will contain various
restrictive covenants that will limit our and our
subsidiaries ability to take certain actions. In
particular, these agreements will limit our and our
subsidiaries ability to, among other things:
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incur additional indebtedness;
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make restricted payments (including paying dividends on,
redeeming or repurchasing capital stock);
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make certain investments or acquisitions;
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create liens on our assets to secure debt;
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engage in certain types of transactions with affiliates;
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engage in
sale-and-leaseback
or similar transactions; and
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transfer or sell assets, merge, liquidate or
wind-up.
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Any or all of these covenants could have a material adverse
effect on our business by limiting our ability to take advantage
of financing, merger and acquisition or other corporate
opportunities and to fund our operations. Any future debt could
also contain financial and other covenants more restrictive than
those to be imposed under our new senior revolving credit
facility.
A breach of a covenant or other provision in any debt instrument
governing our current or future indebtedness could result in a
default under that instrument and, due to customary
cross-default and cross-acceleration provisions, could result in
a default under any other debt instrument that we may have. If
the lenders under our current or future indebtedness were to so
accelerate the payment of the indebtedness, we cannot assure you
that our assets or cash flow would be sufficient to repay in
full our outstanding indebtedness, in which event we likely
would seek reorganization or protection under bankruptcy or
other, similar laws.
Global
capital and credit market issues could negatively affect our
liquidity, increase our costs of borrowing and disrupt the
operations of our suppliers, bottlers, distributors and
customers.
The global capital and credit markets have experienced increased
volatility and disruption over the past two years, making it
more difficult for companies to access those markets. There can
be no assurance that continued or increased volatility and
disruption in the capital and credit markets will not impair our
liquidity or increase our costs of borrowing. Our business could
also be negatively impacted if our suppliers, bottlers,
distributors or retail customers experience disruptions
resulting from tighter capital and credit markets or a slowdown
in the general economy.
We may be
unable to generate sufficient cash flow to service our debt
obligations. In addition, our inability to generate sufficient
cash flows to support operations and other activities without
debt financing could prevent future growth and
success.
Our ability to generate cash, make scheduled payments or
refinance our obligations depends on our successful financial
and operating performance. Our financial and operating
performance, cash flow and capital resources depend upon
prevailing economic conditions and various financial, business
and other factors, many of which are beyond our control. If our
cash flow and capital resources are insufficient to fund our
debt service obligations, we may be forced to reduce or delay
capital expenditures, sell material assets or operations, obtain
additional capital or restructure our debt, any or all of which
could have a material adverse effect on our business, financial
condition and results of operations. In addition, we cannot
assure you that we would be able to take any of these actions on
terms acceptable to us, or at all, that these actions would
enable us to continue to satisfy our capital requirements or
that these actions would be permitted under the terms of our
various debt agreements.
If we are unable to generate sufficient cash flows to support
capital expansion, business acquisition plans and general
operating activities, and are unable obtain the necessary
funding for these items through debt financing, our business
could be negatively affected and we may be unable to expand into
existing and new markets. Our ability to generate cash flows is
dependent in part upon obtaining necessary financing at
favorable interest rates. Interest rate fluctuations and other
capital market conditions may prevent us from doing so.
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are
based on current expectations, estimates, forecasts and
projections regarding managements beliefs and assumptions
about the industry in which we operate. Such statements include,
in particular, statements about our plans, strategies and
prospects under the headings Prospectus Summary,
Risk Factors, Use of Proceeds,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, Business
and Culligan Refill Acquisition. When used in this
prospectus, the words anticipate,
believe, could, estimate,
expect, intend, may,
plan, potential, predict,
project, should, will,
would, and similar expressions identify
forward-looking statements.
Forward-looking statements are not a guarantee of future
performance or results, and will not necessarily be accurate
indications of the times at, or by, which such performance or
results will be achieved. Forward-looking statements are based
on information available at the time the statements are made and
involve known and unknown risks, uncertainties and other factors
that may cause actual outcomes and results to differ materially
from what is expressed or forecasted in such forward-looking
statements. These forward-looking statements include, but are
not limited to, statements relating to:
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our expectations regarding the use of proceeds from this
offering;
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our intentions and expectations regarding the timing of the
closing of the Culligan Refill Acquisition;
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growth in the market for purified water and increased consumer
preference toward purified water relative to tap water or other
beverages;
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consumer recognition of our brand and our water bottle exchange
service and water dispenser products;
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the use of our retail relationships, single-vendor solution,
national network of independent bottlers and distributors and
MIS tools to facilitate our introduction of new purified
water-related products in the future;
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our opportunities to increase store penetration with our
existing retail relationships and develop new retail
relationships;
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the continuing development, innovation and sale of our water
dispensers;
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our intention to offer new products and services, including
self-service refill vending machines and automated, self-bagging
purified ice dispensers;
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our expectations regarding our business strategy, anticipated
profitability, liquidity position, future financial performance,
mix of product sales, inflation and expense levels;
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our ability to use any net operating loss carryforwards;
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our dividend policy;
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our ability to attract and retain key personnel;
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our expectations regarding additional costs connected to the
growth of our business and costs related to becoming a public
company; and
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our policies regarding our executive compensation program and
the level of executive compensation.
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We have included important factors in the cautionary statements
included in this prospectus, particularly in the section
entitled Risk Factors, that we believe could cause
actual results or events to differ materially from the
forward-looking statements we make. Except as required by
applicable law, we assume no obligation to update any
forward-looking statements publicly or to update the reasons why
actual results could differ materially from those anticipated in
any forward looking statements, even if new information becomes
available in the future.
33
USE OF
PROCEEDS
We estimate that the net proceeds to us from this offering will
be approximately $90.7 million (approximately
$104.7 million if the underwriters exercise in full their
option to purchase additional shares to cover overallotments, if
any). This estimate is based upon an assumed initial public
offering price of $12.00 per share, less estimated underwriting
discounts and commissions and offering expenses payable by us.
We intend to use the net proceeds from this offering together
with approximately $15.0 million in borrowings under our
new senior revolving credit facility for the following purposes:
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|
|
|
|
$60.0 million to pay the cash portion of the purchase price
for the Culligan Refill Acquisition;
|
|
|
$18.6 million to repay our 14% subordinated
convertible notes due March 31, 2011;
|
|
|
$15.7 million to redeem 50% of the outstanding shares of
our Series B preferred stock and to pay accrued and unpaid
dividends on all outstanding shares of our Series B
preferred stock;
|
|
|
$8.5 million to repay borrowings under our current senior
revolving credit facility; and
|
|
|
$2.9 million to pay fees and expenses in connection with
all of the foregoing items.
|
This offering, the Culligan Refill Acquisition and our new
senior revolving credit facility are all effectively conditioned
upon each other such that we will not close any of these
transactions unless we are going to close all of them. The
underwriting agreement for this offering will provide that the
following are both conditions to the closing of the initial
public offering:
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|
|
|
|
the satisfaction of all conditions to the Culligan Refill
Acquisition; and
|
|
|
|
|
|
the satisfaction of all conditions to the new senior revolving
credit facility and the Company receiving proceeds thereunder in
an amount sufficient to consummate the transactions described in
this Use of Proceeds section.
|
The condition relating our new senior revolving credit facility
is designed to ensure that we generate sufficient proceeds from
the combination of this offering and the new senior revolving
credit facility to accomplish the items described above.
In addition, the commitment letter relating to our new senior
revolving credit facility contains conditions to closing that
include our simultaneously consummating this offering and having
received gross proceeds under the new senior revolving credit
facility and from this offering in an amount sufficient to
consummate the Culligan Refill Acquisition and cause all of our
2011 Notes to be repaid. As a result, if our offering proceeds
do not permit us to accomplish all of the items described above,
we first intend to reduce the amount of cash we use to redeem
shares of our Series B preferred stock as described below.
To illustrate the effect of these various interrelationships, a
$1.00 increase (decrease) in the assumed initial public offering
price of $12.00 per share would increase (decrease) the net
proceeds to us from this offering by approximately
$7.7 million, assuming the shares offered by us, as set
forth on the cover page of this prospectus, remains the same and
after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by us. This increase
(decrease) would impact borrowings that we make under our new
senior revolving credit facility to accomplish the purposes
described above. If the initial public offering price were
$13.00 per share, we would borrow approximately
$7.3 million under our new senior revolving credit facility
at the closing of this offering. Our new senior revolving credit
facility will limit our ability to borrow more than
$20.0 million in connection with the closing of this
offering. As a result, if our initial public offering price were
less than approximately $11.35 per share, we would redeem
less of our Series B convertible preferred stock and cause
more shares to be converted into common stock at the closing of
this offering but would still repay all of our outstanding 2011
Notes with the proceeds of this offering. Immediately following
the closing of this offering, we anticipate availability under
our new senior revolving credit facility will increase from
$20.0 million to approximately $28.0 million.
Pursuant to the terms of our fifth amended and restated
certificate of incorporation, we have the option of causing
between 50% and all of our Series B preferred stock to be
converted into shares of common stock in connection with our
initial public offering. All shares of Series B preferred
stock not converted into shares of common stock will be
redeemed. While we intend to cause 50% of our Series B
preferred stock to be converted into common stock and 50% to be
redeemed in connection with an initial public offering at a
price of $12.00 per share (the mid-point range
34
set forth on the cover page of this prospectus), this will not
be the case if we sell shares of common stock in our initial
public offering at a price of less than approximately
$11.35 per share.
As of October 5, 2010, we had $18.4 million principal
amount of 2011 Notes outstanding that bear interest at 14% per
annum and mature on March 31, 2011. We issued the 2011
Notes on December 30, 2009 and October 5, 2010. We
used the proceeds from the December 2009 issuance of the 2011
Notes to retire $8.0 million principal amount of
subordinated debt and to repay approximately $7.0 million
of borrowings under our current senior revolving credit
facility. We are using the proceeds from the October 2010
issuance of $3.4 million of 2011 Notes to fund the
continued expansion of our bottled water exchange and water
dispenser businesses, to fund offering costs and for working
capital purposes. Of the $18.6 million in net proceeds from
this offering we intend to use to repay our 2011 Notes,
$5.6 million will be used to repay 2011 Notes held by
directors, officers and persons known to us to be the beneficial
owners of more than 5% of our common stock.
Of the $15.7 million in net proceeds we intend to use to
redeem 50% of the outstanding shares of Series B preferred
stock and to pay accrued and unpaid dividends on all outstanding
shares of Series B preferred stock (assuming an initial
public offering price of $12.00 per share),
$10.7 million will be paid to directors, officers and
persons known to us to be the beneficial owners of more than 5%
of our common stock.
As of September 30, 2010, we had $7.0 million of
outstanding borrowings under our current senior revolving credit
facility that is scheduled to expire January 30, 2011.
Interest on outstanding borrowings under this revolving credit
facility is payable quarterly at our option at: (i) the
greater of (A) the LIBOR Market Index Rate or (B) 2.0%
plus in either case the applicable margin or (ii) the
greater of (X) the Federal Funds Rate plus 0.50% or
(Y) the banks prime rate plus in either case the
applicable margin. At September 30, 2010, the interest rate
on outstanding borrowings was 5.25%. Borrowings under our
current senior revolving credit facility during the past
12 months were incurred to grow our business (including
investments in equipment and new store locations), to fund
offering costs and for working capital purposes.
If the underwriters exercise their over-allotment option, the
cash portion of the purchase price for the Culligan Refill
Acquisition will be increased and the number of shares of common
stock we will issue to Culligan will be decreased by an amount
equal to the net cash proceeds we receive as a result of such
exercise.
Pending use of the net proceeds of this offering, we intend to
invest such net proceeds in short-term, interest-bearing
investment grade securities.
DIVIDEND
POLICY
We have never paid or declared cash dividends on our common
stock. We currently intend to retain all available funds and any
future earnings to finance the development and expansion of our
business. We do not expect to pay any dividends on our common
stock in the foreseeable future. Any future determination to pay
dividends will be at the discretion of our Board of Directors
and will depend upon various factors, including our results of
operations, financial condition, capital requirements,
investment opportunities and other factors that our Board of
Directors deems relevant.
35
CAPITALIZATION
The following table sets forth our capitalization as of
June 30, 2010:
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|
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on an actual basis (after giving effect to the 1-for-10.435
reverse stock split of our common stock);
|
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|
|
|
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on a pro forma basis to give effect to the following items as if
each had occurred as of June 30, 2010:
|
|
|
|
|
|
the conversion of all of our outstanding Series A and
Series C convertible preferred stock into an aggregate of
4,301,265 shares of our common stock;
|
|
|
|
|
|
the conversion of 50% of our outstanding shares of Series B
preferred stock into common stock at a ratio of 1:0.0926, which
is calculated by dividing the liquidation preference of the
Series B preferred stock by 90% of an assumed initial
public offering price of $12.00 per share, which is the midpoint
of the range set forth on the cover page of this prospectus; and
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|
|
the redemption of the remaining 50% of our outstanding shares of
Series B preferred stock and the payment of accrued and
unpaid dividends on all outstanding shares of Series B
preferred stock; and
|
|
|
our sale of shares in this offering at an assumed initial public
offering price of $12.00 per share, which is the midpoint of the
range set forth on the cover page of this prospectus, after
deducting estimated underwriting discounts and commissions and
offering expenses payable by us;
|
|
|
our entry into and making borrowings under the new senior
revolving credit facility; and
|
|
|
the application of a portion of the net proceeds from such sale
of common stock and borrowings under our new senior revolving
credit facility to repay our 2011 Notes, to repay
borrowings under our current senior revolving credit facility
and to pay fees and expenses in connection with the
foregoing; and
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|
|
|
|
|
on a pro forma as adjusted basis to reflect the items described
above, as well as our consummation of the Culligan Refill
Acquisition, including the application of a portion of the net
proceeds from the sale of common stock in this offering and
borrowings under our new senior revolving credit facility to pay
the cash portion of the purchase price for the Culligan Refill
Acquisition and our issuance of shares of common stock with a
value of $45.0 million (or 3,750,000 shares assuming
an initial public offering price of $12.00 per share, the
midpoint of the range set forth on the cover page of this
prospectus) to fund a portion of the purchase price for the
Culligan Refill Acquisition, as if each had occurred as of
June 30, 2010.
|
You should read this table in conjunction with Use of
Proceeds, Selected Historical Consolidated Financial
and Other Data, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
Culligan Refill Acquisition Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and
the notes thereto included elsewhere in this prospectus.
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
as Adjusted
|
|
|
|
(In thousands, except par value data) (Unaudited)
|
|
|
Cash
|
|
$
|
760
|
|
|
$
|
62,510
|
|
|
$
|
760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
23,516
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Long-term debt, net of current portion
|
|
|
47
|
|
|
|
11,550
|
|
|
|
11,550
|
|
Stockholders equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock ($0.001 par value, 200,000 shares
authorized and 1,457 shares issued and outstanding, actual;
70,000 shares authorized and 15,169 shares issued and
outstanding, pro forma, and 18,919 shares issued and
outstanding pro forma as adjusted)
|
|
|
1
|
|
|
|
15
|
|
|
|
19
|
|
Preferred stock, $0.001 par value, 100,000 shares
authorized actual and 65,000 shares authorized pro forma
and pro forma as adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock, 18,755 shares
issued and outstanding, actual, and no shares issued or
outstanding, pro forma and pro forma as adjusted
|
|
|
19
|
|
|
|
|
|
|
|
|
|
Series B preferred stock, 23,280 shares issued and
outstanding, actual, and no shares issued or outstanding, pro
forma and pro forma as adjusted
|
|
|
23
|
|
|
|
|
|
|
|
|
|
Series C convertible preferred stock, 12,520 shares
issued and outstanding, actual, and no shares issued or
outstanding, pro forma and pro forma as adjusted
|
|
|
13
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
87,064
|
|
|
|
170,363
|
|
|
|
215,359
|
|
Common stock warrants
|
|
|
3,797
|
|
|
|
3,797
|
|
|
|
3,797
|
|
Accumulated deficit
|
|
|
(97,120
|
)
|
|
|
(103,368
|
)
|
|
|
(105,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
(6,203
|
)
|
|
|
70,807
|
|
|
|
114,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
17,360
|
|
|
$
|
82,359
|
|
|
$
|
125,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The shares outstanding data in the preceding table as of
June 30, 2010:
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|
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|
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excludes 595,666 shares of common stock issuable upon the
exercise of warrants to purchase common stock issued in
connection with our Series B preferred stock that will,
subject to certain exceptions, expire between April 28,
2016 and January 10, 2017;
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excludes 119,980 shares of common stock issuable upon the
exercise of warrants to purchase common stock issued in
connection with our Series C convertible preferred stock
that will, subject to certain exceptions, expire between
December 14, 2017 and June 2, 2018;
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|
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|
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excludes 9,583 shares of common stock issuable upon the
exercise of warrants to purchase common stock issued to a third
party that will expire 15 days after the closing of this
offering;
|
|
|
|
|
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excludes an aggregate of 130,747 shares of common stock
issuable upon the exercise of warrants to purchase common stock
issued in connection with our 2011 Notes that will expire in
either December 2019 or October 2020;
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excludes an aggregate of 5,305 shares of common stock
issuable under our 2004 Stock Plan;
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excludes an aggregate of 718,735 shares of common stock
available for issuance under our 2010 Omnibus Long-Term
Incentive Plan, which we have adopted in connection with this
offering;
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excludes an aggregate of 23,958 shares of common stock
available for issuance under our 2010 Employee Stock Purchase
Plan, which we have adopted in connection with this
offering; and
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assumes no exercise of the underwriters over-allotment
option to purchase up to 1,250,000 additional shares of our
common stock.
|
37
DILUTION
If you invest in our common stock, your ownership interest will
be diluted to the extent of the difference between the initial
public offering price per share of our common stock and the pro
forma as adjusted net tangible book value per share of our
common stock immediately after the closing of this offering. Pro
forma net tangible book value per share represents total
tangible assets less total liabilities, divided by the number of
shares of common stock outstanding, after giving effect to the
following items as if each had occurred as of June 30, 2010:
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|
|
the 1-for-10.435 reverse stock split of our common stock;
|
|
|
|
|
|
the conversion of all of our outstanding Series A and
Series C convertible preferred stock into an aggregate of
4,301,265 shares of our common stock;
|
|
|
|
|
|
the conversion of 50% of our outstanding shares of Series B
preferred stock into common stock at a ratio of 1:0.0926, which
is calculated by dividing the liquidation preference of the
Series B preferred stock by 90% of an assumed initial
public offering price of $12.00 per share, which is the midpoint
of the range set forth on the cover page of this prospectus; and
|
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|
|
|
|
the redemption of the remaining 50% of our outstanding shares of
Series B preferred stock and the payment of accrued and unpaid
dividends on all outstanding shares of Series B Preferred
Stock.
|
The pro forma net tangible book value of our common stock as of
June 30, 2010, was approximately $(18.9) million, or
approximately $(2.72) per share.
After giving effect to:
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|
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|
|
our sale of shares at an assumed initial public offering price
of $12.00 per share, which is the midpoint of the range set
forth on the cover page of this prospectus, after deducting
estimated underwriting discounts and commissions and offering
expenses payable by us;
|
|
|
|
|
|
our entry into and making borrowings of $11.5 million under
the new senior revolving credit facility; and
|
|
|
|
|
|
the application of a portion of the net proceeds from such sale
of common stock and borrowings under our new senior revolving
credit facility to repay our 2011 Notes, to repay borrowings
under our current senior revolving credit facility and to pay
fees and expenses in connection with the foregoing;
|
the pro forma as adjusted net tangible book value of our common
stock, as of June 30, 2010, would have been approximately
$68.8 million, or $4.50 per share. This amount
represents an immediate increase in net tangible book value to
our existing stockholders of $7.22 per share and an
immediate dilution to new investors of $7.50 per share. The
following table illustrates this per share dilution:
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Initial public offering price per share
|
|
|
|
|
|
$
|
12.00
|
|
Pro forma net tangible book value per share as of June 30,
2010
|
|
$
|
(2.72
|
)
|
|
|
|
|
Increase in pro forma net tangible book value per share
attributable to new investors in this offering
|
|
$
|
7.22
|
|
|
|
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|
|
|
|
|
|
|
|
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Pro forma as adjusted net tangible book value per share after
giving effect to this offering (Post-Offering Pro Forma
Net Tangible Book Value Per Share)
|
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|
|
|
|
$
|
4.50
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
7.50
|
|
|
|
|
|
|
|
|
|
|
After giving effect to each of the items listed above and:
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|
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our consummation of the Culligan Refill Acquisition and our
issuance of shares of common stock with a value of
$45.0 million (or 3,750,000 shares assuming an initial
public offering price of $12.00 per share, the midpoint of
the range set forth on the cover page of this prospectus) to
fund a portion of the purchase price for the Culligan Refill
Acquisition; and
|
|
|
|
|
|
the application of a portion of the net proceeds from this
offering and borrowings under our new senior revolving credit
facility to pay the cash portion of the purchase price for the
Culligan Refill Acquisition;
|
the net tangible book value of our common stock, as of
June 30, 2010 on a pro forma basis as further adjusted to
give effect to the Culligan Refill Acquisition would have been
approximately $21.5 million, or $1.13 per share. This
amount represents an immediate dilution in net tangible book
value to our existing stockholders of $(3.37) per share
38
and an immediate dilution to new investors of $10.87 per share.
The following table illustrates this per share dilution:
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|
|
|
|
|
|
|
|
Initial public offering price per share
|
|
|
|
|
|
$
|
12.00
|
|
Post-Offering Pro forma Net Tangible Book Value Per Share as of
June 30, 2010
|
|
$
|
4.50
|
|
|
|
|
|
Dilution in pro forma net tangible book value per share
attributable to consummation of the Culligan Refill Acquisition
|
|
$
|
(3.37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value per share after
giving effect to the Culligan Refill Acquisition
|
|
|
|
|
|
$
|
1.13
|
|
|
|
|
|
|
|
|
|
|
Total dilution attributable to all transactions described above
|
|
|
|
|
|
$
|
10.87
|
|
|
|
|
|
|
|
|
|
|
If the underwriters exercise their over-allotment option in
full, there will be dilution in pro forma as adjusted net
tangible book value per share to existing stockholders of $0.01
per share based upon the assumed initial public offering price
of $12.00 per share.
A $1.00 increase or decrease in the assumed initial public
offering price per share would increase or decrease,
respectively, our pro forma as adjusted net tangible book value
after giving effect to this offering and the Culligan Refill
Acquisition, by $7.7 million and increase or decrease,
respectively, the pro forma as adjusted dilution per share of
common stock to new investors in this offering and after giving
effect to the Culligan Refill Acquisition by $0.45 and $0.43,
respectively, in each case calculated as described above and
assuming that the number of shares offered by us, as set forth
on the cover page of this prospectus, remains the same. The
number of shares of common stock that our Series B and
Series C preferred stock converts into at the closing of
our initial public offering will increase or decrease based upon
the initial public offering price per share. The conversion
ratio for our Series B preferred stock is based upon 90% of
the initial public offering price or $10.44, whichever is
greater. At initial public offering prices of $11.00 per share
and $13.00 per share, the conversion ratio of the Series B
preferred stock will be 1:0.1010 and 1:0.0855, respectively. The
conversion ratio for our Series C preferred stock adjusts
between initial public offering prices of $10.44 per share and
$13.04 per share. At initial public offering prices of $11.00
per share and $13.00 per share, the conversion ratio of the
Series C preferred stock will be 1:0.2182 and 1:0.1846,
respectively. In addition, since we are obligated to issue
Culligan $45.0 million of our common stock at the closing
of the Culligan Refill Acquisition, the actual number of shares
we will issue will increase or decrease based upon our initial
public offering price per share.
If the underwriters exercise their over-allotment option, the
cash portion of the purchase price for the Culligan Refill
Acquisition will be increased and the number of shares of common
stock we will issue to Culligan will be decreased by an amount
equal to the net cash proceeds we receive as a result of such
exercise.
The following table summarizes, as of June 30, 2010, on a
pro forma as adjusted basis, the number of shares of common
stock purchased from us, the total consideration paid to us and
the average price per share paid by our existing stockholders,
by new investors and by Culligan Store Solutions LLC, based upon
an assumed initial public offering price of $12.00 per share and
before deducting estimated underwriting discounts and
commissions and offering expenses payable by us.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Per Share
|
|
|
Existing stockholders
|
|
|
6,941,593
|
|
|
|
36.5
|
%
|
|
$
|
60,567,113
|
|
|
|
29.5
|
%
|
|
$
|
8.73
|
|
New investors
|
|
|
8,333,333
|
|
|
|
43.8
|
%
|
|
$
|
100,000,000
|
|
|
|
48.6
|
%
|
|
$
|
12.00
|
|
Culligan Store Solutions LLC(1)
|
|
|
3,750,000
|
|
|
|
19.7
|
%
|
|
$
|
45,000,000
|
|
|
|
21.9
|
%
|
|
$
|
12.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
19,024,926
|
|
|
|
100
|
%
|
|
$
|
205,567,113
|
|
|
|
100
|
%
|
|
$
|
10.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Consists of shares to be issued in
connection with the Culligan Refill Acquisition.
|
39
The discussion and tables above are based on
6,941,593 shares of common stock outstanding as of
June 30, 2010, on a pro forma as adjusted basis (and
includes 105,564 shares of unvested restricted common stock that
are subject to time-based vesting and are entitled to voting and
dividend rights prior to vesting), and in addition to the
adjustments described above:
|
|
|
|
|
excludes 595,666 shares of common stock issuable upon the
exercise of warrants to purchase common stock issued in
connection with our Series B preferred stock that will,
subject to certain exceptions, expire between April 28,
2016 and January 10, 2017;
|
|
|
exclude 119,980 shares of common stock issuable upon the
exercise of warrants to purchase common stock issued in
connection with our Series C convertible preferred stock
that will, subject to certain exceptions, expire between
December 14, 2017 and June 2, 2018;
|
|
|
exclude 9,583 shares of common stock issuable upon the
exercise of warrants to purchase common stock issued to a third
party that will expire 15 days after the closing of this
offering;
|
|
|
exclude an aggregate of 130,747 shares of common stock
issuable upon the exercise of warrants to purchase common stock
issued in connection with 2011 Notes that expire in either
December 2019 or October 2020;
|
|
|
exclude an aggregate of 5,305 shares of common stock
issuable under our 2004 Stock Plan;
|
|
|
exclude an aggregate of 718,735 shares of common stock
issuable under our 2010 Omnibus Long-Term Incentive Plan, which
we have adopted in connection with this offering;
|
|
|
exclude an aggregate of 23,958 shares of common stock
issuable under our 2010 Employee Stock Purchase Plan, which we
have adopted in connection with this offering; and
|
|
|
assume no exercise of the underwriters over-allotment
option to purchase up to 1,250,000 additional shares of our
common stock.
|
If the underwriters over-allotment option is exercised in
full, the number of shares held by the existing stockholders
would decrease to 36.3% of the total number of shares of our
common stock outstanding after this offering, the number of
shares held by new investors would increase to 50.2% of the
total number of shares of our common stock outstanding after
this offering, and the number of shares held by Culligan Store
Solutions LLC would decrease to 13.5% of the total number of
shares of our common stock outstanding after this offering.
40
UNAUDITED
PRO FORMA CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated financial data is
derived from our historical consolidated financial statements
and the historical combined financial statements of the Culligan
Refill Business, both of which are included elsewhere in this
prospectus. The unaudited pro forma consolidated financial
statements should be read in conjunction with our consolidated
financial statements and related notes included elsewhere in
this prospectus, the combined financial statements of the
Culligan Refill Business and related notes included elsewhere in
this prospectus, Managements Discussion and Analysis
of Financial Condition and Results of Operations,
Culligan Refill Acquisition Managements
Discussion and Analysis of Financial Condition and Results of
Operations and the other financial information appearing
elsewhere in this prospectus.
In the Culligan Refill Acquisition, we would acquire certain of
Culligans assets related to its business of providing
reverse osmosis water filtration systems that generate filtered
water for refill vending machines and store-use water services
in the United States and Canada. This business also sells
empty reusable water bottles for use at refill vending machines.
Pursuant to the asset purchase agreement, we will purchase these
assets for a total purchase price of $105.0 million,
consisting of a cash payment of $60.0 million and the
issuance of shares of our common stock with a value of
$45.0 million (or 3,750,000 shares, assuming an initial
public offering price of $12.00 per share, the midpoint of the
range set forth on the cover page of this prospectus), all
subject to a working capital adjustment. The cash portion of the
purchase price will be increased and the number of shares of
common stock we will issue will be decreased by an amount equal
to the net cash proceeds we receive from any exercise of the
underwriters over-allotment option. Assuming no exercise
of the underwriters over-allotment option, the shares of
our common stock we will issue to Culligan will represent
approximately 19.7% of our issued and outstanding shares of
common stock after giving effect to this offering.
The unaudited pro forma statements of operations data for the
year ended December 31, 2009 and the six months ended
June 30, 2010, and unaudited pro forma balance sheet data
as of June 30, 2010 have been prepared to give pro forma
effect to (1) a 1-for-10.435 reverse stock split of our
common stock, (2) the conversion of our Series A and
Series C convertible preferred stock into common stock,
(3) the conversion of 50% of our Series B preferred
stock into common stock at a ratio of 1:0.0926, which is
calculated by dividing the liquidation preference of the
Series B preferred stock by 90% of an assumed initial
public offering price of $12.00 per share, which is the
midpoint of the range set forth on the cover page of this
prospectus, (4) the redemption of the remaining 50% of our
Series B preferred stock and the payment of all accrued and
unpaid dividends on our Series B preferred stock,
(5) the sale of shares in this offering at an assumed
initial public offering price of $12.00 per share, the
midpoint of the range set forth on the cover page of this
prospectus, (6) our entry into and making of borrowings
under our new senior revolving credit facility and (7) the
application of the net proceeds from this offering and
borrowings under our new senior revolving credit facility for
the purposes described herein. The unaudited pro forma
statements of operations data for the year ended
December 31, 2009 and the six months ended June 30,
2010 and the unaudited pro forma balance sheet data as of
June 30, 2010 have been further adjusted to give pro forma
effect to the consummation of the Culligan Refill Acquisition
and our issuance of shares of common stock with a value of
$45.0 million (or 3,750,000 shares assuming an initial
public offering price of $12.00 per share, the midpoint of the
range set forth on the cover page of this prospectus). These pro
forma adjustments have been made, in the case of the statements
of operations data, as if these events had occurred on
January 1, 2009 and, in the case of the balance sheet data,
as if these events had occurred on June 30, 2010. We will
account for the Culligan Refill Acquisition as a business
combination in accordance with the acquisition method. The
unaudited pro forma consolidated financial statements presented
below are based upon preliminary estimates of purchase price
allocations and do not reflect any anticipated operating
efficiencies or cost savings from the integration of the
Culligan Refill Business into our business.
The unaudited pro forma consolidated financial statements
reflect pro forma adjustments that are described in the
accompanying notes and are based on available information and
certain assumptions we believe are reasonable, but are subject
to change. We have made, in our opinion, all adjustments that
are necessary to present fairly the pro forma financial data.
The unaudited pro forma consolidated financial data is presented
for informational purposes only and should not be considered
indicative of actual results of operations that would have been
achieved had the Culligan Refill Acquisition and this offering
been consummated on the dates indicated, and do not purport to
be indicative of balance sheet data or results of operations as
of any future date or for any future period.
41
PRIMO
WATER CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
for the Conversion
|
|
|
Immediately
|
|
|
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
Primo Water
|
|
|
of Preferred Stock
|
|
|
Following
|
|
|
Culligan Refill
|
|
|
Relating to the
|
|
|
Following the
|
|
|
|
Corporation
|
|
|
and This Offering
|
|
|
This Offering
|
|
|
Business
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
760
|
|
|
$
|
61,750
|
(a)
|
|
$
|
62,510
|
|
|
$
|
|
|
|
$
|
(61,750
|
)(k)(i)
|
|
$
|
760
|
|
Accounts receivable, net
|
|
|
5,274
|
|
|
|
|
|
|
|
5,274
|
|
|
|
3,041
|
|
|
|
|
|
|
|
8,315
|
|
Inventories
|
|
|
3,513
|
|
|
|
|
|
|
|
3,513
|
|
|
|
324
|
|
|
|
|
|
|
|
3,837
|
|
Prepaid expenses and other current assets
|
|
|
1,701
|
|
|
|
|
|
|
|
1,701
|
|
|
|
928
|
|
|
|
(312
|
)(k)
|
|
|
2,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
11,248
|
|
|
|
61,750
|
|
|
|
72,998
|
|
|
|
4,293
|
|
|
|
(62,062
|
)
|
|
|
15,229
|
|
Bottles, net
|
|
|
2,088
|
|
|
|
|
|
|
|
2,088
|
|
|
|
|
|
|
|
|
|
|
|
2,088
|
|
Property and equipment, net
|
|
|
14,518
|
|
|
|
|
|
|
|
14,518
|
|
|
|
8,187
|
|
|
|
4,520
|
(k)
|
|
|
27,225
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,900
|
|
|
|
51,637
|
(k)
|
|
|
73,537
|
|
Intangible assets, net
|
|
|
940
|
|
|
|
|
|
|
|
940
|
|
|
|
1,604
|
|
|
|
15,396
|
(k)
|
|
|
17,940
|
|
Intercompany receivable, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,677
|
|
|
|
(23,677
|
)(k)
|
|
|
|
|
Other assets
|
|
|
1,738
|
|
|
|
(658
|
)(b)
|
|
|
1,080
|
|
|
|
674
|
|
|
|
(674
|
)(k)
|
|
|
1,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
30,532
|
|
|
$
|
61,092
|
|
|
$
|
91,624
|
|
|
$
|
60,335
|
|
|
$
|
(14,860
|
)
|
|
$
|
137,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,755
|
|
|
$
|
(531
|
)(c)
|
|
$
|
6,224
|
|
|
$
|
1,187
|
|
|
$
|
|
|
|
$
|
7,411
|
|
Accrued expenses and other current liabilities
|
|
|
5,219
|
|
|
|
(3,376
|
)(d)
|
|
|
1,843
|
|
|
|
1,038
|
|
|
|
|
|
|
|
2,881
|
|
Current portion of long-term debt, capital leases and notes
payable
|
|
|
23,516
|
|
|
|
(23,514
|
)(e)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
35,490
|
|
|
|
(27,421
|
)
|
|
|
8,069
|
|
|
|
2,225
|
|
|
|
|
|
|
|
10,294
|
|
Long-term debt, capital leases and notes payable, net of current
portion
|
|
|
47
|
|
|
|
11,503
|
(f)
|
|
|
11,550
|
|
|
|
|
|
|
|
|
|
|
|
11,550
|
|
Other long-term liabilities
|
|
|
1,198
|
|
|
|
|
|
|
|
1,198
|
|
|
|
1,830
|
|
|
|
(1,830
|
)(k)
|
|
|
1,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
36,735
|
|
|
|
(15,918
|
)
|
|
|
20,817
|
|
|
|
4,055
|
|
|
|
(1,830
|
)
|
|
|
23,042
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1
|
|
|
|
14
|
(g)(h)(i)
|
|
|
15
|
|
|
|
|
|
|
|
4
|
(k)
|
|
|
19
|
|
Series A preferred stock
|
|
|
19
|
|
|
|
(19
|
)(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B preferred stock
|
|
|
23
|
|
|
|
(23
|
)(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series C preferred stock
|
|
|
13
|
|
|
|
(13
|
)(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
87,064
|
|
|
|
83,299
|
(i)
|
|
|
170,363
|
|
|
|
|
|
|
|
44,996
|
(k)
|
|
|
215,359
|
|
Common stock warrants
|
|
|
3,797
|
|
|
|
|
|
|
|
3,797
|
|
|
|
|
|
|
|
|
|
|
|
3,797
|
|
Parent company equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,280
|
|
|
|
(56,280
|
)(k)
|
|
|
|
|
Accumulated deficit
|
|
|
(97,120
|
)
|
|
|
(6,248
|
)(j)
|
|
|
(103,368
|
)
|
|
|
|
|
|
|
(1,750
|
)(l)
|
|
|
(105,118
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders (deficit) equity
|
|
|
(6,203
|
)
|
|
|
77,010
|
|
|
|
70,807
|
|
|
|
56,280
|
|
|
|
(13,030
|
)
|
|
|
114,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders (deficit) equity
|
|
$
|
30,532
|
|
|
$
|
61,092
|
|
|
$
|
91,624
|
|
|
$
|
60,335
|
|
|
$
|
(14,860
|
)
|
|
$
|
137,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Reflects estimated net proceeds of
$90.7 million from this offering (gross proceeds of
$100.0 million less $9.3 million in underwriting
discounts and commissions and offering expenses payable by us)
and $11.5 million in borrowings under our new senior
revolving credit facility, less the repayment of
$15.0 million of 2011 Notes, the repayment of
$8.9 million of borrowings and the payment of
$0.1 million of
|
42
|
|
|
|
|
accrued interest under our current
senior revolving credit facility, the redemption of
$11.6 million of the Series B preferred stock, the
payment of $3.3 million in accrued dividends on the
Series B preferred stock, the payment of $0.5 million
of accrued interest on the 2011 Notes and our current
senior revolving credit facility, and payment of $1.1 million in
debt issuance costs associated with the new senior revolving
credit facility. The $1.5 million of offering costs capitalized
to date in connection with this offering is not reflected in the
net proceeds.
|
|
|
|
(b)
|
|
Reflects the debt issuance costs on
our new senior revolving credit facility of $1.1 million
less the offset of offering costs capitalized to date in
connection with this offering of $1.5 million and the
write-off of $0.2 million of debt issuance costs on our
current senior revolving credit facility.
|
|
|
|
(c)
|
|
Reflects payment of accrued
interest of $0.5 million on the 2011 Notes.
|
|
|
|
(d)
|
|
Reflects payment of accrued and
unpaid dividends on the Series B preferred stock of
$3.3 million and accrued interest of $0.1 million on
the current senior revolving credit facility.
|
|
|
|
(e)
|
|
Reflects repayment of
$15.0 million of the 2011 Notes and $8.9 million
of borrowings under our current senior revolving credit
facility, net of the 2011 Notes original issue discount
balance of $0.4 million, which is expensed upon the
repayment.
|
|
(f)
|
|
Represents borrowings under our new
senior revolving credit facility.
|
|
|
|
(g)
|
|
Reflects the conversion of the
Series A and Series C convertible preferred stock into
4.3 million shares of common stock.
|
|
(h)
|
|
Reflects the redemption and
conversion of the Series B preferred stock, with the
conversion into 1.1 million shares of common stock at a par
value of $0.001.
|
|
|
|
(i)
|
|
Reflects the issuance of
approximately 8.3 million shares of common stock at a par
value of $0.001 and additional paid-in capital of
$90.7 million, net of estimated offering costs including
underwriting discounts and commissions and offering expenses
payable by us. The $1.5 million of offering costs
capitalized to date in connection with this offering is not
reflected in the net proceeds. Also reflects: (i) the redemption
of 50% of the Series B preferred stock for
$11.6 million; (ii) the estimated unrecognized compensation
expense of $0.3 million associated with the immediate
vesting of all unvested stock options upon the initial public
offering; (iii) the estimated beneficial conversion charge of
$2.9 million on the conversion of 50% of the Series B
preferred stock at 90% of the initial public offering price. The
beneficial conversion charge is estimated using the net carrying
value on the Series B of approximately $0.86 per
Series B share as compared to the value of the conversion
feature of $1.11 per Series B share resulting in an
approximate $0.25 per Series B share beneficial conversion
charge. The total amount of $2.9 million will be a charge to
additional paid-in capital at the time of the conversion and
will reduce the net income (loss) attributable to common
stockholders; and (iv) the estimated beneficial conversion
charge of $2.4 million on the conversion of the
Series C preferred stock at a price of $12.00 per share.
The beneficial conversion charge represents the value of the
additional common shares issued to obtain an equivalent value
$13.04 per share of common stock.
|
|
|
|
(j)
|
|
Reflects: (i) estimated
unrecognized compensation expense of $0.3 million
associated with the immediate vesting of all unvested stock
options upon the initial public offering; (ii) expense of
$0.4 million of original issue discount on the
2011 Notes upon the repayment; (iii) the estimated
beneficial conversion charge of $2.9 million on the
conversion of 50% of the Series B preferred stock at 90% of
the initial public offering price; (iv) the write-off of
$0.2 million in debt issuance cost on our current credit
facility; and (v) the estimated beneficial conversion
charge of $2.4 million on the conversion of the
Series C convertible preferred stock at a price of $12.00
per share.
|
|
|
|
(k)
|
|
Reflects the acquisition of the
Culligan Refill Business and the allocation of the purchase
price of $105.0 million based upon the preliminary
estimates of the fair value of the identifiable assets and
liabilities and the elimination of the Culligan Refill
Businesss intercompany receivable, deferred taxes and
equity. We have estimated the purchase price allocation as
follows:
|
|
|
|
|
|
Aggregate purchase price:
|
|
|
|
|
Cash consideration
|
|
$
|
60.0 million
|
|
Common stock to be issued
|
|
|
45.0 million
|
|
|
|
|
|
|
Purchase price
|
|
$
|
105.0 million
|
|
|
|
|
|
|
Purchase price allocation:
|
|
|
|
|
Net assets acquired
|
|
|
|
|
Net current assets
|
|
$
|
4.0 million
|
|
Property and equipment
|
|
|
12.7 million
|
|
Identifiable intangible assets
|
|
|
17.0 million
|
|
Goodwill
|
|
|
73.5 million
|
|
Culligan Refill Business liabilities assumed
|
|
|
(2.2) million
|
|
|
|
|
|
|
Aggregate purchase price
|
|
$
|
105.0 million
|
|
|
|
|
|
|
|
|
|
|
|
The initial allocation of the
purchase price to specific assets and liabilities is based, in
part, upon preliminary appraisals, and is therefore subject to
change. Further, since the closing date of the Culligan Refill
Acquisition is not fixed, it is likely that the working capital
of the Culligan Refill Business on the closing date will vary
from the estimated working capital set forth in the asset
purchase agreement and goodwill will be adjusted accordingly.
The identifiable intangible assets consist primarily of customer
lists and will be amortized over 15 years. Upon closing we will
obtain an estimate of the fair value of the identifiable assets
and liabilities utilizing an unrelated third party.
|
|
|
|
The value of the business was based
on many factors including the cash flow generation of the
business, solid customer base, length of relationship with
customers, quality of the customer base, as well as the ability
to use the Culligan business as a platform for growing
additional refill locations, which complement the Companys
water dispenser business. The purchase premium over the fair
value of identifiable assets (goodwill) is primarily the result
of the high cash flow generation and growth potential of the
business compared to the relatively low fair value of
identifiable assets.
|
|
(l)
|
|
Includes $1.8 million in estimated
transaction costs to be expensed in connection with the
acquisition of the Culligan Refill Business.
|
43
PRIMO
WATER CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
for the Conversion
|
|
|
Immediately
|
|
|
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
Primo Water
|
|
|
of Preferred Stock
|
|
|
Following
|
|
|
Culligan Refill
|
|
|
Relating to the
|
|
|
Following the
|
|
|
|
Corporation
|
|
|
and This Offering
|
|
|
This Offering
|
|
|
Business
|
|
|
Acquisition
|
|
|
Acquisition
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
46,981
|
|
|
$
|
|
|
|
$
|
46,981
|
|
|
$
|
26,017
|
|
|
$
|
|
|
|
$
|
72,998
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
38,771
|
|
|
|
|
|
|
|
38,771
|
|
|
|
13,643
|
|
|
|
|
|
|
|
52,414
|
|
Selling, general and administrative expenses
|
|
|
9,922
|
|
|
|
|
|
|
|
9,922
|
|
|
|
2,877
|
|
|
|
|
|
|
|
12,799
|
|
Depreciation and amortization
|
|
|
4,205
|
|
|
|
|
|
|
|
4,205
|
|
|
|
2,488
|
|
|
|
1,223
|
(c)
|
|
|
7,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
52,898
|
|
|
|
|
|
|
|
52,898
|
|
|
|
19,008
|
|
|
|
1,223
|
|
|
|
73,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(5,917
|
)
|
|
|
|
|
|
|
(5,917
|
)
|
|
|
7,009
|
|
|
|
(1,223
|
)
|
|
|
(131
|
)
|
Interest expense
|
|
|
(2,258
|
)
|
|
|
1,253
|
(a)
|
|
|
(1,005
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,005
|
)
|
Other income, net
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
(8,174
|
)
|
|
|
1,253
|
|
|
|
(6,921
|
)
|
|
|
7,009
|
|
|
|
(1,223
|
)
|
|
|
(1,135
|
)
|
Provisions for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,665
|
)
|
|
|
655
|
(d)
|
|
|
(2,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations
|
|
|
(8,174
|
)
|
|
|
1,253
|
|
|
|
(6,921
|
)
|
|
|
4,344
|
|
|
|
(568
|
)
|
|
|
(3,145
|
)
|
Preferred dividends
|
|
|
(3,042
|
)
|
|
|
3,042
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to common
stockholders
|
|
$
|
(11,216
|
)
|
|
$
|
4,295
|
|
|
$
|
(6,921
|
)
|
|
$
|
4,344
|
|
|
$
|
(568
|
)
|
|
$
|
(3,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations attributable to common
stockholders
|
|
$
|
(7.72
|
)
|
|
|
|
|
|
$
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
1,453
|
|
|
|
|
|
|
|
15,165
|
|
|
|
|
|
|
|
|
|
|
|
18,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
PRIMO
WATER CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
for the Conversion
|
|
|
Immediately
|
|
|
|
|
|
Adjustments
|
|
|
Pro Forma
|
|
|
|
Primo Water
|
|
|
of Preferred Stock
|
|
|
Following
|
|
|
Culligan Refill
|
|
|
Relating to the
|
|
|
Following
|
|
|
|
Corporation
|
|
|
and This Offering
|
|
|
this Offering
|
|
|
Business
|
|
|
Acquisition
|
|
|
the Acquisition
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net sales
|
|
$
|
21,002
|
|
|
$
|
|
|
|
$
|
21,002
|
|
|
$
|
12,569
|
|
|
$
|
|
|
|
$
|
33,571
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
16,672
|
|
|
|
|
|
|
|
16,672
|
|
|
|
6,654
|
|
|
|
|
|
|
|
23,326
|
|
Selling, general and administrative expenses
|
|
|
5,814
|
|
|
|
|
|
|
|
5,814
|
|
|
|
1,395
|
|
|
|
|
|
|
|
7,209
|
|
Depreciation and amortization
|
|
|
2,010
|
|
|
|
|
|
|
|
2,010
|
|
|
|
1,360
|
|
|
|
496
|
(c)
|
|
|
3,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
24,496
|
|
|
|
|
|
|
|
24,496
|
|
|
|
9,409
|
|
|
|
496
|
|
|
|
34,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(3,494
|
)
|
|
|
|
|
|
|
(3,494
|
)
|
|
|
3,160
|
|
|
|
(496
|
)
|
|
|
(830
|
)
|
Interest expense
|
|
|
(1,464
|
)
|
|
|
822
|
(a)
|
|
|
(582
|
)
|
|
|
|
|
|
|
|
|
|
|
(582
|
)
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(4,958
|
)
|
|
|
822
|
|
|
|
(4,076
|
)
|
|
|
3,160
|
|
|
|
(496
|
)
|
|
|
(1,412
|
)
|
Provisions for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,210
|
)
|
|
|
208
|
(d)
|
|
|
(1,002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(4,958
|
)
|
|
|
822
|
|
|
|
(4,076
|
)
|
|
|
1,950
|
|
|
|
(288
|
)
|
|
|
(2,414
|
)
|
Preferred dividends
|
|
|
(1,164
|
)
|
|
|
1,164
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common shareholders
|
|
$
|
(6,122
|
)
|
|
$
|
2,046
|
|
|
$
|
(4,076
|
)
|
|
$
|
1,950
|
|
|
$
|
(288
|
)
|
|
$
|
(2,414
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
(4.21
|
)
|
|
|
|
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
1,455
|
|
|
|
|
|
|
|
15,167
|
|
|
|
|
|
|
|
|
|
|
|
18,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: The pro forma adjustments to the consolidated statements
of operations do not include the nonrecurring $1.8 million
in estimated transaction costs that will be expensed in
connection with the acquisition of the Culligan Refill Business
at the time the acquisition is completed. In addition, the
pro forma adjustments to the consolidated statements of
operations do not include any estimate of severance obligations
to employees of Culligan who are not offered employment upon
completion of the Culligan Refill Acquisition. The Company has
not completed its analysis of which employees, if any, will not
be offered employment upon the completion of the acquisition.
However, based on the contractual commitments the maximum
estimated severance obligation for the Company is approximately
$1.7 million.
|
|
|
(a)
|
|
Reflects the additional interest
expense on the estimated borrowings on the new senior revolving
credit facility, net of interest expense on the current senior
revolving credit facility, for the year ended December 31,
2009 and the six months ended June 30, 2010 of
$0.4 million and $0.2 million, respectively. The
interest rate on the new senior revolving credit facility has
been estimated at 5.75%. Also reflects: (i) the interest
expense on the amortization of the debt issuance cost on our new
senior revolving credit facility for the year ended
December 31, 2009 and the six months ended June 30,
2010 of $0.4 million and $0.2 million, respectively;
(ii) the reduction of interest expense and amortization of
debt issuance costs on the 2011 Notes for the six months ended
June 30, 2010 of $1.1 million and $0.2 million,
respectively; and (iii) the reduction of interest expense
and amortization of debt issuance costs for the year ended
December 31, 2009 related to the January 2009
$10 million term loan which was repaid in December 2009 of
$1.3 million and $0.7 million, respectively.
|
45
|
|
|
(b)
|
|
Reflects the conversion and
redemption of the Series B preferred stock and the
associated reduction of preferred stock dividends for the year
ended December 31, 2009 and the six months ended
June 30, 2010 of $3.0 million and $1.2 million,
respectively.
|
(c)
|
|
Reflects a charge for depreciation
and amortization based upon the preliminary estimate of the
portion of the purchase price to be allocated to the fair value
of property and equipment and identifiable intangibles for the
year ended December 31, 2009 and the six months ended
June 30, 2010 of $1.2 million and $0.5 million,
respectively.
|
(d)
|
|
Reflects a reversal of the income
tax provision of the combined financial statements of the
Culligan Refill Business for the year ended December 31,
2009 and the six months ended June 30, 2010 of
$2.7 million and $1.2 million, respectively. Our
historical effective tax rate has been zero due to our recording
of a valuation allowance against our deferred tax assets. We
have estimated we will be subject to income tax in Canada on the
Canadian operations, at an effective rate of approximately 33%.
For the year ended December 31, 2009, we estimated the
income tax provision to be $0.1 million. In addition, the
year ended December 31, 2009 and the six months ended
June 30, 2010, includes adjustments of $2.0 million
and $1.0 million, respectively, for the income tax
provision related to the expected amortization of goodwill for
income tax purposes that will create a deferred tax liability
with an indeterminate reversal date.
|
46
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth, for the periods and dates
indicated, our selected historical consolidated financial and
other data. We prepared the selected historical consolidated
financial data using our consolidated financial statements for
each of the periods presented. The selected historical
consolidated financial data for each year in the three-year
period ended December 31, 2009, was derived from our
audited historical consolidated financial statements appearing
elsewhere in this prospectus, and the selected historical
consolidated financial data for each year in the two-year period
ended December 31, 2006, was derived from our audited
historical consolidated financial statements not appearing in
this prospectus. The selected historical consolidated financial
data as of and for the six months ended June 30, 2009 and
2010 was derived from our unaudited consolidated financial
statements included elsewhere in this prospectus. The unaudited
consolidated financial statements have been prepared on the same
basis as our audited consolidated financial statements and, in
the opinion of management, reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair
presentation of the results for those periods. The results for
any interim period are not necessarily indicative of the results
that may be expected for a full year. The historical results
included here and elsewhere in this prospectus are not
necessarily indicative of future performance or results of
operations.
The selected historical consolidated financial data presented
below represent portions of our financial statements and are not
complete. You should read this information in conjunction with
Use of Proceeds, Capitalization,
Unaudited Pro Forma Consolidated Financial Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations, Culligan Refill
Acquisition Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the consolidated financial statements and related notes
included elsewhere in this prospectus.
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Year Ended December 31,
|
|
|
Ended June 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands, except per share amounts)
|
|
Consolidated statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
158
|
|
|
$
|
6,589
|
|
|
$
|
13,453
|
|
|
$
|
34,647
|
|
|
$
|
46,981
|
|
|
$
|
24,500
|
|
|
$
|
21,002
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
220
|
|
|
|
6,141
|
|
|
|
11,969
|
|
|
|
30,776
|
|
|
|
38,771
|
|
|
|
20,368
|
|
|
|
16,672
|
|
Selling, general and administrative expenses
|
|
|
5,968
|
|
|
|
7,491
|
|
|
|
10,353
|
|
|
|
13,791
|
|
|
|
9,922
|
|
|
|
5,041
|
|
|
|
5,814
|
|
Depreciation and amortization
|
|
|
716
|
|
|
|
3,681
|
|
|
|
3,366
|
|
|
|
3,618
|
|
|
|
4,205
|
|
|
|
2,078
|
|
|
|
2,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
6,904
|
|
|
|
17,313
|
|
|
|
25,688
|
|
|
|
48,185
|
|
|
|
52,898
|
|
|
|
27,487
|
|
|
|
24,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(6,746
|
)
|
|
|
(10,724
|
)
|
|
|
(12,235
|
)
|
|
|
(13,538
|
)
|
|
|
(5,917
|
)
|
|
|
(2,987
|
)
|
|
|
(3,494
|
)
|
Interest (expense) and other income, net
|
|
|
175
|
|
|
|
116
|
|
|
|
65
|
|
|
|
(70
|
)
|
|
|
(2,257
|
)
|
|
|
(1,037
|
)
|
|
|
(1,464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(6,571
|
)
|
|
|
(10,608
|
)
|
|
|
(12,170
|
)
|
|
|
(13,608
|
)
|
|
|
(8,174
|
)
|
|
|
(4,024
|
)
|
|
|
(4,958
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(6,571
|
)
|
|
|
(10,608
|
)
|
|
|
(12,170
|
)
|
|
|
(13,608
|
)
|
|
|
(8,174
|
)
|
|
|
(4,024
|
)
|
|
|
(4,958
|
)
|
Loss from discontinued operations, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
(1,904
|
)
|
|
|
(5,738
|
)
|
|
|
(3,650
|
)
|
|
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(6,571
|
)
|
|
|
(10,608
|
)
|
|
|
(14,074
|
)
|
|
|
(19,346
|
)
|
|
|
(11,824
|
)
|
|
|
(4,381
|
)
|
|
|
(4,958
|
)
|
Preferred dividends and beneficial conversion
charge(1)
|
|
|
|
|
|
|
(851
|
)
|
|
|
(2,147
|
)
|
|
|
(19,875
|
)
|
|
|
(3,042
|
)
|
|
|
(1,521
|
)
|
|
|
(1,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(6,571
|
)
|
|
$
|
(11,459
|
)
|
|
$
|
(16,221
|
)
|
|
$
|
(39,221
|
)
|
|
$
|
(14,866
|
)
|
|
$
|
(5,902
|
)
|
|
$
|
(6,122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to common
stockholders
|
|
$
|
(4.59
|
)
|
|
$
|
(7.94
|
)
|
|
$
|
(9.88
|
)
|
|
$
|
(23.06
|
)
|
|
$
|
(7.72
|
)
|
|
$
|
(3.82
|
)
|
|
$
|
(4.21
|
)
|
Loss from discontinued operations attributable to common
stockholders
|
|
|
|
|
|
|
|
|
|
|
(1.32
|
)
|
|
|
(3.96
|
)
|
|
|
(2.51
|
)
|
|
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(4.59
|
)
|
|
$
|
(7.94
|
)
|
|
$
|
(11.20
|
)
|
|
$
|
(27.02
|
)
|
|
$
|
(10.23
|
)
|
|
$
|
(4.06
|
)
|
|
$
|
(4.21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
1,433
|
|
|
|
1,443
|
|
|
|
1,448
|
|
|
|
1,452
|
|
|
|
1,453
|
|
|
|
1,453
|
|
|
|
1,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
As of June 30,
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(In thousands)
|
Consolidated balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
5,606
|
|
|
$
|
7,638
|
|
|
$
|
5,776
|
|
|
$
|
516
|
|
|
$
|
|
|
|
$
|
760
|
|
Total assets
|
|
|
12,107
|
|
|
|
20,904
|
|
|
|
21,909
|
|
|
|
30,570
|
|
|
|
22,368
|
|
|
|
30,532
|
|
Current portion of long-term debt
|
|
|
32
|
|
|
|
74
|
|
|
|
13
|
|
|
|
7,006
|
|
|
|
426
|
|
|
|
23,516
|
|
Long-term debt, net of current portion
|
|
|
43
|
|
|
|
13
|
|
|
|
|
|
|
|
5
|
|
|
|
14,403
|
|
|
|
47
|
|
Other long-term obligations
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
481
|
|
|
|
1,048
|
|
|
|
1,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Year Ended December 31,
|
|
Ended
|
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
June 30, 2010
|
|
|
(In thousands, except location amounts)
|
|
|
(Unaudited)
|
|
Other information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primo water bottle exchange locations at period end
|
|
|
300
|
|
|
|
2,300
|
|
|
|
4,700
|
|
|
|
6,400
|
|
|
|
7,000
|
|
|
|
7,200
|
|
Primo water bottle units sold
|
|
|
14
|
|
|
|
745
|
|
|
|
1,994
|
|
|
|
3,215
|
|
|
|
3,853
|
|
|
|
2,062
|
|
Primo water dispenser units sold
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
177
|
|
|
|
272
|
|
|
|
138
|
|
|
|
|
(1)
|
|
In 2008, we recorded a non-cash
beneficial conversion charge or deemed dividend of
$17.6 million on our Series C preferred stock. This
was a result of the adjustment of the conversion ratio on the
Series C preferred stock based upon a formula taking into
account our net sales for the year ending December 31,
2008, which resulted in a conversion ratio of 1:0.184.
|
49
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with the section titled Selected Historical
Consolidated Financial and Other Data and our financial
statements and related notes appearing elsewhere in this
prospectus. Our actual results could differ materially from
those anticipated in the forward-looking statements included in
this discussion as a result of certain factors, including, but
not limited to, those discussed in the section of this
prospectus titled Risk Factors.
Overview
Primo Water Corporation is a rapidly growing provider of three-
and five-gallon purified bottled water and water dispensers sold
through major retailers nationwide. Our business is designed to
generate recurring demand for Primo purified bottled water
through the sale of our innovative water dispensers. Once our
bottled water is consumed using a water dispenser, empty bottles
are exchanged at our recycling center displays, which provide a
recycling ticket that offers a discount toward the purchase of a
new bottle of Primo purified water. We have created a nationwide
single-vendor water bottle exchange service for our retail
customers that requires minimal customer management supervision
and store-based labor and provides centralized billing and
detailed performance reports. We deliver this service utilizing
our current relationships with 55 independent bottlers and 27
independent distributors and our two Company-owned distribution
operations covering portions of four states, which we refer to
collectively as our national network. As of
June 30, 2010, our water bottle exchange service and water
dispensers were offered in each of the contiguous United States
and located in approximately 7,200 and 5,500 retail locations,
respectively. For 2007, 2008 and 2009, we generated net sales of
$13.5 million, $34.6 million and $47.0 million,
respectively. For the six months ended June 30, 2009 and
2010, we generated sales of $24.5 million and
$21.0 million, respectively.
In this Managements Discussion and Analysis of Financial
Condition and Results of Operations, when we refer to same
store sales for our Exchange segment, we are comparing
retail locations at which our water bottle exchange service had
been available for at least 12 months at the beginning of
the relevant period.
Business
Segments
We manage our business primarily through two reporting segments:
Primo Bottled Water Exchange (Exchange) and Primo
Products (Products).
Our Exchange segment sells three- and five-gallon purified
bottled water through retailers in each of the contiguous United
States. As of June 30, 2010, we offered our exchange
service at approximately 7,200 locations through point of
purchase display racks and recycling centers that are
prominently located at major retailers in space that is often
underutilized. We service these retail locations through our
national network of primarily independent bottlers and
distributors.
Our Products segment sells water dispensers that are designed to
dispense Primo and other dispenser-compatible bottled water. Our
Products sales are primarily generated through major
U.S. retailers. Our water dispensers are sold primarily
through a direct-import model, where we recognize revenues for
the sale of the water dispensers when title is transferred to
our retailer customers. We support retail sell-through with
limited domestic inventory.
We evaluate the financial results of these segments focusing
primarily on segment net sales and segment income (loss) from
operations before depreciation and amortization (segment
income (loss) from operations). We utilize segment net
sales and segment income (loss) from operations because we
believe they provide useful information for effectively
allocating our resources between business segments, evaluating
the health of our business segments based on metrics that
management can actively influence and gauging our investments
and our ability to service, incur or pay down debt.
Operating segments that do not meet quantitative thresholds for
segment reporting are included in Other.
50
Cost of sales for Exchange consists of costs for bottling and
related packaging materials and distribution costs for our
bottled water. Cost of sales for Products consists of contract
manufacturing, freight, duties and warehousing costs of our
water dispensers.
Selling, general and administrative expenses for both segments
consist primarily of personnel costs for sales, marketing,
operations support and customer service, as well as other
supporting costs for operating each segment.
Expenses not specifically related to operating segments are
shown separately as Corporate. Corporate expenses are comprised
mainly of compensation and other related expenses for corporate
support, information systems, and human resources and
administration. Corporate expenses also include certain
professional fees and expenses and compensation of our Board of
Directors.
Recent
Transactions
In December 2009, we completed the divestiture of our former
subsidiary, Prima Bottled Water, Inc. (Prima), by
distributing the stock in Prima to our existing stockholders on
a pro rata basis based upon each such stockholders
proportionate ownership of our common stock, Series A
preferred stock and Series C preferred stock on an
as-converted basis. The assets, liabilities and results of
operations of Prima are accounted for as discontinued
operations. For 2007, 2008 and 2009, we recognized losses from
discontinued operations of $1.9 million, $5.7 million
and $3.7 million, respectively. For the six months ended
June 30, 2009 and 2010, we recognized losses from
discontinued operations of $0.4 million and $0,
respectively.
On June 1, 2010 we entered into an asset purchase with
Culligan to purchase the Culligan Refill Business. See
Culligan Refill Acquisition on page 85 for a
more detailed description of this transaction.
51
Results
of Operations
The following table sets forth our results of operations for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Consolidated statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
13,453
|
|
|
$
|
34,647
|
|
|
$
|
46,981
|
|
|
$
|
24,500
|
|
|
$
|
21,002
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
11,969
|
|
|
|
30,776
|
|
|
|
38,771
|
|
|
|
20,368
|
|
|
|
16,672
|
|
Selling, general and administrative expenses
|
|
|
10,353
|
|
|
|
13,791
|
|
|
|
9,922
|
|
|
|
5,041
|
|
|
|
5,814
|
|
Depreciation and amortization
|
|
|
3,366
|
|
|
|
3,618
|
|
|
|
4,205
|
|
|
|
2,078
|
|
|
|
2,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
25,688
|
|
|
|
48,185
|
|
|
|
52,898
|
|
|
|
27,487
|
|
|
|
24,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(12,235
|
)
|
|
|
(13,538
|
)
|
|
|
(5,917
|
)
|
|
|
(2,987
|
)
|
|
|
(3,494
|
)
|
Interest (expense) and other income, net
|
|
|
65
|
|
|
|
(70
|
)
|
|
|
(2,257
|
)
|
|
|
(1,037
|
)
|
|
|
(1,464
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(12,170
|
)
|
|
|
(13,608
|
)
|
|
|
(8,174
|
)
|
|
|
(4,024
|
)
|
|
|
(4,958
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(12,170
|
)
|
|
|
(13,608
|
)
|
|
|
(8,174
|
)
|
|
|
(4,024
|
)
|
|
|
(4,958
|
)
|
Loss from discontinued operations, net of income taxes
|
|
|
(1,904
|
)
|
|
|
(5,738
|
)
|
|
|
(3,650
|
)
|
|
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(14,074
|
)
|
|
|
(19,346
|
)
|
|
|
(11,824
|
)
|
|
|
(4,381
|
)
|
|
|
(4,958
|
)
|
Preferred dividends and beneficial conversion charge
|
|
|
(2,147
|
)
|
|
|
(19,875
|
)
|
|
|
(3,042
|
)
|
|
|
(1,521
|
)
|
|
|
(1,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(16,221
|
)
|
|
$
|
(39,221
|
)
|
|
$
|
(14,866
|
)
|
|
$
|
(5,902
|
)
|
|
$
|
(6,122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth our results of operations
expressed as a percentage of net sales for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Six Months Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Consolidated statements of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
89.0
|
|
|
|
88.8
|
|
|
|
82.5
|
|
|
|
83.1
|
|
|
|
79.4
|
|
Selling, general and administrative expenses
|
|
|
77.0
|
|
|
|
39.8
|
|
|
|
21.1
|
|
|
|
20.6
|
|
|
|
27.6
|
|
Depreciation and amortization
|
|
|
25.0
|
|
|
|
10.5
|
|
|
|
9.0
|
|
|
|
8.5
|
|
|
|
9.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
191.0
|
|
|
|
139.1
|
|
|
|
112.6
|
|
|
|
112.2
|
|
|
|
116.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(91.0
|
)
|
|
|
(39.1
|
)
|
|
|
(12.6
|
)
|
|
|
(12.2
|
)
|
|
|
(16.6
|
)
|
Interest (expense) and other income, net
|
|
|
0.5
|
|
|
|
(0.2
|
)
|
|
|
(4.8
|
)
|
|
|
(4.2
|
)
|
|
|
(7.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(90.5
|
)
|
|
|
(39.3
|
)
|
|
|
(17.4
|
)
|
|
|
(16.4
|
)
|
|
|
(23.6
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(90.5
|
)
|
|
|
(39.3
|
)
|
|
|
(17.4
|
)
|
|
|
(16.4
|
)
|
|
|
(23.6
|
)
|
Loss from discontinued operations, net of income taxes
|
|
|
(14.1
|
)
|
|
|
(16.5
|
)
|
|
|
(7.8
|
)
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(104.6
|
)%
|
|
|
(55.8
|
)%
|
|
|
(25.2
|
)%
|
|
|
(17.9
|
)%
|
|
|
(23.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
The following table sets forth our segment net sales and segment
income (loss) from operations presented on a segment basis and
reconciled to our consolidated loss from operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
Years Ended December 31,
|
|
|
Ended June 30,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands)
|
|
|
Segment Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange
|
|
$
|
10,875
|
|
|
$
|
19,237
|
|
|
$
|
22,638
|
|
|
$
|
11,121
|
|
|
$
|
12,022
|
|
Products
|
|
|
949
|
|
|
|
13,758
|
|
|
|
22,824
|
|
|
|
12,642
|
|
|
|
8,177
|
|
Other
|
|
|
1,818
|
|
|
|
1,874
|
|
|
|
1,611
|
|
|
|
820
|
|
|
|
811
|
|
Inter-company elimination
|
|
|
(189
|
)
|
|
|
(222
|
)
|
|
|
(92
|
)
|
|
|
(83
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
13,453
|
|
|
$
|
34,647
|
|
|
$
|
46,981
|
|
|
$
|
24,500
|
|
|
$
|
21,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Income (Loss) from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange
|
|
$
|
(2,834
|
)
|
|
$
|
(1,267
|
)
|
|
$
|
3,374
|
|
|
$
|
1,517
|
|
|
$
|
1,733
|
|
Products
|
|
|
(631
|
)
|
|
|
(1,447
|
)
|
|
|
(272
|
)
|
|
|
60
|
|
|
|
26
|
|
Other
|
|
|
(175
|
)
|
|
|
(116
|
)
|
|
|
(34
|
)
|
|
|
(30
|
)
|
|
|
62
|
|
Inter-company elimination
|
|
|
|
|
|
|
(13
|
)
|
|
|
9
|
|
|
|
5
|
|
|
|
(5
|
)
|
Corporate
|
|
|
(5,229
|
)
|
|
|
(7,077
|
)
|
|
|
(4,789
|
)
|
|
|
(2,461
|
)
|
|
|
(3,300
|
)
|
Depreciation and amortization
|
|
|
(3,366
|
)
|
|
|
(3,618
|
)
|
|
|
(4,205
|
)
|
|
|
(2,078
|
)
|
|
|
(2,010
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(12,235
|
)
|
|
$
|
(13,538
|
)
|
|
$
|
(5,917
|
)
|
|
$
|
(2,987
|
)
|
|
$
|
(3,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2010 Compared to Six Months Ended
June 30, 2009
Net Sales. Net sales for the six months ended
June 30, 2010 decreased $3.5 million or 14.3% to
$21.0 million from $24.5 million for the six months
ended June 30, 2009. The decrease in sales for the six
months ended June 30, 2010 resulted primarily from a 35.3%
decrease in Products sales offset by an 8.1% increase in
Exchange sales.
Exchange. Exchange net sales increased
$0.9 million or 8.1% to $12.0 million, representing
57.2% of our total net sales, for the six months ended
June 30, 2010. The increase for the six months ended
June 30, 2010 compared to the same period in 2009 was the
result of a 10.7% increase in water bottle units sold to
approximately 2.1 million. The increase in units sold was
driven by an 8.1% increase in selling locations to approximately
7,200 at June 30, 2010 as well as an increase in same store
units of 4.0% for the six months ended June 30, 2010. The
average price per unit decreased 2.4% for the six months ended
June 30, 2010 compared to the same period in 2009. The
decrease is a result of a shift in mix of transactions to 73.2%
exchange transactions and 26.8% non-exchange transactions for
the six months ended June 30, 2010 compared to 69.0%
exchange transactions and 31.0% non-exchange transactions for
the six months ended June 30, 2009. The shift in the mix of
transactions is due to the increase in the overall number of
repeat consumers utilizing our three- and five-gallon bottled
water exchange service. This shift in mix is also impacted by
the number of new locations added during the period. Locations
in new markets generally have a higher percentage of
non-exchange transactions as we introduce our service to new
consumers. We recognize approximately twice as much revenue on
non-exchange transactions as we do on exchange transactions as a
result of the discount provided to consumers for the return of
an empty three- or five-gallon bottle in exchange for the
purchase of a new three- or five-gallon bottle of purified
water. Adding new locations at which our water bottle exchange
service is offered is important to our strategy of penetrating
more homes with our water dispensers as expanded locations and
increased water bottle availability enhance the convenience of
our service to consumers.
Products. Products net sales decreased
$4.5 million or 35.3% to $8.2 million, representing
38.9% of our total net sales, for the six months ended
June 30, 2010. Dispenser sales decreased approximately
45,000 units or 24.6% to approximately 138,000 units
for the six months ended June 30, 2010. We believe our
water dispenser sales at retail to consumers increased
substantially in units and revenues during 2010 based on sales
data from our retail partners despite our reduced sales to
retailers as we believe retailers are managing their inventory
levels in anticipation of a new product line in the fourth
quarter of 2010. In addition, our 2009 sales of water dispensers
benefited from many of our retail customers building their
inventory levels.
53
Gross Margin. Our overall gross margin, defined as
net sales less cost of sales, as a percentage of net sales
increased to 20.6% for the six months ended June 30, 2010
from 16.9% for the six months ended June 30, 2009.
Exchange. Gross margin as a percentage of net sales
in our Exchange segment increased to 26.9% for the six months
ended June 30, 2010 from 25.4% for the six months ended
June 30, 2009. This increase is due primarily to benefits
from the improvements in our supply chain, which were completed
in 2009. We anticipate that gross margins will continue to see
improvements as we realize the full benefits of these
improvements. These benefits could be offset slightly if fuel
prices continue to increase and effect freight cost negatively.
Products. Gross margin as a percentage of net sales
in our Products segment increased to 7.4% for the six months
ended June 30, 2010 from 6.8% for the six months ended
June 30, 2009. This increase is due primarily to the mix of
dispensers sold during 2010 as compared to 2009. Our strategy is
to sell our water dispensers at minimal operating profit in
order to increase home penetration, which we believe will lead
to increased recurring revenue, higher margin Exchange sales.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses
increased $0.8 million or 15.3% to $5.8 million for
the six months ended June 30, 2010. As a percentage of net
sales, selling, general and administrative expenses increased to
27.6% for the six months ended June 30, 2010 from 20.6% for
the six months ended June 30, 2009. The increase in
selling, general and administrative expenses is primarily from
increased salaries and related payroll costs associated with
additional employees, professional and other expenses of
approximately $0.3 million associated with the acquisition
of Culligan Store Solutions, LLC and the increase in non-cash
stock compensation of $0.1 million.
Exchange. Selling, general and administrative
expenses of our Exchange segment increased $0.2 million or
14.3% to $1.5 million for six months ended June 30,
2010. Selling, general and administrative expenses as a
percentage of Exchange segment net sales was 12.5% for the six
months ended June 30, 2010 compared to 11.8% for the six
months ended June 30, 2009. The increase resulted primarily
from increased salaries and related payroll expenses from
employees added in business development.
Products. Selling, general and administrative
expenses of our Products segment decreased $0.2 million or
27.5% to $0.6 million for the six months ended
June 30, 2010. This decrease is primarily the result of
reduced advertising and marketing expenses in 2010 as compared
to 2009. Selling, general and administrative expenses as a
percentage of Products segment net sales increased to 7.1% for
the six months ended June 30, 2010 from 6.3% for the six
months ended June 30, 2009. The increase as a percentage of
Products segment net sales is a result of the 35.3% decrease in
Product net sales.
Other. Other selling, general and administrative
expenses, which include our Other segment and Corporate,
increased $0.8 million or 27.5% to $3.7 million for
the six months ended June 30, 2010. Selling, general and
administrative expenses as a percentage of consolidated net
sales increased to 17.8% for the six months ended June 30,
2010 from 12.0% for the six months ended June 30, 2009. The
increase resulted primarily from an increase in salaries and
related payroll costs associated with the additional employees,
professional and other expenses of approximately
$0.3 million associated with the acquisition of Culligan
Store Solutions, LLC and the increase in non-cash stock
compensation of $0.1 million. In connection with the
acquisition of Culligan Store Solutions, LLC we will incur a
transaction fee of $1.5 million along with other legal and
professional fees related to the acquisition that will be
expensed when they are incurred. In addition, we expect to incur
approximately $1.0 million annually in additional costs as
a public company related to compliance, reporting and insurance.
Depreciation and Amortization. Depreciation and
amortization decreased 3.3% to $2.0 million for the six
months ended June 30, 2010.
Interest (Expense) and Other Income, Net. Net
interest expense increased to $1.5 million for the six
months ended June 30, 2010 from $1.0 million for the
six months ended June 30, 2009. The increase is a result of
an increase in the use of debt to fund business operations as
well as the higher interest rate on our 2011 Notes.
Preferred Dividends and Beneficial Conversion
Charge. Dividends on our Series B preferred stock
decreased $0.4 million to $1.2 million for the six
months ended June 30, 2010. In January 2009, we offered
holders of our Series B preferred stock the option to
suspend their current cash dividend payment of 10% in exchange
for a
54
dividend accrual of 15% for 2009. In January 2010, the dividend
accrual was reduced to 10% with no cash dividend until the
Series B preferred stock is redeemed. Cash dividends paid
on our Series B preferred stock were $0.2 million and
$0.8 million for the six months ended June 30, 2010
and 2009, respectively. At June 30, 2010, the accrued and
unpaid dividends on our Series B preferred stock is
$3.3 million, which is included in accrued expenses and
other current liabilities in the consolidated balance sheet. In
July 2010, we agreed to modify the terms of common stock
warrants for the aggregate purchase of 716 shares of common
stock, originally issued to the purchasers of the Series B
preferred stock and Series C preferred stock, to remove a
provision that accelerated the termination of the warrants
exercise period upon the consummation of an IPO. The warrants
will now expire on the date such warrants would have otherwise
expired absent an IPO. At the time of the modification a charge
of approximately $2.3 million will be recorded to
additional paid in capital with no effect on total
stockholders equity, but will increase the net loss
attributable to common stockholders in the third quarter of
2010. In October 2010, we agreed to reduce the exercise price of
the warrants issued to the holders of the Series C
convertible preferred stock from $20.66 to $13.04. At the time
of modification, a charge of approximately $0.2 million
will be recorded to additional paid in capital with no effect on
stockholders equity but will increase the net loss
attributable to common stockholders in the fourth quarter of
2010.
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Net Sales. Net sales for 2009 increased
$12.3 million or 35.6% to $47.0 million from
$34.6 million in 2008. The increase in sales resulted
primarily from a 65.9% increase in Products sales and a 17.7%
increase in Exchange sales.
Exchange. Exchange net sales increased
$3.4 million or 17.7% to $22.6 million in 2009,
representing 48.2% of our total net sales in 2009. The increase
was due to an increase in water bottle units sold of
approximately 0.6 million units or 19.8% to
3.9 million units sold in 2009. The increase in units sold
was driven by a same store sales increase of 7.9% as well as an
8.3% increase in selling locations to approximately 7,000 at
December 31, 2009. We believe the increase in same store
sales is primarily a result of two factors: first, the increase
in water dispenser sales results in an increasing number of
consumers of
three- and
five-gallon bottled water and second, as more consumers become
aware of and participate in our exchange program at a particular
selling location, the number of water bottle units sold at that
location typically increases over comparable prior periods.
During 2009, we added approximately 600 selling locations as a
result of both adding new retail customers and increased
penetration with our existing retail customers. The average
price per unit decreased 1.7% in 2009 compared to 2008 as a
result of a shift in mix of transactions to 70.9% exchange and
29.1% non-exchange transactions in 2009 compared to 63.2%
exchange and 36.8% non-exchange transactions in 2008. The shift
in the mix of transactions is due to the increase in the overall
number of repeat consumers utilizing our
three- and
five-gallon bottled water exchange service compared to the
number of consumers that are new to our service. We anticipate
the shift in mix towards a higher percentage of exchange
transactions to continue as the overall number of consumers
utilizing our exchange program continues to grow. We recognize
approximately twice as much revenue on non-exchange transactions
as we do on exchange transactions as a result of the discount
provided to consumers for the return of an empty
three- or
five-gallon bottle in exchange for the purchase of a new
three- or
five-gallon bottle of purified water. Adding new locations at
which our water bottle exchange service is offered is important
to our strategy of penetrating more homes with our water
dispensers as expanded locations and increased water bottle
availability enhance the convenience of our service to consumers.
Products. Products net sales increased
$9.1 million or 65.9% to $22.8 million in 2009,
representing 48.6% of our total net sales in 2009. Dispenser
sales increased 95,000 units or 53% to approximately
272,000 units in 2009. The increase in sales and units in
2009 is primarily a result of a greater than 100% increase in
the number of retail locations offering our dispensers to
approximately 5,500 at December 31, 2009. The difference in
growth rates in net sales compared to the number of retail
locations at which our water dispensers are offered is the
result of retail locations being added during the course of the
year which did not sell our water dispensers during the entire
twelve-month period. As a result, during a period in which we
experience rapid growth in the number of retail locations at
which our water dispensers are offered, there is a delay before
the full effect of these additional retail locations is
reflected in our net sales. In addition, we successfully
launched several new water dispenser models which accounted for
approximately 48% of the total units sold in 2009. We anticipate
continuing to introduce and offer
55
new water dispenser models. Water dispenser home penetration is
critical to the success of our strategy of increasing sales of
our complementary recurring-revenue bottled water exchange
service.
Gross Margin. Our overall gross margin, defined as
net sales less cost of sales, as a percentage of net sales
increased to 17.5% for 2009 from 11.2% for 2008.
Exchange. Gross margin as a percentage of net sales
in our Exchange segment increased to 26.6% for 2009 from 15.2%
in 2008 due primarily to decreased freight costs as a result of
the addition of bottling and distribution capabilities during
2008 for which we received a full-year benefit in 2009. With
these additions we believe we have sufficient bottling and
distribution capabilities to service our continued growth. We
anticipate slight improvements in gross margin for our Exchange
segment for 2010 as we further benefit from improvements in our
supply chain and realize efficiencies from our business model in
which many of our variable costs are fixed.
Products. Gross margin as a percentage of net sales
in our Products segment improved to 5.6% for 2009 from 0.5% in
2008 due primarily to improved pricing from retailers. Our
strategy is to sell our water dispensers at minimal operating
profit in order to increase home penetration, which we believe
will lead to increased recurring-revenue, higher margin Exchange
sales.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses
for 2009 decreased $3.9 million or 28.1% to
$9.9 million from $13.8 million and, as a percentage
of net sales, decreased to 21.1% for 2009 from 39.8% for 2008.
Exchange. Selling, general and administrative
expenses of our Exchange segment decreased $1.5 million or
36.8% to $2.6 million from $4.2 million and as a
percentage of Exchange segment net sales decreased to 11.7% in
2009 from 21.8% in 2008. The decrease is due to lower
employee-related costs as a result of a reduction in headcount
of seven employees as well as reduced levels of consulting fees
and related travel and benefit costs resulting in approximately
$1.0 million of the overall reduction of selling, general
and administrative expenses. The additional personnel resources
were related to our efforts in 2008 to expand our supply chain
with more bottling and distribution capacity. During 2009 we
were able to reduce these personnel resources when our supply
chain reached what we believe to be an appropriate size. We were
able to significantly grow our Exchange segment net sales and
gross margins in 2009 despite the reduction in selling, general
and administrative expenses.
Products. Selling, general and administrative
expenses of our Products segment decreased as a percentage of
Products segment net sales to 6.8% in 2009 from 11.1% in 2008.
Our Products segment was able to significantly increase sales
without the need for additional headcount or selling, general
and administrative costs.
Other. Other selling, general and administrative
expenses for 2009, which includes our Other segment and
Corporate, decreased $2.4 million or 29.1% to
$5.7 million from $8.1 million, and as a percent of
consolidated net sales decreased to 12.2% for 2009 from 23.3% in
2008. The decrease is primarily due to lower employee-related
costs as a result of a reduction in headcount of nine employees
as well as reduced levels of consulting fees and related travel
and benefit costs resulting in about $1.6 million of the
overall reduction of selling, general and administrative
expenses. The additional resources were related to our efforts
in 2008 to expand our information system and financial
infrastructure as well as our efforts to establish new business
segments. While we do not expect to incur significant additional
costs connected with the growth of our businesses in 2010, we do
expect to incur about $1.0 million in additional costs as a
public company related to compliance, reporting and insurance.
Depreciation and Amortization. Depreciation and
amortization increased $0.6 million or 16.2% to
$4.2 million in 2009 from $3.6 million in 2008. The
increase is the result of a full year of depreciation on the
$8.3 million of capital expenditures in 2008.
Interest (Expense) and Other Income, Net. Net
interest expense for 2009 increased to $2.3 million from
$70,000 in 2008 as a result of increased use of debt to fund
business operations. We expect the proceeds from this offering
to repay debt and lower future interest cost relative to that
experienced during 2009.
Preferred Dividends and Beneficial Conversion
Charge. Dividends on our Series B preferred stock
increased $0.7 million to $3.0 million in 2009 from
$2.3 million in 2008. In January 2009, we offered holders
of our Series B preferred stock the option to suspend their
current cash dividend payment of 10% in exchange for a dividend
accrual of 15% for 2009. Cash dividends paid on our
Series B preferred stock during 2009 and 2008 were
$1.3 million and
56
$2.3 million, respectively. At December 31, 2009 and
2008 the accrued and unpaid dividends on our Series B
preferred stock were $2.4 million and $0.6 million,
respectively, which is included in accrued expenses and other
current liabilities in the consolidated balance sheet. Our
Series C preferred stock is convertible into common stock
at a ratio of 1:0.184, which was based upon a formula taking
into account sales for 2008, compared to the original conversion
ratio of 1:0.096. The change in the conversion resulted in a
$17.6 million beneficial conversion or deemed dividend on
the Series C preferred stock for 2008, which is included in
the $19.9 million preferred dividends and beneficial
conversion charge in 2008.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Net Sales. Net sales for 2008 increased
$21.2 million or 157.5% to $34.6 million from
$13.5 million in 2007. The increase in net sales resulted
primarily from a 1,349.7% increase in Products sales and a 76.9%
increase in Exchange sales.
Exchange. Exchange net sales increased
$8.3 million to $19.2 million in 2008, representing
55.5% of our total net sales in 2008. The increase was due to an
increase in water bottle units sold of 1.2 million or 61.2%
to 3.2 million units sold in 2008. The increase in units
was driven by a same store sales increase of 22.0% as well as a
36.1% increase in selling locations to approximately 6,400
selling locations at December 31, 2008. The average price
per unit increased 9.7% in 2008 primarily as a result of a price
increase implemented in mid-2008.
Products. Products net sales increased
$12.8 million to $13.8 million, representing 39.7% of
our total net sales in 2008. The increase is due to the
successful launch of our Products business segment in late 2007.
Product sales increased by approximately 165,000 units to
approximately 177,000 units sold in 2008.
Gross Margin. Our overall gross margin, defined as
net sales less cost of sales, as a percentage of net sales
increased to 11.2% for 2008 from 11.0% for 2007.
Exchange. Gross margin as a percentage of net sales
in our Exchange segment increased to 15.2% for 2008 from 6.1% in
2007 due primarily to decreased freight costs as a result of the
addition of 28 bottlers and ten distributors in 2008.
Products. Gross margin as a percentage of net sales
in our Products segment improved to 0.5% for 2008 from (23.2)%
in 2007 due primarily to limited sales volume in 2007.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses,
excluding impairment charges, for 2008 increased
$3.4 million or 33.2% to $13.8 million from
$10.4 million and, as a percentage of net sales, decreased
to 39.8% for 2008 from 77.0% for 2007.
Exchange. Selling, general and administrative
expenses of our Exchange segment increased $0.7 million or
19.5% to $4.2 million from $3.5 million and as a
percentage of Exchange segment net sales decreased to 21.8% in
2008 from 32.2% in 2007. The increase is primarily due to higher
employee-related costs as a result of headcount additions,
consulting fees and related travel and benefit costs resulting
in about $0.3 million of the overall increase. The
additional personnel and resources were related to our efforts
to expand our supply chain with more bottling and distribution
capacity. Selling, general and administrative expenses as a
percentage of Exchange segment net sales decreased significantly
as we grew net sales at a faster rate than our expense growth.
Products. Selling, general and administrative
expenses of our Products segment increased $1.1 million or
270.3% to $1.5 million from $0.4 million and as a
percentage of Products segment net sales to 11.1% in 2008 from
43.3% in 2007. The increase is primarily due to increases in
employee headcount resulting from our expanded product line and
significant increase in net sales in 2008.
Other. Other selling, general and administrative
expenses for 2008, which includes our Other segment and
Corporate, increased $1.6 million or 24.5% to $8.1 million
from $6.5 million, and as a percentage of consolidated net
sales decreased to 23.3% for 2008 from 48.3% in 2007. The
increase is primarily due to higher employee-related costs as a
result of additional headcount, consulting fees and related
travel and benefit costs related to our efforts in 2008 to
expand our information system and financial infrastructure as
well as our efforts to establish new business segments.
57
Depreciation and Amortization. Depreciation and
amortization increase $0.2 million or 7.5% to $3.6 million in
2008 from $3.4 million in 2007.
Interest Expense and Other Income, Net. Net interest
and other income for 2008 decreased to an expense of $70,000
from income of $65,000 in 2007 as a result of the use of debt to
fund business operations, which were primarily funded with
equity in 2007.
Preferred Dividends and Beneficial Conversion
Charge. Dividends on our Series B preferred stock
increased $0.2 million to $2.3 million in 2008 from
$2.1 million in 2007. At both December 31, 2008 and
2007, the accrued and unpaid dividends on our Series B
preferred stock were $0.6 million, which is included in
accrued expenses and other current liabilities in the
consolidated balance sheet. Our Series C preferred stock is
convertible into common stock at a ratio of 1:0.184, which was
based upon a formula taking into account sales for 2008,
compared to the original conversion ratio of 1:0.096. The change
in the conversion resulted in a $17.6 million beneficial
conversion or deemed dividend on the Series C preferred
Stock for 2008, which is included in the $19.9 million of
preferred dividends and beneficial conversion charge in 2008.
Liquidity
and Capital Resources
The following table shows the components of our cash flows for
the periods presented:
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Six Months
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|
|
Year Ended December 31,
|
|
Ended June 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
(In thousands)
|
|
Net cash provided by (used in):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Operating activities
|
|
$
|
(6,752
|
)
|
|
$
|
(11,832
|
)
|
|
$
|
(1,972
|
)
|
|
$
|
(2,426
|
)
|
|
$
|
(4,558
|
)
|
Investing activities
|
|
|
(4,992
|
)
|
|
|
(9,628
|
)
|
|
|
(2,450
|
)
|
|
|
(1,345
|
)
|
|
|
(1,712
|
)
|
Financing activities
|
|
|
12,529
|
|
|
|
24,361
|
|
|
|
6,274
|
|
|
|
5,304
|
|
|
|
7,030
|
|
Since inception, we have financed our operations primarily
through the sale of preferred stock, the issuance of long term
debt and borrowings under credit facilities. At June 30,
2010, our principal sources of liquidity were accounts
receivable, net of allowance for doubtful accounts, of
$5.3 million compared to cash of $0.8 million and
borrowing availability under our current senior revolving credit
facility.
During the first half of 2010, our primary source of capital was
proceeds from borrowings under our current senior revolving
credit facility, which had a balance of $8.9 million at
June 30, 2010. During 2009, the primary source of capital
was proceeds from the issuance of long term debt and, as of
December 31, 2009, we had an outstanding debt balance of
$14.8 million, net of a $0.6 million discount. During
2008 and 2007, our primary source of capital was the proceeds of
preferred stock issuances of $19.6 million and
$14.1 million, respectively. Additionally, during 2008 we
made borrowings under our current senior revolving credit
facility, which had a balance of $7.0 million at
December 31, 2008.
Net Cash
Flows from Operating Activities
During the first half of 2010, we used $4.6 million in
operations primarily as a result of $5.0 million of loss
from continuing operations, offset by non-cash depreciation and
amortization of $2.0 million. During the first half of
2009, we used $2.4 million in operating activities as a
result of $4.0 million of loss from continued operations,
offset by non-cash depreciation and amortization of
$2.1 million.
Net cash used in operating activities was $2.0 million for
2009, $11.8 million for 2008 and $6.8 million for
2007. For 2009, net cash used in operations was primarily the
result of $8.2 million of loss from continuing operations,
partially offset by non-cash depreciation and amortization of
$4.2 million, non-cash interest expense of
$0.7 million related to our long term debt issuances and
reduction in working capital components of $0.8 million.
For 2008, net cash used in operations was primarily the result
of $13.6 million of loss from continuing operations,
partially offset by depreciation and amortization of
$3.6 million. Additional working capital for accounts
receivable and inventory
58
due to revenue growth resulted in a use of cash of
$1.9 million and $1.3 million, respectively, and was
partially offset by an increase in accounts payable of
$1.1 million.
For 2007, net cash used in operations was primarily the result
of $12.2 million of loss from continuing operations,
partially offset by depreciation and amortization of
$3.4 million and the increase of accounts payable and
accrued expenses of $1.0 million and $1.3 million,
respectively.
Net Cash
Flows from Investing Activities
Our primary investing activities are capital expenditures for
property, equipment and bottles. Our capital expenditures in the
past have been primarily for the installation of our recycle
centers and display racks at new locations that offer our water
bottle exchange service as well as related transportation racks
and bottles. We also invest in technology infrastructure to
manage our national network.
During the first half of 2010 and 2009, cash flows from
investing activities primarily consisted of capital expenditures
for property, equipment and bottles of $1.7 million and
$1.3 million, respectively. During 2009, 2008 and 2007 cash
flows from investing activities included capital expenditures
for property and equipment and bottles of $2.4 million,
$9.4 million and $5.0 million, respectively.
Net Cash
Flows from Financing Activities
During the first half of 2010, cash provided by financing
activities was primarily from borrowings under our current
senior revolving credit facility of $8.5 million offset by
dividends paid of $0.2 million and equity issuance costs of
$1.4 million. During the first half of 2009, cash provided
by financing activities was primarily from the issuance of long
term debt of $10.0 million offset by payments on our
current senior revolving credit facility of $3.0 million,
debt issuance costs of $0.6 million and dividends paid of
$0.8 million.
For 2009, financing activities were primarily the issuance of
long term debt of $20.4 million that was partially offset
by payments of $6.6 million on our current senior revolving
credit facility, payments of $5.4 million related to other
long term debt, Series B preferred stock dividend payments
of $1.3 million and payment of debt issuance costs of
$0.6 million. The cash component of our Series B
preferred stock dividends was partially reduced in 2009 and
accrued as opposed to paid currently. Additionally, the cash
dividends paid will be further reduced for 2010 to approximately
$0.2 million.
For 2008, financing activities were primarily the issuance of
preferred stock of $19.6 million and borrowings of
$7.0 million on our current senior revolving credit
facility that were partially offset by payments of
$2.3 million of Series B preferred stock dividends.
For 2007, financing activities were primarily the issuance of
preferred stock of $14.1 million that was partially offset
by $1.6 million of Series B Preferred Stock dividend
payments.
Current
Senior Revolving Credit Facility
We originally entered into a revolving credit facility with
Wachovia Bank National Association in June 2005 and have
subsequently amended the facility and extended the term to
January 30, 2011. The current facility commitment is
$10.0 million, allows for up to a $3.0 million
overadvance line (the Overadvance Line) and is
subject to a customary borrowing base calculation for advances.
Interest on the outstanding borrowings under the current senior
revolving credit facility is payable quarterly at our option at:
(i) the greater of (A) the LIBOR Market Index Rate or
(B) 2.0% plus in either such case the applicable margin or
(ii) the greater of (X) the Federal Funds Rate plus
0.50% or (Y) the banks prime rate plus in either such
case the applicable margin. At December 31, 2009 and 2008,
the interest rate on the outstanding balance under the facility
was at the banks prime rate plus 2.50% and 0.75%,
respectively (5.75% at December 31, 2009 and 4.00% at
December 31, 2008). Effective with a June 2010 amendment,
the applicable margin was increased to 4.00% for a Libor Market
Index Rate loan (5.00% when borrowings under the Overadvance
Line are outstanding) and 2.00% for a loan provided at the
Federal Funds Rate plus 0.50% or the banks prime rate
(3.00% when borrowings under the Overadvance Line are
outstanding). At June 30, 2010, the interest rate on
outstanding borrowings was 5.25% and availability under the
facility was $0.9 million.
59
We are required to pay a fee per annum equal to 3.50% of the
outstanding amount of letters of credit issued under the current
senior revolving credit facility. In addition, there is a fee of
0.50% on the unused portion of the revolver lending commitment.
At June 30, 2010, there were outstanding letters of credit
totaling approximately $0.2 million.
The current senior revolving credit facility contains various
conditions for extensions of credit and restrictive covenants
including minimum quarterly EBITDA and gross revenue
requirements. Substantially all of our assets are pledged as
collateral to borrowings under the current senior revolving
credit facility.
Finally, Billy Prim, our Chief Executive Officer, has agreed to
personally guarantee our borrowings with respect to the
Overadvance Line in an amount up to $3.0 million. As an
inducement to Mr. Prim to guarantee the $3.0 million
Overadvance Line, the Company will issue Mr. Prim $150,000
of restricted stock with the per share value equal to
(i) the initial public offering price or (ii) if the
initial public offering does not occur, the lesser of
(a) $12.84 per share (the fair value of our common stock
based upon the valuation we obtained from a third party in
December 2009) or (b) the price per share we issue
equity in our next financing round. The restricted stock will be
issued within 30 days after our initial public offering or
the closing of our next financing round and will vest in full on
January 2, 2011. The award of restricted stock was approved
by the independent members of the board of directors and the
amount of the award was based upon 5% of the guaranteed
obligations (which the board members believed was an appropriate
amount in light of their experience with similar transactions
and representative of a 2.5% commitment fee and a 2.5% draw-down
fee).
14%
Subordinated Convertible Notes due March 31, 2011
In December 2009 and October 2010, we issued our
14% subordinated convertible notes due March 31, 2011
(2011 Notes) to 34 investors, including existing
stockholders, affiliates of existing stockholders and senior
management. The 2011 Notes have a total face value of
$18.4 million and are subordinated to our current senior
revolving credit facility. The 2011 Notes pay quarterly interest
at a rate of 14% per annum. We intend to use proceeds of this
offering to repay the 2011 Notes.
Warrants to purchase 130,747 shares of our common stock
were issued in connection with the 2011 Notes. The initial fair
value of the warrants is approximately $0.7 million and
resulted in an original issue discount on the 2011 Notes which
will be amortized as interest expense over the term of the 2011
Notes. The fair value of the warrants is included in other
long-term liabilities in the consolidated balance sheet and will
be adjusted periodically until such time as the exercise price
becomes fixed at which time the then fair value will be
reclassified as a component of stockholders equity
(deficit).
New
Senior Revolving Credit Facility
In connection with and as a condition to the closing of this
offering and in order to partially finance the Culligan Refill
Acquisition, we intend to enter into a new $40.0 million
senior revolving credit facility with Wells Fargo Bank, National
Association, Bank of America, N.A. and Branch Banking &
Trust Company that will replace our current senior revolving
credit facility. The new senior revolving credit facility will
have a three-year term and will be secured by substantially all
of the assets of the Company. The commitment letter related to
this new senior revolving credit facility effectively limits our
ability to borrow more than $20.0 million under this
facility on the closing of the offering and the senior revolving
credit facility. Interest on the outstanding borrowings under
the new senior revolving credit facility will be payable at our
option at either a floating base rate plus an interest rate
spread or a floating rate of LIBOR plus an interest rate spread.
We will also be required to pay a commitment fee on the unused
amounts of the commitments under the new senior revolving credit
facility. Both the interest rate spreads and the commitment fee
rate are determined from a pricing grid based on the
Companys total leverage ratio. The new senior revolving
credit will contain the following financial covenants: (i) a
maximum total leverage ratio that will initially be set at 3.5
to 1.0 and that will step down to 2.5 to 1.0 for the quarter
ending December 31, 2011; (ii) a minimum EBITDA threshold
initially set at $7.5 million for the quarter ended
December 31, 2010 and increasing for the two quarters
thereafter; and (iii) a minimum interest coverage ratio of
3.0 to 1.0 beginning with the quarter ended September 30,
2011.
60
Adequacy
of Capital Resources
Our future capital requirements may vary materially from those
now anticipated and will depend on many factors, including
acquisitions of other businesses, the rate of growth in new
locations and related display and rack costs, cost to develop
new water dispensers, sales and marketing resources needed to
further penetrate our markets, the expansion of our operations
in the United States and the response of competitors to our
solutions and products. Historically, we have experienced
increases in our capital expenditures consistent with the growth
in our operations and personnel, and we anticipate that our
expenditures will continue to increase as we grow our business.
While we had no material commitments for capital expenditures as
of June 30, 2010, we do anticipate incurring between
$2.0 million and $3.0 million of capital expenditures
related to our anticipated growth in exchange locations and new
water dispenser lines for the remainder of 2010. Upon completion
of the Culligan Refill Acquisition, we estimate that we will
incur between $1.0 million and $2.0 million of
additional capital expenditures in 2010 related to current
locations and future customer growth in connection with the
Culligan Refill Business. In addition, we anticipate that we may
incur additional expenses related to the integration of the
Culligan Refill Acquisition.
In addition, following the completion of this offering, we
expect to incur approximately $1.0 million per year in
increased costs as a public company related to compliance,
reporting and insurance. Mitigating these additional expenses,
our Series B preferred stock dividends will terminate upon
the completion of this offering.
Following the completion of this offering (assuming an initial
public offering price of $12.00 per share) and our entering into
our new senior revolving credit facility and the application of
the proceeds therefrom as described herein (including
consummation of the Culligan Refill Acquisition), we anticipate
having $5.0 million in initial availability under our new
senior revolving credit facility. We anticipate this
availability will increase to approximately $13.0 million
following the closing of this new facility. We believe our cash,
the proceeds from this offering, funds available under our new
senior revolving credit facility and future cash flows from our
operations will be sufficient to meet our currently anticipated
working capital and capital expenditure requirements for at
least the next twelve months.
During the last three years, trends and conditions in the retail
environment and credit markets, inflation and changing prices
have not had a material effect on our business and we do not
expect that these trends and conditions, inflation or changing
prices will materially affect our business in the foreseeable
future.
Off-Balance
Sheet Arrangements
We do not have any off-balance sheet arrangements, investments
in special purpose entities or undisclosed borrowings or debt.
Additionally, we are not a party to any derivative contracts or
synthetic leases.
Contractual
and Commercial Commitment Summary
Our contractual obligations and commercial commitments as of
December 31, 2009 are summarized below:
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Payments Due by Period
|
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Less Than
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More Than
|
|
Contractual
Obligations(1)
|
|
Total
|
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|
1 Year
|
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|
1-3 Years
|
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3-5 Years
|
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5 Years
|
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(In thousands)
|
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|
Long-term debt obligations
|
|
$
|
15,000
|
|
|
$
|
|
|
|
$
|
15,000
|
|
|
$
|
|
|
|
$
|
|
|
Capital lease obligations
|
|
|
7
|
|
|
|
4
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
2,008
|
|
|
|
691
|
|
|
|
841
|
|
|
|
394
|
|
|
|
82
|
|
Current senior revolving credit facility
|
|
|
423
|
|
|
|
423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,438
|
|
|
$
|
1,118
|
|
|
$
|
15,844
|
|
|
$
|
394
|
|
|
$
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
No amounts are included herein with
respect to dividends related to our Series B preferred
stock as all such shares will be converted or redeemed in
connection with this offering.
|
61
Inflation
During the last three years, inflation and changing prices have
not had a material effect on our business and we do not expect
that inflation or changing prices will materially affect our
business in the foreseeable future.
Quantitative
and Qualitative Disclosures About Market Risk
For fixed rate debt, interest rate changes affect the fair value
of financial instruments but do not impact earnings or cash
flows. Conversely, for floating rate debt, interest rate changes
generally do not affect the fair market value but do impact
future earnings and cash flows, assuming other factors are held
constant. The recorded carrying amounts of cash and cash
equivalents approximate fair value due to their short maturities.
We are exposed to market risk related to changes in interest
rates on borrowings under our current senior revolving credit
facility. Our current senior revolving credit facility bears
interest based on LIBOR and the prime rate, plus an applicable
margin. To quantify our exposure to interest rate risk, a
100 basis point increase in interest rates would have
increased interest expense for the years ended December 31,
2007, 2008, and 2009 by approximately $8,000, $29,000 and
$132,000, respectively. Actual changes in interest rates may
differ materially from the hypothetical assumptions used in
computing this exposure.
Seasonality
We have experienced and expect to continue to experience
seasonal fluctuations in our sales and operating income. Our
sales and operating income have been highest in the spring and
summer, and lowest in the fall and winter. Our Exchange segment,
which generally enjoys higher margins than our Products segment,
experiences higher sales and operating income in the spring and
summer. Our Products segment had historically experienced higher
sales and operating income in spring and summer, however, we
believe the seasonality of this segment will be more dependent
on retailer inventory management and purchasing cycles and not
correlated to weather. Sustained periods of poor weather,
particularly in the spring and summer, can negatively impact our
sales in our higher margin Exchange segment. Accordingly, our
results of operations in any quarter will not necessarily be
indicative of the results that we may achieve for a fiscal year
or any future quarter.
Critical
Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations is based upon our consolidated financial
statements and related notes, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America (GAAP). The preparation of
our financial statements in conformity with GAAP requires us to
make certain estimates, judgments and assumptions. We believe
that the estimates, judgments and assumptions used to determine
certain amounts that affect the financial statements are
reasonable, based on information available at the time they are
made. To the extent there are material differences between these
estimates, judgments and assumptions and actual results, our
consolidated financial statements may be affected. Some of the
more significant estimates include allowances for doubtful
accounts, valuation of inventories, depreciation, valuation of
deferred taxes and allowance for sales returns.
Revenue Recognition. Revenue is recognized for the
sale of three- and five-gallon purified bottled water upon
either the delivery of inventory to the retail stores or the
purchase by the consumer. Revenue is either recognized as an
exchange transaction (where a discount is provided on the
purchase of a
three- or
five-gallon bottle of purified water for the return of an empty
three- or
five-gallon bottle) or a non-exchange transaction. Revenues on
exchange transactions are recognized net of the exchange
discount. Our water dispensers are sold primarily through a
direct-import model, where we recognize revenue when title is
transferred to our retail customers. We have no contractual
obligation to accept returns of water dispensers nor do we
guarantee water dispenser sales. However, we will at times
accept returns or issue credits for water dispensers that have
manufacturer defects or that were damaged in transit. Revenues
of water dispensers are recognized net of an estimated allowance
for returns using an average return rate based upon historical
experience. In addition, we offer certain incentives such as
coupons and rebates that are netted against and reduce net sales
in the consolidated statements of operations. Historically,
these incentives have not been material to the overall
consolidated results of operations. With the purchase of certain
of our water dispensers we include a coupon for a free
three- or
five-gallon bottle of water. No revenue is recognized with
respect to the
62
redemption of the coupon for a free
three- and
five-gallon bottle of water and the estimated cost of the three-
and five-gallon bottle of water is included in cost of sales.
Allowance for Doubtful Accounts. We maintain an
allowance for doubtful accounts for estimated losses resulting
from our retail customers inability to pay us. The
allowance for doubtful accounts is based on a review of
specifically identified accounts in addition to an overall aging
analysis. Judgments are made with respect to the collectability
of accounts receivable based on historical experience and
current economic trends. Actual losses could differ from those
estimates.
Long-Lived Assets. We review long-lived assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. The carrying
amount of a long-lived asset is not recoverable if it exceeds
the sum of the undiscounted cash flows expected to result from
the use and eventual disposition of the asset at the date it is
tested for recoverability, whether in use or under development.
An impairment loss is measured as the amount by which the
carrying amount of a long-lived asset exceeds its fair value. We
recorded an impairment charge in 2008 of $98,000, related to
display racks no longer in use and to be disposed.
Income Taxes. We account for income taxes using the
asset and liability method, which requires recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial
statements. Under this method, deferred tax assets and
liabilities are determined based on the difference between the
financial statement and tax bases of assets and liabilities,
using enacted tax rates in effect for the year in which the
differences are expected to reverse. Deferred tax assets are
reduced by a valuation allowance to the extent that utilization
is not presently more likely than not.
Effective January 1, 2007, we adopted the provisions of
Accounting Standards Codification (ASC)
740-10,
Income Taxes. Previously, we had accounted for tax
contingencies in accordance with ASC
450-10,
Contingencies. As required by ASC
740-10, we
recognize the financial statement benefit of a tax position only
after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax
positions meeting the more-likely-than-not threshold, the amount
recognized in the financial statements is the largest benefit
that has a greater than 50 percent likelihood of being
realized upon ultimate settlement with the relevant tax
authority. At the adoption date, we applied ASC
740-10 to
all tax positions for which the statute of limitations remained
open. The implementation of ASC
740-10 did
not have a material impact on our consolidated financial
statements.
Stock-Based Compensation. We account for our
stock-based employee and director compensation plans in
accordance with ASC 718, Compensation-Stock Compensation.
ASC 718 requires recognition of the cost of employee services
received in exchange for an award of equity instruments in the
financial statements over the period the employee is required to
perform the services in exchange for the award (presumptively
the vesting period). In 2007, 2008 and 2009 compensation expense
related to stock options was approximately $157,000, $215,000
and $298,000 and is included in selling, general and
administrative expenses from continuing operations,
respectively, and approximately $25,000, $61,000 and $80,000 is
included in discontinued operations, respectively. For the six
months ended June 30, 2010, compensation expense related to
stock options was approximately $153,000, which is included in
selling, general and administrative expenses from continuing
operations.
We measure the fair value of each stock option grant at the date
of grant using the Black-Scholes option pricing model. The
weighted-average fair value per share of the options granted
during 2007, 2008 and 2009 was $6.99, $8.66 and $5.11,
respectively. The weighted-average fair value per share of the
options granted during the six months ended June 30, 2010
was $6.16. The following assumptions were used in arriving at
the fair value of options granted:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Year Ended
|
|
Ended
|
|
|
December 31,
|
|
June 30,
|
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
Risk-free interest rate
|
|
|
4.6
|
%
|
|
|
3.2
|
%
|
|
|
2.0
|
%
|
|
|
2.8
|
%
|
Expected life of options in years
|
|
|
6.3
|
|
|
|
5.9
|
|
|
|
5.5
|
|
|
|
6.3
|
|
Estimated volatility
|
|
|
45.0
|
%
|
|
|
39.0
|
%
|
|
|
39.0
|
%
|
|
|
45.5
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63
The risk-free interest rate is based on the implied yield
available on U.S. Treasury zero-coupon issues with a
remaining term approximately equal to the expected life of our
stock options. The estimated pre-vesting forfeiture rate is
based on our historical experience. The expected term of the
options is based on evaluations of historical and expected
future employee exercise behavior. As a non-public entity,
historic volatility is not available for our shares. As a
result, we estimated volatility based on a peer group of
companies, which we believe collectively provide a reasonable
basis for estimating volatility. We intend to continue to
consistently use the same group of publicly traded peer
companies to determine volatility in the future until sufficient
information regarding volatility of our share price becomes
available or the selected companies are no longer suitable for
this purpose. We do not expect to declare dividends on our
common stock in the foreseeable future. As of each stock option
grant date, we considered the fair value of the underlying
common stock, determined as described below, in order to
establish the option exercise price.
During 2009 a total of 13,608 common stock options were granted,
all on one date during the quarter ended March 31, 2009, at
an exercise price of $13.04 per share. The estimated fair value
of our common stock on the issuance date was $13.04 per share.
During the six months ended June 30, 2010, a total of
31,145 common stock options were granted, all in the first
quarter of 2010, at an exercise price of $12.84 per share.
The estimated fair value of our common stock on the issuance
date was $12.84 per share. In addition, we granted
105,654 shares of restricted stock that generally
cliff-vest over a three-year period and we recognized
compensation expense of $127,000 related to these awards, which
is included in selling, general, and administrative expenses
from continuing operations.
At June 30, 2010, we had approximately 307,000 stock
options outstanding, approximately 250,000 of which were vested
with an intrinsic value of approximately $210,000, and
approximately 57,000 of which were unvested with no intrinsic
value. The intrinsic value reflects the amount by which $12.00
(the midpoint of our estimated public offering price) exceeds
the exercise price of the outstanding stock options.
In April 2010, the Board of Directors approved the 100%
vesting of all unvested stock option awards upon the successful
completion of an initial public offering of the Companys
common stock. All unrecognized compensation cost at the time the
stock option awards become fully vested would then be expensed.
Significant Factors Used in Determining Fair Value of Our
Common Stock. The fair value of the shares of common
stock that underlie the stock options we have granted has
historically been determined by our board of directors based
upon information available to it at the time of grant. Because,
prior to this offering, there has been no public market for our
common stock, our board of directors has determined the fair
value of our common stock by utilizing, among other things,
recent or contemporaneous valuation information from negotiated
equity transactions with third parties or third party
valuations. The valuation information included reviews of our
business and general economic, market and other conditions that
could be reasonably evaluated at that time, including our
financial results, business agreements, intellectual property
and capital structure. These valuation approaches are based on a
number of assumptions, including our future sales and industry,
general economic, market and other conditions that could
reasonably be evaluated at the time of the valuation.
For the 13,608 stock options granted on one date in the first
quarter of 2009, the fair value of our common stock was
determined by the board of directors to be $13.04 per share. The
fair value was based in part upon the finalization of the
conversion ratio of the Series C Preferred Stock on
December 31, 2008. The Series C Preferred Stock was
issued in an
arms-length
transaction primarily to unrelated third parties in 2008 with an
initial conversion to common stock ratio of 1:0.096 or $25.04
per share. However, the Series C Preferred Stock contained
a beneficial conversion feature that was negotiated with the
primarily unrelated third parties that adjusted and was
finalized based upon the consolidated net sales for the year
ending December 31, 2008. The adjusted conversion ratio was
1:0.184 or $13.04 per share. In addition, the board of directors
considered the Companys most recent independent valuation
and then current expectations of the Companys future
performance in determining that $13.04 per share was a
reasonable fair valuation of common stock at December 31,
2008 and that there were not any significant changes in the
business or results of operations from December 31, 2008 to
the date in the first quarter of 2009 the stock options were
issued that would change that estimated fair value.
64
For the 31,145 stock options and 105,654 restricted
stock awards granted during the first quarter of 2010, the fair
value of our common stock was determined by the board of
directors to be $12.84 per share. The fair value was based
upon a valuation obtained by the Company from an unrelated party
in December 2009 that determined the fair value of the
Companys common stock to be $12.84 per share. The
fair value method utilized by the unrelated party was the income
approach. The income approach recognizes that the current value
is premised upon the expected receipt of future economic
benefits or cash flows. The fair value is developed utilizing
managements estimates of expected future cash flows and
discounting them to their present value utilizing a discount
rate of 20.0%. In addition, there were not any significant
changes in the business, results of operations or expected
future cash flows from the valuation date in December 2009 to
the dates in the first quarter of 2010 the stock options and
restricted stock awards were granted that would change the
estimated fair value.
Recent
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board
(FASB) issued authoritative guidance which
established the Accounting Standards Codification
(ASC or Codification) as the source of
authoritative GAAP recognized by the FASB to be applied to
nongovernmental entities, and rules and interpretive releases of
the SEC as authoritative GAAP for SEC registrants. The
Codification supersedes all existing non-SEC accounting and
reporting standards upon its effective date and, subsequently,
the FASB will not issue new standards in the form of Statements,
FASB Staff Positions or Emerging Issues Task Force Abstracts.
The guidance is not intended to change or alter existing GAAP.
The guidance became effective in our fourth quarter of 2009. The
guidance did not have an impact on our consolidated financial
position, results of operations or cash flows.
In May 2009, the FASB issued authoritative guidance on the
accounting for and disclosure of events that occur after the
balance sheet date. This guidance was effective for interim and
annual financial periods ending after June 15, 2009. This
guidance was amended in February 2010. It requires an entity
that is a SEC filer to evaluate subsequent events through the
date that the financial statements are issued. The adoption did
not impact our consolidated financial position, results of
operations or cash flows.
In January 2010, the FASB issued guidance, which clarifies that
the stock portion of a distribution to stockholders that allows
them to receive cash or stock with a potential limitation on the
total amount of cash that all stockholders can elect to receive
in the aggregate is considered a share issuance that is
reflected in earnings per share prospectively and is not a stock
dividend. This update is effective for our first quarter of
2010. The adoption is not expected to have a material impact on
our consolidated financial position results of operations or
cash flows.
In January 2010, the FASB issued guidance that clarifies ASC 810
implementation issues relating to a decrease in ownership of a
subsidiary that is a business or non-profit activity. This
amendment affects entities that have previously adopted ASC
810-10. This
update is effective for our first quarter of 2010. The adoption
is not expected to have a material impact on our consolidated
financial position, results of operations or cash flows.
65
BUSINESS
Overview
We are a rapidly growing provider of three- and five-gallon
purified bottled water and water dispensers sold through major
retailers nationwide. We believe the market for purified water
is growing due to evolving taste preferences, perceived health
benefits and concerns regarding the quality of municipal tap
water. Our products provide an environmentally friendly,
economical, convenient and healthy solution for consuming
purified water. Our business is designed to generate recurring
demand for Primo purified bottled water through the initial sale
of our innovative water dispensers. This business strategy is
commonly referred to as razor-razorblade because the
initial sale of a product creates a base of users who frequently
purchase complementary consumable products. We believe dispenser
owners consume an average of 35 multi-gallon bottles of water
annually. Once our bottled water is consumed using a water
dispenser, empty bottles are exchanged at our recycling center
displays where consumers receive a recycling ticket that offers
a discount toward the purchase of a full bottle of Primo
purified water. Each of our three- and five-gallon bottles can
be sanitized and reused up to 40 times before being taken out of
use, crushed and recycled, substantially reducing landfill waste
compared to consumption of an equivalent volume of single-serve
bottled water. As of June 30, 2010, our water bottle
exchange service and water dispensers were offered in each of
the contiguous United States and located in approximately 7,200
and 5,500 retail locations respectively, including Lowes
Home Improvement, Sams Club, Costco, Walmart, Target,
Kroger, Albertsons and Walgreens.
We have created a new nationwide single-vendor water bottle
exchange solution for our retail customers, addressing a market
demand that we believe was previously unmet. Our water bottle
exchange solution is easy for retailers to implement, requires
minimal management supervision and store-based labor and
provides centralized billing and detailed performance reports.
Our solution offers retailers attractive financial margins and
the ability to optimize typically unused retail space with our
displays. Additionally, due to the recurring nature of water
consumption and water bottle exchange, retailers benefit from
year-round customer traffic and highly predictable revenue.
We deliver our solution to retailers utilizing our national
network. Our independent bottlers and distributors typically
have made already the capital investment required to deliver our
solution, including investment in bottling facilities and
storage and distribution assets. We focus our capital
expenditures on developing new retail relationships, installing
displays at store locations, raising brand awareness, research
and development for new products and maintaining our MIS tools.
We are able to manage our national network on a real-time basis
through our MIS tools, which provide resource planning and
delivery schedule tracking, thus enabling us to optimize our
networks assets and respond to customer needs. In
addition, our national network benefits from the recurring
nature
66
of water consumption and water bottle exchange that generates
year-round demand and optimizes utilization of their existing
production and distribution assets. In addition, our national
network benefits from our MIS tools that assist resource
planning and delivery schedule optimization. We believe our
solution and national network provide us a significant
competitive advantage in servicing our retail customers.
We benefit significantly from management experience gained over
the last 15 years in exchange-based businesses, which
enables us to implement best practices and develop and maintain
key business relationships. Prior to founding Primo, our Chief
Executive Officer founded Blue Rhino Corporation, a propane
cylinder exchange business, in 1994 and, with several of our
other key executive officers, led its initial public offering in
1998 and successful sale in 2004. At the time of the sale, we
believe Blue Rhino was a market leader in propane grill cylinder
exchange with over 29,000 retail locations in 49 states.
Industry
Background
We believe there are several trends that support consumer demand
for our water bottle exchange service, water dispensers and,
following the Culligan Refill Acquisition, refill vending
services, including the following:
Emphasis
on Health and Wellness
The majority of the human body is comprised of water and nearly
all critical body functions rely on proper hydration. As part of
a desire to live a healthier lifestyle, we believe consumers are
increasingly focused on drinking more water relative to
consumption of high caloric beverages, carbonated soft drinks
and beverages containing artificial sweeteners.
Concerns
Regarding Quality of Municipal Tap Water
Many consumers purchase purified water not only due to better
taste, but also because of concerns regarding municipal tap
water quality. Municipal water is typically surface water that
is treated centrally and pumped to homes, which can allow
additional contaminants to dissolve into the water through
municipal or household pipes impacting taste and quality. There
have been many recent publications highlighting pollution and
quality issues with municipal water in the United States.
Additionally, due to budgetary deficits, municipalities are
increasingly privatizing their water treatment and distribution
systems, and there have been many compliance and quality issues
documented in connection with privatized municipal water systems.
Growing
Preference for Purified Water
We believe consumer preference toward purified water relative to
tap water continues to grow. With increasing availability in
recent years, purified water has become accepted on a mainstream
basis and preferred by many over municipal tap water. While it
is difficult to quantify purified water consumption in all of
its forms, according to an April 2010 report by independent
market analyst Datamonitor, Bottled Water in the United
States, the U.S. bottled water market generated revenues of
$17.1 billion in 2009.
Increasing
Demand for Products with Lower Environmental Impact
We believe that consumers are increasingly favoring products
with a lower environmental impact with a reuse, recycle,
reduce mindset becoming a common driver of consumer
behavior. Areas of concern include products packaging
materials, carbon footprint and crude oil usage in production
and distribution and the impact on landfills when disposed. Most
single-serve PET water bottles are produced using fossil fuels
and contribute to landfill waste given that only 27% of PET
bottles are recycled according to a November 2009 Environmental
Protection Agency report. Additionally, according to the
December 2008 report, Bottled Water-U.S., by Mintel
International Group Limited, the incidence of people who do not
drink single-serve PET bottled water because of environmental
concerns nearly doubled from 18.0% in 2007 to 35.0% in 2008.
Governmental legislation also reflects these concerns with the
passage of bottle bills in many jurisdictions that
tax the purchase of plastic water bottles, require deposits with
the purchase of certain plastic bottles, prohibit the use of
government funds to purchase plastic water bottles and ban
certain plastic bottles from landfills.
67
Source: National Association for PET Container Resources 2005
and 2008 Reports on Postconsumer PET Container Recycling
Activity.
Availability
of an Economical Water Bottle Exchange Service and Innovative
Water Dispensers
According to 2007 United States census data, there are
approximately 112 million households. Based on estimates
derived from industry data, we believe the current household
penetration rate of
multi-gallon
water dispensers is approximately 4%, with the vast majority of
these households utilizing traditional home delivery services.
Until recently, there has been little innovation, design
enhancement and functionality improvement in water dispensers to
meet modern household needs and competing water dispensers have
traditionally retailed at prices we believe are unlikely to
support greater household adoption. Compounding these issues,
there previously was no viable provider of an economical water
bottle exchange service with major retailer relationships
nationwide to promote dispenser usage beyond the traditional
home delivery model. We believe our water bottle exchange
service provides this alternative and we believe we are
currently the only provider delivering a solution nationally to
retailers. We believe there are over 200,000 major retail
locations throughout the United States and Canada that we can
target to sell our dispensers or offer our water bottle exchange
service and, following the Culligan Refill Acquisition, refill
vending services.
Our
Competitive Strengths
We believe that our competitive strengths include the following:
Appeal to
Consumer Preferences
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Environmental Awareness. Our water bottle exchange
service incorporates reuse of existing bottles, recycles water
bottles when their lifecycle is complete and reduces landfill
waste and fossil fuel usage compared to alternative methods of
bottled water consumption. Our three- and five-gallon water
bottles are exchanged, sanitized and reused up to 40 times
before being taken out of service, crushed and recycled. Given
its typical exchange lifecycle, one Primo five-gallon water
bottle provides consumers with water in an amount equivalent to
approximately 1,200 16 ounce single-serve PET bottles. When used
as an alternative for consuming purified water, based on current
recycling rates, one Primo five-gallon water bottle can prevent
approximately 875 16 ounce single-serve PET bottles from
contributing to landfill waste. In addition, we believe our
water bottle exchange service uses less fossil fuel in the
distribution process and has a lower carbon footprint than
alternative methods of bottled water consumption. Our
geographically dispersed national network is typically closer to
major retailers than our centralized single-serve bottled water
competitors. In addition, our exchange service is utilized by
consumers as part of their ordinary shopping patterns, compared
to separate, non-
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68
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optimized deliveries typically associated with traditional home
delivery providers, generally by less fuel efficient vehicles.
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Value. We provide consumers the opportunity for cost
savings when consuming our bottled water compared to both
single-serve bottled water and typical home and office delivery
services. We believe our five-gallon bottles of purified water
typically cost a consumer between $5.99 and $6.99, after giving
effect to the discount provided by our recycling ticket. We
believe this compares favorably to the cost of single-serve PET
bottles, case pack water and most home and office delivery
services. The cost savings provided by our recycle ticket also
provides consumers an incentive to remain a user of our water
bottle exchange service. Finally, our water dispensers are sold
at attractive retail prices in order to enhance consumer
awareness and adoption of our water bottle exchange service,
increase household penetration and drive sales of our bottled
water.
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Convenience. Our water bottle exchange service and
water dispensers are available at major retail locations
nationwide. In addition, our water bottle exchange service
provides consumers the convenience of exchanging empty bottles
and purchasing full bottles at any participating retailer. We
offer three- and five-gallon water bottle options to address
different consumer volume preferences. We believe our water
bottle exchange service provides a convenient way to consume
purified water compared to home and office delivery services.
Our water bottle sales displays are fully stocked and ready for
consumer purchases. In addition, our exchange service permits
consumers to purchase only the number of water bottles they need
without the water bottle purchase minimums or bottle deposits
often charged by home and office delivery providers.
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Taste. We have dedicated significant time and effort
in developing our water purification process and formulating the
proprietary blend of mineral ingredients included in Primo
purified water that we believe has a silky smooth taste. In an
independent taste test that we commissioned and was conducted in
six regions throughout the United States in 2007, four out of
five participants on average preferred Primo purified water over
municipal tap water and three out of four participants on
average preferred Primo purified water over their regions
market-leading bottled water.
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Health and Wellness. As part of a desire to live a
healthier lifestyle, we believe that consumers are increasingly
focused on drinking more water relative to consumption of other
beverages. As we raise our brand awareness, we believe consumers
will recognize that our water bottle exchange service is an
effective option for their purified water consumption needs.
|
Key
Retail Relationships Served by Nationwide Single-Vendor
Solution
We believe we are the only water bottle exchange provider with a
single-vendor solution for retailers nationwide. Our solution is
easy to implement and supervise for national and regionally
concentrated major retailers. We manage our national network to
service our retail customers. This network utilizes our MIS
tools and processes to optimize their production and
distribution assets while servicing our retail customers. We
believe the combination of our major retail relationships,
unique single-vendor solution for retail customers, national
network and our MIS tools is difficult to replicate. We
anticipate these factors will facilitate our introduction of new
purified water-related products in the future.
Ability
to Attract and Retain Consumers
We offer razor-razorblade products designed to
generate recurring demand for Primo purified bottled water (the
razorblade) through the initial sale of our innovative water
dispensers (the razor), which include a coupon for a free three-
or five-gallon Primo bottle of water. We acquire new consumers
and enhance recycling efforts by accepting most
dispenser-compatible water bottles in exchange for a recycle
ticket discount toward the purchase of a full bottle of Primo
purified water. Our water bottle exchange service is attractive
to retailers as water dispenser owners consume what we believe
to be an average of 35 multi-gallon bottles of water per year,
which facilitates repeat consumer traffic in our retailers
stores. In addition, based on discussions with our retail
customers, we believe we are a leading provider of water
dispensers to U.S. retailers, a status we believe we achieved
within less than two years of entering the market. We believe
this rapid success is due to the innovative features, design
elements and attractive retail prices of our water dispensers.
We further believe our offering high-quality water dispensers
enhances consumer awareness and adoption of our water bottle
exchange service, increases household penetration and drives
sales of our bottled water.
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Efficient
Business Model
Our business model allows us to efficiently offer our solution
to our retail partners and centrally manage our national network
without a substantial capital investment. We believe our
business processes and MIS tools enable us to manage the
bottling and distribution of our water, our product quality,
retailer inventory levels and the return of used bottles on a
centralized basis, leveraging our invested capital and
personnel. We own the bottles, transportation racks, mineral
injectors and sales and recycling displays to ensure product
quality and proper positioning of the Primo brand. We focus our
capital expenditures on developing new retail relationships,
installing displays at store locations, raising brand awareness,
research and development for new products and maintaining our
MIS tools. We believe our water bottle exchange service is
unique in that we are not required to make a significant portion
of the capital investment required to operate our exchange
service nationwide. Participation in our water bottle exchange
service does not typically require independent bottlers and
distributors to make substantial new investments because they
often are able to augment their current production capacity and
leverage their existing bottling and distribution assets. In
addition, the flow of payments between the retailer and our
bottlers and independent distributors is a critical component of
our overall relationship with our major retail accounts that we
control efficiently through electronic data interchange.
Benefit
from Managements Proven Track Record
We benefit greatly from management experience gained over the
last 15 years in exchange businesses, which enables us to
implement and refine best practices and develop and maintain key
business relationships. Our Chief Executive Officer, Billy D.
Prim, founded Blue Rhino Corporation, a propane cylinder
exchange business, in 1994 and led its IPO in 1998 and its
successful sale in 2004. At the time of the sale, we believe
Blue Rhino was a market leader of propane grill cylinder
exchange with over 29,000 retail locations in 49 states. In
addition to our Chief Executive Officer, our Chief Financial
Officer, Senior Vice President of Operations, Vice President of
Products and Vice President of National Accounts all held
comparable positions within the Blue Rhino organization during
its rapid sales and location growth. We believe this experience
combined with our nationwide single-vendor solution contributed
to Walmarts recent decision to name Primo category manager
for water bottle exchange and water dispensers.
Growth
Strategy
We seek to increase our market share and drive further growth in
our business by pursuing the following strategies:
Increase
Penetration with Existing Retail Relationships and Develop New
Retail Relationships
We believe we have significant opportunities to increase store
penetration with our existing retail relationships. As of
June 30, 2010, our water bottle exchange service was
offered at 5,600 of our top ten retailers nationwide
locations. Such retailers present us an opportunity of
approximately 13,900 additional nationwide locations.
There is minimal overlap of fewer than 100 locations where our
water bottle exchange service is offered and the Culligan Refill
Business is operated. Following the Culligan Refill Acquisition,
we intend to further penetrate our other existing retail
customers with our hydration solutions which collectively
provide us the opportunity to be present in more than 26,600
additional locations.
Our long-term strategy includes targeting more than 50,000 total
retail store locations (which includes new locations with our
existing retail customers) within our primary retail categories
of home centers, hardware stores, mass merchants, membership
warehouses, grocery stores, drug stores and discount general
merchandise stores for our water bottle exchange service or the
Culligan Refill Business. We believe that the introduction of
additional hydration solutions to our product portfolio will
allow us to cross-sell products to our existing and
newly-acquired retail customers.
Within two years of Primos inception, we expanded our
retail presence from 13 states to our current locations within
each of the contiguous United States. In addition, from 2005
through June 30, 2010, we increased our water
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bottle exchange locations from approximately 300 to 7,200,
representing a compound annual growth rate of approximately 103%.
Drive
Consumer Adoption Through Innovative Water Dispenser
Models
We intend to continue to develop and sell innovative water
dispensers at attractive retail prices, which we believe is
critical to increasing consumer awareness and driving consumer
adoption of our water bottle exchange service. We believe our
water dispensers have appealing features, such as stainless
steel finishes, adjustable hot and cold temperature controls and
hidden bottle bottom-loading features for convenience. As a
result of our strategy of developing innovative water
dispensers, we believe based on discussions with our retail
customers that we became a leading seller of water dispensers to
retailers within less than two years of our entry into the
market. Since we began selling our water dispensers in 2005, we
have sold over 590,000 units, and have expanded our retail
network from four locations as of December 31, 2007, to our
current network of approximately 5,500 locations. We plan to
continue introducing new dispenser models at attractive retail
price points to meet the evolving needs of consumers, enhance
consumer awareness and adoption of our water bottle exchange
service, and increase household penetration. Our long term
strategy is to provide multiple purified water-based beverages
(including traditional hot drink products and flavored and
carbonated beverages) from a single Primo water dispenser, with
consistent promotion of our water bottle exchange and, following
the Culligan Refill Acquisition, refill vending services to
supply the purified water.
Increase
Same Store Sales
We offer razor-razorblade products designed to
generate recurring demand for Primo purified bottled water and,
upon the consummation of the Culligan Refill Acquisition,
drinking water refill vending services (the razorblade) through
the initial sale of water dispensers (the razor). We sell our
water dispensers at minimal margin and provide a coupon for a
free three- or five-gallon bottle of water with the sale of
various water dispensers at certain retailers to drive consumer
demand for our water bottle exchange and, following the Culligan
Refill Acquisition, refill vending services.
We believe increasing unit sales of Primo purified bottled water
is dependent on generating greater consumer awareness of the
environmentally friendly and economical aspects of and the
convenience associated with both our purified bottled water and
our water bottle exchange and, following the Culligan Refill
Acquisition, refill vending services. We expect that our
branding, marketing and sales efforts will result in greater
usage of our water bottle exchange and, following the Culligan
Refill Acquisition, refill vending services. We are also
increasing our public relations initiatives associated with new
market launches, developing additional cooperative advertising
programs with retail distribution partners and increasing our
field marketing activities. In addition, as consumers exchange
dispenser-compatible water bottles, we encourage the use of our
water bottle exchange service by providing them a recycling
ticket that provides a discount on a full bottle of Primo
purified water.
Develop
and Install Other Hydration Solutions
We believe we have significant opportunities to leverage our
national network and our systems and processes to offer other
environmentally friendly, economical, convenient and healthy
hydration solutions to our retail partners without significant
increases in our centralized costs. For example, the Culligan
Refill Business will provide us an established platform to offer
our retail partners self-service refill vending machines that
dispense drinking water into empty reusable water bottles. We
believe this offering will cater to a more price-sensitive
consumer. In addition, we intend to offer to our retail partners
automated, self-bagging purified ice dispensers. These purified
ice dispensers will provide a simplified method of acquiring ice
in customized offering sizes without the extensive manufacturing
and storage networks typical of the ice dispensing industry.
Pursue
Strategic Acquisitions to Augment Geographic and Retail
Relationships
In addition to the Culligan Refill Acquisition, we believe
opportunities exist to expand through selective acquisitions,
including smaller water bottle exchange businesses with
established retail accounts, other on-premises self-service
water refill vending machine networks and retail accounts, ice
dispenser machine networks and retail accounts and water
dispenser companies.
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Product
Overview
Water
We have dedicated significant time and effort in developing our
water purification process and formulating the proprietary blend
of mineral ingredients included in our purified water. Our
proprietary blend of mineral ingredients was developed with the
assistance of consultants and several months of lab work and
taste tests and has what we believe to be a silky smooth taste.
In an independent taste test that we commissioned and was
conducted in six regions throughout the United States in 2007,
four out of five participants on average preferred Primo
purified bottled water over tap water and three out of four
participants on average preferred Primo over their regions
market-leading bottled water brand. We believe it is important
that each bottle of Primo purified water has consistent taste
and each production lot is tested by the bottler to ensure it
meets our standards. In addition, to ensure that our safety
standards are met and FDA and industry standards are met or
exceeded, each production lot of our purified water undergoes
chemical and microbiological testing by the bottler and all
facilities bottling Primo purified water undergo regular hygiene
audits by a third party hired by us.
Water
Bottles
We currently source three- and five-gallon water bottles from
multiple independent vendors for use in our exchange service.
Each of our Primo water bottles includes a handle designed for
easy transportation and lifting when installing the bottle onto
or into one of our water dispensers. Our bottles also include a
specially designed cap that prevents spills when carrying or
installing.
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Water
Dispensers
We currently source and market three lines of water dispensers
comprised of 18 models:
Our dispensers are designed to dispense Primo and other
dispenser-compatible bottled water. Our dispensers have
manufacturer suggested retail prices that range from $169.99 for
our
top-of-the-line
bottom-loading model with a stainless steel finish to $19.99 for
a simple pump that can be installed on a bottle and operated by
hand.
Currently, more than 95% of our dispenser sales are attributable
to our bottom- and top-loading products. Consistent with our
environmental focus, our electric dispensers are Energy
Star®
rated, and, we believe, utilize less energy than competing water
dispensers without this industry rating. In addition, some of
our dispenser models feature power switches to individually
control the hot and cold tanks of the dispenser, saving
additional energy when not in use and providing a child-safety
feature. In addition, certain models of our bottom- and
top-loading dispensers come equipped with adjustable hot and
cold temperature controls conveniently located on the top of the
dispenser.
We believe our bottom loading dispensers are attractive to
consumers and will drive the greatest increase in household
penetration as a result of their innovative styling and
features. Water bottles are loaded and concealed inside our
bottom-loading dispensers by a hinged door for ease of use and a
clean aesthetic appearance.
Currently, all of our water dispensers are manufactured by
independent suppliers in China. Our dispensers are shipped
directly to our retailer partners and we do not use distributors
in connection with our water dispensers.
Primo
Water Marketing
Our marketing efforts focus primarily on developing and
maintaining a brand identity synonymous with an environmentally
friendly, economical, convenient and healthy solution for
purified water consumption. We direct our marketing efforts as
close as possible to the point of sale to strengthen our brand
and promote consumer awareness of our water bottle exchange
service. We believe our water bottle exchange service develops
consumer loyalty through the use of our recycling tickets. Our
marketing efforts include the following initiatives:
Primo
Water Packaging
Our three- and five-gallon water bottles, sales and recycling
center displays, water dispensers and certain distributor
delivery vehicles prominently display our Primo logo and
distinctive four-bubble design.
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Primo
Water Displays
Our sales and recycling center displays are typically located
near the front of a store, providing
point-of-sale
advertising and branding. We believe our displays enhance
consumer awareness of the Primo brand and reinforce the
association of our water with an environmentally friendly,
economical, convenient and healthy solution for purified water
consumption. Our displays include Primo graphics, slogans and
instructions on the exchange process that simply attach to the
displays. We have the ability to quickly replace, customize or
introduce new marketing materials on our displays throughout our
retail network. In addition, we work with retailers to customize
in-store solutions to best promote our brand.
Promotions
Our promotional activities target new customers by:
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Accepting third-party dispenser-compatible water bottles in the
exchange process (which we believe is unique in the industry);
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Providing attractive pricing on our water dispensers;
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Offering a free bottle of water with the purchase of a water
dispenser;
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Advertising in retailers weekly circulars; and
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Providing samples of our purified water and water dispensers
on-site at
our retailers locations and educating consumers on the
benefits of our purified bottled water and dispensers.
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We promote our brand through social media, our website
(www.primowater.com) and other public relations efforts.
We also maintain a blog (www.breakfree411.com) that is
styled as a third-party website and provides updates on the
water industry. In addition, we seek to raise awareness of our
brand and products through blogs and related periodicals that
target women as well as household and kitchen matters. We
believe that women often significantly influence household and
kitchen appliance decisions and concentrating our efforts in
this manner is designed to improve the effectiveness of our
advertising campaigns and improve household penetration.
Our promotional activities have evolved from our Taste
Perfection campaign to our Zero Waste. Perfect
Taste, campaign emphasizing our environmental efforts
while simultaneously focusing on the taste of our purified
water. We plan to increase our promotional activity as we expand
our business.
The Primo
Water Bottle Exchange Supply Chain
Water
Purification and Bottling
Our independent bottlers are responsible for the water
purification and bottling process and use their own equipment to
complete this process. Our bottling process begins with either
spring water or water from a public source that is processed
through a pre-filtration stage to remove large particles. The
water is then passed through polishing filters to catch smaller
particles followed by a carbon filtration process that removes
odors, tastes, sanitization by-products and pharmaceutical
chemicals. A microfiltration process then removes microbes
before the water is passed through a softener to increase the
purification efficiency. The water next passes through the last
phase of reverse osmosis or distillation, completing the
purification process. After the purification process is
complete, our proprietary blend of mineral ingredients is
injected into the water followed by the final ozonation process
to sanitize the water. A bottle is filled with Primo purified
water only after the inspection and sanitization steps outlined
below are completed. Each of our production lots is placed on a
48-hour hold
to allow for testing by the bottler and to ensure successful
compliance with chemical and microbiological standards. We have
the ability to trace each bottle of Primo water to its bottling
and distributor sources, and we regularly perform recall tests
to ensure our ability to react to a contamination event should
it occur. In comparison, municipal water is generally treated at
a centralized processing facility and then distributed
throughout the pipeline network. As the water flows to the point
of use, contaminants and other foreign objects may be dissolved
into the water, and household piping and faucets may collect
sediment that over time reduces the quality of municipally
supplied water.
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Our distributors are responsible for collecting empty Primo
bottles and other dispenser-compatible bottles that are
deposited into our recycling center displays. At the completion
of the delivery cycle, a distributor inspects the exchanged
bottles for reusability and coordinates the recycling efforts
with our operations personnel to ensure that reuse of each water
bottle we receive in the exchange process is being optimized.
Our water bottles can be sanitized and reused up to 40 times
before being taken out of use, crushed and recycled,
substantially reducing landfill waste compared to consumption of
similar amounts of single-serve PET bottled water. Bottles that
pass a distributors initial inspection are subject to
three washing cycles to remove particles. Bottles are then
passed through two sanitization stages before a final rinse with
hyper-ozonated water to kill or inactivate any microbes that
remain at that point in the sanitization process. The water
bottles are then ready to be filled with our purified water.
Distribution
Network
We rely on our national network to deliver our solution to
retailers. Our water bottle exchange process begins when a
distributor is directed through our proprietary MIS tool,
Routeview, to stock or replenish a Primo bottled water retail
location. Routeview enables our distributors to review delivery
quantities and tentative scheduling requirements in their
territory. Our systems provide anticipated demand based on
historical sales and, to the extent available, retailer point of
sale (POS) data. Each distributor is provided
information to enable the distributor to load a truck with the
appropriate inventory to stock or restock the water bottle sales
displays on its route, including a tailored amount of excess
bottles as safety stock. Upon arrival at each retail location,
the driver first visits the recycling center display to collect
empty Primo and other dispenser-compatible bottles. The driver
enters data related to empty bottles on a handheld device to
collect exchange efficiency information and potential customer
conversion data and then loads empty bottles onto the truck. The
driver next checks the in-store sales display to compare the
number of remaining bottles of water with the anticipated demand
report generated by our MIS tools. After entering current stock
levels, the driver is instructed by our MIS tools through the
handheld device and based on proprietary algorithms, to
replenish the sales display with an appropriate quantity of
bottles.
At the completion of the delivery cycle and after inspection of
the bottles, our distributors typically are responsible for
coordinating the sanitization and bottling process with our
bottlers. In addition, distributors must run
end-of-day
reports on their handheld devices which transmit crucial data
points into our databases and validate daily activity. Our
handheld devices also capture electronic signatures,
significantly reducing paper exchange. This greatly improves our
verification procedures and enhances our environmental efforts.
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Certain independent distributors
operate multiple distribution sites and the Company-owned
distribution sites in North Carolina and Virginia are part of a
single Company-owned distribution operation.
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We have the ability to test and refine procedures through our
Company-operated distribution system before implementing them
with our independent distributors nationwide. In addition, we
regularly solicit feedback from our independent distributors to
improve processes.
Flow of
Payments and Capital Requirements
We control the flow of payments between our retail customers and
our bottlers and distributors through electronic data
interchange. Our distributors are responsible for handling
distribution and servicing our sales and recycling center
displays. Through our handheld devices, distributors report
their deliveries which are received by our systems and verified
by data integrity checks. Depending on the retailer, our
distributors either present the store manager with an invoice
for the bottles delivered or our systems electronically bill the
retailer. We believe our five-gallon bottles of purified water
typically cost a consumer between $5.99 and $6.99, after giving
effect to the discount provided by our recycling ticket. When
accounting for the wholesale costs of our water, we believe our
retailers receive a gross margin typically between 20% and 30%.
We compensate our distributors with a fixed payment per
delivered water bottle on the fifteenth day of the month
following the delivery activity. Our fixed payment is a gross
amount from which the distributor must typically pay the
bottler. In order to maximize their returns and profitability,
our distributors increasingly are becoming vertically
integrated, using their capital to build bottling facilities.
Due to the high degree of automation during our billing and
inventory management procedures, we are able to leverage our
centralized personnel and believe we will be able to
significantly expand our business with minimal increases in
variable cost.
We focus our capital expenditures on developing new retail
relationships, installing displays at store locations, raising
brand awareness, research and development for new products and
maintaining our MIS tools. We are also
76
responsible for the centralized operations and personnel, sales
and recycling displays, bottles, transportation racks, mineral
packets and mineral injectors and handheld devices. Our national
network typically has made the capital investment required to
operate our exchange service nationwide, including a majority of
the capital expenditures related to the bottling, sanitization
and refill process and the distribution assets such as delivery
trucks and warehouse storage. Participation in our water bottle
exchange service does not typically require the independent
bottlers and distributors to make substantial new investments
because they often are able to augment their current production
capacity and leverage their existing bottling and distribution
assets. In addition, many of our major retail customers have
invested their capital to expand store locations and generate
customer traffic.
Flow of
Payments and Capital Requirements
Retailer
Relationships
We target major retailers with either a national footprint or a
significant regional concentration. Our relationships are
diversified among the following retail categories and major
accounts:
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Retail Category
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Major Accounts
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Home Centers / Hardware Stores
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Lowes Home Improvement, Ace Hardware, True Value
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Mass Merchants
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Walmart, Target, Kmart
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Grocery Stores
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Kroger, Albertsons, Food Lion
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Membership Warehouses
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Sams Club, Costco
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Drug Stores
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Walgreens, CVS
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In addition to the retail categories listed above, we anticipate
entering the office retail category in the fourth quarter of
2010.
Retailer
Opportunity
We offer retailers a single-vendor solution. Our water bottle
exchange service provides retailers with a year-round consumer
product and an opportunity to increase sales and profits with
minimal labor and financial investment. Through our national
network, we are able to service major retailers nationwide.
Retailers benefit from our water bottle exchange service that
offers high margin and generates productivity from often
underutilized interior and exterior retail space. In addition,
our water bottle exchange service has the potential to increase
retailers sales of ancillary products through increased
traffic from repeat water bottle exchange consumers, who we
believe purchase an average of 35 water bottles annually.
Account
Set-Up
We actively pursue headquarters-based retail relationships to
better serve our retail partners and minimize layers of approval
and decision-making with regard to the roll-out of our water
bottle exchange service to multiple
77
locations. Upon confirmation of new retail locations, we
coordinate with the retailer and distributor to schedule
openings in a timely manner. We actively assist retailers in
developing site plans for the setup of our sales and recycling
center displays. While retailer setup preferences may vary,
retailers often like to locate the recycling center display
prominently on the exterior of their store to ease the
transaction process, showcase their recycling and environmental
efforts and conserve inside floor space while at the same time
promoting the Primo brand.
Account
Service
Our water bottle exchange service is a turn-key program for
retailers in which we and our distributors actively service each
retail account. After the retail location is established, our
distributors complete
on-site
training and have an economic interest in supporting and growing
the business relationship to increase product throughput.
Distributors deliver three- and five-gallon Primo bottled water
directly to retail locations and maintain the sales and
recycling center displays.
Sales
Support
While distributors service our retail accounts, the customer
relationship is owned and maintained by our
experienced retail sales organization, which allows us to
develop strong brand affinity and maintain key
headquarters-based relationships to secure and maintain our
national retail network. Our retail relationships are divided
into regions and managed by our sales personnel. In addition, we
leverage our independent distributors who typically employ their
own sales representatives. This combined team is responsible for
selling and supporting our water bottle exchange service to
targeted retailers.
Systems
Support
We supply each major retail customer with a customized sales and
business update on a monthly basis. The monthly update consists
of a graphical dashboard highlighting sales trends and
location-based information as well as qualitative commentary to
assist store and headquarters personnel in their business
decisions. We believe our reports help retail personnel monitor
the success of our water bottle exchange service and highlight
our analytical and customer support capabilities as a retail
partner. In many cases, our retail customers do not have
internal reporting capabilities to develop comparable analyses.
Customer
Service
We maintain a single toll-free number for all distributors,
retailers and customers to contact us directly with questions
regarding our bottled water, water bottle exchange process and
customer service inquires. In addition, we maintain a separate
toll-free number for our water dispensers. We believe
maintaining our own customer service numbers allows us to
effectively monitor all aspects of our business and receive
feedback on issues first-hand that we can direct to our
distributors or dispenser suppliers.
Significant
Customers
For the year ended December 31, 2009, Lowes Home
Improvement, Sams Club and Walmart represented
approximately 33%, 19% and 15% of our total sales, respectively.
National
Bottler and Distributor Network
In an effort to build a market-leading single-vendor national
water bottle exchange service, we have sought to attract
experienced and well-capitalized independent bottlers and
distributors to support our retail partners. As of
December 31, 2009, we had 55 independent bottlers and 27
independent distributors as well as our two Company-owned
distribution operations covering portions of four states.
Bottler
and Distributor Opportunity
We provide independent bottlers and distributors with an
attractive business opportunity, complementing many of their
existing operations. We continually pursue new relationships and
additional locations with existing retail
78
partners to increase the production at each bottlers
manufacturing facility and the retail customer density within
each distributors territory.
Bottler
and Distributor Standards
We work very closely with our national network to ensure their
production and storage standards meet or exceed the requirements
of the United States Food and Drug Administration and other
industry regulations. As we seek to promote our brand, we
believe it is critical to provide bottled water that has
consistent taste and is produced in a manner that exceeds
current industry requirements. We regularly monitor, test and
arrange for third-party hygiene audits of each bottling facility.
In addition, we regularly monitor our distributors
performance to ensure a high level of account service.
Distributors are generally required to develop an infrastructure
sufficient to:
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Complete customer installations within 30 days of the
notification of a newly established account;
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Monitor and maintain inventory levels with assigned retail
accounts; and
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Resolve water bottle stock-outs within 36 hours.
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Bottler
and Distributor Selection Process
We have selectively identified and pursued high quality
independent bottlers and distributors that can support our major
retailers nationwide. We screen all independent bottler and
distributor candidates by reviewing credit reports, safety
records and manufacturing compliance reports, and conducting
management reference checks. As a result of this thorough
selection process, we have established what we believe to be
highly dependable relationships with our independent bottlers
and distributors. We currently maintain three distributor or
bottler relationships that have relatively high customer
concentrations in the geographic areas they serve. None of these
independent distributors or bottlers, however, had
responsibility for more than 8.0% of the bottling or more than
12.6% of the distribution with respect to our water bottle
exchange volume for the year ended December 31, 2009. We
believe we have a positive relationship with each of these
parties and our senior executives have maintained a business
relationship with each such party since they were managing
operations at Blue Rhino Corporation.
Bottler
and Distributor Services
We currently employ raw material procurement and supply chain
personnel who perform periodic inventory audits and month-end
review procedures. In addition we have operations personnel who
manage our independent bottler and distributor relationships,
including training and monitoring personnel and activities. We
also employ customer service personnel who handle bottler,
distributor, retailer and end-user phone calls.
Company
Owned Distribution Operations
We currently own and operate two distribution operations that
have distribution responsibilities for certain regions that are
relatively near our primary facilities. We distribute our
bottled water to major retailers in portions of North Carolina,
South Carolina, Florida and Virginia. We believe distributing
our bottled water in these areas is an important way for us to
better understand the bottled water exchange process and
provides us the necessary feedback to enhance our independent
bottler and distributor relationships. In addition, distributing
our bottled water in these areas should assist us in validating
the economic arrangements we offer our bottlers and distributors
and developing industry knowledge that we can deploy throughout
our system. For the year ended December 31, 2009, our two
Company-owned distribution operations accounted for
approximately 23.5% of our water bottle exchange volume.
Independent
Bottler and Distributor Agreements
We have entered into bottler and distributor agreements with
each of our independent bottlers and distributors on
substantially similar terms. While individual agreements contain
variances and exceptions, the material terms of such agreements
are described generally below. No individual bottler or
distributor is material to our overall financial condition or
results of operations.
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Independent
Bottler Agreement
In our independent bottler agreement, we appoint a bottler as a
non-exclusive supplier of our purified drinking water. The
bottler is restricted from competing with us during the term of
the agreement and for a specified period after the term in a
specified geography.
The bottler is required to bottle and deliver product in
conformance with our specifications, including our proprietary
mineral formula. The bottler must ensure that our bottled water
products comply with applicable laws, rules and regulations
(including those of the FDA), industry standards (including
those of the International Bottled Water Association) and our
quality requirements. The agreement also imposes requirements on
the bottler with respect to the maintenance of its facilities
and equipment that are intended to ensure the quality of our
products.
We provide the necessary bottles, caps, labels, transportation
racks, mineral injectors and formula minerals at no charge to
the bottler to support the bottling and supply of our bottled
water products. The bottler is required to maintain inventory
levels necessary to satisfy our production requirements. Product
may not be released for shipment until the bottler meets all
applicable quality requirements.
Pricing is set forth in the agreement, and we have the right to
modify pricing on thirty days notice to the bottler. The
agreements generally have a three-year term, and if not
otherwise terminated, automatically renew for successive
one-year periods after the initial term. Either party may
terminate the agreement in the event of an uncured material
breach by the other party.
Independent
Distributor Agreement
In our independent distributor agreement, we grant a distributor
the right to serve as our exclusive delivery and service agent
and representative with respect to our bottled water exchange
service for a specified term in a specified geographic
territory. The distributor is restricted from competing with us
during the term of the agreement and for a specified period
after the term in the specified geography. We have the right, at
any time, to purchase a distributors rights under the
agreement, along with related distribution equipment, for an
amount based on the distributors revenues under the
agreement for the prior twelve-month period and the fair market
value of the equipment being purchased.
The distributor must perform its services under the agreement in
conformance with our distributor manual and all applicable laws
and regulations, including those of the FDA.
We compensate a distributor for its services while maintaining a
direct relationship with and collecting payments from our
retailer customers within the distributors service
territory. Pricing is set forth in the agreement, and we have
the right to modify pricing and payment terms on thirty days
notice to the distributor.
The agreements generally have a ten-year term, and if not
otherwise terminated, automatically renew for successive
one-year terms after the initial ten-year term. Either party may
terminate the agreement for, among other reasons, an uncured
material breach by the other party.
Management
Information Systems
We have made a substantial investment in MIS tools which enhance
our ability to process orders, manage inventory and accounts
receivable, maintain distributor and customer information,
maintain cost-efficient operations and assist distributors in
delivering products and services on a timely basis. Our
technology utilizes highly integrated, scalable software
applications that cost-effectively support our growing retail
network. Our MIS tools also allow us to analyze historical
trends and data to further enhance the execution, service and
identification of new markets and marketing opportunities. The
primary components of our systems include the following:
Sales and
Marketing Support Systems
We operate a single customer relationship management database
that integrates all financial and transaction-based data with
respect to each retail account. Our MIS tools provide our
account managers and customer service representatives access to
crucial data to effectively manage each bottler, distributor and
retail relationship.
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Bottler
and Distributor Level Technology
Our distribution process is highly automated and scalable. Our
technology allows bottlers and distributors timely access to
information for customer support needs and provides access to
real-time data to enhance decisions. In addition, each
distributor is electronically linked to our systems with our
proprietary Routeview software. Routeview enables distributors
to review delivery quantities and tentative scheduling
requirements across our entire national network. In addition,
our MIS tools allow drivers to update delivery, inventory and
invoicing information through handheld devices. This technology
provides retailers with accurate and timely inventory and
invoices and assists each distributor in managing its
responsibilities.
Financial
Integration
We utilize Microsofts Dynamics GP software as our core
platform which interfaces with all of our systems. Each handheld
device is based on Microsofts operating system and ensures
integration within our reporting and financial databases. All
delivery transactions are validated and data is imported into
our database tables and mapped to corresponding accounting
ledgers.
Manufacturing
and Sourcing
Our manufacturing strategy is to utilize independent
manufacturers to produce empty water bottles, sales displays and
recycle centers and water dispensers at a reasonable cost. We
believe that using independent manufacturers has several
advantages over our manufacturing these items directly,
including (i) decreased capital investment in manufacturing
plants and equipment and working capital, (ii) the ability
to leverage independent manufacturers purchasing
relationships for lower materials costs, (iii) minimal
fixed costs of maintaining unused manufacturing capacity and
(iv) the ability to utilize our suppliers broad
technical and process expertise.
Currently, the majority of our water dispensers are assembled by
a single independent manufacturer in China, which utilizes
several
sub-suppliers
to provide components and subassemblies. We have the sole North
American rights to develop products with this manufacturer and
each dispenser unit is produced to our design specifications.
Each unit is inspected and tested for quality by the
manufacturers personnel prior to shipment and any units
returned by consumers or retailers are sent directly to the
manufacturer for a credit, replacement or refund issued by the
manufacturer. Our units generally are shipped directly from Hong
Kong to the retailer. For the year ended December 31, 2009,
this manufacturer produced water dispenser units that accounted
for more than 95% of our water dispenser billings.
Our water bottles and caps are produced by multiple independent
vendors throughout the United States. We select suppliers based
on price, quality and geographic proximity to our bottlers. We
only purchase water bottles with handles as a convenience
feature for consumers.
Our sales displays and recycle centers are made to our design.
We frequently request bids from multiple independent
manufacturers to achieve optimal pricing.
Product
Design and Development
A primary focus of our product research and development efforts
is developing innovative water dispensers as part of our
strategy to enhance consumer awareness and adoption of our water
bottle exchange service, increase household penetration and
drive sales of our bottled water. We continually work to improve
water dispenser features, seek to lower manufacturing costs so
that our innovative products are more affordable and introduce
new models. Innovative improvements developed in cooperation
with our manufacturing partners include bottom-loading
dispensers, adjustable hot and cold temperature controls and
faster water dispensing capabilities. Our water dispenser models
are designed to appeal to consumers of diverse demographic
audiences. We expect to introduce a new water dispenser product
line in the fourth quarter of 2010. We are also in the early
development stage of creating a water dispenser product that
provides consumers the ability to dispense multiple purified
water-based beverages, including traditional hot drink products
and flavored and carbonated beverages.
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Competition
We participate in the highly competitive bottled water segment
of the nonalcoholic beverage industry. While the industry is
dominated by large and well-known international companies,
numerous smaller firms are also seeking to establish market
niches. We believe we have a unique business model in the
bottled water market in the United States in that we not only
offer three- and five-gallon bottled water on a nationwide basis
but also provide consumers the ability to exchange their used
containers as part of our water bottle exchange service. We
believe that we are one of the first companies to provide a
national water bottle exchange service at retail. While we are
aware of a few direct competitors that operate similar networks,
we believe they operate on a much smaller scale than we do and
do not have equivalent MIS tools or bottler and distributor
capabilities to effectively support major retailers nationwide.
Competitive factors with respect to our business include
pricing, taste, advertising, sales promotion programs, product
innovation, efficient production and distribution techniques,
introduction of new packaging, and brand and trademark
development and protection.
Our primary competitors in our bottled water business include
Nestlé, The
Coca-Cola
Company, PepsiCo, Dr Pepper Snapple Group and DS Waters of
America. While none of these companies currently offers a
nationwide water bottle exchange service at retail, Nestlé
and DS Waters of America offer this service on a regional basis.
However, many of these competitors are leading consumer products
companies, have substantially greater financial and other
resources than we do, have established a strong brand presence
with consumers and have established relationships with
retailers, manufacturers, bottlers and distributors necessary to
start an exchange business at retail locations nationwide should
they decide to do so. In addition to competition between firms
within the bottled water industry, the industry itself faces
significant competition from other non-alcoholic beverages,
including carbonated and non-carbonated soft drinks and waters,
juices, sport and energy drinks, coffees, teas and spring and
tap water.
We also compete directly and indirectly in the water dispenser
marketplace. This marketplace is diverse and faces competition
from other methods of purified water consumption such as
countertop filtration systems, faucet mounted filtration
systems, in-line whole-house filtration systems, water
filtration dispensing products such as pitchers and jugs,
standard and advanced feature water coolers and
refrigerator-dispensed filtered and unfiltered water.
Intellectual
Property and Trademarks
We believe that our intellectual property provides a competitive
advantage and we have invested substantial time, effort and
capital in establishing and protecting our intellectual property
rights. We have filed certain patent applications and trademark
registration applications and intend to seek additional patents,
to develop additional trademarks and seek federal registrations
for such trademarks and to develop other intellectual property.
We consider our Primo name and related trademarks and our other
intellectual property to be valuable to our business and the
establishment of a national branded bottled water exchange
service. We rely on a combination of patent, copyright,
trademark and trade secret laws and other arrangements to
protect our proprietary rights. We own ten United States federal
trademark registrations, including registrations for our
Primo®
and Taste
Perfection®
trademarks, our
Primo®
logo and our distinctive four bubble design. U.S. federal
trademark registrations generally have a perpetual duration if
they are properly maintained and renewed. We also own a pending
application to register our Zero Waste. Perfect
Tastetm
trademark in the United States and Canada for use in association
with drinking water dispensers, bottled drinking water and a
variety of other non-alcoholic beverages. In addition, the
design of our recycling center displays is protected by four
United States design patents and two Canadian industrial design
registrations. The United States design patents expire between
May 2021 and April 2022 and, assuming that certain
required fees are paid, the Canadian industrial design
registrations expire in May 2017. We own three pending
utility patent applications in the United States for our bottled
water distribution method and bottle return apparatus (or our
recycling center displays). Additionally, we are party to a
license agreement with The Black & Decker Corporation,
which expires December 31, 2010, pursuant to which we
provided private label water dispensers to Target that are
branded as Black & Decker products.
In addition to patent protection, we also rely on trade secrets
and other non-patented proprietary information relating to our
product development, business processes and operating
activities. We regard portions of our proprietary MIS tools,
various algorithms used in our business and the composition of
our mineral formula to be
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valuable trade secrets of the Company. We seek to protect this
information through appropriate efforts to maintain its secrecy,
including confidentiality agreements.
Governmental
Regulation
The conduct of our businesses and the production, distribution,
advertising, promotion, labeling, safety, transportation, sale
and use of our products are subject to various laws and
regulations administered by federal, state and local
governmental agencies in the United States. It is our policy to
abide by the laws and regulations that apply to us, and we
require our bottling, manufacturing, and distributing partners
to comply with all laws and regulations applicable to them.
We are required to comply with:
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federal laws, such as the Federal Food, Drug and Cosmetic Act
and the Occupational Safety and Health Act;
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customs and foreign trade laws and regulations;
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state consumer protection laws;
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federal, state and local environmental, health and safety laws;
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laws governing equal employment opportunity and workplace
activities; and
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various other federal, state and local statutes and regulations.
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We maintain environmental, health and safety policies and a
quality, environmental, health and safety program designed to
ensure compliance with applicable laws and regulations.
The United States Food and Drug Administration (the
FDA) regulates bottled water as a food under the
federal Food, Drug and Cosmetic Act. Our bottled water must meet
FDA requirements of safety for human consumption, identity,
quality and labeling. Further, the sale and marketing of our
products is subject to FDAs advertising and promotion
requirements and restrictions. In addition, FDA has established
current good manufacturing practice regulations,
which govern the facilities, methods, practices and controls
used for the processing, bottling and distribution of bottled
drinking water. We and our third-party supply, bottling and
distribution partners are subject to these requirements. We also
must comply with overlapping and sometimes inconsistent state
regulations in various jurisdictions. As a result, we must
expend resources to continuously monitor state legislative and
regulatory activities for purposes of identifying and ensuring
compliance with the laws and regulations that apply to our
bottled water business in each state in which we operate. While
we must meet the government-mandated standards, we believe that
our self-imposed standards meet or exceed those set by federal,
state and local regulations.
Additionally, the manufacture, sale and use of resins used to
make water bottles is subject to regulation by the FDA. Those
regulations are concerned with substances used in food packaging
materials, not with specific finished food packaging products.
We believe our beverage containers are in compliance with FDA
regulations. Additionally, the use of polycarbonates in food
containers used by children under three years of age is subject
to certain state and local restrictions.
Measures have been enacted in various localities and states that
require a deposit or tax to be charged for certain
non-refillable beverage containers. The precise requirements
imposed by these measures vary. Other deposit, recycling or
product stewardship proposals have been introduced in various
jurisdictions. We anticipate that similar legislation or
regulations may be proposed in the future at the local, state
and federal levels.
Legal
Proceedings
From time to time, we are a party to various lawsuits, claims
and other legal proceedings arising from our normal business
activities. We have not had, and we do not believe that we have
currently, any proceedings that, individually or in the
aggregate, would be expected to have a material adverse effect
on our business, results of operations or financial condition.
Facilities
Our corporate headquarters, including our principal
administrative, marketing, sales, technical support and research
and development facilities, are located in Winston-Salem, North
Carolina where we lease approximately 14,200 square feet
under an agreement that expires on May 31, 2011.
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In addition we lease warehouse space in Winston-Salem and
Wilmington, North Carolina; Lakeland, Florida; and Petersburg,
Virginia to support our Company-owned operations in these
regions. These facilities have lease expirations that vary from
November 2010 to May 2012.
We believe that our current facilities are suitable and adequate
to meet our current needs, and that suitable additional or
substitute space will be available as needed to accommodate
expansion of our operations.
Employees
As of June 30, 2010, we had 75 employees. We believe
that our continued success will depend on our ability to
continue to attract and retain skilled personnel. We have never
had a work stoppage and none of our employees are represented by
a labor union. We believe our relationship with our employees is
good.
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CULLIGAN
REFILL ACQUISITION
General
Simultaneously with the closing of this offering, we will
acquire certain assets (the Culligan Refill
Business) of Culligan Store Solutions, LLC and Culligan of
Canada, Ltd. (together with Culligan International Company,
Culligan) related to its business of providing
reverse osmosis water filtration systems that generate filtered
water for refill vending machines and
store-use
water services in the United States and Canada at approximately
4,500 retail locations. This business also sells empty reusable
water bottles for use at refill vending machines (such
businesses are together referred to as the Culligan Refill
Business). We will fund the $105.0 million purchase
price for the Culligan Refill Acquisition with a portion of the
proceeds from this offering, with borrowings under our new
senior revolving credit facility and through the issuance of our
common stock. The acquisition of the Culligan Refill Business is
referred to in this prospectus as the Culligan Refill
Acquisition.
We have structured the Culligan Refill Acquisition such that its
closing will occur promptly following the closing of this
offering, and we will not consummate this offering on the terms
described in this prospectus unless we believe the Culligan
Refill Acquisition will close promptly thereafter. Additionally,
we will not be able to consummate this offering unless we are
concurrently entering into and closing our new
$40.0 million senior revolving credit facility with Wells
Fargo Bank, National Association and a group of other lenders on
substantially the terms described in this prospectus.
We have structured the transactions in this manner because the
proceeds of this offering and the new senior revolving credit
are together necessary to fund the cash portion of the purchase
price in the Culligan Refill Acquisition and to take the other
actions described in Use of Proceeds. The
underwriting agreement for this offering will provide that
(i) the satisfaction of all conditions precedent to the new
senior revolving credit facility (other than the closing of this
offering) and the Company receiving gross proceeds in initial
borrowings under the new senior revolving credit facility
simultaneously with payment for the shares of our common stock
offered hereby in an amount sufficient to consummate the
transactions described in Use of Proceeds herein and
(ii) the satisfaction of all conditions precedent to the
Culligan Refill Acquisition (other than the closing of this
offering) are both conditions to the closing of the initial
public offering. In addition, the asset purchase agreement
relating to the Culligan Refill Acquisition provides that the
closing of this offering is a condition precedent to the closing
of the Culligan Refill Acquisition. We have entered into a
commitment letter with Wells Fargo Bank, National Association
and Wells Fargo Securities, LLC and a group of other lenders
with respect to the new senior revolving credit facility that is
subject to certain closing conditions, including the execution
of definitive documentation and other customary conditions
precedent. We expect these closing conditions will be satisfied
concurrently with and will not delay the consummation of the
initial public offering. Additionally, we expect all conditions
precedent set forth in the asset purchase agreement relating to
the Culligan Refill Acquisition other than the consummation of
this offering will be satisfied prior to the consummation of
this offering such that the Culligan Refill Acquisition will
close promptly after the consummation of this offering. As a
result of these interrelationships, we expect this offering, the
new senior revolving credit facility and the Culligan Refill
Acquisition will all close contemporaneously. If we are unable
to close our new senior revolving credit facility on
substantially the terms described in this prospectus, we will be
unable to consummate this offering. In connection with the
closing of the Culligan Refill Acquisition, we will be required
to pay Wells Fargo Securities, LLC a fee of $1.5 million
for financial advisory services provided in connection with the
transaction.
The Culligan Refill Business provides filtered water through the
installation and servicing of reverse osmosis water filtration
systems. Retailers benefit from the reverse osmosis water
filtration systems as they ensure water used throughout a store
is clean and safe for self-serve refill vending and store-use
services, such as food preparation and hydration of produce.
Customers of the Culligan Refill Business include Walmart,
Safeway, Meijer, Sobeys, Target, Hy-Vee and Kroger. For the year
ended December 31, 2009, the Culligan Refill Business
generated revenues of $26.0 million and net income of $4.3
million. Approximately 84% of the Culligan Refill
Businesss revenues were generated in the United States,
with operations in 48 states, and approximately 16% of its
revenues were generated in Canada across 10 provinces. The
Culligan Refill Businesss revenues are driven by
self-serve refill vending services and empty reusable water
bottle sales, which account for approximately 76% and 16% of its
revenues, respectively, and to a lesser extent by store-use
services.
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The Culligan Refill Business provides us with an established
platform to expand into the self-serve water refill business. We
believe the Culligan Refill Business is highly complementary to
our water bottle exchange business from both a product and
operational perspective. We believe the Culligan Refill
Acquisition will:
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provide additional consumer value and convenience;
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augment our environmentally friendly product offering;
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allow us to leverage our marketing and increase the sales of our
water dispensers;
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enhance our ability to provide retail customers a broad range of
hydration solutions;
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deepen our retail customer relationships through a more
extensive product offering;
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expand our retail customer base and geographic presence;
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strengthen our distribution network;
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increase our knowledge base of the refill segment and add
experienced personnel; and
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provide a source of stable, dependable cash flows to fund future
growth.
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The
Culligan Refill Business
Overview
The principal product line of the Culligan Refill Business
consists of a reverse osmosis water filtration system. This
system filters water on site at retail locations and dispenses
drinking water on a self service basis. As of June 30,
2010, the Culligan Refill Business had installed its reverse
osmosis water filtration systems in approximately 4,500 retail
customer locations in the United States and Canada.
Reverse
Osmosis Water Filtration System
The reverse osmosis water filtration system that the Culligan
Refill Business installs and maintains generally consists of a
refill vending machine located within its customers retail
space and reverse osmosis filtration equipment that is typically
located in the back room of the retail customers store
location. The refill vending machine is typically accompanied by
a sales display containing empty reusable water bottles.
Refill
Vending Machine and Empty Reusable Water Bottles
The use of reverse osmosis filtration equipment located in the
back room benefits the retail customer in several ways,
including:
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minimizing the refill vending machines footprint within
the customers retail space;
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allowing the retail customer to use the filtered water for
internal purposes such as in produce misters, ice makers and the
customers bakery;
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allowing preventative maintenance, repair and meter reading with
minimal consumer interruption; and
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allowing filtration equipment modifications to increase water
volume handling capacity without an increased footprint within
the customers retail space.
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Reverse
Osmosis Water Filtration System
Retail customers also benefit from the filtration equipment as
using filtered water for store-use purposes such as produce
misters and ice makers extends the life of and reduces
maintenance costs with respect to the retail customers
in-store equipment.
The Culligan Refill Business also sells to retail customers a
line of one-, three- and five-gallon empty reusable bottles to
be sold to consumers for use at the refill vending machines.
During 2009, the Culligan Refill Business derived revenues from
the following activities:
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76% of its revenues from the sale of filtered drinking water
through refill vending machines;
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16% of its revenues from the sale of empty reusable water
bottles; and
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8% of its revenues from the store-use by its retail customers of
the reverse osmosis water filtration system for produce misters,
ice makers, the customers bakery and other similar uses.
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Marketing
Sales and marketing to retail customers of the Culligan Refill
Business is accomplished primarily through direct selling
activities. Sales managers and field sales personnel call
directly on major retail accounts. Sales to consumers are
accomplished principally through point of sale
displays and literature at the site of each refill vending
machine. The Culligan Refill Business also uses traditional
merchandising techniques such as free samples, coupons, special
pricing and other in-store promotional techniques to promote
consumption of drinking water by the ultimate consumer.
We are required to rebrand the Culligan Refill Business within
12 months after the closing of the Culligan Refill
Acquisition.
Product
Distribution
The reverse osmosis water filtration systems used in the
Culligan Refill Business are placed under services agreements
with retail customers who pay fees based on the number of
gallons of water used or dispensed by the system. Under this
program, the Culligan Refill Business owns the water filtration
system and contracts for the provision of all required service
and maintenance. Water meters are generally read monthly by a
third-party representative and an invoice is subsequently
delivered to the retailer.
The revenue realized by the Culligan Refill Business on each
reverse osmosis water filtration system is highly dependent upon
the overall volume of water sold through a particular location.
The consumer typically pays a price to the retailer for water
from the refill vending machine ranging from approximately $0.25
to $0.50 per gallon, depending upon the location and the
retailers overall pricing strategy. When accounting for
the wholesale costs of water, we believe the retailers of the
Culligan Refill Business receive a gross margin of approximately
50%. The competitive nature of product pricing varies by
geographic location.
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Certain retail customers also use the reverse osmosis water
filtration system for produce misters, ice makers, the
customers bakery and other similar uses. These retail
customers are billed monthly for this store water usage with the
charges based on each particular stores volume of water
used.
Customers
A significant portion of the revenues of the Culligan Refill
Business comes from a small group of major retail customers. For
the year ended December 31, 2009, Walmart accounted for 65%
of the net sales of the Culligan Refill Business, and no other
retail customer accounted for more than 10% of its net sales. As
of June 30, 2010, the Culligan Refill Business had
installed its reverse osmosis water filtration systems in
approximately 4,500 retail customer locations in 48
U.S. states (a total of approximately 3,800 locations) and
10 Canadian provinces (a total of approximately 700 locations).
The Culligan Refill Business has long-standing relationships
with most of its major retail customers. For example, its
business relationship with Walmart began in 1991 and its
business relationships with its next four largest retail
customers began in 2005, 1995, 2000 and 1998, respectively.
Operational
Process
The Culligan Refill Business has divided its operating territory
into seven distinct geographic regions. The Culligan Refill
Business has a district vending manager for each region who is
responsible for managing the operations within the region as
well as the oversight, support and management of the service
providers servicing the retail locations within the region.
Sales
Process
The Culligan Refill Business employs a direct sales force that
actively pursues headquarters-based retail relationships to
better serve the retailer customers and to minimize layers of
approval and decision-making with regard to the addition of new
retail locations. Upon confirmation of a new retail location,
the Culligan Refill Business coordinates with the retailer and
the service provider to schedule an installation in a timely
manner.
The reverse osmosis water filtration system is part of a
turn-key program for retailers in which the network of service
providers actively service each retail account. After the water
filtration equipment is installed and operational, the service
provider completes
on-site
training with the retailer and has an ongoing economic interest
in supporting and growing the business relationship to increase
gallon sell through as the service providers are paid by the
Culligan Refill Business based upon a percentage of water volume
sales, subject to minimum and maximum commission amounts.
Retail
Relationships
While individual retail locations are typically serviced by
third party service providers, the customer relationship is
owned and maintained by the experienced retail sales
and service organization at the Culligan Refill Business, which
allows a strong customer affinity and the maintenance of key
headquarters-based relationships. The sales team routinely
reviews sales results and trends with retail customers to
provide suggestions for improving the sell through. The retail
relationships are divided into regions and managed by sales and
service personnel.
Service
Providers
The Culligan Refill Business has over 500 service providers who
are responsible for the initial installation of the reverse
osmosis water filtration systems, the regular maintenance of the
systems, any necessary repairs, routine water testing and
monthly meter reading to determine retail customer water usage.
These service providers are comprised of Culligan International
franchised dealers, service providers owned by subsidiaries of
Culligan International and third-party service providers, which
are responsible for serving retail store locations representing
55%, 27% and 18% of the revenues of the Culligan Refill Business
for the year ended December 31, 2009, respectively.
Typically, a service provider is paid a commission based on a
percentage of the total revenues at the locations for which the
service provider is responsible, subject to minimum and maximum
commission amounts. Service providers also earn an hourly rate
for initial installations of the reverse osmosis water
filtration systems.
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The Culligan Refill Business employs a field service team which
provides training and support to its service providers and
retail customers.
Reverse
Osmosis Water Filtration Systems
The reverse osmosis water filtration system is comprised of two
components: reverse osmosis water filtration equipment and a
refill vending machine. The water filtration equipment is
typically installed in the back room of a retail location and
all such equipment generally has the same component filters and
parts. A water line is installed from the water filtration
equipment to the refill vending machine. The retail customer
will specify the location of the refill vending machine, which
is typically in the water aisle or back wall of the store. The
retail customer is responsible for the plumbing, electrical and
drainage requirements of an installation. An installation
typically takes a few hours to complete, and the service
provider that installed the system provides a completed work
order to confirm the installation.
The Culligan Refill Business employs an operations team which
assembles, refurbishes and repairs the refill vending machines.
This team is located in its Eagan, Minnesota facility, where it
routinely refurbishes equipment that has been in service for
five years and longer or when a customer requests a refreshed
system. The operations team also procures new filtration systems
component parts and assembles the units and ships them to
locations for installation by service providers. The component
parts are generally sourced from multiple suppliers.
Maintenance
The regular maintenance completed by the service providers
generally includes a monthly sanitization of the reverse osmosis
water filtration system, a monthly system component check and
any necessary preventative maintenance resulting from such
component check and may include a water test for regulatory
purposes. The various jurisdictions in which the Culligan Refill
Business operates have specific bimonthly, monthly, quarterly or
annual water testing reporting requirements with which it
complies, but it performs water tests on each reverse osmosis
water filtration system at least quarterly.
Customer
Service
The Culligan Refill Business has a customer service team which
coordinates service and bottle order replenishment requests from
its retail customers. All calls are received and tracked through
a toll-free telephone number for the United States and a
separate telephone number for Canada. This team coordinates
service requests to the service provider network and manages
work orders to ensure completion of the service request. This
team also addresses any consumer questions.
Administration
The accounting department of the Culligan Refill Business is
responsible for billing and collecting from retail customers.
Retailers are typically billed monthly based on a meter reading
performed by the service provider that is faxed to the billing
department. The billing team enters the meter reading into a
billing system and generates invoices for the retail customer,
which are sent electronically or by mail to the retail customer.
Retail customers generally have 30 day terms to pay
invoices. The Culligan Refill Business utilizes an ERP system
and document imaging system and has supplemented the system with
its billing system.
Bottle
Sourcing
The Culligan Refill Business sources empty reusable bottles from
several manufacturing sources. The bottles are managed,
inventoried and shipped through a 16,000 square foot leased
warehouse facility in Oklahoma City, Oklahoma. The Culligan
Refill Business co-owns with the bottle manufacturers certain
bottle molds for bottles exclusively purchased for retailers.
The Culligan Refill Business has historically used a variety of
suppliers and does not believe it is materially dependent on any
single supplier. Alternate sources of supply are available for
all of the critical components used in the Culligan Refill
Business.
90
Services
Agreements
The Culligan Refill Business has historically entered into
services arrangements with its retail customers pursuant to
which the Culligan Refill Business agrees to install and
maintain its reverse osmosis water filtration system within the
retail customers store in exchange for typically monthly
payments from the retail customer based on the stores
water volume usage. These arrangements generally have terms of
one to five years and the original terms of many of the
agreements have expired. In such cases the arrangements have
generally been automatically renewed or continue to operate on
the same terms.
Competition
The Culligan Refill Business participates in the highly
competitive bottled water segment of the nonalcoholic beverage
industry. While the industry is dominated by large and
well-known international companies, numerous smaller firms are
also seeking to establish market niches. The business model of
the Culligan Refill Business is differentiated from most of the
participants in the North American nonalcoholic beverage
industry in that it offers self-service refill of drinking
water. There are a few direct competitors that offer similar
refill vending services, but with the exception of Glacier Water
Services, Inc., we believe these direct competitors generally
operate on a smaller geographical and operational scale than the
Culligan Refill Business. The Culligan Refill Business faces two
levels of competition: (i) competition at the retail
customer level to secure placement of its reverse osmosis water
filtration systems in the store; and (ii) competition at an
end-user level to convince consumers to purchase its water
versus other options. Competitive factors with respect to the
Culligan Refill Business include pricing, taste, advertising,
sales promotion programs, retail placement, introduction of new
packaging and branding.
Many of the indirect competitors in the bottled water segment of
the nonalcoholic beverage industry are leading consumer products
companies, have substantially greater financial and other
resources than the Culligan Refill Business or us, have
established a strong brand presence with consumers and have
established relationships with retailers, manufacturers,
bottlers and distributors necessary to start a self-service
drinking water refill business at North American retail
locations should they decide to do so. In addition to
competition between firms within the bottled water industry, the
industry itself faces significant competition from other
nonalcoholic beverages, including carbonated and non-carbonated
soft drinks and waters, juices, sport and energy drinks,
coffees, teas and spring and tap water.
Intellectual
Property and Trademarks
There are no material registered patents, trademarks or
copyrights related to the Culligan Refill Business that we are
acquiring in connection with the Culligan Refill Acquisition.
However, employees of the Culligan Refill Business that will be
joining our Company do possess important know-how related to the
self-service drinking water refill business and the reverse
osmosis water filtration systems offered by the Culligan Refill
Business. We consider this know-how to be an important part of
the Culligan Refill Business and one of the principal reasons we
believe the Culligan Refill Business will provide our Company a
solid platform to include self-service drinking water refill in
our product offerings.
Governmental
Regulation
The conduct of the Culligan Refill Business and the production,
distribution, advertising, promotion, labeling, safety, sale and
use of its products are subject to various laws and regulations
administered by federal, state, provincial and local
governmental agencies in the United States and Canada. It is the
policy of the Culligan Refill Business to abide by the laws and
regulations that apply to it and the Culligan Refill Business
requires manufacturing and service provider partners to comply
with all laws and regulations applicable to them.
The refill vending machines used in the Culligan Refill Business
are certified by the National Automatic Merchandising
Association (NAMA). NAMA maintains a vending
machine certification program which evaluates food and
beverage vending machines against current requirements of the
U.S. Public Health Service Ordinance and Code. The
manufacturing facility used in connection with the Culligan
Refill Business is required to be registered with the EPA under
the provisions of the Federal Insecticide, Fungicide and
Rodenticide Act because
91
certain components used in connection with the reverse osmosis
water filtration systems are deemed to be pesticidal
devices. The Eagan, Minnesota facility has been registered
as required.
Certain states have permit requirements for the operation of the
refill vending machines. The Culligan Refill Business uses
outside laboratories to periodically test the quality of the
water dispensed through the refill vending machine. The water
dispensed through the refill vending machine is also regularly
tested by outside laboratories for the presence of coliform
bacteria.
Legal
Proceedings
From time to time, the Culligan Refill Business has been
involved in various lawsuits, claims and other legal proceedings
arising from its normal business activities. The Culligan Refill
Business is not currently the subject of any proceedings that,
individually or in the aggregate, would be expected to have a
material adverse effect on its business, results of operations
or financial condition.
Facilities
The Culligan Refill Business is headquartered in Eagan,
Minnesota. We will assume the office lease relating to the
headquarters facility for a term that expires in October 2014.
The Culligan Refill Business uses one warehouse and distribution
facility located in Oklahoma City, Oklahoma. We will assume the
lease related to this facility covering approximately
16,000 square feet for a term that is on a month-to-month
basis.
We believe that these facilities are suitable and adequate to
meet our current needs with respect to the Culligan Refill
Business, and that suitable additional or substitute space will
be available to accommodate expansion of these operations.
Employees
As of June 30, 2010, the Culligan Refill Business had
approximately 50 employees, none of which are represented
by a labor union or covered by a collective bargaining agreement.
92
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE CULLIGAN REFILL
BUSINESS
The following discussion and analysis of the financial
condition and results of operations of the Culligan Refill
Business should be read in conjunction with the financial
statements and related notes of the Culligan Refill Business
appearing elsewhere in this prospectus. The actual results of
the Culligan Refill Business could differ materially from those
anticipated in the forward-looking statements included in this
discussion as a result of certain factors, including, but not
limited to, those discussed in the section of this prospectus
titled Risk Factors.
Overview
The Culligan Refill Business provides reverse osmosis water
filtration systems that generate filtered water for refill
vending machines and store-use water services in the United
States and Canada at approximately 4,500 retail locations. This
business also sells empty reusable water bottles for use at
refill vending machines. Retailers benefit from the Culligan
Refill Business as it ensures water used throughout a store is
clean and safe for self-serve refill vending and store-use
services, such as food preparation and hydration of produce.
Customers of the Culligan Refill Business include Walmart,
Safeway, Meijer, Sobeys, Target, Hy-Vee and Kroger. For the year
ended December 31, 2009, the Culligan Refill Business
generated revenues of $26.0 million and net income of
$4.3 million. Approximately 84% of the Culligan Refill
Businesss revenues were generated in the United States,
with operations in 48 states, and approximately 16% of its
revenues were generated in Canada across 10 provinces. The
Culligan Refill Businesss revenues are principally driven
by self-serve refill vending services, empty reusable water
bottle sales and store-use services, which account for
approximately 76%, 16% and 8% of revenues, respectively.
Results
of Operations
The following table sets forth the results of operations of the
Culligan Refill Business for the periods indicated:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Years Ended December 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Consolidated statements of operations data:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
25,746
|
|
|
$
|
26,017
|
|
|
$
|
12,687
|
|
|
$
|
12,569
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
13,635
|
|
|
|
13,643
|
|
|
|
6,778
|
|
|
|
6,654
|
|
Selling, general and administrative expenses
|
|
|
3,270
|
|
|
|
2,877
|
|
|
|
1,255
|
|
|
|
1,395
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|
Depreciation and amortization
|
|
|
3,872
|
|
|
|
2,488
|
|
|
|
1,215
|
|
|
|
1,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
20,777
|
|
|
|
19,008
|
|
|
|
9,248
|
|
|
|
9,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
4,969
|
|
|
|
7,009
|
|
|
|
3,439
|
|
|
|
3,160
|
|
Provision for income taxes
|
|
|
1,837
|
|
|
|
2,665
|
|
|
|
1,305
|
|
|
|
1,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,132
|
|
|
$
|
4,344
|
|
|
$
|
2,134
|
|
|
$
|
1,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
The following table sets forth the results of operations for the
Culligan Refill Business expressed as a percentage of net sales
for the periods indicated:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Years Ended December 31,
|
|
|
June 30,
|
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
Consolidated statements of operations data:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
53.0
|
%
|
|
|
52.4
|
%
|
|
|
53.4
|
%
|
|
|
53.0
|
%
|
Selling, general and administrative expenses
|
|
|
12.7
|
%
|
|
|
11.1
|
%
|
|
|
9.9
|
%
|
|
|
11.1
|
%
|
Depreciation and amortization
|
|
|
15.0
|
%
|
|
|
9.6
|
%
|
|
|
9.6
|
%
|
|
|
10.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
80.7
|
%
|
|
|
73.1
|
%
|
|
|
72.9
|
%
|
|
|
74.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
19.3
|
%
|
|
|
26.9
|
%
|
|
|
27.1
|
%
|
|
|
25.1
|
%
|
Provision for income taxes
|
|
|
7.1
|
%
|
|
|
10.2
|
%
|
|
|
10.3
|
%
|
|
|
9.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
12.2
|
%
|
|
|
16.7
|
%
|
|
|
16.8
|
%
|
|
|
15.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2010 Compared to Six Months Ended
June 30, 2009
Net Sales. Net sales for the first half of 2010
decreased slightly by $0.1 million or 0.9% to
$12.6 million from $12.7 million in the first half of
2009. The decrease in sales resulted primarily from lower volume
in the U.S. in the vended water business.
Gross Margin. Overall gross margin, defined as net
sales less cost of sales, as a percentage of net sales increased
to 47.0% for the first half of 2010 from 46.6% for the first
half of 2009. The primary reason for the favorable change in
margin was lower material costs.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses
for the first half of 2010 and 2009 were $1.4 million and
$1.3 million, respectively, and as a percentage of net
sales, increased to 11.1% for the first half of 2010 from 9.9%
for the first half of 2009. Selling, general and administrative
expenses increased as a result of favorable bad debt and
employee compensation related expenses in the first half of 2009
that did not reoccur the first half of 2010.
Depreciation and Amortization. Depreciation and
amortization increased 11.9% to $1.4 million in the first
half of 2010 from $1.2 million in the first half of 2009.
The increase in depreciation and amortization is primarily due
to an increase in capital expenditures over the last twelve
months.
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Net Sales. Net sales for 2009 increased
$0.3 million or 1.2% to $26.0 million from
$25.7 million in 2008. The increase in sales resulted from
a price increase as well as slightly higher volumes.
Gross Margin. Our overall gross margin, defined as
net sales less cost of sales, as a percentage of net sales
increased to 47.6% for 2009 from 47.0% for 2008. The primary
reasons for the favorable change in margin were benefits from a
price increase and slightly lower expenses.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses
for 2009 decreased $0.4 million or 12.1% to
$2.9 million from $3.3 million and, as a percentage of
net sales, decreased to 11.1% for 2009 from 12.7% for 2008.
Selling, general and administrative expenses decreased as a
result of lower bad debt and salary related expenses.
Depreciation and Amortization. Depreciation and
amortization decreased by $1.4 million or 35.9% to
$2.5 million in 2009 from $3.9 million in 2008. The
decrease in depreciation and amortization expense is due to a
significant amount of assets becoming fully depreciated in 2008.
94
Critical
Accounting Policies and Estimates
Revenue Recognition. Vended water dispensing
machines placed at the retailers are used by consumers on a
self-serve basis. Revenue is recognized at the time the meters
are read during the servicing of the vended water dispensing
machines. At December 31, 2009, there were approximately
4,500 refill vending machines, making the servicing of each
machine at the end of each reporting period impractical.
Consequently, the Culligan Refill Business estimates the revenue
from the last time each machine was serviced until the end of
the reporting period, based on the most current average daily
volume of each machine. For the years ended December 31,
2009 and 2008, the Culligan Refill Business recorded
approximately $1,051 and $1,050, respectively, of such revenues,
which for both year-ends represent an average of approximately
22 days of use per machine.
The Culligan Refill Business recognizes revenue when empty
bottles are shipped and the customer takes ownership and assumes
risk of loss, collection of the relevant receivable is probable,
persuasive evidence of an arrangement exists and the sales price
is fixed or determinable. Shipping and other transportation
costs charged to buyers are recorded in cost of sales.
Foreign Currency Translation. The Culligan Refill
Businesss operations are in the U.S. and Canada.
Assets and liabilities denominated in Canadian dollars are
translated into U.S. dollars at the current rate of
exchange existing at period-end. Revenues, expenses, gains, and
losses are translated at average monthly exchange rates.
Translation adjustments are included in the combined statements
of parent equity and comprehensive income for the Culligan
Refill Business.
Goodwill and Other Intangible Assets. Goodwill
reflected in the Culligan Refill Businesss financial
statements represents an allocation of the goodwill, the excess
of costs over fair value of assets of business acquired,
recorded by Culligan Holding S.àr.l at the date of
acquisition of the Culligan Refill Business. The relative fair
value approach was used as the basis for the allocation. The
Culligan Refill Business is a component of the Culligan Holding
S.àr.l reporting unit. Goodwill is not amortized but is
instead tested at the reporting unit level for impairment at the
reporting unit level at least annually in accordance with
Accounting Standards Codification (ASC) Topic 350,
Intangibles- Goodwill and Other (ASC 350). Culligan
Holding S.àr.l completed its annual goodwill impairment
tests as of December 31, 2009 and 2008 and determined that
goodwill was not impaired during these years.
Impairment of Long-Lived Assets. The Culligan Refill
Business reviews whether events or circumstances subsequent to
the acquisition of any long-lived assets have occurred that
indicate the remaining estimated useful lives of those assets
may warrant revision or that the carrying value of those assets
may not be recoverable. If events or circumstances indicate that
the long-lived assets should be reviewed for possible
impairment, the Culligan Refill Business uses projections to
assess whether future cash flows on a nondiscounted basis
related to the tested assets are likely to exceed the recorded
carrying amount of those assets, to determine whether a
write-down is appropriate. Should an impairment be identified, a
loss would be recorded to the extent that the carrying value of
the impaired assets exceeds their fair value as determined by
valuation techniques appropriate in the circumstance, which
could include the use of similar projections on a discounted
basis. No such events or circumstances were identified during
the years ended December 31, 2009 and 2008.
Fair Value of Financial Instruments. Financial
instruments consist primarily of accounts receivable, accounts
payable, and accrued liabilities. The carrying amounts of such
instruments are considered to be representative of their
respective fair values due to the short-term maturity of the
instruments.
Concentrations of Risk. The Culligan Refill Business
offers products and services to a fairly diverse customer base;
however, one customer accounted for approximately 65% and 63% of
the Culligan Refill Businesss revenues in 2009 and 2008
and approximately 57% and 59% of accounts receivable as of
December 31, 2009 and 2008, respectively. There is no
significant supplier, product line, credit, geographic, or other
concentrations that could expose the Culligan Refill Business to
adverse near term severe financial impacts.
95
Culligan
Refill Acquisition Agreements
Asset
Purchase Agreement
On June 1, 2010, we entered into an asset purchase
agreement with Culligan to purchase the assets related to the
Culligan Refill Business for a total purchase price of
$105.0 million consisting of:
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|
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a cash payment of $60.0 million; and
|
|
|
the issuance of shares of our common stock with a value of
$45.0 million based upon the price that we issue shares in
this offering (or 3,750,000 shares, assuming an initial
public offering price of $12.00 per share, the midpoint of the
range set forth on the cover page of this prospectus).
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The purchase price for the Culligan Refill Business is subject
to a working capital adjustment that is to be finally determined
after the closing of the transaction. There will be a
dollar-for-dollar adjustment to the purchase price if the actual
working capital amount is above or below the target working
capital of approximately $2.0 million. The cash portion of
the purchase price will be increased and the number of shares of
common stock we will issue will be decreased by an amount equal
to the net cash proceeds we receive from any exercise of the
underwriters over-allotment option. We will also assume
certain specifically identified liabilities in connection with
the Culligan Refill Acquisition.
The asset purchase agreement contains customary representations,
warranties, covenants and conditions to closing, including a
condition related to the closing of the initial public offering.
We will be required to close the Culligan Refill Acquisition if
we obtain permits to operate refill vending machines
representing at least 80% of the revenues of all of the refill
vending machines that are part of the Culligan Refill Business
for the year ending December 31, 2009. However, we do not
anticipate such percentage to be obtained prior to closing and
we expect to waive such condition and close without a minimum
percentage of permits.
In connection with the closing of the Culligan Refill
Acquisition, we have entered or will enter into a trademark
license agreement, two transition services agreements, a dealer
services agreement, a non-compete agreement, a supply agreement,
a lock-up
agreement, a registration rights agreement and employment
agreements with Jeanne Cantu, Vice President and General Manager
of the Culligan Refill Business, and Carl Werner, Controller of
the Culligan Refill Business.
Trademark
License Agreement
At the closing of the Culligan Refill Acquisition, we will enter
into a trademark license agreement with Culligan International
Company, pursuant to which Culligan International Company will
grant us a non-exclusive, royalty-free right and license to use
certain of Culligans trademarks in connection with the
Culligan Refill Business within the United States and Canada.
The term of the trademark license agreement is one year, unless
sooner terminated in accordance with its provisions.
Transition
Services Agreements
United
States Transition Services Agreement
At the closing of the Culligan Refill Acquisition, we will enter
into a transition services agreement with Culligan International
Company, pursuant to which Culligan International Company will
provide or cause to be provided certain services, including
payroll and information technology services at no charge. We
will use our commercially reasonable efforts to end our use of
the provided services as soon as reasonably possible. Culligan
International Company will provide such support as we may
reasonably request to assist us in obtaining replacement
services and exiting from the systems of Culligan International
Company on or before the termination of the transition services
agreement. This transition services agreement has a 60-day term,
which commences on the date of the closing of the Culligan
Refill Acquisition.
Canada
Transition Services Agreement
At the closing of the Culligan Refill Acquisition, we will enter
into a transition services agreement with Culligan of Canada,
Ltd., pursuant to which Culligan of Canada, Ltd. will provide or
cause to be provided certain services,
96
including information technology, accounting and billing
services at a rate of CAD$28,250 per month. This transition
services agreement will terminate on December 31, 2011
unless earlier terminated in accordance with its terms.
Dealer
Services Agreement
At the closing of the Culligan Refill Acquisition, we will enter
into a dealer services agreement with Culligan International
Company, pursuant to which Culligan International Company will
provide us with access to the Culligan-owned service providers
and its franchisee service providers and will cause, or use
commercially reasonable efforts to cause, such service providers
to conduct the services they currently conduct with respect to
the refill vending machines. The dealer services agreement will
terminate on December 31, 2011 unless earlier terminated in
accordance with its terms.
Non-Compete
Agreement
At the closing of the Culligan Refill Acquisition, we will enter
into a non-competition agreement with Culligan Store Solutions,
LLC, Culligan of Canada, Ltd., and Culligan International
Company, pursuant to which the Culligan entities will agree,
subject to certain exceptions, to refrain from engaging in
certain conduct for a period of five years, including:
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|
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|
|
selling or providing certain products and services related to
refill vending machines within a specified territory;
|
|
|
soliciting or accepting as a customer any customer of the
Culligan Refill Business for purposes of marketing, selling or
providing certain products and services to such customer;
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|
|
soliciting or hiring certain current employees of the Culligan
Refill Business; or
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|
|
providing certain products and services to any person for use by
any person to engage in business similar to that of the Culligan
Refill Business within a specified territory.
|
Supply
Agreement
At the closing of the Culligan Refill Acquisition, we will enter
into a supply agreement with Culligan International Company
pursuant to which it has agreed to sell us certain water
filtration equipment and products. This supply agreement has a
one-year term, but will automatically renew for one-month
periods unless either party provides notice of termination at
least 30 days prior to the expiration of the then current
term.
Lock-Up
Agreement
Culligan Store Solutions, LLC and Culligan International Company
have entered into a
lock-up
agreement pursuant to which they have agreed, subject to certain
exceptions, not to offer, sell, contract to sell, pledge, grant
any option to purchase, make any short sale or otherwise dispose
of any shares of common stock, or any securities convertible
into, exchangeable for or that represent the right to receive
shares of common stock for a period of 180 days from the
date of this prospectus without the prior written consent of
Thomas Weisel Partners LLC (an affiliate of Stifel, Nicolaus
& Company, Incorporated). There are no contractually
specified conditions for the waiver of
lock-up
restrictions and any waiver is at the sole discretion of Thomas
Weisel Partners LLC, which may be granted by Thomas Weisel
Partners LLC for any reason. The
180-day
lock-up
period will be automatically extended if (i) during the
last 17 days of the
180-day
restricted period we issue an earnings release or announce
material news or a material event or (ii) prior to the
expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
15-day
period following the last day of the
180-day
period, in which case the restrictions described in this
paragraph will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
announcement of the material news or material event. After the
lock-up
period, these shares may be sold, subject to compliance with
applicable securities laws.
Registration
Rights Agreement
At the closing of the Culligan Refill Acquisition, we will enter
into a registration rights agreement with Culligan International
Company pursuant to which we will agree, subject to certain
exceptions, to prepare and file a registration
97
statement to register the shares of our common stock received by
Culligan in connection with the Culligan Refill Acquisition
within 181 days of the consummation of the transaction. If
this registration statement is not declared effective within
such 181-day
period or, subject to certain limitations, Culligan is not
permitted to make sales pursuant to such registration statement
after it is declared effective, we will be required to pay
Culligan a ticking fee for any such period during which the
registration statement is not effective or sales cannot be made.
Such ticking fee will generally be calculated by multiplying
Culligans cost of capital at the relevant time (up to 12%)
by the value of shares of our common stock then held by Culligan
(calculated based upon the price we are selling shares in this
offering).
Employment
Agreements
Jeanne
Cantu
We have entered into an employment agreement with Jeanne Cantu
that is effective upon the closing of the Culligan Refill
Acquisition pursuant to which Ms. Cantu has agreed to serve
as a Vice President and General Manager of the Culligan Refill
Business. Ms. Cantu will receive a base salary of $168,100,
would receive severance in certain circumstances and would be
subject to a one year non-competition covenant. This employment
agreement has a term of two years.
Carl
Werner
We have entered into an employment agreement with Carl Werner
that is effective upon the closing of the Culligan Refill
Acquisition pursuant to which Mr. Werner has agreed to
serve as Controller of the Culligan Refill Business.
Mr. Werner will receive a base salary of $91,637, would
receive severance in certain circumstances and would be subject
to a one year non-competition covenant. This employment
agreement has a term of two years.
98
MANAGEMENT
Set forth below are our executive officers and directors,
together with their positions and ages as of August 15,
2010.
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Billy D. Prim
|
|
|
54
|
|
|
Chairman, Chief Executive Officer, President and Director
|
Mark Castaneda
|
|
|
46
|
|
|
Chief Financial Officer
|
Michael S. Gunter
|
|
|
41
|
|
|
Senior Vice President, Operations
|
Duane G. Goodwin
|
|
|
52
|
|
|
Senior Vice President, Business Development
|
Richard A. Brenner
|
|
|
47
|
|
|
Director
|
David W. Dupree
|
|
|
55
|
|
|
Director
|
Malcolm McQuilkin
|
|
|
64
|
|
|
Director
|
David L. Warnock
|
|
|
51
|
|
|
Director
|
Set forth below is a brief description of the business
experience of our directors and executive officers.
Billy D. Prim Chairman, Chief Executive Officer,
President and Director. Mr. Prim has been our
Chairman, Chief Executive Officer and President since he founded
the Company in 2004. Mr. Prim has also served on our Board
of Directors since 2004. Prior to founding the Company,
Mr. Prim founded Blue Rhino Corporation (a provider of
propane cylinder exchange and complementary propane and
non-propane products) in March 1994 and served as its Chief
Executive Officer and Chairman of the Board. He led Blue
Rhinos initial public offering in May 1998 and remained
its Chief Executive Officer until April 2004, when Blue Rhino
was acquired by Ferrellgas Partners, L.P., at which time he was
elected to the Ferrellgas board of directors on which he served
until November 2008. Mr. Prim currently serves on the
board of directors of Towne Park Ltd. and previously served on
the board of directors of Southern Community Bank and Trust from
1996 until 2005. Mr. Prim brings extensive business,
managerial and leadership experience to our Board of Directors.
Mr. Prims service as an executive and a Director of
Primo provide our Board of Directors with a vital understanding
and appreciation of our business. In addition,
Mr. Prims leadership abilities, his experience at
Blue Rhino and his extensive knowledge of the bottled water
industry position him well for service on our Board of Directors.
Mark Castaneda Chief Financial
Officer. Mr. Castaneda has served as our Chief
Financial Officer since March 2008. Prior to joining our
Company, he served as Chief Financial Officer for Tecta America,
Inc. (a private national roofing contractor) from October 2007
until March 2008, as Chief Financial Officer for Interact Public
Safety (a private software company) from September 2006 until
October 2007 and as Chief Financial Officer for Pike Electric
Corporation (a publicly-traded energy solutions provider) from
October 2004 until August 2006, where he helped lead its initial
public offering in July 2005. Mr. Castaneda served Blue
Rhino Corporation as its Chief Financial Officer from November
1997 until October 2004 and as a Director from September 1998
until April 2004. Mr. Castaneda helped lead Blue Rhinos
initial public offering with Mr. Prim in May 1998.
Mr. Castaneda began his career with Deloitte &
Touche in 1988 and is a certified public accountant.
Michael S. Gunter Senior Vice President,
Operations. Mr. Gunter has served as our Senior
Vice President of Operations since March 2010 and previously
served as our Vice President of Operations from our founding in
October 2004 through February 2010. Prior to joining our
Company, he served as the Senior Director of Strategy and
Financial Analysis as well as the Director of Information
Technology for Blue Rhino Corporation from 2000 until October
2004. Mr. Gunter served as an Artillery Officer in the
United States Marine Corps from 1990 to 1996.
Duane G. Goodwin Senior Vice President,
Business Development. Mr. Goodwin has served as
our Senior Vice President of Business Development since February
2010. Prior to joining our Company, he served as Chief Supply
Chain Officer for BlueLinx Corporation (a distributor of
building products) from December 2005 until April 2009, as
Senior Operations Consultant for Cerberus Capital Management (a
private investment firm) from June 2005 until December 2005 and
in various management roles for The Home Depot (a home
improvement retailer) from 1994 until January 2005. Before
joining The Home Depot Mr. Goodwin was with Walmart Stores, Inc.
(a mass merchant retailer), where he served in a variety of
roles from 1985 through 1994.
Richard A. Brenner
Director. Mr. Brenner has served on our Board of
Directors since 2005. He has been the Chief Executive Officer of
Amarr Garage Doors (a manufacturer and distributor of garage
doors) since July 2002
99
and was its President from July 1993 until June 2002.
Mr. Brenner also serves on several boards of private and
nonprofit entities, including ABC of North Carolina, Idealliance
and Wake Forest University Health Sciences, and was a member of
the board of directors of Blue Rhino Corporation from 1998 to
2004. Mr. Brenners significant executive and board
service experience qualify him for service on our Board of
Directors.
David W. Dupree
Director. Mr. Dupree has served on our Board of
Directors since April 2008. As a founder of The Halifax Group (a
private equity group) in 1999, he serves as the Chief Executive
Officer and Managing Director of Halifax. As the Chief Executive
Officer and Managing Director of Halifax, Mr. Dupree has an
active role with many of Halifaxs portfolio companies,
including serving as the managing member of GenPar Primo, LLC,
the general partner of Primo Investors, L.P. Prior to
co-founding Halifax, Mr. Dupree was a Managing Director and
Partner with The Carlyle Group, where he was primarily
responsible for investments in healthcare and related sectors.
Mr. Dupree is also a Director Emeritus of Whole Foods
Markets, Inc. where he served as a director from 1997 until 2008
and served on the Audit Committee and was Chairman of the
Nominating and Governance Committee. Mr. Dupree also serves
on several boards of private and non-profit organizations,
including the Wake Forest University Board of Trustees. Mr.
Duprees business, financial, executive and managerial
experience as well as service on the boards of various entities
position him well to serve as a member of our Board of Directors.
Malcolm McQuilkin
Director. Mr. McQuilkin has served on our Board of
Directors since 2005. Since 1990, he has been Chief
Executive Officer of Blue Rhino Global Sourcing, LLC (an import
and design company and a wholly owned subsidiary of Ferrellgas
Propane Partners). As the current Chief Executive Officer of
Blue Rhino Global Sourcing, Mr. McQuilkin provides our
Board of Directors with significant leadership and executive
experience. Mr. McQuilkins leadership abilities, his
international business expertise (particularly with respect to
outsourcing) and his extensive knowledge of complex financial
and operational issues facing large companies qualify him to
serve as a member of our Board of Directors.
David L. Warnock
Director. Mr. Warnock has served on our Board of
Directors since 2005. He is a founder and managing member of
Camden Partners Holdings, LLC (a private investment management
firm established in 1995 and formerly known as Cahill
Warnock & Company, LLC). Mr. Warnock also serves
as the managing member of the general partner of both Camden
Partners Strategic Fund III, L.P. and Camden Partners Strategic
Fund III-A,
L.P. Mr. Warnock serves on the board of National American
University, Inc., New Horizons Worldwide, Inc., Nobel Learning
Communities, Inc., Questar Assessment, Inc., Towne Park Ltd.,
Ranir LLC, and CIBT School of Business and Technology Corp., and
was a member of the board of directors of Blue Rhino Corporation
from 2000 to 2004. Mr. Warnock brings to our Board of
Directors a unique and valuable perspective from his years of
experience in private investment management.
Mr. Warnocks business acumen and his financial,
managerial, leadership and board service experience qualify him
to serve on our Board of Directors.
Our executive officers are elected by, and serve at the
discretion of, our Board of Directors.
Board of
Directors
Immediately following the closing of this offering, our Board of
Directors will consist of five members. Our amended and restated
bylaws that will be in effect immediately following the closing
of this offering permit our Board of Directors to establish the
authorized number of directors, and five directors are currently
authorized. These amended and restated bylaws also provide that
any vacancies or newly-created directorships may be filled only
by the remaining members of our Board of Directors.
As of the closing of this offering, our amended and restated
certificate of incorporation and amended and restated bylaws
will provide for a classified board of directors consisting of
three classes of directors, each serving staggered three-year
terms, as follows:
|
|
|
|
|
the Class I directors will be Billy D. Prim and David W.
Dupree, and their terms will expire at the annual meeting of
stockholders to be held in 2011;
|
|
|
the Class II directors will be David L. Warnock and Malcolm
McQuilkin, and their terms will expire at the annual meeting of
stockholders to be held in 2012; and
|
|
|
the Class III director will be Richard A. Brenner, and his
term will expire at the annual meeting of stockholders to be
held in 2013.
|
100
Upon expiration of the term of a class of directors, directors
for that class will be elected for a three-year term at the
annual meeting of stockholders in the year in which that term
expires. Each directors term continues until the election
and qualification of that directors successor, or that
directors earlier death, resignation or removal. Any
increase or decrease in the number of directors will be
distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the directors.
This classification of our Board of Directors may have the
effect of delaying or preventing changes in control of our
Company.
Director
Independence
Upon the closing of this offering, we anticipate that our common
stock will be listed on the Nasdaq Global Market. Under the
applicable Nasdaq listing standards, independent directors must
comprise a majority of a listed companys Board of
Directors within a specified period following the closing of its
initial public offering. In addition, Nasdaqs rules
require that, subject to specific exceptions, each member of a
listed companys audit committee and those members of the
board of directors determining executive compensation and
director nominations be independent. Audit committee members
also must satisfy the independence criteria set forth in
rule 10A-3
under the Securities Exchange Act of 1934. Under the Nasdaq
rules, a director will only qualify as an independent
director if, in the opinion of the companys board of
directors, that person does not have a relationship that would
interfere with the exercise of independent judgment in carrying
out the responsibilities of a director.
In order to be considered independent for purposes of
rule 10A-3
under the Securities Exchange Act of 1934, a member of an audit
committee of a listed company may not, other than in his or her
capacity as a member of the audit committee, the board of
directors or any other board committee: (1) accept,
directly or indirectly, any consulting, advisory or other
compensatory fee from the listed company or any of its
subsidiaries; or (2) be an affiliated person of the listed
company or any of its subsidiaries.
In March 2010, our Board of Directors undertook a review of its
composition, the composition of its committees and the
independence of each director. Based upon information requested
from and provided by each director concerning his background,
employment and affiliations, including family relationships, our
Board of Directors has determined that none of
Messrs. Brenner, Dupree, McQuilkin and Warnock,
representing four of our five current directors, has a
relationship that would interfere with the exercise of
independent judgment in carrying out the responsibilities of a
director and that each of these directors is
independent as that term is defined under Nasdaq
rules. Our Board of Directors also determined that
Messrs. Brenner, Dupree and Warnock, who comprise our audit
committee, Messrs. Dupree, McQuilkin and Warnock, who
comprise our compensation committee, and Messrs. Brenner,
Dupree, McQuilkin and Warnock, who comprise our nominating and
governance committee, satisfy the independence standards for
those committees established by applicable SEC rules and the
rules of Nasdaq. In making these determinations, our Board of
Directors considered the relationships that each non-employee
director has with our Company and all other facts and
circumstances our Board of Directors deemed relevant in
determining their independence, including the beneficial
ownership of our capital stock by each non-employee director.
There is no family relationship between any director, executive
officer or person nominated to become a director or executive
officer.
Board
Committees
Our Board of Directors has established an audit committee, a
compensation committee and a nominating and governance
committee. Our Board of Directors may establish other committees
from time to time to facilitate our corporate governance.
Audit Committee. Our audit committee is comprised of
Messrs. Brenner, Dupree and Warnock, with Mr. Dupree
acting as chair. The principal responsibilities and functions of
our audit committee are to assist the Board of Directors in
fulfilling its oversight of (i) the integrity of our
financial statements, (ii) the effectiveness of our
internal controls over financial reporting, (iii) our
compliance with legal and regulatory requirements, (iv) the
qualifications and independence of our registered public
accounting firm, and (v) the performance of our registered
public accounting firm. In carrying out its oversight
responsibilities and functions, our audit committee, among other
things, oversees and interacts with our independent auditors
regarding the auditors engagement
and/or
dismissal,
101
duties, compensation, qualifications and performance; reviews
and discusses with our independent auditors the scope of audits
and our accounting principles, policies and practices; reviews
and discusses our audited annual financial statements with our
independent auditors and management; and reviews and approves or
ratifies (if appropriate) related party transactions. Our audit
committee also is directly responsible for the appointment,
compensation, retention and oversight of our independent
auditors.
Our Board of Directors has determined that Mr. Warnock is
an audit committee financial expert, as defined under the
applicable rules of the SEC, and that all members of the audit
committee are independent within the meaning of the
applicable Nasdaq listing standards and the independence
standards of
rule 10A-3
of the Securities Exchange Act of 1934. Each of the members of
the audit committee meets the requirements for financial
literacy under the applicable rules and regulations of the SEC
and The Nasdaq Stock Market.
Compensation Committee. Our compensation committee
is comprised of Messrs. Dupree, McQuilkin and Warnock, with
Mr. Warnock acting as the chair. The principal functions of
our compensation committee include (i) reviewing our
compensation practices and policies, (ii) reviewing and
approving the compensation for our senior executives,
(iii) evaluating the performance of our senior executives,
and (iv) assisting in the Companys compliance with
the regulations of the SEC regarding executive compensation
disclosure. Our Board of Directors has determined that all
members of the compensation committee are
independent within the meaning of the applicable
Nasdaq listing standards.
Nominating and Governance Committee. Our nominating
and governance committee is comprised of Messrs. Brenner,
Dupree, McQuilkin and Warnock, with Mr. Brenner acting as
the chair. The principal functions of our nominating and
corporate governance committee are, among other things, to
(i) establish membership criteria for our Board of
Directors, (ii) establish and communicate to stockholders a
method of recommending potential director nominees for the
committees consideration, (iii) identify individuals
qualified to become directors consistent with such criteria and
select the director nominees, (iv) plan for continuity on
our Board of Directors, (v) recommend action to our Board
of Directors upon any vacancies on our Board of Directors,
(vi) facilitate the annual evaluation of the performance of
our Board of Directors and its committees,
(vii) periodically review management succession plans, and
(viii) consider and recommend to our Board of Directors
other actions relating to our Board of Directors, its members
and its committees. Our Board of Directors has determined that
all members of the nominating and governance committee are
independent within the meaning of the applicable
Nasdaq listing standards.
Code of
Conduct
Our Board of Directors has adopted a Code of Business Conduct
and Ethics that will become effective upon the closing of this
offering. This code will apply to all of our employees,
officers, and directors, including our principal executive,
financial and accounting officers and all persons performing
similar functions. A copy of our Code of Business Conduct and
Ethics will be available upon the closing of this offering on
our corporate website (www.primowater.com). We expect
that any amendments to the code, or any waivers of its
requirements, will be disclosed on our website.
Director
Compensation
We have not historically had any policy regarding compensation
payable to our directors. Instead, we have from time to time in
the past made awards of stock options to our non-employee
directors. We made no such awards in 2008 or 2009 and we have
not otherwise compensated our directors for services. In
February 2010, we awarded each of our non-employee directors
5,749 shares of restricted common stock that vest in equal
annual installments over a three-year period.
102
After giving effect to these awards, our non-employee directors
hold the following equity awards received as director
compensation:
|
|
|
|
|
|
|
|
|
Name
|
|
Stock Options
(#)(1)
|
|
|
Restricted Stock
(#)(2)
|
|
|
Richard A. Brenner
|
|
|
2,300
|
|
|
|
5,749
|
|
David W. Dupree
|
|
|
|
|
|
|
5,749
|
|
Malcolm McQuilkin
|
|
|
1,150
|
|
|
|
5,749
|
|
David L. Warnock
|
|
|
2,300
|
|
|
|
5,749
|
|
|
|
|
(1)
|
|
These stock options were granted
prior to 2008, are vested in their entirety and have an exercise
price of $13.04 per share. As of December 31, 2009, the
only outstanding equity awards were the stock options listed
above.
|
|
|
|
(2)
|
|
These shares of restricted stock
were granted on February 18, 2010 and vest in equal annual
installments over a three-year period.
|
In connection with this offering, our Board of Directors
approved and adopted our Non-Employee Director Compensation
Policy. Under the Non-Employee Director Compensation Policy,
each non-employee director will receive an annual retainer of
$25,000, to be paid one-half in restricted common stock and
one-half in options to purchase common stock, granted on the
first business day following each annual meeting of our
stockholders. Additionally, non-employee directors will receive
the following cash awards: (i) a $5,000 retainer for
directors who also serve as committee chairs and a $2,500
retainer for other directors; (ii) $2,500 for each
regularly scheduled Board of Directors meeting attended in
person ($1,000 if attended telephonically); (iii) $1,000
for each ad hoc telephonic special Board of Directors meeting
attended; (iv) $1,000 for each regularly scheduled
committee meeting attended; and (v) $500 for each ad hoc
telephonic committee meeting attended. Grants made under the
Non-Employee Director Compensation Policy will be made pursuant
to the 2010 Omnibus Long-Term Incentive Plan and will vest in
full on the day immediately following the first anniversary of
the grant date.
Compensation
Committee Interlocks and Insider Participation
Upon the closing of this offering, our compensation committee
will consist of Messrs. Dupree, McQuilkin and Warnock.
During 2009, Messrs. Prim, Brenner, McQuilkin and Warnock
served on our compensation committee. Mr. Filipowski, a
former member of our Board of Directors, also served on our
compensation committee through the end of January 2009.
Interlocks
With the exception of Mr. Prim who served on our
compensation committee through the end of 2009, none of the
members of our current compensation committee or our
compensation committee during 2009 is or has at any time been an
officer or employee of ours. None of our executive officers has
served as a member of the board of directors, or as a member of
the compensation or similar committee, of any entity that has
one or more executive officers who served on our Board of
Directors or compensation committee during 2009.
The following paragraphs provide a description of certain
transactions between the company and current members of the
compensation committee and former members of the compensation
committee who served at any time during 2009. See Related
Party Transactions for additional information regarding
these transactions.
Sale of
Subordinated Convertible Notes and Warrants
Messrs. Prim, Brenner, Dupree, McQuilkin and Warnock
(either individually or through an affiliated entity) purchased
an aggregate of $3.12 million of our 2011 Notes and an
aggregate of 22,149 warrants to purchase shares of our common
stock in a private placement on December 30, 2009. We
issued a total of $15.0 million of 2011 Notes and a total
of 106,482 warrants in that private placement. The exercise
price of these warrants is either (a) $13.04 per share or
(b) following a public offering in which we realize at
least $30.0 million in net proceeds, 80% of the per
103
share price of the shares issued in the offering. The following
table sets forth certain information regarding such
persons purchase of the 2011 Notes and the related
warrants issued in the December 2009 private placement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
Amount of Notes
|
|
|
|
|
|
|
Purchased
|
|
Warrants
|
Name
|
|
Affiliated Investor
|
|
($)
|
|
(#)
|
|
Billy D. Prim
|
|
|
|
|
540,000
|
|
|
|
3,833
|
|
Richard Brenner
|
|
|
|
|
60,000
|
|
|
|
426
|
|
Richard Brenner
|
|
ALB-5 Trust
|
|
|
10,000
|
|
|
|
71
|
|
Richard Brenner
|
|
ALB-3 Trust
|
|
|
10,000
|
|
|
|
71
|
|
David W. Dupree
|
|
|
|
|
100,000
|
|
|
|
710
|
|
Malcolm McQuilkin
|
|
Malcolm McQuilkin Living Trust
|
|
|
1,000,000
|
|
|
|
7,099
|
|
David L. Warnock
|
|
Camden Partners Strategic Fund III, LP
|
|
|
1,344,140
|
|
|
|
9,542
|
|
David L. Warnock
|
|
Camden Partners Strategic Fund III-A, LP
|
|
|
55,860
|
|
|
|
397
|
|
Messrs. Prim, Brenner, Dupree, McQuilkin and Warnock
(either individually or through an affiliated entity) purchased
an aggregate of $1.79 million of our 2011 Notes and an
aggregate of 12,705 warrants to purchase shares of our common
stock in a second private placement on October 5, 2010. We
issued a total of $3.4 million of 2011 Notes and a total of
24,265 warrants in this second private placement. The exercise
price of these warrants is either (a) $13.04 per share or
(b) following a public offering in which we realize at
least $30.0 million in net proceeds, 80% of the per share
price of the shares issued in the offering. The following table
sets forth certain information regarding such persons
purchase of the 2011 Notes and the related warrants issued in
the October 2010 private placement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
Amount of Notes
|
|
|
|
|
|
|
Purchased
|
|
Warrants
|
Name
|
|
Affiliated Investor
|
|
($)
|
|
(#)
|
|
Billy D. Prim
|
|
|
|
|
250,000
|
|
|
|
1,775
|
|
Richard Brenner
|
|
|
|
|
20,000
|
|
|
|
142
|
|
Richard Brenner
|
|
ALB-5 Trust
|
|
|
10,000
|
|
|
|
71
|
|
Richard Brenner
|
|
ALB-3 Trust
|
|
|
10,000
|
|
|
|
71
|
|
David W. Dupree
|
|
|
|
|
33,000
|
|
|
|
234
|
|
Malcolm McQuilkin
|
|
Malcolm McQuilkin Living Trust
|
|
|
1,000,000
|
|
|
|
7,099
|
|
David L. Warnock
|
|
Camden Partners Strategic Fund III, LP
|
|
|
448,047
|
|
|
|
3,181
|
|
David L. Warnock
|
|
Camden Partners Strategic Fund III-A, LP
|
|
|
18,620
|
|
|
|
132
|
|
Participation
Interests in Loan and Security Agreement
On January 7, 2009, the Company and certain of its
subsidiaries entered into a $10.0 million Loan and Security
Agreement with Wachovia Bank, National Association (the
January 2009 Financing). Certain stockholders of the
Company purchased an aggregate of $5.9 million in
participation interests from Wachovia Bank, National Association
in connection with the January 2009 Financing. These
participation interests allowed each holder to participate to
the extent of such holders percentage share in the
$10.0 million Loan and Security Agreement and bore interest
at a rate equal to Wachovia Banks prime rate from time to
time plus 10%. Messrs. Prim, McQuilkin and Warnock (either
individually or through an affiliated entity) purchased an
aggregate of $1.8 million in participation interests from
Wachovia Bank on January 7, 2009. All amounts owed to
Messrs. Prim, McQuilkin and Warnock in connection with the
January 2009 Financing were rolled over into an equivalent
amount of our 2011
104
Notes on December 30, 2009. The following table sets forth
certain information regarding such persons ownership of
the participation interests in the January 2009 Financing.
|
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|
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|
|
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|
|
|
|
|
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Maximum
|
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|
|
|
Amount
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Amount
|
|
|
Principal
|
|
|
Rolled Over
|
|
|
Interest
|
|
|
|
|
|
Amount
|
|
|
Owed in
|
|
|
Paid in
|
|
|
Into the 2011
|
|
|
Paid in
|
|
|
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Invested
|
|
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2009
|
|
|
2009
|
|
|
Notes
|
|
|
2009
|
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Name
|
|
Affiliated Investor
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
Billy D. Prim
|
|
|
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|
300,000
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|
|
|
300,000
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|
|
|
|
|
|
|
300,000
|
|
|
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39,308
|
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Malcolm McQuilkin
|
|
Malcolm McQuilkin Living Trust
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
500,000
|
|
|
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65,514
|
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David L. Warnock
|
|
Camden Partners Strategic
Fund III, L.P.
|
|
|
960,100
|
|
|
|
960,100
|
|
|
|
|
|
|
|
960,100
|
|
|
|
125,800
|
|
David L. Warnock
|
|
Camden Partners Strategic
Fund III-A, L.P.
|
|
|
39,900
|
|
|
|
39,900
|
|
|
|
|
|
|
|
39,900
|
|
|
|
5,228
|
|
Sale of
Series C Convertible Preferred Stock and Warrants
Messrs. Prim, Dupree, McQuilkin and Warnock (either
individually or through an affiliated entity) purchased an
aggregate of 5,826,947 shares of Series C convertible
preferred stock and warrants to purchase an aggregate of
55,841 shares of common stock at an exercise price of
$20.66 per share in private placement transactions between
December 14, 2007 and May 20, 2008. We issued a total
of 12,520,001 shares of Series C convertible preferred stock and
warrants to purchase 119,980 shares of common stock in
connection with these private placement transactions. The
following table sets forth certain information regarding such
persons ownership of those shares and warrants.
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|
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Series C
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Amount Paid for
|
|
|
|
|
Shares
|
|
Warrants
|
|
Shares and
|
|
|
|
|
Purchased
|
|
Purchased
|
|
Warrants
|
Name
|
|
Affiliated Investor
|
|
(#)
|
|
(#)
|
|
($)
|
|
Billy D. Prim
|
|
|
|
|
512,363
|
|
|
|
4,910
|
|
|
|
1,229,671
|
|
David W. Dupree
|
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Primo Investors, L.P.
|
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4,281,250
|
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41,028
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|
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10,275,000
|
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Malcolm McQuilkin
|
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Malcolm McQuilkin Living Trust
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200,000
|
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1,917
|
|
|
|
480,000
|
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David L. Warnock
|
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Camden Partners Strategic Fund III, LP
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|
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800,084
|
|
|
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7,667
|
|
|
|
1,920,202
|
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David L. Warnock
|
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Camden Partners Strategic Fund III-A, LP
|
|
|
33,250
|
|
|
|
319
|
|
|
|
79,800
|
|
Sale of
Series B Preferred Stock and Warrants
Messrs. Prim, Brenner, McQuilkin, Warnock and Filipowski
(either individually or through or with an affiliated entity or
person) purchased an aggregate of 9,249,691 shares of
Series B preferred stock and warrants to purchase an
aggregate of 236,672 shares of common stock at an exercise
price of $13.04 per share in private placement transactions
between April 28, 2006 and June 30, 2007. We issued a
total of 23,280,221 shares of Series B preferred stock
and warrants to purchase a total of 595,666 shares of
common stock in these private placement transactions. The
following table sets forth certain information regarding such
persons ownership of those shares.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series B
|
|
|
|
Amount Paid for
|
|
|
|
|
Shares
|
|
Warrants
|
|
Shares and
|
|
|
|
|
Purchased
|
|
Purchased
|
|
Warrants
|
Name
|
|
Affiliated Investor
|
|
(#)
|
|
(#)
|
|
($)
|
|
Billy D. Prim
|
|
|
|
|
5,164,846
|
|
|
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132,153
|
|
|
|
5,164,846
|
|
Billy D. Prim
|
|
Deborah Prim
|
|
|
70,000
|
|
|
|
1,791
|
|
|
|
70,000
|
|
Richard Brenner
|
|
|
|
|
250,000
|
|
|
|
6,397
|
|
|
|
250,000
|
|
Malcolm McQuilkin
|
|
Malcolm McQuilkin Living Trust
|
|
|
600,000
|
|
|
|
15,352
|
|
|
|
600,000
|
|
David L. Warnock
|
|
Camden Partners Strategic Fund III, LP
|
|
|
2,880,300
|
|
|
|
73,698
|
|
|
|
2,880,300
|
|
David L. Warnock
|
|
Camden Partners Strategic Fund III-A, LP
|
|
|
119,700
|
|
|
|
3,063
|
|
|
|
119,700
|
|
Andrew J. Filipowski
|
|
|
|
|
164,845
|
|
|
|
4,218
|
|
|
|
164,845
|
|
105
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
The following discussion and analysis of compensation
arrangements of our (1) principal executive officer (Billy
D. Prim), (2) principal financial officer (Mark Castaneda)
and (3) three most highly compensated executive officers
other than our principal executive officer and principal
financial officer who were serving as executive officers on
December 31, 2009 (Michael S. Gunter, Richard E. Belmont
and Brent C. Boydston, and collectively with Messrs. Prim
and Castaneda, our NEOs) should be read together with the
compensation tables and related disclosures set forth below.
This discussion contains forward-looking statements that are
based on our current considerations, expectations and
determinations regarding future compensation programs. The
actual amount and form of compensation and the compensation
programs that we adopt may differ materially from current or
planned programs as summarized in this discussion.
Introduction
Our compensation discussion and analysis discusses the total
compensation for our NEOs, and it describes our overall
compensation philosophy, objectives and practices. Our
compensation philosophy and objectives generally apply to all of
our employees and all of our employees are eligible to
participate in the main components our compensation program
consisting of:
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|
base salary;
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|
|
annual cash bonus; and
|
|
|
equity compensation.
|
The relative value of each of these components for individual
employees varies based on job role and responsibility, as well
as our financial performance.
Compensation
Philosophy and Objectives
Our compensation approach is necessarily tied to our stage of
development. Our compensation philosophy is to offer our
executive officers, including our NEOs, compensation and
benefits that are competitive and meet our goals of attracting,
retaining and motivating highly skilled management, which is
necessary to achieve our financial and strategic objectives and
create long-term value for our stockholders. Accordingly, our
executive officer compensation program is designed to link
annual and long-term cash and stock incentives to the
achievement of Company and individual performance goals and to
align the interests of executive officers with the creation of
stockholder value.
We believe compensation should be determined within a framework
that is intended to reward individual contribution and the
achievement of Company objectives. Within this overall
philosophy, our objectives are to:
|
|
|
|
|
attract, retain and motivate our executives by providing a total
compensation program that takes into consideration competitive
market requirements and strategic business needs;
|
|
|
align the financial interests of executive officers with those
of our stockholders, both in the short and long term;
|
|
|
provide incentives for achieving and exceeding annual and
long-term performance goals; and
|
|
|
appropriately reward executive officers for creating long-term
stockholder value.
|
Each of Messrs. Prim, Castaneda and Gunter has entered into
an employment agreement with the Company in connection with this
offering. We have also entered into an employment agreement in
connection with this offering with Duane G. Goodwin who joined
our Company as Senior Vice President, Business Development in
February 2010. The material terms of those employment agreements
are described below.
Role of
Directors and Executive Officers in Setting
Compensation
Prior to this offering, we were a privately-held company. As a
result, we have not been subject to any stock exchange listing
or SEC rules requiring a majority of our Board of Directors to
be independent or relating to the formation and functioning of
Board committees, including our compensation committee.
Historically, we have
106
informally considered the competitive market for corresponding
positions within comparable geographic areas and companies of
similar size and stage of development, including other small,
high-growth public companies. This consideration was based on
the general knowledge possessed by members of our compensation
committee and also included consultations with our Chief
Executive Officer. As we gain experience as a public company, we
expect that the specific direction, emphasis and components of
our executive compensation program will continue to evolve. For
example, over time, we expect to reduce our reliance upon
subjective determinations in favor of a more empirically based
approach that could involve, among other practices, benchmarking
the compensation paid to our NEOs against peer companies that we
identify and the use of clearly defined, objective targets to
determine incentive compensation awards.
The compensation committee typically considers, but is not
required to accept, our Chief Executive Officers
evaluation regarding the performance and recommendation
regarding proposed base salary and bonus and equity awards for
the other NEOs, as well as himself. The compensation committee
may also request the assistance of our Chief Financial Officer
in evaluating the financial, accounting and tax implications of
various compensation awards paid to the NEOs. However, our Chief
Financial Officer does not recommend or determine the amounts or
types of compensation paid to the NEOs. Our Chief Executive
Officer and certain of our other NEOs may attend compensation
committee meetings, as requested by the chairman of the
compensation committee. Our NEOs, including our Chief Executive
Officer, typically do not attend any portion of the compensation
committee meetings during which their compensation is
established and approved.
We believe the levels of compensation we provide should be
competitive, reasonable and appropriate for our business needs
and circumstances. To date, the compensation committee has not
engaged a compensation consultant. Rather, the compensation
committee and our Chief Executive Officer applied subjective
discretion to make compensation decisions and they have not used
a specific formula or matrix to set compensation in relation to
compensation paid by other companies. To date, our compensation
committee has not established any percentile targets for the
levels of compensation provided to our NEOs. Similarly, the
compensation committee has not performed competitive reviews of
our compensation programs with those of similarly-situated
companies, nor have we engaged in benchmarking of compensation
paid to our NEOs. Our historical approach has been to consider
competitive compensation practices and other factors such as how
much compensation was necessary to recruit and retain an
executive and individual performance rather than establishing
compensation at specific benchmark percentiles. This approach
has enabled us to respond to dynamics in the labor market and
provided us with flexibility in maintaining and enhancing our
NEOs engagement, focus, motivation and enthusiasm for our
future. However, as mentioned above, we expect to build some of
these practices into our compensation approach over time as we
review, evaluate and refine our compensation policies and
practices as a public company.
The amount of past compensation, including annual discretionary
bonus awards and amounts realizable from prior stock option
awards, is generally not a significant factor in the
compensation committees considerations because these
awards would have been earned based on performance in prior
years. The compensation committee does, however, consider prior
awards when considering the retention aspects of our
compensation program.
Our NEOs are not subject to mandated stock ownership or stock
retention guidelines. It is the belief of the compensation
committee that the equity component of our executive
compensation program ensures that our NEOs are also owners and
those components work to align the NEOs goals with the
best interests of our stockholders.
Elements
of Our Executive Compensation Program
The principal elements of our executive compensation program
have to date been base salary, a discretionary annual cash bonus
and long-term equity compensation in the form of stock options.
Each of these compensation elements satisfies one or more of our
compensation objectives.
We have not adopted any policies with respect to long-term
versus currently-paid compensation, but feel that both elements
are necessary for achieving our compensation objectives.
Currently-paid salary compensation provides financial stability
for each of our NEOs and annual increases in base salary provide
a reward for short-term Company and individual performance.
Annual cash bonuses likewise provide a reward for short-term
Company and individual performance. Long-term equity
compensation rewards achievement of strategic long-term
objectives and contributes toward overall stockholder value.
Similarly, while we have not adopted any policies with respect
to
107
cash versus non-cash compensation (or among different forms of
non-cash compensation), we feel that it is important to
encourage or provide for a meaningful amount of equity ownership
by our NEOs to help align their interests with those of
stockholders, one of our compensation objectives. We have also
used equity compensation in order to preserve the Companys
cash to the extent practicable in order to facilitate our growth
and development. We combine the compensation elements for each
NEO in a manner that the compensation committee believes, in its
discretion and judgment, is consistent with the executives
contributions to our Company and our overall goals with respect
to executive compensation.
Base
Salary
We believe that a competitive base salary is an important
component of compensation as it provides a degree of financial
stability for our NEOs and is critical to recruiting and
retaining our executives. Base salary is also designed to
recognize the scope of responsibilities placed on each NEO and
reward each executive for his or her unique leadership skills,
management experience and contributions. We make a subjective
determination of base salary after considering such factors
collectively.
Annual
Bonuses
Our cash bonus compensation is designed to reward achievement of
goals that support our objective of enhancing stockholder value
and motivating executives to achieve superior performance in
their areas of responsibility. We generally utilize incentive
plans that tie payment of cash bonuses to the Companys
achievement of certain objectives, including revenue targets,
EBITDA targets and new selling locations. Our incentive plans
also base a portion of the bonus payment on the achievement of
individual initiatives that are determined by the Chief
Executive Officer, or, in the case of the Chief Executive
Officer, by the compensation committee. We determined not to
establish an annual incentive plan for 2009 given our desire to
reduce expenses in the face of uncertain U.S. economic
conditions. As a result, we paid no bonuses to our NEOs with
respect to the 2009 performance year.
We have, however, established such an annual incentive plan for
2010, which includes an opportunity for a cash award and an
equity award as follows:
|
|
|
|
o
|
A cash incentive pool will be created based upon the amount by
which the Companys actual earnings before interest, taxes,
depreciation and amortization (EBITDA) for 2010
exceeds target EBITDA (based on the Companys 2010 budget).
This cash pool will be funded as follows:
|
|
|
|
|
n
|
50% of the first $1.0 million of actual EBITDA in excess of
target EBITDA; plus
|
|
n
|
30% of the next $1.0 million of actual EBITDA in excess of
target EBITDA; plus
|
|
n
|
20% of any actual EBITDA more than $2.0 million in excess
of target EBITDA.
|
|
|
|
|
o
|
Each participant in the annual incentive plan for 2010 will be
entitled to a portion of the cash incentive pool equal to that
participants individual 2010 salary over the total 2010
salaries of all the participants in the 2010 annual incentive
plan multiplied by the total amount in the cash incentive pool.
|
|
|
|
|
o
|
Target amounts are based on Company and employee-specific
performance;
|
|
o
|
50% of the award will be payable in stock options and 50% will
be payable in restricted stock; and
|
|
o
|
Actual awards will be based on the compensation committees
subjective evaluation of the Companys and each
individuals performance.
|
Long-Term
Equity Compensation
Historically, we have provided long-term equity compensation
primarily through grants of stock options. However, no such
equity compensation was paid in 2009 other than certain awards
that were made with respect to 2008 performance. Beginning in
2010, we intend to use a combination of stock options and
restricted stock.
We have granted stock options and intend to grant stock options
and restricted stock through annually-adopted executive
incentive plans, initial grants to new employees and, on
occasion, through additional grants approved by our Board of
Directors or the compensation committee. We believe that such
grants further our compensation objectives of aligning the
interests of our NEOs with those of our stockholders,
encouraging long-term
108
performance, and providing a simple and
easy-to-understand
form of equity compensation that promotes executive retention.
We view such grants both as incentives for future performance
and as compensation for past accomplishments.
We generally have used stock options in the past, rather than
other forms of long-term incentives, because they create value
for the executive only if stockholder value is increased through
appreciation of our share price. Prior to this offering, all
stock option grants were made pursuant to our 2004 Stock Plan.
Historically, the exercise price of our stock options has been
at least equal to the fair market value of our common stock on
the date of grant. Prior to this offering, the fair market value
of our common stock has been established by our Board of
Directors using factors it considered appropriate for a
reasonable valuation. Following this offering, the fair market
value of our common stock will be the closing price of our
common stock on the Nasdaq Global Market on the date of the
grant, provided our shares are approved for listing on the
Nasdaq Global Market. As a privately owned company prior to the
date of this offering, we have not established a program, plan
or practice pertaining to the timing of stock option grants to
executive officers coinciding with the release of material
non-public information. We have adopted a policy, to take effect
upon completion of this offering, that provides for our
compensation committee to approve stock option grants up to four
times per year at its regularly scheduled quarterly meetings,
and further provides that such grants will be effective on the
third trading day following the date of the next public
disclosure of our financial results following the date of each
such meeting.
Following this offering, we anticipate that we will continue to
use stock option grants, as well as restricted stock and other
forms of equity compensation. We believe restricted stock aligns
the interests of our executive officers with those of our
stockholders and serves as a retention tool as it will typically
be subject to a multi-year vesting period. Following this
offering, all equity award grants will be made pursuant to our
2010 Omnibus Long-Term Incentive Plan. The exercise price of
stock options will be based on the fair market value of our
common stock on the grant date as described above.
Our Chief Executive Officer received an initial stock option
grant to purchase 9,583 shares of our common stock in 2004
in connection with the formation of the Company. Our other NEOs
received stock option grants in connection with their initial
hire. The number of stock options granted to our NEOs in
connection with their initial hire was determined based upon
negotiations with each executive, represented the number
necessary to recruit each executive from his then-current
position and reflected our Board of Directors subjective
evaluation of the executives experience and potential for
future performance.
We have made additional discretionary grants of equity
compensation to all of our executive officers from time to time,
as determined by our Board of Directors or the compensation
committee taking into consideration factors such as individual
performance and competitive market conditions.
Perquisites
and Other Benefits
As a general matter, we do not intend to offer perquisites or
other benefits to any executive officer, including the NEOs,
with an aggregate value in excess of $10,000 annually, because
we believe we can provide better incentives for desired
performance with compensation in the forms described above. We
recognize that, from time to time, it may be appropriate to
provide some perquisites or other benefits in order to attract,
motivate and retain our executives, with any such decision to be
reviewed and approved by the compensation committee as needed.
Our executive officers are eligible to participate in standard
employee benefit plans, including medical, dental, vision, life
and any other employee benefit or insurance plan made available
to employees. We maintain a 401(k) plan, which is intended to be
a tax-qualified defined contribution plan under
Section 401(k) of the Internal Revenue Code of 1986, as
amended, or the Code. In general, all of our employees are
eligible to participate in this plan. The 401(k) plan includes a
salary deferral arrangement pursuant to which participants may
elect to reduce their current compensation by up to 90% or the
statutory limit, $16,500 in 2009, whichever is less, and have
the amount of the reduction contributed to the 401(k) plan. We
made no matching contributions during 2009; however, in 2010 our
Board of Directors established a Company match of up to 50% of
employee contributions up to 6% of their salaries, with 50% of
the matching amount being contingent upon our achievement of
certain objectives to be determined by our Board of Directors.
109
Employment
and Severance and Change of Control Benefits
We believe that a strong, experienced management team is
essential to the best interests of the Company and our
stockholders. We recognize that the possibility of a change of
control could arise and that such a possibility could result in
the departure or distraction of members of the management team
to the detriment of our Company and our stockholders. We have
entered into new employment agreements with certain of our NEOs
in connection with this offering, which are intended to minimize
employment security concerns arising in the course of
negotiating and completing a change of control transaction. A
more detailed description of the change of control provisions
provided in these employment agreements is available under the
section captioned Employment Agreements and Change of
Control Arrangements below, and the change of control
benefits are quantified in the section captioned Potential
Payments Upon Termination or Change of Control.
Analysis
of 2009 Compensation for Named Executive Officers
Base
Salary
In light of the uncertain U.S. economic conditions, we did
not increase the base salaries of our NEOs for 2009 compared to
2008.
During 2008 and 2009, the base salary of our Chief Executive
Officer, Billy D. Prim, was $400,000 per year.
Mark Castaneda, our Chief Financial Officer, became an employee
of the Company in 2008. At that time, our Board of Directors set
his base salary at $225,000 per year. Mr. Castanedas
2009 base salary remained at $225,000 per year.
During 2008 and 2009, the base salary of Michael S. Gunter, our
Senior Vice President, Operations, was $173,363.
Richard E. Belmont, our Vice President, Products, became an
employee of the Company in 2008. At that time, our Board of
Directors set his base salary at $183,195 per year.
Mr. Belmonts 2009 base salary remained at $183,195
per year.
During 2008 and 2009, the base salary of Brent C. Boydston, our
former Vice President, Business Development and current Vice
President, National Accounts, was $217,350.
In February 2010, we approved base salaries for our NEOs as
follows:
|
|
|
|
|
Name
|
|
Amount ($)
|
|
Billy D. Prim
|
|
|
400,000
|
|
Mark Castaneda
|
|
|
250,000
|
|
Michael S. Gunter
|
|
|
225,000
|
|
Richard E. Belmont
|
|
|
190,000
|
|
Brent C. Boydston
|
|
|
150,000
|
|
Annual
Cash Bonuses
We did not make any cash bonus payments to NEOs for 2009. The
compensation committee decided not to establish an annual
incentive plan for 2009 given its desire to reduce expenses in
the face of uncertain U.S. economic conditions. We
paid the following cash bonuses to our NEOs for 2008:
|
|
|
|
|
Name
|
|
Amount ($)
|
|
Billy D. Prim
|
|
|
|
|
Mark Castaneda
|
|
|
30,000
|
|
Michael S. Gunter
|
|
|
22,000
|
|
Richard E. Belmont
|
|
|
15,300
|
|
Brent C. Boydston
|
|
|
14,000
|
|
110
Long-Term
Equity Compensation
We did not make any equity awards to NEOs for 2009 because, as
noted above, the compensation committee determined not to
establish an annual incentive plan for 2009. We awarded our NEOs
options to purchase the following number of shares (at an
exercise price of $13.04 per share) in 2009 for 2008 performance:
|
|
|
|
|
|
|
Number
|
Name
|
|
of Options
|
|
Billy D. Prim
|
|
|
|
|
Mark Castaneda
|
|
|
3,833
|
|
Michael S. Gunter
|
|
|
|
|
Richard E. Belmont
|
|
|
2,281
|
|
Brent C. Boydston
|
|
|
2,012
|
|
Tax
Considerations
Other than our Chief Executive Officer, we have not provided any
executive officer or director with a
gross-up or
other reimbursement for tax amounts the executive might pay
pursuant to Section 280G or Section 409A of the
Internal Revenue Code. As described in the section below
captioned Employment Agreements and Change of Control
Arrangements, any payments our Chief Executive Officer
receives in connection with a change of control may be subject
to increase to cover any excise tax imposed by Section 280G
of the Internal Revenue Code.
Section 280G and related Code sections provide that
executive officers, directors who hold significant stockholder
interests and certain other service providers could be subject
to significant additional taxes if they receive payments or
benefits in connection with a change of control that exceed
certain limits, and that we or our successor could lose a
deduction on the amounts subject to the additional tax.
Section 409A also imposes additional significant taxes on
the individual in the event that an executive officer, director
or service provider receives deferred compensation
that does not meet the requirements of Section 409A.
Because of the limitations of Internal Revenue Code
Section 162(m), our federal income tax deduction for
compensation paid to our Chief Executive Officer and to certain
other highly compensated executive officers (other than our
Chief Financial Officer) may be limited if the compensation
exceeds $1,000,000 per person during any fiscal year, unless it
is performance-based under Code Section 162(m)
or meets another exception to the deduction limits. In addition
to salary and bonus compensation, upon the exercise of stock
options that are not treated as incentive stock options, the
excess of the current market price over the option price, or the
option spread, is treated as compensation and accordingly, in
any year, such exercise may cause an officers total
compensation to exceed $1,000,000. However, option compensation
will not be subject to the $1,000,000 cap on deductibility if
the options meet certain requirements, and in the past we have
granted options that we believe met those requirements.
Additionally, under a special Code Section 162(m)
transition rule, any compensation paid pursuant to a
compensation plan in existence before the effective date of this
public offering will not be subject to the $1,000,000 limitation
until the first meeting of stockholders at which directors are
elected after the close of the third calendar year following the
year in which the public offering occurs, unless the
compensation plan is materially modified. While the compensation
committee cannot predict how the deductibility limit may impact
our compensation programs in future years, the compensation
committee intends to maintain an approach to executive
compensation that links pay to performance. In addition, while
the compensation committee has not adopted a formal policy
regarding tax deductibility of compensation paid to our NEOs,
the compensation committee intends to consider tax deductibility
under Code Section 162(m) as a factor in compensation
decisions.
Risk
Analysis of Compensation Program
The compensation committee has reviewed the Companys
compensation program and does not believe that it encourages
excessive or unnecessary risk taking. Base salaries are fixed in
amount and thus do not encourage risk taking. By utilizing
annual cash bonuses that are tied to individual and Company-wide
performance measures and long-term equity compensation as a
significant portion of total compensation, the compensation
committee believes that it has aligned our executive
officers objectives with those of our long-term
stockholders.
111
Conclusion
The compensation committee believes that our executive
leadership is a key element to our success and that the
compensation package offered to our NEOs is a key element in
attracting and retaining the appropriate personnel.
The compensation committee believes it has maintained
compensation for our NEOs at levels that are reflective of the
talent and success of the individuals being compensated, and
with the inclusion of additional compensation directly tied to
performance, the compensation committee believes executive
compensation will be sufficiently comparable to its industry
peers to allow us to retain our key personnel at costs which are
appropriate for us.
The compensation committee will continue to develop, analyze and
review its methods for aligning our executive officers
long-term compensation with the benefits generated for
stockholders. The compensation committee believes the idea of
creating ownership helps align managements interests with
the interests of stockholders. The compensation committee has no
pre-determined timeline for implementing new or ongoing
long-term incentive plans. New plans are reviewed, discussed and
implemented as the compensation committee believes it is
necessary or appropriate as a measure to incentivize, retain and
reward our NEOs.
Summary
Compensation Table for 2009
The following table sets forth information regarding the
compensation earned in 2009 for our NEOs.
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Option
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All Other
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Salary
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Awards
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Compensation
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Total
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Name and Principal Position
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Year
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($)
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($)(1)
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($)(2)
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($)
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Billy D. Prim
Chairman, Chief Executive
Officer and President
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2009
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400,000
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138
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400,138
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Mark Castaneda
Chief Financial Officer
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2009
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225,000
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19,399
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93
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244,492
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Michael S. Gunter
Senior Vice President, Operations
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2009
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173,363
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62
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173,425
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Richard E. Belmont
Vice President, Products
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2009
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183,195
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11,542
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143
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194,880
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Brent C. Boydston
Vice President, Business
Development(3)
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2009
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217,350
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10,184
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62
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227,596
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(1)
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Represents the aggregate grant date
fair value of stock options awarded in 2009 calculated in
accordance with Financial Accounting Standards Board Accounting
Standards Codification 718 (formerly referred to as
SFAS 123(R)). For a description of the assumptions used in
estimating the grant date fair value of the option awards as
reported in this column, see note 9 to our consolidated
financial statements for the year ended December 31, 2009.
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(2)
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Amounts shown in this column
consist of life insurance premiums paid on behalf of each NEO.
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(3)
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Mr. Boydston served as Vice
President, Business Development through February 15, 2010.
Mr. Boydston currently serves the Company as Vice
President, National Accounts.
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112
Grants of
Plan-Based Awards for 2009
The following table sets forth certain information regarding
grants of plan-based awards to our NEOs in 2009.
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All Other
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Option Awards:
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Number of
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Exercise or
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Grant Date
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Securities
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Base Price of
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Fair Value of
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Underlying
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Option
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Option
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Grant
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Options
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Awards
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Awards
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Name
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Date
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(#)(1)
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($/Sh)
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($)(2)
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Billy D. Prim
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Mark Castaneda
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1/29/2009
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3,833
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13.04
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19,399
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Michael S. Gunter
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Richard E. Belmont
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1/29/2009
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2,281
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13.04
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11,542
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Brent C. Boydston
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1/29/2009
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2,012
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13.04
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10,184
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(1)
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We granted the stock options listed
in this column under our 2004 Stock Plan in 2009 for 2008
performance. The vesting schedule applicable to each award is
set forth below in the section entitled Outstanding Equity
Awards at December 31, 2009.
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(2)
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Represents the aggregate grant date
fair value calculated in accordance with Financial Accounting
Standards Board Accounting Standards Codification 718
(formerly referred to as SFAS 123(R)). For a description of
the assumptions used in estimating such fair value, see
note 9 to our consolidated financial statements for the
year ended December 31, 2009.
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Outstanding
Equity Awards at December 31, 2009
The following table sets forth information regarding outstanding
equity awards held by our NEOs as of December 31, 2009.
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Option Awards
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Number of Shares
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Number of Shares
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Underlying
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Underlying
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Unexercised
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Unexercised
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Option
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Option
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Options (#)
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Options (#)
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Exercise Price
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Expiration
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Name
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Exercisable
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Unexercisable
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($)
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Date
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Billy D. Prim
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9,583
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10.44
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11/01/14
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21,562
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10.44
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01/01/16
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958
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958
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(1)
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13.04
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01/25/17
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9,583
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20.66
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05/01/18
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Mark Castaneda
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3,594
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10,781
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(2)
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20.66
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05/01/18
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3,833
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(3)
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13.04
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01/29/19
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Michael S. Gunter
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9,583
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10.44
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11/01/14
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8,625
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10.44
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01/01/16
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401
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401
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(1)
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13.04
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01/25/17
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5,091
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(4)
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13.04
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01/25/17
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Richard E. Belmont
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7,187
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2,396
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(5)
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13.04
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09/11/16
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424
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424
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(1)
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13.04
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01/25/17
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3,180
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20.66
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05/01/18
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2,281
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(3)
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13.04
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01/29/19
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Brent C. Boydston
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9,583
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10.44
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11/01/14
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7,906
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10.44
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01/01/16
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503
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503
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(1)
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13.04
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01/25/17
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1,797
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(4)
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13.04
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01/25/17
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3,773
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20.66
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05/01/18
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2,012
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(3)
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13.04
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01/29/19
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(1)
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These options vest in two equal
annual installments on January 1, 2010 and January 1,
2011.
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(2)
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These options vest in three equal
annual installments on May 1, 2010, May 1, 2011 and
May 1, 2012.
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(3)
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These options vested in their
entirety on January 30, 2010.
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(4)
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These options vested in their
entirety on January 1, 2010.
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(5)
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These options vest in their
entirety on September 11, 2010.
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113
On April 29, 2010, our Board of Directors determined that
all outstanding unvested options will accelerate and be fully
vested upon the closing of the initial public offering described
in this prospectus. This accelerated vesting will result in a
non-cash charge of approximately $300,000.
Option
Exercises and Stock Vested for 2009
No stock options held by our NEOs were exercised during 2009. As
of December 31, 2009, none of our NEOs held any unvested
restricted stock.
Employment
Agreements and Change of Control Arrangements
The following summaries of the employment agreements of
Messrs. Prim, Castaneda and Gunter describe the new
employment agreements with such individuals that have been
entered into in connection with this offering.
Employment
Agreement with Mr. Prim
Mr. Prims employment agreement provides for a base
annual salary of $400,000, which may be adjusted up but not down
by our Board of Directors. Mr. Prim will also be eligible
to receive bonuses and awards of equity and non-equity
compensation as approved by our Board of Directors. The
employment agreement entitles Mr. Prim to participate in
all other Company benefits generally available to other senior
executives. Mr. Prims employment agreement also
provides for: (i) an annual automatic cost of living
increase to base salary based on the Consumer Price Index;
(ii) long-term disability coverage at 100% of base annual
salary; (iii) an annual physical paid for by the Company;
and (iv) Companys payment of certain attorneys fees
incurred in the event Mr. Prim has to take action to
enforce his rights under the employment agreement. We have
agreed to maintain insurance coverage for and indemnify
Mr. Prim in connection with his capacity as our director
and officer.
Our employment agreement with Mr. Prim provides for an
initial three-year employment term commencing April 1, 2010
and automatically extending for additional one-year periods
unless terminated by Mr. Prim or us upon at least
90 days prior written notice of intention not to renew. The
agreement may also be terminated by us or Mr. Prim for
other reasons and, subject to the conditions set forth in the
employment agreement, provides for certain payments to
Mr. Prim upon a termination of his employment or a change
of control of the Company, as described below.
If Mr. Prims employment is terminated for any reason,
he will be entitled to continued coverage under our
directors and officers insurance policy and to
continued rights to corporate indemnification, each as offered
to (and on the same terms as) other executive officers for six
years following his termination date. Unless Mr. Prim is
terminated for Cause or he resigns without Good Reason (each as
defined below), he will be entitled to any applicable prorated
annual bonus for such year and any accrued but unpaid annual
bonus for the immediately preceding year. Additionally, if
Mr. Prim is terminated without Cause, resigns for Good
Reason or we do not renew his employment agreement at the end of
its term, Mr. Prim will be entitled to (a) severance
payments in an amount equal to (i) his highest annual base
salary in effect during the 12 months immediately prior to
his termination date plus (ii) the average annual bonus
earned by him for the most recent two fiscal years ending prior
to his termination date; (b) coverage under health, dental,
life, accident, disability and similar benefit plans offered to
(and on the same terms as) other executive officers for
12 months following his termination date; and (c) the
immediate vesting of any restricted stock, stock option or other
equity compensation awards scheduled to vest within six months
after his termination date.
If Mr. Prim is terminated without Cause or if he resigns
for Good Reason within two years following a Change of Control
(as defined below), he will be entitled to (a) any
applicable prorated annual bonus for such year and any accrued
but unpaid annual bonus for the immediately preceding year;
(b) severance payments in an amount equal to two times the
sum of (i) his highest annual base salary in effect during
the 12 months immediately prior to his termination date
plus (ii) the average annual bonus earned by Mr. Prim
for the most recent two fiscal years ending prior to his
termination date; and (c) coverage under health, dental,
life, accident, disability and similar benefit plans offered to
(and on the same terms as) the other executive officers for the
24 months following his termination date. In addition, any
restricted stock, stock option or other equity compensation
awards will immediately vest as of the date of the Change of
Control.
114
Mr. Prims employment agreement provides that a
Change of Control occurs when:
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any individual, entity or group (a Person) becomes
the beneficial owner of 50% or more of either (A) the
then-outstanding shares of common stock of the Company (the
Outstanding Company Common Stock) or (B) the
combined voting power of the then-outstanding voting securities
of the Company entitled to vote generally in the election of
directors (the Outstanding Company Voting
Securities); provided, however, that the following
acquisitions shall not constitute a Change of Control:
(i) any acquisition directly from the Company,
(ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company, or (iv) any
acquisition pursuant to a transaction that complies with (A),
(B) and (C) in the third bullet point below;
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individuals who, as of the effective date of the agreement,
constitute the board of directors of the Company (the
Incumbent Board) cease for any reason to constitute
at least a majority of the board of directors; provided,
however, that any individual becoming a director subsequent to
the effective date of the agreement whose election, or
nomination for election by the Companys stockholders, was
approved by a vote of at least a majority of the directors then
comprising the Incumbent Board shall be considered as though
such individual was a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or
removal of directors or other actual or threatened solicitation
of proxies or consents by or on behalf of a Person other than
the board of directors;
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there is consummation of a reorganization, merger or similar
transaction involving the Company or any of its subsidiaries, a
sale or other disposition of all or substantially all of the
assets of the Company, or the acquisition of assets or stock of
another entity by the Company or any of its subsidiaries (each,
a Business Combination), in each case unless,
following such Business Combination, (A) all or
substantially all of the individuals and entities that were the
beneficial owners of the Outstanding Company Common Stock and
the Outstanding Company Voting Securities immediately prior to
such Business Combination beneficially own, directly or
indirectly, more than 50% of the then-outstanding shares of
common stock and the combined voting power of the entity
resulting from such Business Combination in substantially the
same proportions as their ownership immediately prior to such
Business Combination of the Outstanding Company Common Stock and
the Outstanding Company Voting Securities, as the case may be,
(B) no Person beneficially owns, directly or indirectly,
20% or more of the then-outstanding shares of common stock of
the corporation resulting from such Business Combination or the
combined voting power of the then-outstanding voting securities
of such corporation, except to the extent that such ownership
existed prior to the Business Combination, and (C) at least
a majority of the members of the board of directors of the
entity resulting from such Business Combination were members of
the Incumbent Board at the time of the execution of the initial
agreement or of the action of the Board providing for such
Business Combination; or
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the stockholders of the Company approve a complete liquidation
or dissolution of the Company.
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The initial public offering described in this prospectus is not
an event that would trigger change of control payments under
Mr. Prims employment agreement.
As defined in Mr. Prims employment agreement,
Cause means (a) continued willful failure to
substantially perform his duties with the Company,
(b) willful engaging in misconduct materially and
demonstrably injurious to the Company or (c) his uncured
material breach of the agreement. Mr. Prim may terminate
his employment for Good Reason (i) if there is
a material reduction in his duties or responsibilities,
(ii) if he is required to relocate to an employment
location more than 50 miles from his initial employment
location, or (iii) upon our uncured material breach of the
agreement.
If Mr. Prim becomes subject to excise taxes under
Section 4999 of the Internal Revenue Code, we will make a
tax gross-up
payment to him in an amount sufficient to cover such excise
taxes and any interest or penalties thereon.
Mr. Prims employment agreement also contains
confidentiality provisions and non-competition and
non-solicitation covenants prohibiting, among other things,
Mr. Prims competition with us or his solicitation of
our customers, suppliers or employees for the
12-month
period following the termination of his employment.
115
Employment
Agreements with Messrs. Castaneda and Gunter
The Companys employment agreements with
Messrs. Castaneda and Gunter are substantially similar to
our employment agreement with Mr. Prim, except that the
economic terms differ among the agreements and their agreements
do not provide for: (i) an annual automatic cost of living
increase to base salary; (ii) additional long-term
disability coverage; (iii) a Company-paid annual physical;
(iv) Company payment of certain attorney fees; and
(v) a Section 4999 excise tax
gross-up
payment to cover certain taxes and penalties.
Mr. Castanedas employment agreement provides for a
base annual salary of $250,000 and Mr. Gunters
employment agreement provides for a base annual salary of
$225,000, which base salaries may be adjusted up but not down by
our Board of Directors. Messrs. Castaneda and Gunter will
also each be eligible to receive bonuses and awards of equity
and non-equity compensation as approved by our Board of
Directors. The employment agreements entitle each of
Messrs. Castaneda and Gunter to participate in all other
Company benefits generally available to other senior executives.
We have agreed to maintain insurance coverage for and indemnify
each of Messrs. Castaneda and Gunter in connection with
their respective capacities as officers.
Our employment agreements with each of Messrs. Castaneda
and Gunter provide for initial three-year employment terms
commencing April 1, 2010 and automatically extending for
additional one-year periods unless terminated by the NEO or us
upon at least 90 days prior written notice of intention not
to renew. The agreement may also be terminated by us or the NEO
for other reasons and, subject to the conditions set forth in
the employment agreement, provides for certain payments to be
made to such NEO upon a termination of his employment or a
change of control of the Company, as described below.
If either of Messrs. Castaneda or Gunter is terminated for
any reason, he will be entitled to continued coverage under our
directors and officers insurance policy and
continued rights to corporate indemnification, each as offered
to (and on the same terms as) other executive officers for six
years following his termination date. Unless either of
Messrs. Castaneda or Gunter is terminated for Cause or
resigns without Good Reason (each as defined above with respect
to Mr. Prims employment agreement), he will be
entitled to any applicable prorated annual bonus for such year
and any accrued but unpaid annual bonus for the immediately
preceding year. Additionally, if either of
Messrs. Castaneda or Gunter is terminated without Cause,
resigns for Good Reason or we do not renew his employment
agreement at the end of its term, he will be entitled to
(a) severance payments in an amount equal to (i) his
highest annual base salary in effect during the 12 months
immediately prior to his termination date plus (ii) the
average annual bonus earned by him for the most recent two
fiscal years ending prior to his termination date;
(b) coverage under health, dental, life, accident,
disability and similar benefit plans offered to (and on the same
terms as) other executive officers for 12 months following
his termination date; and (c) the immediate vesting of any
restricted stock, stock option or other equity compensation
awards scheduled to vest within six months after his termination
date.
If either of Messrs. Castaneda or Gunter is terminated
without Cause or resigns for Good Reason within two years
following a Change of Control, he will be entitled to
(a) any applicable prorated annual bonus for such year and
any accrued but unpaid annual bonus for the immediately
preceding year; (b) severance payments in an amount equal
to 1.5 times the sum of (i) his highest base salary in
effect during the 12 months immediately prior to his
termination date plus (ii) the average annual bonus earned
by him for the most recent two fiscal years ending prior to his
termination date; and (c) coverage under health, dental,
life, accident, disability and similar benefit plans offered to
(and on the same terms as) the other executive officers for the
18 months following his termination date. In addition, any
restricted stock, stock option or other equity compensation
awards will immediately vest as of the date of the Change of
Control. The definition of Change of Control in our
employment agreements with each of Messrs. Castaneda and
Gunter is the same as the definition of Change of
Control in our employment agreement with Mr. Prim
described above. Similarly, the initial public offering
described in this prospectus is not an event that would trigger
change of control payments under the employment agreements for
Messrs. Castaneda and Gunter.
If either of Messrs. Castaneda or Gunter becomes subject to
excise taxes under Section 4999 of the Internal Revenue
Code, or any interest or penalty is incurred by any of them with
respect to such excise taxes, then the payments owed under the
applicable employment agreement will be reduced to avoid such
taxes, interest or penalties if doing so will result in greater
after tax payments to the executive.
116
The employment agreements also contain confidentiality
provisions and non-competition and non-solicitation covenants
prohibiting Messrs. Castaneda and Gunter from, among other
things, competing with us or soliciting our customers, suppliers
or employees for the
12-month
period following the termination of their respective employment.
Potential
Payments Upon Termination or Change of Control
Arrangements
in Effect Prior to this Offering
Until Messrs. Prim, Castaneda and Gunter entered into the new
employment agreements discussed below in connection with this
offering, no NEO was party to any change of control agreement or
employment agreement that would provide benefits to that NEO
upon his termination or upon a change of control of the Company.
The NEOs are entitled to certain benefits payable by our
insurance carrier under our current insurance policies in the
case of a termination resulting from death or disability.
Certain option award agreements with our NEOs provide for
accelerated vesting upon a change of control.
The following table sets forth the amounts payable to
Messrs. Prim, Castaneda, Gunter, Belmont and Boydston upon
a Transfer of Control as defined in such NEOs
option award agreement, assuming the Transfer of Control
occurred on December 31, 2009. The relevant option award
agreements define a Transfer of Control as:
(i) the direct or indirect sale or exchange by the
stockholders of the Company of all or substantially all of the
stock of the Company where the stockholders of the Company
before such sale or exchange do not retain, directly or
indirectly, at least a majority of the beneficial interest in
the voting stock of the Company after such sale or exchange;
(ii) a merger in which the Company is not the surviving
corporation; (iii) a merger in which the Company is the
surviving corporation where the stockholders of the Company
before such merger do not retain, directly or indirectly, at
least a majority of the beneficial interest in the voting stock
of the Company after such merger; (iv) the sale, exchange
or transfer of all or substantially all of the Company assets
(other than a sale, exchange or transfer to one or more
subsidiary corporations of the Company); or (v) a
liquidation or dissolution of the Company. The initial public
offering described in this prospectus is not an event that would
trigger change of control payments under the relevant option
award agreements. As of December 31, 2009, no such NEO was
entitled to any compensation or benefits in connection with his
termination or upon a change of control other than as set forth
below.
|
|
|
|
|
|
|
|
|
|
|
Number of Shares Underlying
|
|
|
|
|
Unvested Options Subject
|
|
Amount Payable Upon a
|
|
|
to Vesting Upon a Change
|
|
Change of Control
|
Name
|
|
of Control (#)
|
|
($)(1)
|
|
Billy D. Prim
|
|
|
|
|
|
|
|
|
Mark Castaneda
|
|
|
10,781
|
|
|
|
|
|
Michael S. Gunter
|
|
|
|
|
|
|
|
|
Richard E. Belmont
|
|
|
|
|
|
|
|
|
Brent C. Boydston
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents the value of unvested
stock options held at December 31, 2009, calculated by
comparing the fair market value on December 31, 2009 of the
shares of common stock underlying those options ($12.84) with
the $20.66 exercise price of such options. The fair market value
at December 31, 2009 is based upon a valuation obtained by
the Company from an unrelated third party in December 2009. On
this basis, the value of the stock options was $0.
|
New
Employment Agreements
In connection with this offering, we have entered into new
employment agreements with each of Messrs. Prim, Castaneda and
Gunter. Under these new agreements, these NEOs will be entitled
to certain benefits upon their termination or upon a Change of
Control (as defined in the employment agreement). A more
detailed description of the terms of these employment agreements
and the definitions of Change of Control,
Cause and Good Reason are available
under the section captioned Employment Agreements and
Change of Control Arrangements above.
Unless any of Messrs. Prim, Castaneda or Gunter is terminated
for Cause or resigns without Good Reason, he will be entitled to
any applicable prorated annual bonus for that year and any
accrued but unpaid annual bonus for the immediately preceding
year.
117
Under these new employment agreements, if any of Messrs. Prim,
Castaneda or Gunter is terminated without Cause or if any of
Messrs. Prim, Castaneda or Gunter resigns for Good Reason, then
such individual will be entitled to the following benefits:
|
|
|
|
|
severance payments in an amount equal to (i) his highest
annual base salary in effect during the 12 months
immediately prior to his termination date plus (ii) the
average annual bonus earned by him for the most recent two
fiscal years ending prior to his termination date;
|
|
|
coverage under health, dental, life, accident, disability and
similar benefit plans offered to (and on the same terms as) the
other executive officers for the 12 months following his
termination date; and
|
|
|
the immediate vesting of any restricted stock, stock option or
other equity compensation awards scheduled to vest within six
months his termination date.
|
Under these new employment agreements, if any of
Messrs. Prim, Castaneda or Gunter is terminated without
Cause or if any such individual resigns for Good Reason within
two years following a Change of Control, then he will be
entitled to the following benefits under his employment
agreement:
|
|
|
|
|
severance payments in an amount equal to 1.5 times (two times in
the case of Mr. Prim) the sum of (i) his highest
annual base salary in effect during the 12 months
immediately prior to his termination date plus (ii) the
average annual bonus earned by him for the most recent two
fiscal years ending prior to his termination date; and
|
|
|
coverage under health, dental, life, accident, disability and
similar benefit plans offered to (and on the same terms as) the
other executive officers for the 18 months (24 months
in the case of Mr. Prim) following his termination date.
|
In addition, any restricted stock, stock option or other equity
compensation awards that are unvested will immediately vest as
of the date of the Change of Control.
The following table sets forth the amounts payable to
Messrs. Prim, Castaneda and, Gunter upon termination of
employment or a Change in Control as defined in
their employment agreements, assuming each of the events
occurred on December 31, 2009 and assuming that the
employment agreements that such individuals have entered into in
connection with this offering were in effect as of
December 31, 2009. As described in Arrangements in
Effect Prior to this Offering, neither Mr. Belmont
nor Mr. Boydston is entitled to any compensation or
benefits in connection with his termination or upon Change of
Control.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
|
|
|
Termination
|
|
Termination
|
|
Without Cause or
|
|
|
|
|
|
|
|
|
for Cause or
|
|
Without Cause
|
|
for Good Reason
|
|
Termination
|
|
Termination
|
|
Change of
|
Benefits and Payments
|
|
Without Good
|
|
or for Good
|
|
Following a Change
|
|
Due to
|
|
Due to
|
|
Control (No
|
Upon Termination
|
|
Reason ($)
|
|
Reason ($)
|
|
of Control ($)
|
|
Disability
($)(1)
|
|
Death
($)(2)
|
|
Termination)
($)(3)
|
|
Billy D. Prim:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base
Salary(4)
|
|
|
|
|
|
|
400,000
|
|
|
|
800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Cash Bonus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Stock Options
|
|
|
|
|
|
|
48,750
|
(5)
|
|
|
48,750
|
(6)
|
|
|
|
|
|
|
|
|
|
|
48,750
|
(6)
|
Health
Insurance(7)
|
|
|
|
|
|
|
5,500
|
|
|
|
11,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
Insurance(7)
|
|
|
|
|
|
|
204
|
|
|
|
408
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disability
Coverage(7)
|
|
|
|
|
|
|
923
|
|
|
|
1,846
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
455,377
|
|
|
|
862,004
|
|
|
|
|
|
|
|
|
|
|
|
48,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination
|
|
|
|
|
|
|
|
|
Termination
|
|
Termination
|
|
Without Cause or
|
|
|
|
|
|
|
|
|
for Cause or
|
|
Without Cause
|
|
for Good Reason
|
|
Termination
|
|
Termination
|
|
Change of
|
Benefits and Payments
|
|
Without Good
|
|
or for Good
|
|
Following a Change
|
|
Due to
|
|
Due to
|
|
Control (No
|
Upon Termination
|
|
Reason ($)
|
|
Reason ($)
|
|
of Control ($)
|
|
Disability
($)(1)
|
|
Death
($)(2)
|
|
Termination)
($)(3)
|
|
Mark Castaneda:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base
Salary(8)
|
|
|
|
|
|
|
250,000
|
|
|
|
375,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Cash
Bonus(9)
|
|
|
|
|
|
|
15,000
|
|
|
|
22,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Stock Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
Insurance(10)
|
|
|
|
|
|
|
7,672
|
|
|
|
11,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
Insurance(10)
|
|
|
|
|
|
|
204
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disability
Coverage(10)
|
|
|
|
|
|
|
923
|
|
|
|
1,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
|
|
|
|
|
273,799
|
|
|
|
410,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael S. Gunter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base
Salary(8)
|
|
$
|
|
|
|
|
225,000
|
|
|
|
337,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Cash
Bonus(9)
|
|
|
|
|
|
|
26,703
|
|
|
|
40,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested Stock Options
|
|
|
|
|
|
|
28,500
|
(5)
|
|
|
28,500
|
(6)
|
|
|
|
|
|
|
|
|
|
|
28,500
|
(6)
|
Health
Insurance(10)
|
|
|
|
|
|
|
7,672
|
|
|
|
11,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
Insurance(10)
|
|
|
|
|
|
|
204
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disability
Coverage(10)
|
|
|
|
|
|
|
846
|
|
|
|
1,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
|
|
|
|
288,925
|
|
|
|
419,165
|
|
|
|
|
|
|
|
|
|
|
|
28,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Excludes amounts payable to the
executive by our insurance carrier upon termination resulting
from the disability of such executive under disability insurance
policies maintained for the benefit of the executive.
|
|
(2)
|
|
Excludes amounts payable to the
executive by our insurance carrier upon termination resulting
from the death of such executive under life insurance policies
maintained for the benefit of the executive.
|
|
|
|
(3)
|
|
Represents the value of unvested
stock options subject to vesting in connection with a Change of
Control (as defined in the executives option award
agreement) held at December 31, 2009, calculated by
comparing the fair market value on December 31, 2009 of the
shares of common stock underlying those options ($12.84) with
the exercise price of such options. The fair market value at
December 31, 2009 is based upon a valuation obtained by the
Company from an unrelated third party in December 2009.
|
|
|
|
(4)
|
|
Represents a payment equal to
Mr. Prims highest base salary in effect during the
12 months immediately prior to the termination date in the
case of a termination without Cause or for Good Reason and a
payment equal to two times Mr. Prims highest base
salary in effect during the 12 months immediately prior to
the termination date in the case of a termination without Cause
or for Good Reason in connection with a Change of Control.
|
|
|
|
(5)
|
|
Represents the value of unvested
stock options held at December 31, 2009 which are scheduled
to vest within six month of such date, calculated by comparing
the fair market value on December 31, 2009 of the shares of
common stock underlying those options ($12.84) with the exercise
price of such options. The fair market value at
December 31, 2009 is based upon a valuation obtained by the
Company from an unrelated third party in December 2009.
|
|
|
|
(6)
|
|
Represents the value of all
unvested stock options held at December 31, 2009,
calculated by comparing the fair market value on
December 31, 2009 of the shares of common stock underlying
those options ($12.84) with the exercise price of such options.
The fair market value at December 31, 2009 is baed upon a
valuation obtained by the Company from an unrelated third party
in December 2009.
|
|
|
|
(7)
|
|
In the case of a termination
without Cause or for Good Reason, represents the estimated
incremental cost to maintain coverage under the applicable
policy for 12 months. In the case of a termination without
Cause or for Good Reason in connection with a Change of Control,
represents the estimated incremental cost to us maintain
coverage under the applicable policy for 24 months.
|
|
(8)
|
|
Represents a payment equal to such
executives highest base salary in effect during the
12 months immediately prior to the termination date in the
case of a termination without Cause or for Good Reason and a
payment equal to 1.5 times such executives highest base
salary in
|
119
|
|
|
|
|
effect during the 12 months
immediately prior to the termination date in the case of a
termination without Cause or for Good Reason in connection with
a Change of Control.
|
|
(9)
|
|
Represents a payment equal to the
average annual bonus earned by the executive for the most recent
two fiscal years ending prior to the termination date in the
case of a termination without Cause or for Good Reason and a
payment equal to 1.5 times the average annual bonus earned by
the executive for the most recent two fiscal years ending prior
to the termination date in the case of a termination without
Cause or for Good Reason in connection with a Change of Control.
|
|
(10)
|
|
In the case of a termination
without Cause or for Good Reason, represents the estimated
incremental cost to maintain coverage under the applicable
policy for 12 months. In the case of a termination without
Cause or for Good Reason in connection with a Change of Control,
represents the estimated incremental cost to us maintain
coverage under the applicable policy for 18 months.
|
Equity
and Stock Option Plans
2010
Omnibus Long-Term Incentive Plan
In March 2010 our Board of Directors adopted and in
April 2010 our stockholders approved the Primo Water
Corporation 2010 Omnibus Long-Term Incentive Plan, which we
refer to as the 2010 Omnibus Plan and which will be effective
upon the closing of this offering. The material terms of the
2010 Omnibus Plan are summarized below.
Administration of the Plan. Our Board of Directors
has such powers and authorities related to the administration of
the 2010 Omnibus Plan as are consistent with our corporate
governance documents and applicable law. The Board of Directors
may (and in some cases under applicable law, our governance
documents or regulatory requirements, must) delegate to a
committee (the committee) administration of all or
some parts of the 2010 Omnibus Plan. Following the initial
public offering and to the extent required by applicable law,
the committee or a
sub-committee,
as applicable, to which administrative responsibility will be
delegated will be comprised of directors who (i) qualify as
outside directors within the meaning of
Section 162(m) of the Internal Revenue Code of 1986, as
amended (the Code), (ii) meet such other
requirements as may be established from time to time by the SEC
for plans intended to qualify for exemption under
Rule 16b-3
(or its successor) under the Securities Exchange Act of 1934, as
amended, and (iii) comply with the independence
requirements of the stock exchange on which our common stock is
listed.
Number of Authorized Shares. The initial number of
shares of our common stock reserved for issuance under the 2010
Omnibus Plan is 718,735. In addition, any shares of our stock
which are subject to stock options granted under the 2004 Stock
Plan and are canceled, expired, forfeited, settled in cash or
otherwise terminated without delivery of shares, will be
available for issuance under the 2010 Omnibus Plan. Subject to
the terms of the 2010 Omnibus Plan, 718,735 of the reserved
shares may be issued pursuant to incentive stock options
(ISOs). Following the end of the Transition Period
(as defined herein) and subject to adjustment as described
below, the maximum number of each type of award granted to any
grantee in any
36-month
period and intended to constitute performance-based
compensation under Section 162(m) will not exceed the
following:
|
|
|
|
|
stock appreciation rights 95,831;
|
|
|
|
|
|
restricted stock 95,831;
|
|
|
|
|
|
restricted stock units 95,831; and
|
|
|
|
|
|
other stock-based performance awards 95,831.
|
Any shares covered by an award that are forfeited, expired,
cancelled, settled in cash, settled by issuance of fewer shares
than the amount underlying the award, or otherwise terminated
without delivery of shares to the grantee, will be available for
future grants under the 2010 Omnibus Plan. The number and class
of shares available under the 2010 Omnibus Plan
and/or
subject to outstanding awards may be equitably adjusted by our
Board of Directors in the event of various changes in the
capitalization of the Company.
Eligibility and Participation. Eligibility to
participate in the 2010 Omnibus Plan is limited to such
employees, officers, non-employee directors, consultants and
advisors of the Company, or of any affiliate, as our Board of
Directors may determine and designate from time to time.
Type of Awards. The following types of awards are
available for grant under the 2010 Omnibus Plan: ISOs,
non-qualified stock options (NSOs), stock
appreciation rights (SARs), restricted stock,
restricted stock units, cash- or stock-based performance awards
and other stock-based awards.
120
Stock
Options and SARs
Grant of Options and SARs. Our Board of Directors
may award ISOs, NSOs (together, Options), and SARs
to grantees. Our Board of Directors is authorized to grant SARs
either in tandem with or as a component of other awards or alone.
Exercise Price of Options and SARs. The exercise
price per share of an Option will be at least 100% of the fair
market value per share of our stock underlying the award on the
grant date and in no case will the exercise price of any Option
be less than the par value of a share of our stock. A SAR will
confer on the grantee a right to receive, upon exercise, a
payment of the excess of (i) the fair market value of one
share of our stock on the date of exercise over (ii) the
grant price of the SAR as determined by our Board of Directors.
The grant price will be fixed at the fair market value of a
share of stock on the date of grant. SARs granted in tandem with
an outstanding Option following the grant date of such Option
will have a grant price that is equal to the Options
exercise price; provided, however, that the SARs grant
price may not be less than the fair market value of a share of
stock on the grant date of the SAR.
Vesting of Options and SARs. Our Board of Directors
will determine the terms and conditions (including any
performance requirements) under which an Option or SAR will
become exercisable and will include such information in the
award agreement.
Special Limitations on ISOs. In the case of a grant
of an Option intended to qualify as an ISO to a grantee that
owns more than ten percent of the total combined voting power of
all classes of our outstanding stock (a Ten Percent
Stockholder), the exercise price of the Option will not be
less than 110% of the fair market value of a share of our stock
on the grant date. Additionally, an Option will constitute an
ISO only (i) if the grantee is an employee of the Company
or a subsidiary of the Company, (ii) to the extent such
Option is specifically designated as an ISO in the related award
agreement, and (iii) to the extent that the aggregate fair
market value (determined at the time the option is granted) of
the shares of stock with respect to which all ISOs held by such
grantee become exercisable for the first time during any
calendar year (under the 2010 Omnibus Plan and all other plans
of the grantees employer and its affiliates) does not
exceed $100,000.
Exercise of Options and SARs. An Option may be
exercised by the delivery to us of written notice of exercise
and payment in full of the exercise price (plus the amount of
any taxes which we may be required to withhold). The minimum
number of shares with respect to which an Option may be
exercised, in whole or in part, at any time will be the lesser
of (i) the number set forth in the applicable award
agreement and (ii) the maximum number of shares available
for purchase under the Option at the time of exercise. Our Board
of Directors has the discretion to determine the method or
methods by which a SAR may be exercised.
Expiration of Options and SARs. Options and SARs
will expire at such time as our Board of Directors determines;
provided, however, that no Option may be exercised more than ten
years from the date of grant, or in the case of an ISO held by a
Ten Percent Stockholder, not more than five years from the date
of grant.
Restricted
Stock and Restricted Stock Units
Restricted Stock. At the time a grant of restricted
stock is made, our Board of Directors may, in its sole
discretion, establish the applicable restricted
period and prescribe restrictions in addition to or other
than the expiration of the restricted period, including the
satisfaction of corporate or individual performance objectives.
Unless our Board of Directors otherwise provides in an award
agreement, holders of restricted stock will have the right to
vote such stock and the right to receive any dividends declared
or paid with respect to such stock. Our Board of Directors may
provide that any such dividends paid must be reinvested in
shares of stock, which may or may not be subject to the same
vesting conditions and restrictions applicable to such
restricted stock. All distributions, if any, received by a
grantee with respect to restricted stock as a result of any
stock split, stock dividend, combination of shares, or other
similar transaction will be subject to the restrictions
applicable to the original grant.
The grantee will be required, to the extent required by
applicable law, to purchase the restricted stock at a price
equal to the greater of (i) the aggregate par value of the
shares of stock represented by such restricted stock or
(ii) the price, if any, specified in the award agreement
relating to such restricted stock. If specified in the award
agreement, the price may be deemed paid by services already
rendered.
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Restricted Stock Units. At the time a grant of
restricted stock units is made, our Board of Directors may, in
its sole discretion, establish the applicable restricted
period and prescribe restrictions in addition to or other
than the expiration of the restricted period, including the
satisfaction of corporate or individual performance objectives.
Holders of restricted stock units will have no rights as
stockholders of the Company. Our Board of Directors may provide
that the holder of restricted stock units will be entitled to
receive dividend equivalent rights, which may be deemed
reinvested in additional restricted stock units.
Cash- and
Stock-Based Performance Awards
The right of a grantee to exercise or receive a grant or
settlement of any award, and the timing thereof, may be subject
to such performance conditions as may be specified by our Board
of Directors. Our Board of Directors may use such business
criteria and other measures of performance as it may deem
appropriate in establishing any performance conditions, and may,
subject to certain limitations in the case of a performance
award intended to qualify under Section 162(m) of the Code
(Section 162(m)), exercise its discretion to
reduce the amounts payable under any award subject to
performance conditions.
Following the completion of the Transition Period (as defined
herein), we intend that performance awards granted to persons
who are designated by our Board of Directors as likely to be
Covered Employees within the meaning of
Section 162(m) and regulations thereunder will, if so
designated by our Board of Directors, constitute qualified
performance-based compensation within the meaning of
Section 162(m) and regulations thereunder. The grant,
exercise
and/or
settlement of such performance awards will be contingent upon
achievement of pre-established performance goals which will
consist of one or more business criteria and a targeted level or
levels of performance with respect to each of such criterion.
Performance goals will be objective and will otherwise meet the
requirements of Section 162(m) and regulations thereunder.
In addition, after the Transition Period, the maximum amount of
each cash-based performance award intended to constitute
performance-based compensation under
Section 162(m) granted to a grantee in any
12-month
period will not exceed $2,000,000.
One or more of the following business criteria for the Company
will be used exclusively by our Board of Directors in
establishing performance goals for such awards: net sales;
revenue; revenue growth or product revenue growth; operating
income (before or after taxes); pre-or after-tax income (before
or after allocation of corporate overhead and bonuses); net
earnings; earnings per share; net income (before or after
taxes); return on equity; total stockholder return; return on
assets or net assets; appreciation in
and/or
maintenance of, share price; market share; gross profits;
earnings (including earnings before taxes, earnings before
interest and taxes or earnings before interest, taxes
depreciation and amortization); economic value-added models or
equivalent metrics; comparisons with various stock market
indices; reduction in costs; cash flows or cash flows per share
(before or after dividends); return on capital (including return
on total capital or return on invested capital); cash flow
return on investment; improvement in or attainment of expense
levels or working capital levels; operating margins; gross
margins or cash margin; year-end cash; debt reductions;
stockholder equity; regulatory performance; implementation,
completion or attainment of measurable objectives with respect
to research, development, products or projects and recruiting
and maintaining personnel; and, prior to the completion of the
Transition Period (as defined herein), to the extent permitted
by applicable law, any other business criteria as determined by
our Board of Directors.
Other
Stock-Based Awards
Our Board of Directors may, in its discretion, grant other
stock-based awards, consisting of stock units or other awards,
valued in whole or in part by reference to, or otherwise based
upon, our common stock. The terms of such other stock-based
awards will be set forth in the applicable award agreements.
Effect of Certain Transactions. Except as otherwise
provided in an award agreement, in the event of (a) the
liquidation or dissolution of the Company or (b) a
reorganization, merger, exchange or consolidation of the Company
or involving the shares of our common stock (a
Transaction), the 2010 Omnibus Plan and the awards
issued pursuant to the plan shall continue in effect in
accordance with their respective terms, except that following a
Transaction either (i) each outstanding award will be
treated as provided for in the agreement entered into in
connection with the Transaction or (ii) if not so provided
in such agreement, each grantee will be entitled to receive in
respect of each share of our common stock subject to any
outstanding awards, upon exercise or payment or transfer in
respect of any award, the same number and kind of stock,
securities, cash, property or other consideration
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that each holder of a share of our common stock was entitled to
receive in the Transaction in respect of a share of common
stock; provided, however, that, unless otherwise determined by
our Board of Directors, such stock, securities, cash, property
or other consideration shall remain subject to all of the
conditions, restrictions and performance criteria which were
applicable to the awards prior to such Transaction. Without
limiting the generality of the foregoing, the treatment of
outstanding Options and SARS in connection with a Transaction in
which the consideration paid or distributed to our stockholders
is not entirely shares of common stock of the acquiring or
resulting corporation may include the cancellation of
outstanding Options and SARS upon consummation of the
Transaction as long as, at the election of our Board of
Directors, (x) the holders of affected Options and SARs
have been given a period of at least fifteen days prior to the
date of the consummation of the Transaction to exercise the
Options or SARs (whether or not they were otherwise exercisable)
or (y) the holders of the affected Options and SARs are
paid (in cash or cash equivalents) in respect of each share
covered by the Option or SAR being canceled an amount equal to
the excess, if any, of the per share price paid or distributed
to our stockholders in the Transaction (the value of any
non-cash consideration to be determined by our Board of
Directors in its sole discretion) over the Option or SAR
exercise price, as applicable. For avoidance of doubt,
(1) the cancellation of Options and SARs as described in
the preceding sentence may be effected notwithstanding anything
to the contrary contained in the 2010 Omnibus Plan or any award
agreement and (2) if the amount determined pursuant to the
preceding sentence is zero or less, the affected Option or SAR
may be cancelled without any payment therefor.
Change in Control. Our Board of Directors will
determine the effect of a change in control (as defined in the
2010 Omnibus Plan) of the Company with respect to any Award or
Awards, including but not limited to, acceleration of vesting,
termination or assumption of Awards.
Deferral Arrangements. Our Board of Directors may
permit or require the deferral of any award payment into a
deferred compensation arrangement.
Nontransferability of Awards. Generally, during the
lifetime of a grantee, only the grantee may exercise rights
under the 2010 Omnibus Plan and no award will be assignable or
transferable other than by will or laws of descent and
distribution. If authorized in the award agreement, a grantee
may transfer, not for value, all or part of an award (other than
an ISO) to certain family members (including trusts and
foundations for the benefit thereof). Neither restricted stock
nor restricted stock units may be sold, transferred, assigned,
pledged or otherwise encumbered or disposed of during the
restricted period or prior to the satisfaction of any other
restrictions prescribed by our Board of Directors.
Separation from Service. Our Board of Directors may
provide in the applicable award agreements for actions that will
be taken upon a grantees separation from service from the
Company, including but not limited to, accelerated vesting or
termination of awards.
Tax Withholding and Tax Offset Payments. We will
have the right to deduct from payments of any kind otherwise due
to a grantee any federal, state, or local taxes of any kind
required by law to be withheld with respect to the vesting of or
other lapse of restrictions applicable to an award or upon the
issuance of any shares of stock upon the exercise of an Option
or pursuant to an award.
Term of Plan. Unless earlier terminated by our Board
of Directors, the authority to make grants under the 2010
Omnibus Plan will terminate on the date that is ten years after
it is adopted by our Board of Directors.
Amendment and Termination. Our Board of Directors
may, at any time and from time to time, amend, suspend, or
terminate the 2010 Omnibus Plan as to any shares of stock as to
which awards have not been made. An amendment will be contingent
on approval of our stockholders to the extent stated by our
Board of Directors, required by applicable law or required by
applicable stock exchange listing requirements. No awards will
be made after termination of the 2010 Omnibus Plan. No
amendment, suspension, or termination of the 2010 Omnibus Plan
will, without the consent of the grantee, impair rights or
obligations under any award theretofore awarded under the 2010
Omnibus Plan.
New Plan Benefits. All grants of awards under the
2010 Omnibus Plan will be discretionary. Therefore, in general,
the benefits and amounts that will be received under the 2010
Omnibus Plan are not determinable.
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Federal Income Tax Consequences. The following is a
summary of the general federal income tax consequences to the
Company and to U.S. taxpayers of awards granted under the
2010 Omnibus Plan. Tax consequences for any particular
individual or under state or
non-U.S. tax
laws may be different.
NSOs and SARs. No taxable income is reportable when
a NSO or SAR is granted. Upon exercise, generally, the recipient
will have ordinary income equal to the fair market value of the
underlying shares of stock on the exercise date minus the
exercise price. Any gain or loss upon the disposition of the
stock received upon exercise will be capital gain or loss to the
recipient if the appropriate holding period under federal tax
law is met for such treatment.
ISOs. No taxable income is reportable when an ISO is
granted or exercised (except for grantees who are subject to the
alternative minimum tax, who may be required to recognize income
in the year in which the ISO is exercised). If the recipient
exercises the ISO and then sells the underlying shares of stock
more than two years after the grant date and more than one year
after the exercise date, the excess of the sale price over the
exercise price will be taxed as long-term capital gain or loss.
If the recipient exercises the ISO and sells the shares before
the end of the two- or one-year holding periods, he or she
generally will have ordinary income at the time of the sale
equal to the fair market value of the shares on the exercise
date (or the sale price, if less) minus the exercise price of
the ISO.
Restricted Stock and Restricted Stock Units. A
recipient of restricted stock or restricted stock units will not
have taxable income upon the grant unless, in the case of
restricted stock, he or she elects to be taxed at that time.
Instead, he or she will have ordinary income at the time of
vesting equal to the fair market value on the vesting date of
the shares (or cash) received minus any amount paid for the
shares.
Cash- and Stock-Based Performance Awards and Other
Stock-Based Awards. Typically, a recipient will not
have taxable income upon the grant of cash or stock-based
performance awards or other stock-based awards. Subsequently,
when the conditions and requirements for the grants have been
satisfied and the payment determined, any cash received and the
fair market value of any common stock received will constitute
ordinary income to the recipient.
Tax Effect for the Company. We generally will
receive a tax deduction for any ordinary income recognized by a
grantee in respect of an award under the 2010 Omnibus Plan (for
example, upon the exercise of a NSO). In the case of ISOs that
meet the holding period requirements described above, the
grantee will not recognize ordinary income; therefore, we will
not receive a deduction.
Once we become a public company, special rules limit the
deductibility of compensation paid to our CEO and to each of our
three most highly compensated executive officers whose
compensation is required to be reported annually in our proxy.
Under Section 162(m), the annual compensation paid to each
of these executives may not be deductible to the extent that it
exceeds $1 million. However, we intend to rely on Treas.
Reg.
Section 1.162-27(f)
which provides that the deduction limit of Section 162(m)
does not apply to any remuneration paid pursuant to a
compensation plan or agreement that existed during the period in
which the company was not publicly held. Subject to certain
requirements, we may rely on this grandfather
provision until the first meeting of stockholders at which
directors are elected that occurs after the end of the third
calendar year following the calendar year in which the offering
occurs (the Transition Period). Additionally, after
the expiration of the grandfather period, we can preserve the
deductibility of compensation over $1 million if certain
conditions of Section 162(m) are met. These conditions
include stockholder approval of the 2010 Omnibus Plan, setting
limits on the number of awards that any individual may receive
and, for awards other than Options and SARs, establishing
performance criteria that must be met before the award will
actually be granted, be settled, vest or be paid. The 2010
Omnibus Plan has been designed to permit our Board of Directors
to grant awards that qualify as performance-based for purposes
of satisfying the conditions of Section 162(m).
Registration of Shares. Following the closing of
this offering we intend to file a registration statement on
Form S-8
under the Securities Act to register the full number of shares
of our common stock which will be reserved for issuance under
the 2010 Omnibus Plan, as described in the section titled
Number of Authorized Shares above (plus such
number of shares reserved under the 2004 Stock Plan that become
available for issuance under the 2010 Omnibus Plan), as well as
registration statements on
Form S-8
to register shares of common stock reserved for issuance under
the 2004 Stock Plan.
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2004
Stock Plan
On November 1, 2004, our Board of Directors adopted the
Primo Water Corporation 2004 Stock Plan, which we refer to as
the 2004 Stock Plan. The material terms of the 2004 Stock Plan
are summarized below.
Administration of the Plan. Our Board of Directors
has such powers and authorities related to the administration of
the 2004 Stock Plan as are consistent with our corporate
governance documents and applicable law and may delegate to a
committee administration of all or some parts of the 2004 Stock
Plan. Our Board of Directors has the authority to, among other
things, interpret the plan, terminate or amend the plan,
determine individuals eligible to participate in the plan and
determine the size and terms of awards granted under the plan.
Number of Authorized Shares. A total of
431,241 shares of our common stock are reserved for
issuance under the 2004 Stock Plan. As of September 20,
2010, options to purchase a total of 304,214 shares of our
common stock with a weighted average exercise price of $13.15
were outstanding under our 2004 Stock Plan. In addition,
105,654 shares of restricted stock have been issued
pursuant to the 2004 Stock Plan. We do not intend to issue any
additional awards under the 2004 Stock Plan following the
closing of this offering. All awards outstanding under the 2004
Stock Plan will remain in effect and will continue to be
governed by their existing terms.
Eligibility and Participation. Eligibility to
participate in the 2004 Stock Plan is limited to such key
employees, non-employee directors and consultants of the
Company, or of any parent or subsidiary, as our Board of
Directors may determine and designate from time to time.
Types of Awards. The following types of awards are
available for grant under the 2004 Stock Plan: incentive stock
options (ISOs), non-qualified stock options
(NSOs, and together with ISOs, Options)
and rights to purchase restricted shares of our common stock
(Purchase Rights).
Stock
Options
Grant of Options. Our Board of Directors may award
ISO and NSOs to grantees under the 2004 Stock Plan. The exercise
price per share of an Option is determined by our Board of
Directors; provided, however, in no event will the exercise
price of an ISO be less than 100% of the fair market value per
share of our stock underlying the award on the grant date. In
the case of a grant of an Option intended to qualify as an ISO
to a grantee that owns more than ten percent of the total
combined voting power of all classes of our outstanding stock,
the exercise price of the Option will not be less than 110% of
the fair market value of a share of our stock on the grant date.
Additionally, an Option will constitute an ISO only (i) if
the grantee is an employee of the Company or a subsidiary of the
Company, (ii) to the extent specifically provided in the
related award agreement, and (iii) to the extent that the
aggregate fair market value (determined at the time the option
is granted) of the shares of stock with respect to which all
ISOs held by such grantee become exercisable for the first time
during any calendar year (under the 2004 Stock Plan and all
other plans of the grantees employer and its affiliates)
does not exceed $100,000.
Stock Option Vesting and Exercise. Our Board of
Directors will determine the vesting terms of all Options and
will include such information in the award agreement. An Option
may be exercised by the delivery to us of written notice of
exercise and payment in full of the exercise price (plus the
amount of any taxes which we may be required to withhold). The
exercise price may be paid in cash or, at the discretion of our
Board of Directors, in shares of the Companys stock having
a fair market value equal to the exercise price or by a
combination of cash and stock. Once vested, Options granted
under the 2004 Stock Plan remain exercisable for the term of the
Option, which may not exceed ten years, provided that the
Options may terminate prior to the end of the term if the
grantees service relationship with us terminates. On
April 29, 2010, our Board of Directors determined that all
outstanding unvested Options granted under the 2004 Stock Plan
will accelerate and be fully vested upon the closing of the
initial public offering described in this prospectus. This
accelerated vesting will result in a
non-cash
charge of approximately $300,000.
Transferability of Options. A grantee of an Option
under the 2004 Stock Plan may not transfer such Option except by
will or the laws of descent or distribution.
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Stock
Purchase Rights
Our Board of Directors may award Purchase Rights evidenced by
restricted stock agreements
and/or
subscription agreements under the 2004 Stock Plan. Our Board of
Directors will determine the number of shares subject to the
Purchase Right and the purchase price for each share to be
purchased pursuant to the Purchase Right and set forth this
information in the grantees award agreement. Our Board of
Directors will also determine any transfer restrictions on
shares purchased pursuant to a Purchase Right and may, in their
sole discretion, provide for a right of the Company to
repurchase any shares purchased pursuant to a Purchase Right in
the grantees award agreement. Upon the exercise of a
Purchase Right, the grantee will possess all rights of a
stockholder of the Company.
Change in Control. The 2004 Stock Plan does not
specify any particular effect of a change in control of the
Company on awards granted under the 2004 Stock Plan. A majority
of the Option awards currently outstanding under the 2004 Stock
Plan will be deemed 100% vested and exercisable upon a
Transfer of Control (as defined in the Option award
agreements) of the Company. This offering will not qualify as a
Transfer of Control for purposes of the Option award agreements
under the 2004 Stock Plan.
Corporate Event. In the event of a merger or
consolidation of the Company, a sale of all or substantially all
of our assets or a dissolution or liquidation of the Company,
our Board of Directors may make such adjustments to the awards
granted under the 2004 Stock Plan as it deems appropriate and
equitable to prevent substantial dilution or enlargement of the
rights granted under the 2004 Stock Plan.
Term of Plan. Unless earlier terminated by our Board
of Directors, the authority to make grants under the 2004 Stock
Plan will terminate on October 31, 2014. However, we do not
intend to issue any additional awards under the 2004 Stock Plan
following the closing of this offering.
Federal Income Tax Consequences. The following is a
summary of the general federal income tax consequences to the
Company and to U.S. taxpayers of awards granted under the
2004 Stock Plan. Tax consequences for any particular individual
or under state or
non-U.S. tax
laws may be different.
NSOs. No taxable income is reportable when a NSO is
granted. Upon exercise, generally, the recipient will have
ordinary income equal to the fair market value of the underlying
shares of stock on the exercise date minus the exercise price.
Any gain or loss upon the disposition of the stock received upon
exercise will be capital gain or loss to the recipient if the
appropriate holding period under federal tax law is met for such
treatment.
ISOs. No taxable income is reportable when an ISO is
granted or exercised (except for grantees who are subject to the
alternative minimum tax, who may be required to recognize income
in the year in which the ISO is exercised). If the recipient
exercises the ISO and then sells the underlying shares of stock
more than two years after the grant date and more than one year
after the exercise date, the excess of the sale price over the
exercise price will be taxed as long-term capital gain or loss.
If the recipient exercises the ISO and sells the shares before
the end of the two- or one-year holding periods, he or she
generally will have ordinary income at the time of the sale
equal to the fair market value of the shares on the exercise
date (or the sale price, if less) minus the exercise price of
the ISO.
Purchase Rights. A recipient of a Purchase Right
will recognize ordinary income on the later of the date the
Purchase Right is exercised and the date any applicable vesting
conditions with respect to the Purchase Rights have been met.
The amount of taxable income recognized by the recipient will be
the difference between the fair market value of the stock on the
exercise or vesting date, as applicable, and the purchase price
paid for the shares.
Tax Effect for the Company. We generally will
receive a tax deduction for any ordinary income recognized by a
grantee in respect of an award under the 2004 Stock Plan (for
example, upon the exercise of a NSO). In the case of ISOs that
meet the holding period requirements described above, the
grantee will not recognize ordinary income; therefore, we will
not receive a deduction.
Once we become a public company, special rules limit the
deductibility of compensation paid to our CEO and to each of our
three most highly compensated executive officers (other than our
Chief Financial Officer) whose compensation is required to be
reported annually in our proxy. Under Section 162(m), the
annual compensation paid to each of these executives may not be
deductible to the extent that it exceeds $1 million.
However, we intend to rely on Treas. Reg.
Section 1.162-27(f)
which provides that the deduction limit of Section 162(m)
does not apply to any remuneration paid pursuant to a
compensation plan or agreement that existed during the period in
which the
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company was not publicly held. Subject to certain requirements,
we may rely on this grandfather provision until the
first meeting of stockholders at which directors are elected
that occurs after the end of the third calendar year following
the calendar year in which the offering occurs (the
Transition Period). Additionally, after the
expiration of the grandfather period, we can preserve the
deductibility of compensation over $1 million if certain
conditions of Section 162(m) are met. These conditions
include stockholder approval of the 2004 Stock Plan, setting
limits on the number of awards that any individual may receive
and, for awards other than Options, establishing performance
criteria that must be met before the award will actually be
granted, be settled, vest or be paid.
Registration of Shares. Following the closing of
this offering we intend to file a registration statement on
Form S-8
under the Securities Act to register the 304,214 shares of
common stock reserved for issuance pursuant to outstanding
awards under the 2004 Stock Plan.
2010
Employee Stock Purchase Plan
In March 2010 our Board of Directors adopted and in
April 2010 our stockholders approved the 2010 Employee
Stock Purchase Plan, or the ESPP, which will be effective upon
the consummation of this offering. Our ESPP is intended to
qualify as an employee stock purchase plan as
defined under Section 423 of the Code and will become
effective on the day preceding the consummation of this offering.
Administration of the ESPP. The compensation
committee of our Board has authority to interpret and implement
the terms of the ESPP. The committee will have the discretion to
set the terms of each offering in accordance with the provisions
of the ESPP, to make all determinations regarding the ESPP,
including eligibility, and otherwise administer the ESPP.
Number of Authorized Shares. A total of
23,958 shares of our common stock will be made available
for sale under our ESPP, subject to adjustment in the event of
any significant change in our capitalization, such as a stock
split, a combination or exchange or shares, or a stock dividend
or other distribution.
Eligibility and Participation. All of our employees
generally are eligible to participate if they are customarily
employed by us or any participating subsidiary for at least
20 hours per week and more than five months in any calendar
year. The committee may exclude from an offering period
highly-compensated employees or employees who have not satisfied
a minimum period of employment with us which may not exceed a
period of two years. In addition, an employee may not be granted
rights to purchase stock under our ESPP if such employee would:
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immediately after any grant of purchase rights, own stock
possessing 5% or more of the total combined voting power or
value of all classes of our capital stock; or
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hold rights to purchase stock under all of our employee stock
purchase plans that would accrue at a rate that exceeds $25,000
worth of our stock for each calendar year.
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Offer Periods and Purchase Periods. The ESPP
provides for offering periods of up to 27 months. The
initial offering period under the ESPP will begin on the
effective date of this offering and will end on
December 31, 2010. Subsequent offerings are expected to
consist of
12-month
offering periods, with a new offering period beginning every
January 1 and separate purchases taking place every
6 months during each offering period. However, we may
change the timing and duration of offering periods and the
frequency of purchases, as long as such changes comply with the
terms of the ESPP. Unless otherwise specified by the committee,
a participant may purchase a maximum of 50,000 shares of
common stock during an offering period. No grant of purchase
rights will be made under the ESPP prior to the consummation of
this offering.
Payroll Deductions. Our ESPP permits participants to
exercise their stock purchase rights under the ESPP through
payroll deductions of up to 15% of their eligible compensation,
which includes a participants gross base compensation from
the Company, excluding overtime payments, sales commissions,
incentive compensation, bonuses, expense reimbursements, fringe
benefits and other special payments.
Exercise of Purchase Rights. Amounts deducted and
accumulated by the participant are used to purchase shares of
our common stock at the end of each purchase period during an
offering period. The purchase price of the shares will not be
less than 85% of the fair market value of our common stock on
the first trading day of the offering period or on the last day
of the applicable purchase period, whichever is lower.
Participants may withdraw from
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participation in the ESPP at any time during an offering period,
and will be paid their accrued payroll deductions that have not
yet been used to purchase shares of common stock. Participation
ends automatically upon termination of employment with us.
Change in Control. In the event of a Change in
Control (as defined in the ESPP), the committee may
provide for the successor corporation to assume or substitute
each outstanding purchase right, cashout of the
participants purchase right, acceleration of the next
purchase date or termination of the current offering period
without a purchase.
Amendment and Termination. The ESPP will
automatically terminate in 2020, unless we terminate it sooner.
In addition, our Board of Directors has the authority to amend,
suspend or terminate our ESPP, except that, subject to certain
exceptions described in the ESPP, no such action may adversely
affect any outstanding rights to purchase stock under our ESPP.
Registration of Shares. Following the completion of
this offering we intend to file a registration statement on
Form S-8
under the Securities Act to register the full number of shares
of our common stock which will be reserved for issuance under
the ESPP, as described in the section titled Number of
Authorized Shares above.
128
PRINCIPAL
STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our common stock as of
September 20, 2010, and as adjusted to reflect the sale of
our common stock offered by this prospectus and the issuance of
3,750,000 shares of common stock to Culligan to fund a
portion of the purchase price for the Culligan Refill
Acquisition (assuming an initial public offering price of
$12.00 per share, the midpoint of the range set forth on
the cover page of this prospectus), by:
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each of our named executive officers;
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each of our directors;
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all of our directors and current executive officers as a group;
and
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each person (or group of affiliated persons) known to us to be
the beneficial owner of more than 5% of our common stock.
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Beneficial ownership is determined in accordance with the rules
of the SEC and includes any shares over which a person exercises
sole or shared voting or investment power. Under these rules,
beneficial ownership also includes any shares as to which the
individual or entity has the right to acquire beneficial
ownership of within 60 days of September 20, 2010
through the exercise of any warrant, stock option or other
right. Except as noted by footnote, and subject to community
property laws where applicable, we believe that the stockholders
named in the table below have sole voting and investment power
with respect to all shares of common stock shown as beneficially
owned by them.
Beneficial ownership is based upon shares of common stock
outstanding as of September 20, 2010, and assumes
(i) a 1-for-10.435 reverse stock split of our common stock
that will occur immediately prior to the closing of this
offering, (ii) the conversion of all of our issued and
outstanding Series A and Series C convertible
preferred stock into shares of common stock, (iii) the
conversion of 50% of our issued and outstanding shares of Series
B preferred stock into shares of common stock at a ratio of
1:0.0926, which is calculated by dividing the liquidation
preference of the Series B preferred stock by 90% of an
assumed initial public offering price of $12.00 per share, which
is the midpoint of the range set forth on the cover page of this
prospectus and (iv) the redemption of the remaining 50% of
our issued and outstanding shares of Series B preferred
stock and the payment of accrued and unpaid dividends on all
outstanding shares of Series B preferred stock, all
effective as of September 20, 2010. In addition, beneficial
ownership amounts exclude any shares Mr. Prim may purchase
from the underwriters in this offering at the initial public
offering price per share. See Related Party
Transactions Conversion of Series A and
Series C Convertible Preferred Stock and Conversion and
Redemption of and Payment of Accrued and Unpaid Dividends on
Series B Preferred Stock.
129
Except as set forth below, the address of all stockholders
listed under Directors and named executive officers
and 5% or greater stockholders is
c/o 104
Cambridge Plaza Drive, Winston-Salem, North Carolina 27104.
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Percentage Ownership
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After Offering
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After Offering
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and Culligan Refill
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and Culligan Refill
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After Offering
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Acquisition
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Acquisition
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(Assuming No
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(Assuming
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(Assuming
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Exercise of
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No Exercise
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Full Exercise
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Number
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Prior to
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Over-Allotment
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of Over-Allotment
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of Over-Allotment
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of Shares
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Offering (%)
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Option) (%)
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Option) (%)
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Option) (%)
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Directors and named executive officers
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Billy D.
Prim(1)
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1,972,899
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27.7
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12.8
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10.3
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10.2
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Richard A.
Brenner(2)
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60,413
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*
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*
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*
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*
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David W.
Dupree(3)
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903,953
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12.9
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5.9
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4.7
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4.7
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Malcolm
McQuilkin(4)
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211,555
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3.0
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1.4
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1.1
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1.1
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David L.
Warnock(5)
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699,088
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9.9
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4.5
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3.7
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3.6
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Richard E.
Belmont(6)
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37,261
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*
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*
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*
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*
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Brent C.
Boydston(7)
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49,695
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*
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*
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*
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*
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Mark
Castaneda(8)
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77,137
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1.1
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*
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*
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*
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Michael S.
Gunter(9)
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41,242
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*
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*
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*
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*
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All directors and current executive officers as a group
(8 individuals)
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3,975,870
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53.9
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25.3
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20.4
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20.3
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5% or greater stockholders
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Primo Investors,
L.P.(10)
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897,260
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12.9
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5.9
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4.7
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4.7
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Camden Partners Strategic Fund III,
L.P.(11)
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663,467
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9.4
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4.3
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3.5
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3.5
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Andrew J.
Filipowski(12)
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579,265
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8.3
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3.8
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3.0
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3.0
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Craig J. Duchossois Revocable
Trust(13)
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540,792
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7.7
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3.5
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2.8
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2.8
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Charles
Ergen(14)
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441,876
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6.3
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2.9
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2.3
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2.3
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Edward A. Fortino
Trust(15)
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363,410
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5.2
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2.4
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1.9
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1.9
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Murphy Alternative Investments,
LLC(16)
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446,736
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6.3
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2.9
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2.3
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2.3
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Culligan International
Company(17)
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3,750,000
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19.7
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13.5
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*
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Represents beneficial ownership of
less than 1.0%.
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(1)
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Consists of
(a) 1,710,682 shares of common stock held directly
(95,831 of which are pledged as security); (b) shares
issuable upon the exercise of warrants to purchase
142,671 shares of common stock held directly;
(c) shares issuable upon the exercise of options to
purchase 42,645 shares of common stock held directly;
(d) 8,032 shares of common stock held by
Mr. Prims spouse; (e) shares issuable upon the
exercise of warrants to purchase 1,791 shares of common
stock held by Mr. Prims spouse;
(f) 4,791 shares of common stock held by BD Prim, LLC,
of which Mr. Prim is the sole manager;
(g) 23,957 shares of common stock held by the 2010
Irrevocable Trust fbo Sarcanda W. Bellissimo, of which
Mr. Prim is the sole trustee; (h) 23,957 shares
of common stock held by the 2010 Irrevocable Trust fbo Anthony
Gray Westmoreland, of which Mr. Prim is the sole trustee;
(i) 4,791 shares of common stock held by the 2010
Irrevocable Trust fbo Jager Grayln Dean Bellissimo, of which
Mr. Prim is the sole trustee; (j) 4,791 shares of
common stock held by the 2010 Irrevocable Trust fbo Joseph
Alexander Bellissimo, of which Mr. Prim is the sole
trustee; and (k) 4,791 shares held by the Billy D.
Prim Revocable Trust, of which Mr. Prim is the sole
trustee. Mr. Prim may be deemed to have voting and
investment power with respect to securities held by his spouse,
BD Prim, LLC or the aforementioned irrevocable trusts and
expressly disclaims beneficial ownership of any such securities,
except to the extent of his pecuniary interest therein, if any.
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(2)
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Consists of
(a) 50,864 shares of common stock held directly, which
includes 5,749 shares of restricted common stock over which
Mr. Brenner has voting but not dispositive power;
(b) shares issuable upon the exercise of warrants to
purchase 6,965 shares of common stock held directly;
(c) shares issuable upon the exercise of options to
purchase 2,300 shares of common stock held directly;
(d) shares issuable upon the exercise of warrants to
purchase 142 shares of common stock held by the ALB-3
Trust, of which he is the trustee; and (e) shares issuable
upon the exercise of warrants to purchase 142 shares of
common stock held by the ALB-5 Trust, of which he is the
trustee. Mr. Benner may be deemed to have voting and
investment power with respect to securities held by the ALB-3
Trust or the ALB-5 Trust and expressly disclaims beneficial
ownership of any such securities, except to the extent of his
pecuniary interest therein, if any.
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(3)
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Consists of
(a) 5,749 shares of restricted common stock over which
Mr. DuPree has voting but not dispositive power;
(b) shares issuable upon the exercise of warrants to
purchase 944 shares of common stock held directly;
(c) 856,232 shares of common stock held by Primo
Investors, L.P.; and (d) shares issuable upon the exercise
of warrants to purchase 41,028 shares of common stock held
by Primo Investors, L.P. Mr. Dupree is the managing member
of GenPar Primo, L.L.C., the general partner of Primo Investors,
L.P., and as such, he may be deemed to have voting and
investment power with respect to all securities beneficially
owned by Primo Investors, L.P. Mr. Dupree disclaims
beneficial ownership of any such securities held by Primo
Investors, L.P. except to the extent of his pecuniary interest
therein, if any.
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(4)
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Consists of
(a) 5,749 shares of restricted common stock over which
Mr. McQuilken has voting but not dispositive power;
(b) shares issuable upon the exercise of options to
purchase 10,733 shares of common stock held directly;
(c) 163,607 shares of common stock held by the Malcolm
McQuilkin Living Trust; and (d) shares issuable upon the
exercise of warrants to purchase 31,466 shares of common
stock held by the Malcolm McQuilkin Living Trust.
Mr. McQuilkin is a co-trustee of the Malcolm McQuilkin
Living Trust and as such, he may be deemed to have shared voting
and investment power with respect to such shares.
Mr. McQuilken expressly disclaims beneficial ownership of
any such securities held in the trust, except to the extent of
his pecuniary interest therein, if any.
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(5)
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Consists of
(a) 5,749 shares of restricted common stock over which
Mr. Warnock has voting but not dispositive power;
(b) shares issuable upon the exercise of options to
purchase 2,300 shares of common stock held directly;
(c) 569,380 shares of common stock held by Camden
Partners Strategic Fund III, L.P.; (d) shares issuable
upon the exercise of warrants to purchase 94,087 shares of
common stock held by Camden Partners Strategic Fund III,
L.P.; (e) 23,662 shares of common stock held by Camden
Partners Strategic
Fund III-A,
L.P.; and (f) shares issuable upon the exercise of warrants
to purchase 3,910 shares of common stock held by Camden
Partners Strategic
Fund III-A,
L.P. Mr. Warnock is the managing member of the general
partner of both Camden Partners Strategic Fund III, L.P.
and Camden Partners Strategic
Fund III-A,
L.P., and as such, he may be deemed to have voting and
investment power with respect to all securities beneficially
owned by such entities. Mr. Warnock expressly disclaims
beneficial ownership of any such securities held by Camden
Partners Strategic Fund III, L.P. and Camden Partners
Strategic
Fund III-A,
L.P. except to the extent of his pecuniary interest therein, if
any.
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(6)
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Consists of (a) shares
issuable upon the exercise of warrants to purchase
710 shares of common stock held directly; (b) shares
issuable upon the exercise of options to purchase
15,892 shares of common stock held directly; (c) 14,374
restricted shares of common stock over which Mr. Belmont has
voting but not dispositive power; (d) 1,999 shares of
common stock held by Mr. Belmonts spouse;
(e) shares issuable upon the exercise of warrants to
purchase 96 shares of common stock held by
Mr. Belmonts spouse; (f) 1,999 shares of
common stock held by Mr. Belmonts son;
(g) warrants to purchase 96 shares of common stock
held by Mr. Belmonts son; (h) 1,999 shares
of common stock held by Mr. Belmonts daughter; and
(i) shares issuable upon the exercise of warrants to
purchase 96 shares of common stock held by
Mr. Belmonts daughter. Mr. Belmont may be deemed
to have voting and investment power with respect to securities
held by his spouse or children and expressly disclaims
beneficial ownership of any such securities, except to the
extent of his pecuniary interest therein, if any.
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(7)
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Consists of
(a) 23,457 shares of common stock held directly;
(b) shares issuable upon the exercise of warrants to
purchase 160 shares of common stock held directly; and
(c) shares issuable upon the exercise of options to
purchase 26,078 shares of common stock held directly.
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(8)
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Consists of
(a) 54,402 shares of common stock held directly, which
includes 23,957 shares of restricted common stock over
which Mr. Castaneda has voting but not dispositive power;
(b) shares issuable upon the exercise of warrants to
purchase 4,527 shares of common stock held directly; and
(c) shares issuable upon the exercise of options to
purchase 18,208 shares of common stock held directly.
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(9)
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Consists of
(a) 16,838 shares of common stock held directly, which
includes 14,374 shares of restricted common stock over
which Mr. Gunter has voting but not dispositive power;
(b) shares issuable upon the exercise of warrants to
purchase 302 shares of common stock held directly; and
(c) shares issuable upon the exercise of options to
purchase 24,102 shares of common stock held directly.
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(10)
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Consists of
(a) 856,232 shares of common stock; and
(b) shares issuable upon the exercise of warrants to
purchase 41,028 shares of common stock.
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(11)
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Consists of
(a) 569,380 shares of common stock; and
(b) shares issuable upon the exercise of warrants to
purchase 94,087 shares of common stock.
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(12)
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Consists of
(a) 122,629 shares of common stock; (b) shares
issuable upon the exercise of warrants to purchase
4,218 shares of common stock; (c) shares issuable upon
the exercise of options to purchase 2,012 shares of common
stock; (d) 325,826 shares of common stock held by the
Andrew J. Filipowski Revocable Trust;
(e) 28,749 shares of common stock held by the
Robinwood Gift Trust; and (f) 95,831 shares of common
stock held by the Filipowski Foundation.
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(13)
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Consists of
(a) 494,260 shares of common stock; and
(b) shares issuable upon the exercise of warrants to
purchase 46,532 shares of common stock.
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(14)
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Consists of
(a) 416,658 shares of common stock held directly; and
(b) shares issuable upon the exercise of warrants to
purchase 25,218 shares of common stock held directly.
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(15)
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Consists of
(a) 327,597 shares of common stock held directly; and
(b) shares issuable upon the exercise of warrants to
purchase 35,813 shares of common stock held directly.
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(16)
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Consists of
(a) 314,808 shares of common stock held directly; and
(b) shares issuable upon the exercise of warrants to purchase
131,928 shares of common stock held directly. Murphy
Alternative Investments, LLC (MAI) is a Delaware
limited liability company managed by a committee comprised of
the following four members: Wendell H. Murphy, Jr.; Jeffery B.
Turner; Willard C. Blue, Jr.; and C. David Hulbert. All
committee action relating to the voting or disposition of these
shares requires approval by no less than two members of the
management committee. MAIs address is 5752 NC
Highway 117 South, Wallace, NC 28466.
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(17)
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Assuming no exercise of the
underwriters over-allotment option, such amount consists
of shares of common stock with a value of $45.0 million (or
3,750,000 shares assuming an initial public offering price
of $12.00 per share, which is the midpoint of the range set
forth on the cover page of this prospectus) issued in connection
with the Culligan Refill Acquisition. If the underwriters
exercise their over-allotment option, the cash portion of the
purchase price for the Culligan Refill Acquisition will be
increased and the number of shares of common stock we will issue
to Culligan will be decreased by an amount equal to the net cash
proceeds we receive as a result of cash exercise. As a result,
assuming full exercise of the underwriters over-allotment
option, such amount consists of 2,587,500 shares of common
stock with a value of $31.05 million (assuming an initial
public offering price of $12.00 per share, which is the
midpoint of the range set forth on the cover page of this
prospectus). Culligan International Company (CIC) is
an indirect wholly-owned subsidiary of Culligan Ltd. CIC and
Culligan Ltd. will share voting and dispositive authority over
the shares of common stock owned by CIC with Clayton,
Dubilier & Rice Fund VI Limited Partnership
(Fund VI), CD&R Associates VI Limited
Partnership (Associates VI LP), and
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131
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CD&R Investment Associates VI,
Inc. (Associates VI, Inc.). Fund VI owns
approximately 77.8% of the outstanding voting securities of
Culligan Ltd. Associates VI LP is the general partner of
Fund VI. Associates VI, Inc. is the general partner of
Associates VI LP. As a result, each of Culligan Ltd.,
Fund VI, Associates VI LP and Associates VI, Inc. may be
deemed to be the beneficial owner of the shares owned by CIC.
Each of Associates VI LP and Associates VI, Inc. disclaims
beneficial ownership of those shares. Associates VI, Inc. is
managed by a board of directors comprised of over fifteen
individuals, and all board action relating to the voting or
disposition of these shares requires approval of a majority of
the board. As a result, no person controls the voting and
disposition of Associates VI, Inc. with respect to the shares
shown as beneficially owned by CIC. CICs address is
9399 West Higgins Road, Suite 1100, Rosemont, Illinois
60018. Culligan Ltd.s address is Canons Court, 22
Victoria Street, Hamilton HM 12, Bermuda. The address of
Fund VI, Associates VI LP and Associates VI, Inc. is Ugland
House, 113 South Church Street, George Town, Grand Cayman,
Cayman Islands BWI.
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132
RELATED
PARTY TRANSACTIONS
Our Audit Committee Charter that we are adopting in connection
with this offering will require our Audit Committee to review
and approve or ratify any transaction that is required to be
disclosed under Item 404 of
Regulation S-K.
In the course of its review or approval of a transaction, our
Audit Committee will consider:
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the nature of the related persons interest in the
transaction, including the actual or apparent conflict of
interest of the related person;
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the material terms of the transaction and their commercial
reasonableness;
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the significance of the transaction to the related person;
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the significance of the transaction to us and the benefit and
perceived benefits, or lack thereof, to us;
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opportunity costs of alternate transactions;
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whether the transaction would impair the judgment of a director
or executive officer to act in the best interest of the
Company; and
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any other matters the Committee deems appropriate.
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Our audit committee will not approve or ratify a related person
transaction unless it determines that, upon consideration of all
relevant information, the transaction is in, or is not
inconsistent with, the best interests of our Company and
stockholders. No related person transaction will be consummated
without the approval or ratification of our audit committee, and
directors interested in a related person transaction will recuse
themselves from any vote relating to a related person
transaction in which they have an interest.
Set forth below are certain transactions that have occurred
since January 1, 2007, and through the date of this
prospectus with our directors, executive officers, holders of
more than five percent of our voting securities and affiliates
of our directors, executive officers and five percent
stockholders. We did not have a formal review and approval
policy for related party transactions at the time of any
transaction described in this Certain Relationships and
Related Party Transactions section. Based on our
experience in the business sectors in which we participate and
the terms of our transactions with unaffiliated third persons,
we believe that all of the transactions set forth below were on
terms and conditions that were not materially less favorable to
us than could have been obtained from unaffiliated third parties.
Conversion
of Series A and Series C Convertible Preferred Stock
and Conversion and Redemption of and Payment of Accrued and
Unpaid Dividends on Series B Preferred Stock
In connection with this offering, all outstanding shares of
Series A and Series C convertible preferred stock are
being converted into common stock of the Company. The conversion
ratio for our Series A preferred stock will be 1:0.0958.
The conversion ratio for our Series C preferred stock will
be 1:0.2000 assuming an initial public offering price of $12.00
per share, the midpoint of the range set forth on the cover page
of this prospectus. If the initial public offering price per
share of common stock is between $10.44 and $13.04, the
conversion ratio will be set so that each holder of
Series C preferred stock receives that number of shares of
common stock that together with any cash paid in lieu of
fractional shares have an aggregate value equal to the aggregate
value of the common stock (plus any cash paid in lieu of
fractional shares) that would have been issued to such holder
had the initial public offering price per share of common stock
been $13.04 per share. As examples, if the initial public
offering price is $11.00 per share, the conversion ratio for our
Series C preferred stock will be 1:0.2182, and if the
initial public offering price is $13.00 per share, the
conversion ratio will be 1:0.1846. If the initial public
offering price is below $10.44 per share, the conversion ratio
for our Series C preferred stock will be fixed at 1:0.2300.
While our Series A and Series C convertible preferred
stock is mandatorily convertible into common stock in certain
circumstances pursuant to the terms of our fourth amended and
restated certificate of incorporation, the consummation of this
offering within the price range set forth on the cover page of
this prospectus is not one of these circumstances. Instead, new
provisions governing the conversion of the Series A and
Series C convertible preferred stock into common stock,
which would be triggered by this offering, were approved in
October 2010 by the holders of a majority of the shares of each
such series of preferred stock in accordance with the terms of
our fourth amended and restated certificate of incorporation.
There are no accrued and unpaid dividends on our Series A
and Series C convertible preferred stock.
Additionally, in the discretion of our board of directors,
between 50% and all of our outstanding Series B preferred
stock will be converted into shares of the Companys common
stock in connection with this offering at a ratio of 1:0.0926
(assuming an initial public offering price of $12.00 per share,
the midpoint of the range set forth on
133
the cover page of this prospectus.), which will be calculated by
dividing the liquidation preference of the Series B
preferred stock by 90% of the greater of the initial public
offering price or $10.44, and the balance of the outstanding
Series B preferred stock will be redeemed for cash. Accrued
and unpaid dividends on all outstanding shares of Series B
preferred stock will be paid in cash at the time of the
redemption and/or conversion. Conversion and redemption of the
Series B preferred stock on the terms described above is
not authorized under the Companys fourth amended and
restated certificate of incorporation and instead was approved
by the requisite vote of the Companys stockholders in
October 2010. In connection with the foregoing, the Company
also agreed to modify the terms of the warrants issued to the
holders of the Series B preferred stock and Series C
convertible preferred stock such that these warrants to purchase
an aggregate of 715,646 shares of common stock will not expire
upon the consummation of this offering and instead will expire
on the date such warrants would have otherwise expired had this
offering not occurred. The exercise price of the warrants issued
to the holders of the Series C convertible preferred stock
was also adjusted from $20.66 to $13.04. This treatment of the
Series B preferred stock, Series C convertible
preferred stock and the warrants issued in connection with the
Series B preferred stock and Series C convertible
preferred stock was determined by the Company after discussions
and negotiations with significant holders of Series B
preferred stock and Series C convertible preferred stock
and after consultation with the Companys investment
bankers.
Mr. Prim has indicated that he will use all after-tax cash
proceeds received in connection with the redemption of his
Series B preferred stock (but not the payment of accrued
dividends thereon) to purchase additional shares of common stock
from the underwriters in this offering at the initial public
offering price per share. Assuming that 50% of our outstanding
shares of Series B preferred stock are redeemed in this
offering, Mr. Prim would receive approximately
$2.6 million in gross pre-tax proceeds upon redemption of
this Series B preferred stock.
The following table sets forth (i) the number of shares of
common stock being issued to our executive officers, directors
and beneficial owners of more than 5% of our common stock in
connection with conversion of all of the Series A and
Series C convertible preferred stock and the assumed
conversion of 50% of the Series B preferred stock (assuming
an initial public offering price of $12.00 per share, which is
the midpoint of the range on the cover page of this prospectus),
(ii) the dollar amount to be received by each of the
executive officers, directors and five percent or greater
shareholders in connection with the redemption of the remaining
50% of the Series B preferred stock and the payment of
accrued and unpaid dividends on all outstanding shares of
Series B preferred stock, and (iii) the number of
shares of common stock subject to warrants issued in connection
with our Series B preferred stock and Series C
convertible preferred stock held by each such executive,
officer, director and five percent or greater shareholder:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of
|
|
|
|
|
|
|
Amount to be Received
|
|
|
Common Stock
|
|
|
|
|
|
|
Upon Redemption of
|
|
|
Issuable Upon
|
|
|
|
|
|
|
and Payment of Accrued
|
|
|
Exercise of
|
|
|
|
Number of Shares of Common
|
|
|
and Unpaid Dividends on
|
|
|
Series B and C
|
|
Directors and executive officers
|
|
Stock to be Issued (#)
|
|
|
Series B Preferred Stock ($)
|
|
|
Warrants
|
|
|
Billy D.
Prim(1)
|
|
|
464,607
|
|
|
|
3,053,660
|
|
|
|
138,854
|
|
Richard A. Brenner
|
|
|
45,114
|
|
|
|
145,833
|
|
|
|
6,397
|
|
David W.
Dupree(2)
|
|
|
856,232
|
|
|
|
|
|
|
|
41,028
|
|
Malcolm
McQuilkin(3)
|
|
|
163,607
|
|
|
|
440,000
|
|
|
|
17,269
|
|
David L.
Warnock(4)
|
|
|
593,042
|
|
|
|
2,200,000
|
|
|
|
84,747
|
|
Mark Castaneda
|
|
|
30,445
|
|
|
|
29,167
|
|
|
|
2,397
|
|
Michael S. Gunter
|
|
|
2,463
|
|
|
|
8,668
|
|
|
|
302
|
|
Richard E.
Belmont(5)
|
|
|
5,997
|
|
|
|
|
|
|
|
288
|
|
Brent C. Boydston
|
|
|
17,707
|
|
|
|
|
|
|
|
160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5% or greater stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
Primo Investors, L.P.
|
|
|
856,232
|
|
|
|
|
|
|
|
41,028
|
|
Camden Partners Strategic Fund III, L.P.
|
|
|
569,380
|
|
|
|
2,112,220
|
|
|
|
81,365
|
|
Andrew J.
Filipowski(6)
|
|
|
573,035
|
|
|
|
96,160
|
|
|
|
4,218
|
|
Craig J. Duchossois Revocable Trust
|
|
|
458,323
|
|
|
|
825,000
|
|
|
|
36,771
|
|
Charles Ergen
|
|
|
416,658
|
|
|
|
|
|
|
|
19,965
|
|
Edward A. Fortino Trust
|
|
|
291,660
|
|
|
|
656,250
|
|
|
|
28,785
|
|
Murphy Alternative Investments, LLC
|
|
|
314,808
|
|
|
|
3,666,667
|
|
|
|
131,928
|
|
134
|
|
|
(1)
|
|
Consists of
(a) 456,576 shares issued to Mr. Prim directly;
(b) 3,240 shares issued to Mr. Prims
spouse; and (c) 4,791 shares issued to Billy D.
Prim Revocable Trust, of which Mr. Prim is the sole
trustee. Excludes any shares that Mr. Prim may purchase
from the underwriters in this offering at the initial public
offering price per share.
|
|
|
|
(2)
|
|
Consists of 856,232 shares
issued to Primo Investors, L.P. Mr. Dupree is the managing
member of GenPar Primo, L.L.C., the general partner of Primo
Investors, L.P.
|
|
(3)
|
|
Consists of 163,607 shares
issued to the Malcolm McQuilkin Living Trust. Mr. McQuilkin
is a co-trustee of the Malcolm McQuilkin Living Trust.
|
|
(4)
|
|
Consists of
(a) 569,380 shares issued to Camden Partners Strategic
Fund III, L.P.; and (b) 23,662 shares issued to
Camden Partners Strategic
Fund III-A,
L.P. Mr. Warnock is the managing member of the general
partner of both Camden Partners Strategic Fund III, L.P.
and Camden Partners Strategic
Fund III-A,
L.P.
|
|
(5)
|
|
Consists of
(a) 1,999 shares issued to Mr. Belmonts
spouse; (b) 1,999 shares issued to
Mr. Belmonts son; and (c) 1,999 shares
issued to Mr. Belmonts daughter.
|
|
|
|
(6)
|
|
Consists of
(a) 122,629 shares issued to Mr. Filipowski
directly; (b) 325,826 shares issued to the Andrew
J. Filipowski Revocable Trust; (c) 28,749 shares
issued to the Robinwood Gift Trust; and
(d) 95,831 shares issued to the Filipowski Foundation.
|
Issuance
of Restricted Stock to Mr. Prim
In connection with the May 2010 amendment of our current senior
revolving credit facility, Billy Prim, our Chief Executive
Officer, has agreed to personally guarantee our borrowings with
respect to the overadvance line in an amount up to
$3.0 million. As an inducement to Mr. Prim to
guarantee the $3.0 million over advance line, the Company
will issue Mr. Prim $150,000 of restricted stock with the
per share value equal to (i) the initial public offering
price or (ii) if the initial public offering does not
occur, the lesser of (a) $12.84 per share (the fair value
of our common stock based upon the valuation we obtained from a
third party in December 2009) or (b) the price per
share we issue equity in our next financing round. The
restricted stock will be issued within 30 days after our
initial public offering or the closing of our next financing
round and will vest in full January 2, 2011. The award of
restricted stock was approved by the independent members of the
board of directors and the amount of the award was based upon 5%
of the guaranteed obligations (which the board members believed
was an appropriate amount in light of their experience with
similar transactions and representative of a 2.5% commitment fee
and a 2.5% draw-down fee).
Sale of
Subordinated Convertible Notes and Warrants
Messrs. Prim, Castaneda, Belmont, Brenner, Dupree,
McQuilkin, Warnock, Ergen, Duchossois and Fortino (either
individually or through an affiliated entity) purchased an
aggregate of $3.52 million of our 2011 Notes with an
aggregate of 42,807 warrants to purchase shares of our common
stock in a private placement transaction on December 30,
2009. A portion of the purchase price for the 2011 Notes was
paid for by certain of these investors by rolling over an
equivalent amount of their participation interests in the
January 2009 financing described in Participation
Interests in Loan and Security Agreement below. We issued
a total of $15.0 million of 2011 Notes and a total of
106,482 warrants in this private placement transaction. The
exercise price of these warrants after giving effect to this
offering will be 80% of the initial public offering price per
share. The following table sets forth certain information
regarding such persons ownership of the 2011 Notes and the
related warrants issued in the December 2009 private placement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
Amount Owned at
|
|
|
|
|
|
|
|
|
Amount Owned
|
|
December 31, 2009
|
|
Principal Paid in
|
|
Interest Paid in
|
|
|
Name
|
|
in 2009 ($)
|
|
($)
|
|
2009 ($)
|
|
2009 ($)
|
|
Warrants (#)
|
|
Billy D. Prim
|
|
|
540,000
|
|
|
|
540,000
|
|
|
|
|
|
|
|
|
|
|
|
3,833
|
|
Mark Castaneda
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
2,130
|
|
Rick E. Belmont
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
710
|
|
Richard A.
Brenner(1)
|
|
|
80,000
|
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
568
|
|
David W. Dupree
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
710
|
|
Malcolm
McQuilkin(2)
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
7,099
|
|
David L.
Warnock(3)
|
|
|
1,400,000
|
|
|
|
1,400,000
|
|
|
|
|
|
|
|
|
|
|
|
9,939
|
|
Charles Ergen
|
|
|
740,000
|
|
|
|
740,000
|
|
|
|
|
|
|
|
|
|
|
|
5,253
|
|
Craig J.
Duchossois(4)
|
|
|
1,030,000
|
|
|
|
1,030,000
|
|
|
|
|
|
|
|
|
|
|
|
7,312
|
|
Edward A.
Fortino(5)
|
|
|
740,000
|
|
|
|
740,000
|
|
|
|
|
|
|
|
|
|
|
|
5,253
|
|
135
|
|
|
(1)
|
|
Consists of $60,000 in 2011 Notes
and 426 warrants held by Mr. Brenner individually, $10,000
in 2011 Notes and 71 warrants held by the ALB-3 Trust and
$10,000 in 2011 Notes and 71 warrants held by the ALB-5 Trust.
Mr. Brenner is the trustee of both the ALB-3 Trust and the
ALB-5 Trust. Mr. Brenner disclaims beneficial ownership of
2011 Notes owned by the ALB-3 Trust and the ALB-5 Trust except
to the extent of his pecuniary interest therein.
|
|
(2)
|
|
Consists of $1,000,000 in 2011
Notes and 7,099 warrants held by the Malcolm McQuilkin Living
Trust. Mr. McQuilkin is a co-trustee of the Malcolm
McQuilkin Living Trust.
|
|
(3)
|
|
Consists of $1,344,140 in 2011
Notes and 9,542 warrants held by Camden Partners Strategic
Fund III, L.P. and $55,860 in 2011 Notes and 397 warrants
held by Camden Partners Strategic
Fund III-A,
L.P. Mr. Warnock is the managing member of the general
partner of both Camden Partners Strategic Fund III, L.P.
and Camden Partners Strategic
Fund III-A,
L.P. Mr. Warnock disclaims beneficial ownership of 2011
Notes owned by Camden Partners Strategic Fund III, L.P. and
Camden Partners Strategic
Fund III-A,
L.P. except to the extent of his pecuniary interest therein.
|
|
(4)
|
|
Consists of $1,030,000 in 2011
Notes and 7,312 warrants held by the Craig J. Duchossois
Revocable Trust UAD 9/11/1989. Mr. Duchossois is
trustee of the Craig J. Duchossois Revocable Trust UAD 9/11/1989.
|
|
(5)
|
|
Consists of $740,000 in 2011 Notes
and 5,253 warrants held by the Edward A. Fortino Revocable
Trust UAD 12/15/1994. Mr. Fortino is trustee of the
Edward A. Fortino Revocable Trust UAD 12/15/1994.
|
Messrs. Prim, Brenner, Dupree, McQuilkin, Warnock, Duchossois
and Fortino (either individually or through an affiliated
entity) purchased an aggregate of $2.4 million of our 2011
Notes and an aggregate of 16,929 warrants to purchase shares of
our common stock in a second private placement on
October 5, 2010. We issued a total of $3.4 million of
2011 notes and a total of 24,265 warrants in this second private
placement. The exercise price of these warrants is either
(a) $13.04 per share or (b) following a public
offering in which we realize at least $30.0 million in net
proceeds, 80% of the per share price of the shares issued in the
offering. The following table sets forth certain information
regarding such persons purchase of the 2011 Notes and the
related warrants issued in the October 2010 private
placement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Additional
|
|
|
Amount
|
|
Principal
|
|
Interest
|
|
Warrants
|
|
|
Purchased in
|
|
Paid in
|
|
Paid in
|
|
Issued in
|
|
|
October 2010
|
|
2010
|
|
2010
|
|
October 2010
|
Name
|
|
($)
|
|
($)
|
|
($)
|
|
(#)
|
|
Billy D. Prim
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
1,775
|
|
Richard A.
Brenner(1)
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
284
|
|
David W. Dupree
|
|
|
33,000
|
|
|
|
|
|
|
|
|
|
|
|
234
|
|
Malcolm
McQuilkin(2)
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
7,099
|
|
David L.
Warnock(3)
|
|
|
466,667
|
|
|
|
|
|
|
|
|
|
|
|
3,313
|
|
Craig J.
Duchossois(4)
|
|
|
345,000
|
|
|
|
|
|
|
|
|
|
|
|
2,449
|
|
Edward A.
Fortino(5)
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
1,775
|
|
|
|
|
(1)
|
|
Consists of $20,000 in 2011 Notes
and 142 warrants held by Mr. Brenner individually, $10,000
in 2011 Notes and 71 warrants held by the ALB-3 Trust and
$10,000 in 2011 Notes and 71 warrants held by the ALB-5 Trust.
Mr. Brenner is the trustee of both the ALB-3 Trust and the
ALB-5 Trust. Mr. Brenner disclaims beneficial ownership of
2011 Notes owned by the ALB-3 Trust and the ALB-5 Trust except
to the extent of his pecuniary interest therein.
|
|
(2)
|
|
Consists of $1,000,000 in 2011
Notes and 7,099 warrants held by the Malcolm McQuilkin Living
Trust. Mr. McQuilkin is a co-trustee of the Malcolm
McQuilkin Living Trust.
|
|
(3)
|
|
Consists of $448,047 in 2011 Notes
and 3,181 warrants held by Camden Partners Strategic
Fund III, L.P. and $18,620 in 2011 Notes and 132 warrants
held by Camden Partners Strategic
Fund III-A,
L.P. Mr. Warnock is the managing member of the general
partner of both Camden Partners Strategic Fund III, L.P.
and Camden Partners Strategic
Fund III-A,
L.P. Mr. Warnock disclaims beneficial ownership of 2011
Notes owned by Camden Partners Strategic Fund III, L.P. and
Camden Partners Strategic
Fund III-A,
L.P. except to the extent of his pecuniary interest therein.
|
|
(4)
|
|
Consists of $345,000 in 2011 Notes
and 2,449 warrants held by the Craig J. Duchossois Revocable
Trust UAD 9/11/1989. Mr. Duchossois is trustee of the
Craig J. Duchossois Revocable Trust UAD 9/11/1989.
|
|
(5)
|
|
Consists of $250,000 in 2011 Notes
and 1,775 warrants held by the Edward A. Fortino Revocable
Trust UAD 12/15/1994. Mr. Fortino is trustee of the
Edward A. Fortino Revocable Trust UAD 12/15/1994.
|
The 2011 Notes included a provision allowing the holders to sell
their 2011 Notes to the Company upon an initial public offering
of the Companys common stock resulting in net proceeds to
the Company of at least $30 million at an amount equal to
the unpaid principal balance plus all unpaid interest that has
accrued through the date of such sale. We are amending the 2011
Notes in October 2010 to eliminate this provision.
136
Participation
Interests in Loan and Security Agreement
On January 7, 2009, the Company and certain of its
subsidiaries entered into a $10.0 million Loan and Security
Agreement with Wachovia Bank, National Association (the
January 2009 Financing). Certain stockholders of the
Company purchased an aggregate of $5.9 million in
participation interests from Wachovia Bank, National Association
in connection with the January 2009 Financing. These
participation interests allowed each holder to participate to
the extent of such holders percentage share in the
$10.0 million Loan and Security Agreement and bore interest
at a rate equal to Wachovia Banks prime rate from time to
time plus 10%. Messrs. Prim, Castaneda, Belmont, McQuilkin,
Warnock and Fortino (either individually or through an
affiliated entity) and Murphy Alternative Investments, LLC
purchased an aggregate of $3.2 million in participation
interests from Wachovia Bank on January 7, 2009. All
amounts owed to the holders of the participation interests were
either paid in full or were rolled over into an equivalent
amount of our 2011 Notes on December 30, 2009. The
following table sets forth certain information regarding such
persons ownership of the participation interests in the
January 2009 Financing.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
Principal
|
|
Amount Rolled
|
|
Interest
|
|
|
Amount
|
|
Amount Owned
|
|
Paid in
|
|
Over Into the
|
|
Paid in
|
|
|
Invested
|
|
in 2009
|
|
2009
|
|
2011 Notes
|
|
2009
|
Name
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
Billy D. Prim
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
|
|
|
|
300,000
|
|
|
|
39,308
|
|
Mark Castaneda
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
|
|
|
|
300,000
|
|
|
|
39,308
|
|
Rick E. Belmont
|
|
|
100,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
100,000
|
|
|
|
13,103
|
|
Malcolm
McQuilkin(1)
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
500,000
|
|
|
|
65,614
|
|
David L.
Warnock(2)
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
1,000,000
|
|
|
|
131,028
|
|
Edward A.
Fortino(3)
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
500,000
|
|
|
|
65,514
|
|
Murphy Alternative Investments, LLC
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
65,514
|
|
|
|
|
(1)
|
|
Consisted of $300,000 in
participation interests held by the Malcolm McQuilkin Living
Trust. Mr. McQuilkin is a co-trustee of the Malcolm
McQuilkin Living Trust.
|
|
(2)
|
|
Consisted of $960,100 in
participation interests held by Camden Partners Strategic
Fund III, L.P. and $39,900 in participation interests held
by Camden Partners Strategic
Fund III-A,
L.P. Mr. Warnock is the managing member of the general
partner of both Camden Partners Strategic Fund III, L.P.
and Camden Partners Strategic
Fund III-A,
L.P.
|
|
(3)
|
|
Consisted of $500,000 in
participation interests held by the Edward A. Fortino Revocable
Trust UAD 12/15/1994. Mr. Fortino is trustee of the
Edward A. Fortino Revocable Trust UAD 12/15/1994.
|
Sale of
Series C Convertible Preferred Stock and Warrants
Messrs. Prim, Castaneda, Belmont, Boydston, Dupree,
McQuilkin, Warnock, Ergen and Duchossois (either individually or
through an affiliated entity) and Murphy Alternative
Investments, LLC purchased an aggregate of 9,323,643 shares
of Series C convertible preferred stock and warrants to
purchase an aggregate of 89,351 shares of common stock at
an exercise price of $20.66 per share in private placement
transactions between December 14, 2007 and May 20,
2008. In October 2010, our board of directors agreed to reduce
the exercise price of the warrants to purchase shares of common
stock issued in connection with the Series C convertible
preferred stock from $20.66 to $13.04. We issued a total of
12,520,001 shares of Series C convertible preferred
stock and warrants to purchase
137
119,980 shares of common stock during in connection with
these private placement transactions. The following table sets
forth certain information regarding such persons ownership
of those shares and warrants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Paid for
|
|
|
Series C
|
|
|
|
Shares and Warrants
|
Name
|
|
Shares Purchased (#)
|
|
Warrants Purchased (#)
|
|
($)
|
|
Billy D. Prim
|
|
|
512,363
|
|
|
|
4,910
|
|
|
|
1,229,671
|
|
Mark Castaneda
|
|
|
116,696
|
|
|
|
1,118
|
|
|
|
280,070
|
|
Rick E.
Belmont(1)
|
|
|
30,000
|
|
|
|
288
|
|
|
|
72,000
|
|
Brent C. Boydston
|
|
|
16,666
|
|
|
|
160
|
|
|
|
39,998
|
|
David W.
Dupree(2)
|
|
|
4,281,250
|
|
|
|
41,028
|
|
|
|
10,275,000
|
|
Malcolm
McQuilkin(3)
|
|
|
200,000
|
|
|
|
1,917
|
|
|
|
480,000
|
|
David L.
Warnock(4)
|
|
|
833,334
|
|
|
|
7,986
|
|
|
|
2,000,002
|
|
Charles Ergen
|
|
|
2,083,334
|
|
|
|
19,965
|
|
|
|
5,000,002
|
|
Craig J.
Duchossois(5)
|
|
|
833,333
|
|
|
|
7,986
|
|
|
|
1,999,999
|
|
Murphy Alternative Investments, LLC
|
|
|
416,667
|
|
|
|
3,993
|
|
|
|
1,000,000
|
|
|
|
|
(1)
|
|
Consists of: (a) 10,000 shares
of Series C convertible preferred stock and warrants to purchase
96 shares of common stock purchased by
Mr. Belmonts spouse; (b) 10,000 shares of
Series C convertible preferred stock and warrants to
purchase 96 shares of common stock purchased by Mr.
Belmonts son; and (c) 10,000 shares of Series C
convertible preferred stock and warrants to purchase
96 shares of common stock purchased by
Mr. Belmonts daughter.
|
|
|
|
(2)
|
|
Consists of 4,281,250 shares
of Series C convertible preferred stock and warrants to
purchase 41,028 shares of common stock purchased by Primo
Investors, L.P. Mr. Dupree is the managing member of GenPar
Primo, L.L.C., the general partner of Primo Investors, L.P.
Mr. Dupree disclaims beneficial ownership of the
Series C convertible preferred stock and warrants owned by
Primo Investors, L.P. except to the extent of his pecuniary
interest therein.
|
|
|
|
(3)
|
|
Consists of 200,000 shares of
Series C convertible preferred stock and warrants to
purchase 1,917 shares of common stock purchased by the
Malcolm McQuilkin Living Trust. Mr. McQuilkin is a
co-trustee of the Malcolm McQuilkin Living Trust.
|
|
|
|
(4)
|
|
Consists of 800,084 shares of
Series C convertible preferred stock and warrants to
purchase 7,667 shares of common stock purchased by Camden
Partners Strategic Fund III, L.P. and 33,250 shares of
Series C convertible preferred stock and warrants to
purchase 319 shares of common stock purchased by Camden
Partners Strategic
Fund III-A,
L.P. Mr. Warnock is the managing member of the general
partner of both Camden Partners Strategic Fund III, L.P.
and Camden Partners Strategic
Fund III-A,
L.P. Mr. Warnock disclaims beneficial ownership of the
Series C convertible preferred stock and warrants owned by
Camden Partners Strategic Fund III, L.P. and Camden
Partners Strategic
Fund III-A,
L.P. except to the extent of his pecuniary interest therein.
|
|
|
|
(5)
|
|
Consists of 833,333 shares of
Series C convertible preferred stock and warrants to
purchase 7,986 shares of common stock purchased by Craig J.
Duchossois Revocable Trust UAD 9/11/1989. Mr. Duchossois is
trustee of the Craig J. Duchossois Revocable Trust UAD
9/11/1989.
|
Sale of
Series B Preferred Stock and Warrants
Messrs. Prim, Brenner, McQuilkin, Warnock, Castaneda,
Gunter, Filipowski, Duchossois and Fortino (either individually
or through an affiliated entity) and Murphy Alternative
Investments, LLC purchased an aggregate of
16,561,511 shares of Series B preferred stock and
warrants to purchase an aggregate of 423,758 shares of
common stock at an exercise price of $13.04 per share in
private placement transactions between April 28, 2006 and
June 30, 2007. We issued a total of 23,280,221 shares of
Series B preferred stock and warrants to purchase a total
of 595,666 shares of common stock in these private
placement transactions. The following table sets forth certain
information regarding such persons ownership of those
shares and warrants.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Paid for Shares
|
Name
|
|
Shares Purchased (#)
|
|
Warrants Purchased (#)
|
|
and Warrants ($)
|
|
Billy D.
Prim(1)
|
|
|
5,234,846
|
|
|
|
133,944
|
|
|
|
5,234,846
|
|
Richard Brenner
|
|
|
250,000
|
|
|
|
6,397
|
|
|
|
250,000
|
|
Malcolm
McQuilkin(2)
|
|
|
600,000
|
|
|
|
15,352
|
|
|
|
600,000
|
|
David L.
Warnock(3)
|
|
|
3,000,000
|
|
|
|
76,761
|
|
|
|
3,000,000
|
|
Mark Castaneda
|
|
|
50,000
|
|
|
|
1,279
|
|
|
|
50,000
|
|
Michael S. Gunter
|
|
|
11,820
|
|
|
|
302
|
|
|
|
11,820
|
|
Andrew J. Filipowski
|
|
|
164,845
|
|
|
|
4,218
|
|
|
|
164,845
|
|
Craig J.
Duchossois(4)
|
|
|
1,125,000
|
|
|
|
28,785
|
|
|
|
1,125,000
|
|
Edward A
Fortino(5)
|
|
|
1,125,000
|
|
|
|
28,785
|
|
|
|
1,125,000
|
|
Murphy Alternative Investments, LLC
|
|
|
5,000,000
|
|
|
|
127,935
|
|
|
|
5,000,000
|
|
138
|
|
|
(1)
|
|
Consists of 5,164,846 shares of
Series B preferred stock and warrants to purchase
132,153 shares of common stock purchased by Mr. Prim
and 70,000 shares of Series B preferred stock and warrants to
purchase 1,791 shares of common stock purchased by Mr.
Prims spouse.
|
|
|
|
(2)
|
|
Consists of 600,000 shares of
Series B preferred stock and warrants to purchase
15,352 shares of common stock purchased by the Malcolm
McQuilkin Living Trust. Mr. McQuilkin is a co-trustee of
the Malcolm McQuilkin Living Trust.
|
|
|
|
(3)
|
|
Consists of 2,880,300 shares
of Series B preferred stock and warrants to purchase
73,698 shares of common stock purchased by Camden Partners
Strategic Fund III, L.P. and 119,700 shares of
Series B preferred stock and warrants to purchase
3,063 shares of common stock purchased by Camden Partners
Strategic
Fund III-A,
L.P. Mr. Warnock is the managing member of the general
partner of both Camden Partners Strategic Fund III, L.P.
and Camden Partners Strategic
Fund III-A,
L.P. Mr. Warnock disclaims beneficial ownership of the
Series B preferred stock and warrants to purchase common
stock owned by Camden Partners Strategic Fund III, L.P. and
Camden Partners Strategic
Fund III-A,
L.P. except to the extent of his pecuniary interest therein.
|
|
|
|
(4)
|
|
Consists of 1,125,000 shares
of Series B preferred stock and warrants to purchase
28,785 shares of common stock purchased by the Craig J.
Duchossois Revocable Trust UAD 9/11/1989.
Mr. Duchossois is trustee of the Craig J. Duchossois
Revocable Trust UAD 9/11/1989.
|
|
|
|
(5)
|
|
Consists of 1,125,000 shares of
Series B preferred stock and warrants to purchase
28,785 shares of common stock purchased by the Edward A.
Fortino Trust UAD 12/15/1994. Mr. Fortino is trustee of the
Edward A. Fortino Trust UAD 12/15/1994.
|
PWC
Leasing, LLC
On March 29, 2006 we entered into a Master Equipment Lease
Agreement with PWC Leasing, LLC (the Lease
Agreement), pursuant to which we leased certain equipment
used in our water bottle exchange service. Primier, LLC, a
company wholly-owned by Mr. Prim, was a one third owner of
PWC Leasing, LLC. We made payments to PWC Leasing, LLC pursuant
to the Lease Agreement that totaled approximately $693,000 and
$318,000 in 2007 and the first six months of 2008, respectively.
On June 30, 2008, we purchased the leased assets from PWC
Leasing, LLC at their fair value of $3,500,000 and terminated
the Lease Agreement. Our Board of Directors authorized and
approved this transaction after obtaining an independent,
third-party evaluation of a fair and reasonable price for the
assets.
Spin-Off
of Prima Bottled Water, Inc. and Related Transactions
On December 31, 2009, we distributed all of the issued and
outstanding shares of common stock of our wholly-owned
subsidiary, Prima Bottle Water, Inc. (Prima), to all
of the holders of our Series A and Series C
convertible preferred stock and common stock on a pro rata basis
assuming the conversion of all Series A and Series C
convertible preferred stock into common stock (the
Spin-Off ). Recipients of the Prima shares
included our directors, officers and holders of more than five
percent of our voting securities, but only in direct proportion
to each individuals ownership of our Series A and
Series C preferred stock and common stock at the time of
the Spin-Off. An aggregate of 57,950,457 shares of Prima
common stock were issued pursuant to the Spin-off, approximately
85.6% of which were issued to our directors, executive officers
and holders of greater than 10% of any of our common stock,
Series A or Series C convertible preferred stock or
Series B preferred stock.
The business purpose of the Spin-off was to divest the Company
of certain of its non-core assets and operations related to the
sale of bottled water in single-serve containers. The
Companys strategic focus had shifted since it had
originally determined to pursue this line of business and
management of the Company did not believe that it was
appropriate for the Company to divert further time, energy or
resources to the sale of bottled water in single-serve
containers. The Company believed the spin-off would allow the
management of each of its businesses to focus solely on its
particular business and would permit Prima to pursue certain
strategic relationships that it could not otherwise pursue as a
subsidiary of the Company.
The shares of Prima common stock were not registered under the
Securities Act and may not have been exempt from its
registration requirements. While we believe the Spin-Off was
conducted in accordance with applicable securities laws, it is
possible that a third party could assert that the Spin-Off did
not comply with Section 5 of the Securities Act and
corresponding provisions of applicable state securities laws. If
we failed to comply with the registration requirements of
Section 5 of the Securities Act and these state securities
laws, the Securities and Exchange Commission and state
securities regulators could impose monetary fines or other
sanctions. In addition, the holders of Prima common stock could
have rescission rights. Based upon facts known to us at this
time, we do not believe the assertion of any such claims is
likely or, if any such claims were asserted, that such claims
would result in a material adverse effect on the Company or its
financial condition.
139
On March 15, 2010, we entered into a license agreement with
Prima pursuant to which we license the
Prima®
trademark to Prima in exchange for a license fee based upon the
number of bottles manufactured from bioresin by Prima, an
affiliate of Prima and certain third parties. This fee is the
only compensation payable pursuant to the license agreement and
we expect the total fee to be less than $10,000 for 2010.
Messrs. Prim and Castaneda are the sole directors of Prima.
In addition Mr. Castaneda serves as treasurer of Prima and
David Mills, our controller and treasurer, serves as secretary
of Prima. Messrs. Prim, Castaneda and Mills devote
substantially all of their business time and efforts to their
responsibilities as officers of the Company and do not devote
significant time to their activities as officers of Prima.
Primas other officers were employees of the Company prior
to the Spin-off.
The following table sets forth the number of shares of Prima
common stock issued to our executive officers, directors and
beneficial owners of more than 5% of our common stock:
|
|
|
|
|
|
|
Number of Shares of Prima Common Stock Issued
|
Directors and executive officers
|
|
(#)
|
|
Billy D.
Prim(1)
|
|
|
16,358,737
|
|
Richard A. Brenner
|
|
|
350,000
|
|
David W.
Dupree(2)
|
|
|
8,220,000
|
|
Malcolm
McQuilkin(3)
|
|
|
1,384,000
|
|
David L.
Warnock(4)
|
|
|
4,600,001
|
|
Mark Castaneda
|
|
|
274,056
|
|
Michael S. Gunter
|
|
|
20,000
|
|
Richard E.
Belmont(5)
|
|
|
57,600
|
|
Brent C. Boydston
|
|
|
291,999
|
|
|
|
|
|
|
5% or greater
stockholders
|
|
|
|
|
Primo Investors, L.P.
|
|
|
8,220,000
|
|
Camden Partners Strategic Fund III, L.P.
|
|
|
4,416,461
|
|
Andrew J. Filipowski Holdings
|
|
|
5,900,000
|
|
Craig J. Duchossois Revocable Trust
|
|
|
4,474,999
|
|
Charles Ergen
|
|
|
4,000,001
|
|
Edward A. Fortino Trust
|
|
|
2,875,000
|
|
Murphy Alternative Investments, LLC
|
|
|
800,001
|
|
|
|
|
(1)
|
|
Consists of (a)
16,308,737 shares issued to Mr. Prim directly; and (b)
50,000 shares issued to Mr. Prims spouse.
|
|
(2)
|
|
Consists of 8,220,000 shares
issued to Primo Investors, L.P. Mr. Dupree is the managing
member of GenPar Primo, L.L.C., the general partner of Primo
Investors, L.P.
|
|
(3)
|
|
Consists of 1,384,000 shares
issued to the Malcolm McQuilkin Living Trust. Mr. McQuilkin
is a co-trustee of the Malcolm McQuilkin Living Trust.
|
|
(4)
|
|
Consists of (a)
4,416,461 shares issued to Camden Partners Strategic
Fund III, L.P.; and (b) 183,540 shares issued to
Camden Partners Strategic
Fund III-A,
L.P. Mr. Warnock is the managing member of the general
partner of both Camden Partners Strategic Fund III, L.P.
and Camden Partners Strategic
Fund III-A,
L.P.
|
|
(5)
|
|
Consists of (a) 19,200 shares
issued to Mr. Belmonts spouse; (b) 19,200 shares
issued to Mr. Belmonts son; and (c)
19,200 shares issued to Mr. Belmonts daughter.
|
140
DESCRIPTION
OF CAPITAL STOCK
The following is a description of the material provisions of
our capital stock, as well as other material terms of our
amended and restated certificate of incorporation and amended
and restated bylaws as they will be in effect as of the
completion of this offering. This description is only a summary.
For more detailed information, you should refer to our amended
and restated certificate of incorporation and amended and
restated bylaws filed as exhibits to the registration statement,
of which this prospectus is a part.
Authorized
Capital
Prior to the closing of this offering, our authorized capital
stock consists of: (1) 200,000,000 shares of common
stock (1,561,589 of which were outstanding at September 20,
2010 and includes 103,242 shares of restricted
stock) and (2) 100,000,000 shares of preferred
stock, including 18,780,000 authorized shares of Series A
convertible preferred stock (18,755,000 of which were
outstanding at September 20, 2010), 30,000,000 authorized
shares of Series B preferred stock (23,280,221 of which
were outstanding at September 20, 2010) and 14,000,000
authorized shares of Series C convertible preferred stock
(12,520,001 of which were outstanding at September 20,
2010). Each share of Series A convertible preferred stock
is convertible into 0.096 shares of common stock and each
share of Series C convertible preferred stock is
convertible into 0.184 shares of common stock. As of
September 20, 2010, there were 44 holders of record of our
common stock, 37 holders of record of our Series A
convertible preferred stock, 43 holders of record of our
Series B preferred stock and 41 holders of record of our
Series C convertible preferred stock.
Upon the closing of this offering, we will amend and restate our
certificate of incorporation to provide that our authorized
capital stock will consist of (1) 70,000,000 shares of
common stock, $0.001 par value per share and
(2) 65,000,000 shares of preferred stock, par value
$0.001 per share. Upon the closing of this offering, all
outstanding shares of our Series A and Series C
preferred stock will be converted into shares of common stock,
at least 50% of our outstanding shares of Series B preferred
stock will be converted into shares of common stock at a ratio
of 1:0.0926 (assuming an initial public offering price of $12.00
per share, the midpoint of the range set forth on the cover page
of this prospectus), which ratio will be calculated by dividing
the liquidation preference of the Series B preferred stock
by 90% of the greater of the initial public offering price per
share and $10.44, and a
1-for-10.435
reverse stock split of our common stock will occur.
The conversion ratio for our Series A preferred stock will
be 1:0958. The conversion ratio for our Series C preferred
stock will be 1:0.2000 assuming an initial public offering price
of $12.00 per share, the midpoint of the range set forth on the
cover page of this prospectus. If the initial public offering
price per share of common stock is between $10.44 and $13.04,
the conversion ratio will be set so that each holder of
Series C preferred stock receives that number of shares of
common stock that together with any cash paid in lieu of
fractional shares have an aggregate value equal to the aggregate
value of the common stock (plus any cash paid in lieu of
fractional shares) that would have been issued to such holder
had the initial public offering price per share of common stock
been $13.04 per share. As examples, if the initial public
offering price is $11.00 per share, the conversion ratio for our
Series C preferred stock will be 1:0.2182, and if the
initial public offering price is $13.00 per share, the
conversion ratio will be 1:0.1846. If the initial public
offering price is below $10.44 per share, the conversion ratio
for our Series C convertible preferred stock will be fixed
at 1:0.2300. There are no accrued and unpaid dividends on our
Series A or Series C convertible preferred stock. The
conversion of our Series A and Series C convertible
preferred stock on the terms described above is not authorized
pursuant to the terms of our fourth amended and restated
certificate of incorporation and instead new provisions
governing the conversion of the Series A and Series C
convertible preferred stock were approved by the requisite vote
of the Companys stockholders in October 2010 as part of
their approval of a fifth amended and restated certificate of
incorporation.
Additionally, in the discretion of our board of directors,
between 50% and all of our outstanding Series B preferred
stock will be converted into shares of the Companys common
stock in connection with this offering at a ratio of 1:0.0926
(assuming an initial public offering price of $12.00 per share,
the midpoint of the range set forth on the cover page of this
prospectus), which is calculated by dividing the liquidation
preference of the Series B preferred stock by 90% of the
greater of the initial public offering price or $10.44, and the
balance of the outstanding Series B preferred stock will be
redeemed for cash. Accrued and unpaid dividends on all
outstanding shares of
141
Series B preferred stock will be paid in cash at the time
of the redemption and/or conversion. Conversion and redemption
of the Series B preferred stock on the terms described
above is not authorized under the Companys fourth amended
and restated certificate of incorporation and instead was
approved by the requisite vote of the Companys
stockholders in October 2010 as part of their approval of the
fifth amended and restated certificate of incorporation.
Mr. Prim has indicated that he will use all after-tax cash
proceeds received in connection with the redemption of his
Series B preferred stock (but not the payment of accrued
dividends thereon) to purchase additional shares of common stock
from the underwriters in this offering at the initial public
offering price per share. Assuming that 50% of our outstanding
shares of Series B preferred stock are redeemed in this
offering, Mr. Prim would receive approximately
$2.6 million in gross pre-tax proceeds upon redemption of
this Series B preferred stock.
After giving effect to the foregoing and following the sale of
shares of common stock in this offering and the issuance of
3,750,000 shares to Culligan to fund a portion of the
purchase price for the Culligan Refill Acquisition (assuming an
initial public offering price of $12.00 per share, the
midpoint of the range set forth on the cover page of this
prospectus), we expect to have 19,023,887 shares of common
stock and no shares of preferred stock outstanding (or
19,111,387 shares of common stock and no shares of
preferred stock outstanding if the underwriters exercise in full
their option to purchase additional shares to cover
overallotments, if any).
Common
Stock
Voting. Except as otherwise required by Delaware
law, at every annual or special meeting of stockholders, every
holder of common stock is entitled to one vote per share. There
is no cumulative voting in the election of directors.
Dividend Rights. Subject to preferences that may be
applicable to any outstanding series of preferred stock, the
holders of our common stock will receive ratably any dividends
declared by our Board of Directors out of funds legally
available for the payment of dividends. We have never paid or
declared cash dividends on our common stock. We currently intend
to retain all available funds and any future earnings to finance
the development and expansion of our business. We do not expect
to pay any dividends on our common stock in the foreseeable
future. Any future determination to pay dividends will be at the
discretion of our Board of Directors and will depend upon
various factors, including our results of operations, financial
condition, capital requirements, investment opportunities and
other factors that our Board of Directors deems relevant.
Liquidation and Preemptive Rights. In the event of
our liquidation, dissolution or
winding-up,
the holders of our common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to
prior distribution rights of our preferred stock, if any, then
outstanding. The holders of our common stock have no preemptive
or other subscription rights.
Our outstanding shares of common stock are, and the shares
offered by us in this offering will be, when issued and paid
for, fully paid and nonassessable. The rights, preferences and
privileges of holders of common stock are subject to, and may be
adversely affected by, the rights of the holders of shares of
any series of preferred stock that we may designate and issue in
the future.
Preferred
Stock
Following the closing of this offering, there will be no shares
of preferred stock outstanding. Upon the closing of this
offering and the effectiveness of our amended and restated
certificate of incorporation, our Board of Directors will be
authorized to issue from time to time up to
65,000,000 million shares of preferred stock in one or more
series without stockholder approval. Our Board of Directors will
have the discretion to determine the rights, preferences,
privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation
preferences, of each series of preferred stock. It is not
possible to state the actual effect of the issuance of any
shares of preferred stock on the rights of holders of common
stock until our Board of Directors determines the specific
rights associated with that preferred stock. Although we have no
current plans to issue shares of preferred stock, the effects of
issuing preferred stock could include one or more of the
following:
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decreasing the amount of earnings and assets available for
distribution to holders of common stock;
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restricting dividends on the common stock;
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diluting the voting power of the common stock;
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impairing the liquidation rights of the common stock; or
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delaying, deferring or preventing changes in our control or
management.
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We believe that the ability of our Board of Directors to issue
one or more series of preferred stock will provide us with
flexibility in structuring possible future financings and
acquisitions, and in meeting other corporate needs that may
arise. The authorized shares of preferred stock, as well as
authorized and unissued shares of common stock, will be
available for issuance without action by our stockholders,
unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which our
securities may be listed or traded.
Our Board of Directors may authorize, without stockholder
approval, the issuance of preferred stock with voting and
conversion rights that could adversely affect the voting power
and other rights of holders of common stock. Although our Board
of Directors has no current intention of doing so, it could
issue a series of preferred stock that could, depending on the
terms of such series, impede the completion of a merger, tender
offer or other takeover attempt of our Company. Our Board of
Directors could also issue preferred stock having terms that
could discourage an acquisition attempt through which an
acquirer may be able to change the composition of our Board of
Directors, including a tender offer or other transaction that
some, or a majority, of our stockholders might believe to be in
their best interests or in which stockholders might receive a
premium for their stock over the then-current market price. Any
issuance of preferred stock therefore could have the effect of
decreasing the market price of our common stock.
Our Board of Directors will make any determination to issue such
shares based on its judgment as to the best interests of our
Company and its stockholders. We have no current plan to issue
any preferred stock after this offering.
Stock
Options and Restricted Stock
As of September 20, 2010, we had granted options to
purchase a total of 304,214 shares of common stock at a
weighted average exercise price of $13.15 per share. Of this
total, 254,627 options had vested and 49,587 remained unvested.
On April 29, 2010, our Board of Directors determined that
all of these outstanding unvested options will accelerate and be
fully vested upon the closing of the initial public offering
described in this prospectus. This accelerated vesting will
result in a non-cash charge of approximately $300,000. As of
September 20, 2010, we had also granted 103,242 shares
of restricted stock, all of which are unvested. As of
September 20, 2010, an additional 5,305 shares of
common stock were available for future awards under our 2004
Stock Plan. Upon the closing of this offering, an additional
718,735 shares of our common stock will be available for
future awards under our 2010 Omnibus Long-Term Incentive Plan.
Warrants
As of October 5, 2010, we had issued warrants to purchase a
total of 855,975 shares of common stock. After this
offering, these warrants will have a weighted average exercise
price of $12.60 per share (assuming an initial public offering
price of $12.00 per share, the midpoint of the range set
forth on the cover page of this prospectus).
Warrants to purchase a total of 130,747 shares of our
common stock were issued in connection with our 2011 Notes.
These warrants will remain outstanding after this offering, will
expire in either December 2019 or October 2020 and
will have an exercise price of 80% of the initial public
offering price per share.
Warrants to purchase a total of 595,666 shares of our
common stock were issued in connection with the private
placement of our Series B preferred stock. The exercise
price of these warrants is $13.04 per share and they will,
subject to certain exceptions, expire between April 28,
2016 and January 10, 2017.
Warrants to purchase a total of 119,980 shares of our
common stock were issued in connection with the private
placement of our Series C convertible preferred stock. The
exercise price of these warrants is $13.04 per share and they
will, subject to certain exceptions, expire between
December 14, 2017 and June 2, 2018.
A warrant to purchase a total of 9,583 shares of common
stock was issued on June 4, 2008 to two individuals in
connection with a potential business arrangement. The exercise
price of the warrant is $20.66 per share and it will expire
15 days after the closing of this offering.
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Anti-Takeover
Provisions
Delaware law, our amended and restated certificate of
incorporation and our amended and restated bylaws that will be
effective upon the closing of this offering contain provisions
that could delay or prevent a change of control of our Company
or changes in our Board of Directors that our stockholders might
consider favorable. The following is a summary of these
provisions.
Delaware
Law
We are subject to Section 203 of the Delaware General
Corporation Law. Section 203 generally prohibits a public
Delaware corporation from engaging in a business
combination with an interested stockholder for
a period of three years after the date of the transaction in
which the person became an interested stockholder, unless:
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prior to the date of the transaction, the board of directors of
the corporation approved either the business combination or the
transaction which resulted in the stockholder becoming an
interested stockholder;
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upon the consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the voting stock
outstanding (a) shares owned by persons who are directors
and also officers, and (b) shares owned by employee stock
plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer; or
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on or subsequent to the date of the transaction, the business
combination is approved by the board of directors and authorized
at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least two-thirds
of the outstanding voting stock which is not owned by the
interested stockholder.
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Section 203 defines a business combination to include:
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any merger or consolidation involving the corporation and the
interested stockholder;
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any sale, lease, exchange, mortgage, transfer, pledge or other
disposition involving the interested stockholder of 10% or more
of the assets of the corporation;
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subject to exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder; and
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the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
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In general, Section 203 defines an interested stockholder
as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or
person affiliated with or controlling or controlled by the
entity or person.
Amended
and Restated Certificate of Incorporation and Amended and
Restated Bylaws
Undesignated Preferred Stock. Our Board of Directors
has the ability to issue preferred stock with voting or other
rights, preferences and privileges that could have the effect of
deterring hostile takeovers or delaying changes in control of
our Company or management.
Limits on Ability to Act by Written Consent or Call a Special
Meeting. We have provided in our amended and restated
certificate of incorporation and our amended and restated bylaws
that, in most circumstances, our stockholders may not act by
written consent. This limit on the ability of our stockholders
to act by written consent may, in the future, lengthen the
amount of time required to take stockholder actions. As a
result, a holder controlling a majority of our capital stock
would not be able to amend our certificate of incorporation or
bylaws or remove directors without holding a meeting of our
stockholders called in accordance with our amended and restated
bylaws.
In addition, our amended and restated certificate of
incorporation and amended and restated bylaws provide that
special meetings of the stockholders may be called only by our
Board of Directors. A stockholder may not call a special
meeting, which may delay the ability of our stockholders to
force consideration of a proposal or for holders controlling a
majority of our capital stock to take any action, including the
removal of directors.
144
Requirements for Advance Notification of Stockholder
Nominations and Proposals. Our amended and restated
bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for
election as directors, other than nominations made by or at the
direction of our Board of Directors or a committee of our Board
of Directors. Stockholders must notify our corporate secretary
in writing prior to the meeting at which the matters are to be
acted upon or directors are to be elected. The notice must
contain the information specified in our amended and restated
bylaws. To be timely, the notice must be received at our
principal executive office not later than the 90th day nor
earlier than the 120th day prior to the first anniversary
of the date of the prior years annual meeting of
stockholders. If the date of the annual meeting is more than
30 days before or after such anniversary date, or if no
annual meeting was held in the preceding year, notice by the
stockholder, to be timely, must be received not earlier than the
120th day prior to the annual meeting, and not later than
the later of the 90th day prior to the annual meeting, or
the 10th day following the day on which public announcement
of the date of such meeting is first made or notice of the
meeting date is mailed, whichever occurs first.
Our amended and restated bylaws may have the effect of
precluding the conduct of certain business at a meeting if the
proper procedures are not followed. These provisions may also
discourage or deter a potential acquirer from conducting a
solicitation of proxies to elect the acquirers own slate
of directors or otherwise attempting to obtain control of our
Company.
Board of Directors. Our Board of Directors may elect
a director to fill a vacancy, including vacancies created by the
expansion of our Board of Directors.
Our amended and restated certificate of incorporation and the
amended and restated bylaws will not provide for cumulative
voting in the election of directors. The absence of cumulative
voting may make it more difficult for stockholders who own an
aggregate of less than a majority of our voting power to elect
any directors to our Board of Directors.
Our amended and restated certificate of incorporation and the
amended and restated bylaws provide that our Board of Directors
is divided into three classes, with members of each class
serving staggered three-year terms. Our classified Board of
Directors could have the effect of delaying or discouraging an
acquisition of us or a change in management.
Limitations
of Directors Liability and Indemnification
Our amended and restated certificate of incorporation will limit
the liability of our directors to the fullest extent permitted
by Delaware law. Delaware law provides that directors of a
corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except for
liability for any:
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breach of their duty of loyalty to us or our stockholders;
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act or omission not in good faith or that involves intentional
misconduct or a knowing violation of law;
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unlawful payment of dividends or redemption of shares as
provided in Section 174 of the Delaware General Corporation
Law; or
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transaction from which the directors derived an improper
personal benefit.
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These limitations of liability do not apply to liabilities
arising under federal securities laws and do not affect the
availability of equitable remedies such as injunctive relief or
rescission.
Our amended and restated bylaws, in the form that will become
effective upon the closing of this offering, provide that we
will indemnify and advance expenses to our directors and
officers to the fullest extent permitted by law or, if
applicable, pursuant to indemnification agreements. They further
provide that we may choose to indemnify other employees or
agents of the corporation from time to time. Section 145(g)
of the Delaware General Corporation Law and our amended and
restated bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability
arising out of his or her actions in connection with his or her
services to us, regardless of whether our bylaws permit
indemnification. We have obtained a directors and
officers liability insurance policy.
We have entered into indemnification agreements with each of our
directors that provide, in general, that we will indemnify them
to the fullest extent permitted by law in connection with their
service to us or on our behalf.
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At present, there is no pending litigation or proceeding
involving any of our directors or officers as to which
indemnification is required or permitted, and we are not aware
of any threatened litigation or proceeding that may result in a
claim for indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers and
controlling persons pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the
Securities and Exchange Commission this indemnification is
against public policy as expressed in the Securities Act and is
therefore unenforceable.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is Wells
Fargo Shareholder Services.
Stock
Market
We have applied to have our common stock listed on the Nasdaq
Global Market under the symbol PRMW.
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SHARES ELIGIBLE
FOR FUTURE SALE
Prior to this offering, there has been no market for our common
stock, and a liquid trading market for our common stock may not
develop or be sustained after this offering. Future sales of
amounts of our common stock in the public market, or the
perception that such sales may occur, could adversely affect
prevailing market prices of our common stock. Furthermore, since
only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and
legal restrictions on resale described below, sales of amounts
of our common stock in the public market after the restrictions
lapse could also adversely affect the market price of our common
stock and our ability to raise equity capital in the future. See
Risk Factors.
Eligibility
of Restricted Shares for Resale in the Public Markets
Upon the closing of this offering, based on our outstanding
shares as of September 20, 2010, and assuming (i) the
1-for-10.435 reverse stock split of our common stock,
(ii) the conversion of our Series A and Series C
convertible preferred stock into common stock, (iii) the
conversion of 50% of our outstanding shares of Series B
preferred stock into common stock, the redemption of the
remaining 50% of our outstanding shares of Series B
preferred stock and the payment in cash of accrued and unpaid
dividends on all outstanding shares of Series B preferred
stock, (iv) the issuance of 3,750,000 shares to
Culligan to fund a portion of the purchase price for the
Culligan Refill Acquisition (assuming an initial public offering
price of $12.00 per share, the midpoint of the range set
forth on the cover page of this prospectus) and (v) no
exercise of options or warrants, we will have outstanding an
aggregate of 19,023,887 shares of our common stock
(19,111,387 shares if the underwriters exercise in full
their option to purchase additional shares to cover
overallotments, if any). Of these shares, all of the shares sold
in this offering will be freely transferable without restriction
or registration under the Securities Act, except for shares
purchased by any of our existing affiliates, as that
term is defined in Rule 144 under the Securities Act, who
may sell only the volume of shares described below and whose
sales would be subject to additional restrictions described
below. The remaining 10,690,554 shares of common stock will
be held by our existing stockholders and Culligan International
Company and will be considered restricted securities
as defined in Rule 144. All of these restricted securities
will be subject to transfer restrictions for 180 days from
the date of this prospectus pursuant to the
lock-up
arrangements described below. Restricted securities may be sold
in the public market only if registered or if they qualify for
an exemption from registration under Rules 144 or 701 of
the Securities Act, as described below. In addition, the shares
underlying options and warrants will become available for resale
into the public markets as described below under
Options, Restricted Stock and Warrants.
We have agreed with Culligan to use our commercially reasonable
efforts to register for resale within 181 days of the
closing of the Culligan Refill Acquisition all shares of our
common stock we are issuing to Culligan as payment of a portion
of the purchase price for the Culligan Refill Business.
Lock-up
Agreements
Our officers and directors, certain additional holders of shares
of our common stock (after giving effect to the conversion of
preferred stock and other transactions described above), certain
holders of shares of our common stock issuable upon exercise of
outstanding options and warrants and Culligan have agreed,
subject to certain exceptions, with the underwriters not to
offer, sell, contract to sell, pledge, grant any option to
purchase, make any short sale or otherwise dispose of any shares
of common stock, or any securities convertible into,
exchangeable for or that represent the right to receive shares
of common stock for a period of 180 days from the date of
this prospectus without the prior written consent of Thomas
Weisel Partners LLC, an affiliate of Stifel, Nicolaus &
Company, Incorporated. These shares will represent 91.1% of our
common stock outstanding after the Culligan Refill Acquisition
(including shares issuable upon the exercise of options and
warrants) but excluding shares issued in this offering. There
are no contractually specified conditions for the waiver of
lock-up
restrictions and any waiver is at the sole discretion of Thomas
Weisel Partners LLC, which may be granted by Thomas Weisel
Partners LLC for any reason. The
180-day
lock-up
period will be automatically extended if (i) during the
last 17 days of the
180-day
restricted period we issue an earnings release or announce
material news or a material event or (ii) prior to the
expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
15-day
period following the last day of the
180-day
period, in which case the restrictions described in this
paragraph will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
147
announcement of the material news or material event. After the
lock-up
period, these shares may be sold, subject to applicable
securities laws. Shares representing the remaining 8.9% of our
common stock outstanding after the Culligan Refill Acquisition
(including shares issuable upon the exercise of options and
warrants) but excluding the shares issued in this offering are
subject to comparable lock-up arrangements with the Company. See
Underwriting.
Rule 144
In general, and beginning 90 days after the date of this
prospectus, under Rule 144 as in effect on the date of this
prospectus, a person who is not one of our affiliates at any
time during the three months preceding a sale, and who has
beneficially owned shares of our common stock for at least six
months, would be entitled to sell an unlimited number of shares
of our common stock provided current public information about us
is available and, after owning such shares for at least one
year, would be entitled to sell an unlimited number of shares of
our common stock without restriction. Beginning 90 days
after the date of this prospectus, our affiliates who have
beneficially owned shares of our common stock for at least six
months are entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
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1% of the number of shares of our common stock then
outstanding; or
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the average weekly trading volume of our common stock on the
Nasdaq Global Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to the sale.
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Sales under Rule 144 by our affiliates are also subject to
manner of sale provisions and notice requirements and to the
availability of current public information about us.
Upon expiration of the
lock-up
period described above, all of the 10,690,554 shares of
restricted common stock held by our existing stockholders and
Culligan International Company will be eligible for sale under
Rule 144 subject to applicable volume and other limitations
for stockholders who are affiliates. We cannot estimate the
number of shares of our common stock that our existing
stockholders will elect to sell under Rule 144.
Rule 701
In general, under Rule 701, any of our employees,
directors, officers, consultants or advisors who acquires common
stock from us in connection with a compensatory stock or option
plan or other written agreement before the effective date of
this offering, to the extent not subject to a
lock-up
agreement, is entitled to resell such shares 90 days after
the effective date of this offering in reliance on Rule 144.
The SEC has indicated that Rule 701 will apply to typical
stock options granted by an issuer before it becomes subject to
the reporting requirements of the Exchange Act, along with the
shares acquired upon exercise of such options, including
exercises after the date of this prospectus. Securities issued
in reliance on Rule 701 are restricted securities and,
subject to the
lock-up
agreements described above, beginning 90 days after the
date of this prospectus, may be sold by persons other than
affiliates, as defined in Rule 144, subject only to the
manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its minimum holding
period requirement.
Options,
Restricted Stock and Warrants
Upon the closing of this offering, options to purchase a total
of 304,214 shares of our common stock will be outstanding
with a weighted average per share exercise price of $13.15 and
expiration dates between November 1, 2014 and
February 17, 2020. As of September 20, 2010, we had
also granted 103,242 shares of restricted stock, all of
which are unvested. As of September 20, 2010, an additional
5,305 shares of common stock were available for future
awards under our 2004 Stock Plan. We have also reserved an
additional 718,735 shares of common stock for issuance
pursuant to our 2010 Omnibus Long-Term Incentive Plan and an
additional 23,958 shares of common stock for issuance
pursuant to our 2010 Employee Stock Purchase Plan, both of which
we have adopted in connection with this offering.
Upon the closing of this offering, warrants to purchase a total
of 855,975 shares of our common stock will be outstanding
with a weighted average per share exercise price of $13.13 per
share.
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Warrants to purchase a total of 130,747 shares of our
common stock were issued in connection with our 2011 Notes.
These warrants will remain outstanding after this offering, will
expire in either December 2019 or October 2020 and
will have an exercise price of 80% of the initial public
offering price per share.
Warrants to purchase a total of 595,666 shares of our
common stock were issued in connection with the private
placement of our Series B preferred stock. The exercise
price of these warrants is $13.04 per share and they will,
subject to certain exceptions, expire between April 28,
2016 and January 10, 2017.
Warrants to purchase a total of 119,980 shares of our
common stock were issued in connection with the private
placement of our Series C convertible preferred stock. The
exercise price of these warrants is $13.04 per share and they
will, subject to certain exceptions, expire between
December 14, 2017 and June 2, 2018.
A warrant to purchase a total of 9,583 shares of common
stock was issued on June 4, 2008 to two individuals in
connection with a potential business arrangement. The exercise
price of the warrant is $20.66 per share and it will expire
15 days after the closing of this offering.
In general, under Rule 701 of the Securities Act as
currently in effect, any of our employees, consultants or
advisors who purchase shares of our common stock from us
pursuant to options granted prior to the closing of this
offering under our 2004 Stock Plan or other written agreement is
eligible to resell those shares 90 days after the effective
date of this offering in reliance on Rule 144, but without
compliance with some of the restrictions, including the holding
period, contained in Rule 144.
Additionally, following the closing of this offering, we intend
to file one or more registration statements on
Form S-8
under the Securities Act to register the sale of shares issued
or issuable upon the exercise of our currently outstanding stock
options as well as pursuant to our 2010 Omnibus Long-Term
Incentive Plan and 2010 Employee Stock Purchase Plan. The
registration statements will become effective upon filing.
Subject to the exercise of issued and outstanding options and
contractual restrictions, shares of our directors and executive
officers to which Rule 701 is applicable or which are to be
registered under the registration statement on
Form S-8
will be available for sale into the public market after the
expiration of the
180-day
lock-up
agreements with the underwriters described under the caption
Underwriting.
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MATERIAL
U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS
FOR NON-U.S.
HOLDERS OF OUR COMMON STOCK
The following discussion summarizes certain material
U.S. federal income and estate tax considerations relating
to the acquisition, ownership and disposition of our common
stock purchased in this offering by a
non-U.S. holder
(as defined below). This discussion is based on the provisions
of the Internal Revenue Code of 1986, as amended, final,
temporary and proposed U.S. Treasury regulations
promulgated thereunder and current administrative rulings and
judicial decisions, all as in effect as of the date hereof. All
of these authorities may be subject to differing interpretations
or repealed, revoked or modified, possibly with retroactive
effect, which could materially alter the tax consequences to
non-U.S. holders
described in this prospectus.
There can be no assurance that the IRS will not take a contrary
position to the tax consequences described herein or that such
position will not be sustained by a court. No ruling from the
IRS has been obtained with respect to the U.S. federal
income or estate tax consequences to a
non-U.S. holder
of the purchase, ownership or disposition of our common stock.
This
discussion is for general information only and is not tax
advice. All prospective
non-U.S. holders
of our common stock should consult their own tax advisors with
respect to the U.S. federal, state, local and
non-U.S. tax
consequences of the purchase, ownership and disposition of our
common stock.
As used in this discussion, the term
non-U.S. holder
means a beneficial owner of our common stock that is not any of
the following for U.S. federal income tax purposes:
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an individual who is a citizen or a resident of the United
States;
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a corporation or other entity taxable as a corporation for
U.S. federal income tax purposes that was created or
organized in or under the laws of the United States, any state
thereof or the District of Columbia;
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an estate whose income is subject to U.S. federal income
taxation regardless of its source;
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a trust (a) if a U.S. court is able to exercise
primary supervision over the trusts administration and one
or more U.S. persons have the authority to control all of
the trusts substantial decisions or (b) that has a
valid election in effect under applicable U.S. Treasury
regulations to be treated as a U.S. person; or
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an entity that is disregarded as separate from its owner for
U.S. federal income tax purposes if all of its interests
are owned by a single person described above.
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An individual may be treated, for U.S. federal income tax
purposes, as a resident of the United States in any calendar
year by being present in the United States on at least
31 days in that calendar year and for an aggregate of at
least 183 days during a three-year period ending in the
current calendar year. The
183-day test
is determined by counting all of the days the individual is
treated as being present in the current year, one-third of such
days in the immediately preceding year and one-sixth of such
days in the second preceding year. Residents are subject to
U.S. federal income tax as if they were U.S. citizens.
This discussion assumes that a prospective
non-U.S. holder
will hold shares of our common stock as a capital asset
(generally, property held for investment). This discussion does
not address all aspects of U.S. federal income and estate
taxation that may be relevant to a particular
non-U.S. holder
in light of that
non-U.S. holders
individual circumstances. In addition, this discussion does not
address any aspect of U.S. federal alternative minimum,
U.S. state or U.S. local or
non-U.S. taxes,
or the special tax rules applicable to particular
non-U.S. holders,
such as:
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insurance companies and financial institutions;
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tax-exempt organizations;
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partnerships or other pass-through entities;
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regulated investment companies or real estate investment trusts;
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pension plans;
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persons who received our common stock as compensation;
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brokers and dealers in securities;
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owners that hold our common stock as part of a straddle, hedge,
conversion transaction, synthetic security or other integrated
investment; and
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former citizens or residents of the United States subject to tax
as expatriates.
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If a partnership or other entity treated as a partnership for
U.S. federal income tax purposes is an owner of our common
stock, the treatment of a partner in the partnership generally
will depend on the status of the partner and the activities of
the partnership. We urge any owner of our common stock that is a
partnership and partners in that partnership to consult their
tax advisors regarding the U.S. federal income tax
consequences of acquiring, owning and disposing of our common
stock.
Distributions
on Our Common Stock
Any distribution on our common stock paid to
non-U.S. holders
will generally constitute a dividend for U.S. federal
income tax purposes to the extent paid from our current or
accumulated earnings and profits, as determined under
U.S. federal income tax principles. Distributions in excess
of our current and accumulated earnings and profits will
generally constitute a return of capital to the extent of the
non-U.S. holders
adjusted tax basis in our common stock, and will be applied
against and reduce the
non-U.S. holders
adjusted tax basis. Any remaining excess will be treated as
capital gain, subject to the tax treatment described below in
Gain on Sale, Exchange or Other Disposition of
Our Common Stock.
Dividends paid to a
non-U.S. holder
that are not treated as effectively connected with the
non-U.S. holders
conduct of a trade or business in the United States generally
will be subject to withholding of U.S. federal income tax
at a rate of 30% on the gross amount paid, unless the
non-U.S. holder
is entitled to an exemption from or reduced rate of withholding
under an applicable income tax treaty. In order to claim the
benefit of a tax treaty, a
non-U.S. holder
must provide a properly executed IRS
Form W-8BEN
(or successor form) prior to the payment of dividends. A
non-U.S. holder
eligible for a reduced rate of withholding pursuant to an income
tax treaty may be eligible to obtain a refund of any excess
amounts withheld by timely filing an appropriate claim for a
refund with the IRS.
Dividends paid to a
non-U.S. holder
that are treated as effectively connected with a trade or
business conducted by the
non-U.S. holder
within the United States (and, if an applicable income tax
treaty so provides, are also attributable to a permanent
establishment or a fixed base maintained within the United
States by the
non-U.S. holder)
are generally exempt from the 30% withholding tax if the
non-U.S. holder
satisfies applicable certification and disclosure requirements.
To obtain the exemption, a
non-U.S. holder
must provide us with a properly executed IRS
Form W-8ECI
(or successor form) prior to the payment of the dividend.
Dividends received by a
non-U.S. holder
that are treated as effectively connected with a U.S. trade
or business generally are subject to U.S. federal income
tax at rates applicable to U.S. persons. A
non-U.S. holder
that is a corporation may, under certain circumstances,
be subject to an additional branch profits tax
imposed at a rate of 30%, or such lower rate as
specified by an applicable income tax treaty between the
United States and such holders country of residence.
A
non-U.S. holder
who provides us with an IRS
Form W-8BEN,
Form W-8ECI
or other form must update the form or submit a new form, as
applicable, if there is a change in circumstances that makes any
information on such form incorrect.
Gain On
Sale, Exchange or Other Disposition of Our Common
Stock
In general, a
non-U.S. holder
will not be subject to any U.S. federal income tax or
withholding on any gain realized from the
non-U.S. holders
sale, exchange or other disposition of shares of our common
stock unless:
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the gain is effectively connected with a U.S. trade or
business (and, if an applicable income tax treaty so provides,
is also attributable to a permanent establishment or a fixed
base maintained within the United States by the
non-U.S. holder),
in which case the gain will be taxed on a net income basis
generally in the same manner as if the
non-U.S. holder
were a U.S. person, and, if the
non-U.S. holder
is a corporation, the additional branch profits tax described
above in Distributions on Our Common Stock may also
apply;
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the
non-U.S. holder
is an individual who is present in the United States for
183 days or more in the taxable year of the disposition and
certain other conditions are met, in which case the
non-U.S. holder
will be subject to a 30% tax on the net gain derived from the
disposition, which may be offset by
U.S.-source
capital losses of the
non-U.S. holder,
if any; or
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we are, or have been at any time during the five-year period
preceding such disposition (or the
non-U.S. holders
holding period, if shorter), a United States real property
holding corporation.
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151
Generally, we will be a United States real property
holding corporation if the fair market value of our
U.S. real property interests equals or exceeds 50% of the
sum of the fair market values of our worldwide real property
interests and other assets used or held for use in a trade or
business, all as determined under applicable U.S. Treasury
regulations. We believe that we have not been and are not
currently, and do not anticipate becoming in the future, a
United States real property holding corporation for
U.S. federal income tax purposes.
Backup
Withholding and Information Reporting
We must report annually to the IRS and to each
non-U.S. holder
the amount of distributions paid to such holder and the amount
of tax withheld, if any. Copies of the information returns filed
with the IRS to report the distributions and withholding may
also be made available to the tax authorities in a country in
which the
non-U.S. holder
is a resident under the provisions of an applicable income tax
treaty or agreement.
The United States imposes a backup withholding tax on the gross
amount of dividends and certain other types of payments.
Dividends paid to a
non-U.S. holder
will not be subject to backup withholding if proper
certification of foreign status (usually on IRS
Form W-8BEN)
is provided, and we do not have actual knowledge or reason to
know that the
non-U.S. holder
is a U.S. person. In addition, no backup withholding or
information reporting will be required regarding the proceeds of
a disposition of our common stock made by a
non-U.S. holder
within the United States or conducted through certain
U.S. financial intermediaries if the payor receives the
certification of foreign status described in the preceding
sentence and the payor does not have actual knowledge or reason
to know that such
non-U.S. holder
is a U.S. person or the
non-U.S. holder
otherwise establishes an exemption.
Non-U.S. holders
should consult their own tax advisors regarding the application
of the information reporting and backup withholding rules to
them.
Backup withholding is not an additional tax. Amounts withheld
under the backup withholding rules from a payment to a
non-U.S. holder
can be refunded or credited against the
non-U.S. holders
U.S. federal income tax liability, if any, provided that
certain required information is furnished to the IRS in a timely
manner.
U.S.
Federal Estate Tax
An individual
non-U.S. holder
who is treated as the owner, or who has made certain lifetime
transfers, of an interest in our common stock will be required
to include the value of the common stock in his or her gross
estate for U.S. federal estate tax purposes and may be
subject to U.S. federal estate tax, unless an applicable
estate tax treaty provides otherwise or no U.S. federal
estate tax is in effect.
Recently-Enacted
Legislation Relating to Foreign Accounts
Legislation has been recently enacted that imposes significant
certification, information reporting and other requirements on
foreign financial institutions and certain other
non-U.S. entities.
The legislation is generally effective for payments made after
December 31, 2012. The failure to comply with the
certification, information reporting and other specified
requirements in the legislation would result in withholding tax
being imposed on payments of dividends and sales proceeds to
foreign financial institutions and certain other
non-U.S. holders.
Non-U.S. holders
should consult their own tax advisers regarding the application
of this legislation to them.
152
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting
agreement dated the date of this prospectus, we have agreed to
sell to the underwriters named below, and the underwriters, for
whom Stifel, Nicolaus & Company, Incorporated is
acting as sole-book running manager and representative, have
severally agreed to purchase, the respective numbers of shares
of common stock appearing opposite their names below:
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Underwriters
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Number of Shares
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Stifel, Nicolaus & Company, Incorporated
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BB&T Capital Markets, a division of Scott &
Stringfellow, LLC
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Janney Montgomery Scott LLC
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Signal Hill Capital Group LLC
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Total
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All of
the shares
to be purchased by the underwriters will be purchased from us.
The underwriting agreement provides that the obligations of the
several underwriters are subject to various conditions,
including approval of legal matters by counsel. The underwriting
agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any
are purchased, other than those shares covered by the
over-allotment option described below. If an underwriter
defaults, the underwriting agreement provides that the purchase
commitments of the non-defaulting underwriters may be increased
or the underwriting agreement may be terminated.
The underwriting agreement provides that we will indemnify the
underwriters against liabilities specified in the underwriting
agreement under the Securities Act, or will contribute to
payments that the underwriters may be required to make relating
to these liabilities.
The underwriters expect to deliver the shares of common stock to
purchasers on or
about ,
2010.
Over-Allotment
Option
We have granted a
30-day
over-allotment option to the underwriters to purchase up to a
total
of
additional shares of our common stock from us at the initial
public offering price, less the underwriting discount payable by
us, as set forth on the cover page of this prospectus. If the
underwriters exercise this option in whole or in part, then each
of the underwriters will be separately committed, subject to the
conditions described in the underwriting agreement, to purchase
the additional shares of our common stock in proportion to their
respective commitments set forth in the table above.
If the underwriters exercise their over-allotment option, the
cash portion of the purchase price for the Culligan Refill
Acquisition will be increased and a number of shares of common
stock we will issue to Culligan will be decreased by an amount
equal to the net cash proceeds we receive as a result of such
exercise.
Determination
of Offering Price
Prior to this offering, there has been no public market for our
common stock. The initial public offering price will be
determined through negotiations between us and the underwriters.
In addition to prevailing market conditions, the factors to be
considered in determining the initial public offering price will
include the valuation multiples of publicly-traded companies
that the representatives of the underwriters believe are
comparable to us, our financial information and that of the
Culligan Refill Business, our history and prospects and the
outlook for our industry, an assessment of our management, our
past and present business operations and relationships, and the
prospects for, and timing of, our future sales and an assessment
of these factors in relation to market values and various
valuation measures of other companies engaged in activities
similar to ours.
We cannot assure you that an active or orderly trading market
will develop for our common stock or that our common stock will
trade in the public markets subsequent to this offering at or
above the initial offering price.
153
Commissions
and Discounts
Shares sold by the underwriters to the public will initially be
offered at the initial public offering price set forth on the
cover of this prospectus. Any shares sold by the underwriters to
securities dealers may be sold at that price less a concession
of not more than $ per share from
the initial public offering price. If all the shares are not
sold at the initial public offering price, the underwriters may
change the offering price and the other selling terms. The
offering of the shares by the underwriters is subject to receipt
and acceptance and subject to the underwriters right to
reject any order in whole or in part.
The following table summarizes the compensation to be paid to
the underwriters by us and the proceeds, before expenses,
payable to us:
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Total
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Without
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With
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Per Share
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Option
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Option
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Public offering price
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Underwriting discounts and commissions
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Proceeds, before expenses, to us
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We estimate that the expenses of this offering payable by us,
not including underwriting discounts and commissions, will be
approximately
$ .
In addition, we will reimburse up to $200,000 in legal fees
incurred by the underwriters in connection with this offering.
Indemnification
of Underwriters
We will indemnify the underwriters against some civil
liabilities, including liabilities under the Securities Act and
liabilities arising from breaches of our representations and
warranties contained in the underwriting agreement. If we are
unable to provide this indemnification, we will contribute to
payments the underwriters may be required to make in respect of
those liabilities.
No Sales
of Similar Securities
The underwriters will require all of our directors and officers
and certain other of our stockholders to agree, subject to
certain exceptions, not to offer, sell, contract to sell,
pledge, grant any option to purchase, make any short sale or
otherwise dispose of any shares of common stock, or any options
or warrants to purchase any shares of common stock, or any
securities convertible into, exchangeable for or that represent
the right to receive shares of common stock without the prior
written consent of Thomas Weisel Partners LLC, an affiliate of
Stifel, Nicolaus & Company, Incorporated for a period
of 180 days after the date of this prospectus.
We have agreed that for a period of 180 days after the date
of this prospectus, we will not, without the prior written
consent of Stifel, Nicolaus and Company, Incorporated, offer,
sell, contract to sell or otherwise dispose of any securities
that are substantially similar to the common stock, including
but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, common
stock or any such substantially similar securities except for
the shares of common stock offered in this offering, the shares
of common stock issuable upon exercise of outstanding options
and warrants on the date of this prospectus and the shares of
our common stock that are issued under our 2010 Omnibus
Long-Term Incentive Plan, which we will adopt in connection with
this offering.
The 180-day
restricted period described in the preceding two paragraphs will
be automatically extended if: (1) during the last
17 days of the 180-day restricted period we release
earnings results or announce material news or a material event
or (2) prior to the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
15-day
period following the last day of the
180-day
period, in which case the restrictions described in the
preceding paragraph will continue to apply until the expiration
of the
18-day
period beginning on the date of release of the earnings results
or the announcement of the material news or material event.
Nasdaq
Global Market Listing
We have applied to have our common stock listed on the Nasdaq
Global Market under the symbol PRMW.
154
Short
Sales, Stabilizing Transactions and Penalty Bids
In order to facilitate this offering, persons participating in
this offering may engage in transactions that stabilize,
maintain or otherwise affect the price of our common stock
during and after this offering. Specifically, the underwriters
may engage in the following activities in accordance with the
rules of the SEC.
Short sales. Short sales involve the sales by the
underwriters of a greater number of shares than they are
required to purchase in the offering. Covered short sales are
short sales made in an amount not greater than the
underwriters over-allotment option to purchase additional
shares from us in this offering. The underwriters may close out
any covered short position by either exercising their
over-allotment option to purchase shares or purchasing shares in
the open market. In determining the source of shares to close
out the covered short position, the underwriters will consider,
among other things, the price of shares available for purchase
in the open market as compared to the price at which they may
purchase shares through the over-allotment option. Naked short
sales are any short sales in excess of such over-allotment
option. The underwriters must close out any naked short position
by purchasing shares in the open market. A naked short position
is more likely to be created if the underwriters are concerned
that there may be downward pressure on the price of the common
stock in the open market after pricing that could adversely
affect investors who purchase in this offering.
Stabilizing transactions. The underwriters may make
bids for or purchases of the shares for the purpose of pegging,
fixing or maintaining the price of the shares, so long as
stabilizing bids do not exceed a specified maximum.
Penalty bids. If the underwriters purchase
shares in the open market in a stabilizing transaction or
syndicate covering transaction, they may reclaim a selling
concession from the underwriters and selling group members who
sold those shares as part of this offering. Stabilization and
syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of these
transactions. The imposition of a penalty bid might also have an
effect on the price of the shares if it discourages presales of
the shares.
The transactions above may occur on the Nasdaq Global Market or
otherwise. Neither we nor the underwriters make any
representation or prediction as to the effect that the
transactions described above may have on the price of the
shares. If these transactions are commenced, they may be
discontinued without notice at any time.
Discretionary
Accounts
The underwriters have informed us that they do not intend sales
to discretionary accounts to exceed 5% of the total number of
shares of common stock offered by them. The underwriters have
informed us that they do not intend to confirm sales to
discretionary accounts without the prior specific written
approval of the customer.
Relationships
From time to time, certain of the underwriters
and/or their
respective affiliates have directly and indirectly engaged in
various financial advisory, investment banking and commercial
banking services for us and our affiliates, for which they
received customary compensation, fees and expense reimbursement.
In addition, from time to time, certain of the underwriters and
their affiliates may effect transactions for their own account
or the account of customers, and hold on behalf of themselves or
their customers, long or short positions in our debt or equity
securities or loans, and may do so in the future.
In connection with the closing of this offering and the
completion of the Culligan Refill Acquisition, we intend to
enter into a new $40.0 million senior revolving credit
facility with Wells Fargo Bank, N.A. and a group of other
lenders that will replace our current senior revolving credit
facility. Branch Banking and Trust Company, an affiliate of
BB&T Capital Markets, a division of Scott &
Stringfellow, LLC, will serve as a lender under the new senior
revolving credit facility.
In connection with the acquisition of Thomas Weisel Partners
Group, Inc., the parent company of Thomas Weisel Partners LLC,
by Stifel Financial Corp., Stifel, Nicolaus & Company,
Incorporated, a wholly-owned subsidiary of Stifel Financial
Corp. and an affiliate of Thomas Weisel Partners LLC, replaced
Thomas Weisel Partners LLC in its capacity as underwriter in
this offering effective July 12, 2010.
155
Sales
Outside the United States
No action has been taken in any jurisdiction (except in the
United States) that would permit a public offering of the common
shares, or the possession, circulation or distribution of this
prospectus supplement, the accompanying prospectus or any other
material relating to us or the common shares in any jurisdiction
where action for that purpose is required. Accordingly, the
common shares may not be offered or sold, directly or
indirectly, and none of this prospectus supplement, the
accompanying prospectus or any other offering material or
advertisements in connection with the common shares may be
distributed or published, in or from any country or jurisdiction
except in compliance with any applicable rules and regulations
of any such country or jurisdiction. Each of the underwriters
may arrange to sell common shares offered hereby in certain
jurisdictions outside the United States, either directly or
through affiliates, where they are permitted to do so.
European
Economic Area
In relation to each member state of the European Economic Area
that has implemented the Prospectus Directive (each, a relevant
member state), with effect from and including the date on which
the Prospectus Directive is implemented in that relevant member
state (the relevant implementation date), an offer of shares of
common stock described in this prospectus supplement may not be
made to the public in that relevant member state prior to the
publication of a prospectus in relation to the shares of common
stock that has been approved by the competent authority in that
relevant member state or, where appropriate, approved in another
relevant member state and notified to the competent authority in
that relevant member state, all in accordance with the
Prospectus Directive, except that, with effect from and
including the relevant implementation date, an offer of
securities may be offered to the public in that relevant member
state, subject to any variation in that member state by any
measure implementing the Prospectus Directive in that member
state, at any time:
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to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities;
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to any legal entity that has two or more of (a) an average
of at least 250 employees during the last financial year;
(b) a total balance sheet of more than 43,000,000;
and (c) an annual net turnover of more than
50,000,000, as shown in its last annual or consolidated
accounts;
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to fewer than 100 natural or legal persons (other than qualified
investors as defined in the Prospectus Directive) subject to
obtaining the prior consent of the underwriters; or
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in any other circumstances that do not require the publication
of a prospectus pursuant to Article 3 of the Prospectus
Directive;
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provided that no such offer of shares of common stock shall
require us or any underwriter to publish a prospectus pursuant
to Article 3 of the Prospective Directive.
Each purchaser of shares of common stock described in this
prospectus supplement located within a relevant member state
will be deemed to have represented, acknowledged and agreed that
it is a qualified investor within the meaning of
Article 2(1)(e) of the Prospectus Directive.
For purposes of this provision, the expression an offer to
the public in any relevant member state means the
communication in any form and by any means of sufficient
information on the terms of the offer and the securities to be
offered so as to enable an investor to decide to purchase or
subscribe the securities, as the expression may be varied in
that member state by any measure implementing the Prospectus
Directive in that member state, and the expression
Prospectus Directive means Directive 2003/71/EC and
includes any relevant implementing measure in each relevant
member state.
United
Kingdom
This prospectus and any other material in relation to the shares
described herein is only being distributed to, and is only
directed at, persons in the United Kingdom that are qualified
investors within the meaning of Article 2(1)(e) of the
Prospective Directive (qualified investors) that
also (i) have professional experience in matters relating
to investments falling within Article 19(5) of the
Financial Services and Markets Act 2000 (Financial Promotion)
Order 2005, as amended, or the Order, (ii) who fall within
Article 49(2)(a) to (d) of the Order or (iii) to
whom it may otherwise lawfully be communicated (all such persons
together being referred to as relevant persons). The
shares
156
are only available to, and any invitation, offer or agreement to
purchase or otherwise acquire such shares will be engaged in
only with, relevant persons. This offering memorandum and its
contents are confidential and should not be distributed,
published or reproduced (in whole or in part) or disclosed by
recipients to any other person in the United Kingdom. Any person
in the United Kingdom that is not a relevant person should not
act or rely on this prospectus or any of its contents.
The distribution of this prospectus in the United Kingdom to
anyone not falling within the above categories is not permitted
and may contravene FSMA. No person falling outside those
categories should treat this prospectus as constituting a
promotion to him, or act on it for any purposes whatever.
Recipients of this prospectus are advised that we, the
underwriters and any other person that communicates this
prospectus are not, as a result solely of communicating this
prospectus, acting for or advising them and are not responsible
for providing recipients of this prospectus with the protections
which would be given to those who are clients of any
aforementioned entities that is subject to the Financial
Services Authority Rules.
France
The prospectus supplement and the accompanying prospectus
(including any amendment, supplement or replacement thereto)
have not been approved either by the Autorité des
marchés financiers or by the competent authority of
another State that is a contracting party to the Agreement on
the European Economic Area and notified to the Autorité
des marchés financiers; no security has been offered or
sold and will be offered or sold, directly or indirectly, to the
public in France within the meaning of Article L. 411-1 of the
French Code Monétaire et Financier except to permitted
investors, or Permitted Investors, consisting of persons
licensed to provide the investment service of portfolio
management for the account of third parties, qualified investors
(investisseurs qualifiés) acting for their own
account
and/or a
limited circle of investors (cercle restreint
dinvestisseurs) acting for their own account, with
qualified investors and limited circle of
investors having the meaning ascribed to them in
Articles L.
411-2, D.
411-1, D.
411-2, D.
411-4, D.
744-1, D.
754-1 and D.
764-1 of the
French Code Monétaire et Financier; none of this
prospectus supplement and the accompanying Prospectus or any
other materials related to the offer or information contained
therein relating to our securities has been released, issued or
distributed to the public in France except to Permitted
Investors; and the direct or indirect resale to the public in
France of any securities acquired by any Permitted Investors may
be made only as provided by Articles L.
411-1, L.
411-2, L.
412-1 and L.
621-8 to L.
621-8-3 of
the French Code Monétaire et Financier and
applicable regulations thereunder.
Notice to
the Residents of Germany
This document has not been prepared in accordance with the
requirements for a securities or sales prospectus under the
German Securities Prospectus Act
(Wertpapierprospektgesetz), the German Sales Prospectus
Act (Verkaufsprospektgesetz), or the German Investment
Act (Investmentgesetz). Neither the German Federal
Financial Services Supervisory Authority (Bundesanstalt fur
Finanzdienstleistungsaufsicht BaFin) nor any
other German authority has been notified of the intention to
distribute the securities in Germany. Consequently, the
securities may not be distributed in Germany by way of public
offering, public advertisement or in any similar manner AND THIS
DOCUMENT AND ANY OTHER DOCUMENT RELATING TO THE OFFERING, AS
WELL AS INFORMATION OR STATEMENTS CONTAINED THEREIN, MAY NOT BE
SUPPLIED TO THE PUBLIC IN GERMANY OR USED IN CONNECTION WITH ANY
OFFER FOR SUBSCRIPTION OF THE SECURITIES TO THE PUBLIC IN
GERMANY OR ANY OTHER MEANS OF PUBLIC MARKETING. The securities
are being offered and sold in Germany only to qualified
investors which are referred to in Section 3,
paragraph 2 no. 1, in connection with Section 2,
no. 6, of the German Securities Prospectus Act. This
document is strictly for use of the person who has received it.
It may not be forwarded to other persons or published in Germany.
Switzerland
This document does not constitute a prospectus within the
meaning of Art. 652a of the Swiss Code of Obligations. The
shares of common stock may not be sold directly or indirectly in
or into Switzerland except in a manner which will not result in
a public offering within the meaning of the Swiss Code of
Obligations. Neither this document nor any other offering
materials relating to the shares of common stock may be
distributed, published or otherwise made available in
Switzerland except in a manner which will not constitute a
public offer of the shares of common stock in Switzerland.
157
LEGAL
MATTERS
The validity of the shares of common stock offered hereby and
certain other legal matters will be passed upon for us by
K&L Gates LLP, Raleigh, North Carolina. Certain legal
matters in connection with this offering will be passed upon for
the underwriters by Latham & Watkins LLP, Washington,
DC.
EXPERTS
The financial statements of Primo Water Corporation and
subsidiaries as of December 31, 2009 and 2008, and for each
of the three years ended December 31, 2009 included in this
prospectus and registration statement have been so included in
reliance on the report of McGladrey & Pullen, LLP, an
independent registered public accounting firm, as set forth in
its report thereon appearing elsewhere herein, and are included
in reliance upon such report given on the authority of such firm
as experts in accounting and auditing.
The combined financial statements of Culligan Store Solutions
Group of Culligan Holding S.àr.l as of and for the years
ended December 31, 2009 and 2008, have been included herein
in reliance upon the report of KPMG LLP, an independent
registered public accounting firm, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and
auditing.
CHANGE IN
INDEPENDENT REGISTERED ACCOUNTING FIRM
On February 10, 2009, our Board of Directors approved the
dismissal of Ernst & Young LLP (E&Y),
as our independent registered public accounting firm, which was
immediately effective, and appointed McGladrey &
Pullen, LLP (McGladrey) as our independent
registered public accounting firm for the year ended
December 31, 2008.
E&Ys report on our financial statements for the year
ended December 31, 2007, did not contain an adverse opinion
or a disclaimer of opinion and was not qualified or modified as
to uncertainty, audit scope or accounting principles. During our
two most recent fiscal years and any subsequent interim period
preceding the dismissal of E&Y, there were no disagreements
with E&Y on any matters of accounting principles or
practices, financial statement disclosure or auditing scope or
procedure, which, if not resolved to E&Ys
satisfaction, would have caused E&Y to make reference to
the matter in their report, and there have been no
reportable events as defined in Item 304
(a)(1)(v) of
Regulation S-K.
Prior to the engagement of McGladrey, we did not consult with
such firm regarding the application of accounting principles to
a specific completed or contemplated transaction, or any matter
that was either the subject of a disagreement or a reportable
event. We also did not consult with McGladrey regarding the type
of audit opinion which might be rendered on our financial
statements and no oral or written report was provided by
McGladrey.
We have provided E&Y with a copy of this disclosure prior
to its filing with the Commission and have requested E&Y to
furnish us with a letter addressed to the Commission stating
whether it agrees with the above statements regarding E&Y
and, if not, stating the respects in which it does not agree. A
copy of this letter, dated October 18, 2010, which states
that E&Y agrees with these statements, is filed as
Exhibit 16.1 to the registration statement of which this
prospectus forms a part.
158
WHERE YOU
CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act with respect to the shares of common
stock offered by this prospectus. This prospectus does not
contain all of the information included in the registration
statement, portions of which are omitted as permitted by the
rules and regulations of the SEC. For further information
pertaining to us and the common stock to be sold in this
offering, you should refer to the registration statement and its
exhibits. On the closing of this offering, we will be subject to
the informational requirements of the Securities Exchange Act of
1934 and will be required to file annual, quarterly and current
reports, proxy statements and other information with the SEC. We
anticipate making these documents publicly available, free of
charge, on our website (www.primowater.com) as soon as
reasonably practicable after filing such documents with the SEC.
You can read the registration statement and our future filings
with the SEC over the Internet at the SECs website at
www.sec.gov. You may request copies of the filing, at no cost,
by telephone at
(336) 331-4000
or by mail at Primo Water Corporation, 104 Cambridge Plaza
Drive, Winston-Salem, North Carolina 27104. You may also read
and copy any document we file with the SEC at its public
reference facility at 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. You may also obtain
copies of the documents at prescribed rates by writing to the
Public Reference Section of the SEC. Please call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
facilities.
159
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
Primo Water Corporation
|
|
|
|
|
Annual Financial Statements:
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
Interim Unaudited Consolidated Financial
Statements:
|
|
|
|
|
|
|
|
F-26
|
|
|
|
|
F-27
|
|
|
|
|
F-28
|
|
|
|
|
F-29
|
|
|
|
|
|
|
The Culligan Refill Business
|
|
|
|
|
Annual Financial Statements:
|
|
|
|
|
|
|
|
F-40
|
|
|
|
|
F-41
|
|
|
|
|
F-42
|
|
|
|
|
F-43
|
|
|
|
|
F-44
|
|
|
|
|
F-45
|
|
Interim Unaudited Combined Financial Statements:
|
|
|
|
|
|
|
|
F-56
|
|
|
|
|
F-57
|
|
|
|
|
F-58
|
|
|
|
|
F-59
|
|
F-1
The accompanying consolidated financial statements give effect
to a 1-for-10.435 reverse stock split of the common stock of
Primo Water Corporation which will take place immediately prior
to the effectiveness of the registration statement. The
following report is in the form which will be furnished by
McGladrey & Pullen, LLP, an independent registered public
accounting firm, upon completion of the 1-for-10.435 reverse
split of the common stock of Primo Water Corporation described
in Note 15 to the consolidated financial statements and
assuming that from March 12, 2010 to the date of such
completion no other material events have occurred that would
affect the consolidated financial statements or the required
disclosures therein.
/s/ McGladrey & Pullen, LLP
Raleigh, North Carolina
October 18, 2010
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board
of Directors and Stockholders of
Primo Water Corporation
We have audited the accompanying consolidated balance sheets of
Primo Water Corporation and subsidiaries (the
Company) as of December 31, 2009 and 2008, and
the related consolidated statements of operations,
stockholders equity and cash flows for each of the three
years in the period ended December 31, 2009. These
financial statements and financial statement schedule are the
responsibility of the Companys 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 Primo Water Corporation and subsidiaries as of
December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2009 in conformity with
U.S. generally accepted accounting principles.
Raleigh, North Carolina
March 12, 2010, except for Note 15 as to which the
date
is ,
2010
F-2
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
516
|
|
|
$
|
|
|
Accounts receivable, net
|
|
|
3,205
|
|
|
|
1,888
|
|
Inventories
|
|
|
2,818
|
|
|
|
1,849
|
|
Prepaid expenses and other current assets
|
|
|
281
|
|
|
|
1,083
|
|
Assets associated with discontinued operations
|
|
|
4,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
11,393
|
|
|
|
4,820
|
|
Bottles, net
|
|
|
2,069
|
|
|
|
1,997
|
|
Property and equipment, net
|
|
|
15,574
|
|
|
|
14,321
|
|
Intangible assets, net
|
|
|
1,427
|
|
|
|
1,077
|
|
Other assets
|
|
|
107
|
|
|
|
153
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
30,570
|
|
|
$
|
22,368
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity (deficit)
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,704
|
|
|
$
|
2,756
|
|
Accrued expenses and other current liabilities
|
|
|
2,925
|
|
|
|
4,144
|
|
Current portion of long-term debt, capital leases and notes
payable
|
|
|
7,006
|
|
|
|
426
|
|
Liabilities associated with discontinued operations
|
|
|
1,322
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
13,957
|
|
|
|
7,326
|
|
Long-term debt, capital leases and notes payable, net of current
portion
|
|
|
5
|
|
|
|
14,403
|
|
Other long-term liabilities
|
|
|
481
|
|
|
|
1,048
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
14,443
|
|
|
|
22,777
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit)
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value
200,000 shares authorized, 1,453 and 1,453 shares
issued and outstanding at December 31, 2009 and 2008,
respectively
|
|
|
1
|
|
|
|
1
|
|
Preferred stock, $0.001 par value
100,000 shares authorized
|
|
|
|
|
|
|
|
|
Series A preferred stock, 18,755 shares issued and
outstanding
|
|
|
19
|
|
|
|
19
|
|
Series B preferred stock, 23,280 shares issued and
outstanding
|
|
|
23
|
|
|
|
23
|
|
Series C preferred stock, 12,520 shares issued and
outstanding
|
|
|
13
|
|
|
|
13
|
|
Additional paid-in capital
|
|
|
86,357
|
|
|
|
86,737
|
|
Common stock warrants
|
|
|
3,797
|
|
|
|
3,797
|
|
Accumulated deficit
|
|
|
(74,083)
|
|
|
|
(90,999)
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
16,127
|
|
|
|
(409)
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity (deficit)
|
|
$
|
30,570
|
|
|
$
|
22,368
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-3
PRIMO
WATER CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Net sales
|
|
$
|
13,453
|
|
|
$
|
34,647
|
|
|
$
|
46,981
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
11,969
|
|
|
|
30,776
|
|
|
|
38,771
|
|
Selling, general and administrative expenses
|
|
|
10,353
|
|
|
|
13,791
|
|
|
|
9,922
|
|
Depreciation and amortization
|
|
|
3,366
|
|
|
|
3,618
|
|
|
|
4,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
25,688
|
|
|
|
48,185
|
|
|
|
52,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(12,235)
|
|
|
|
(13,538)
|
|
|
|
(5,917)
|
|
Interest expense
|
|
|
(29)
|
|
|
|
(153)
|
|
|
|
(2,258)
|
|
Other income, net
|
|
|
94
|
|
|
|
83
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(12,170)
|
|
|
|
(13,608)
|
|
|
|
(8,174)
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(12,170)
|
|
|
|
(13,608)
|
|
|
|
(8,174)
|
|
Loss from discontinued operations, net of income taxes
|
|
|
(1,904)
|
|
|
|
(5,738)
|
|
|
|
(3,650)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(14,074)
|
|
|
|
(19,346)
|
|
|
|
(11,824)
|
|
Preferred dividends and beneficial conversion charge
|
|
|
(2,147)
|
|
|
|
(19,875)
|
|
|
|
(3,042)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(16,221)
|
|
|
$
|
(39,221)
|
|
|
$
|
(14,866)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to common
stockholders
|
|
$
|
(9.88)
|
|
|
$
|
(23.06)
|
|
|
$
|
(7.72)
|
|
Loss from discontinued operations attributable to common
stockholders
|
|
|
(1.32)
|
|
|
|
(3.96)
|
|
|
|
(2.51)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(11.20)
|
|
|
$
|
(27.02)
|
|
|
$
|
(10.23)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
1,448
|
|
|
|
1,452
|
|
|
|
1,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-4
PRIMO
WATER CORPORATION AND SUBSIDIARIES
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Additional
|
|
|
Common
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Series A
|
|
|
Series B
|
|
|
Series C
|
|
|
Subscriptions
|
|
|
Paid-in
|
|
|
Stock
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Receivable
|
|
|
Capital
|
|
|
Warrants
|
|
|
Deficit
|
|
|
Equity (Deficit)
|
|
|
Balance, December 31, 2006
|
|
|
1,446
|
|
|
$
|
1
|
|
|
|
18,755
|
|
|
$
|
19
|
|
|
|
23,274
|
|
|
$
|
23
|
|
|
|
|
|
|
$
|
|
|
|
$
|
(3,773)
|
|
|
$
|
39,418
|
|
|
$
|
2,742
|
|
|
$
|
(18,641)
|
|
|
$
|
19,789
|
|
Issuance of common stock
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
Issuance of preferred stock, Series B
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,773
|
|
|
|
(508)
|
|
|
|
|
|
|
|
|
|
|
|
3,265
|
|
Warrants attached to Series B Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
510
|
|
|
|
|
|
|
|
510
|
|
Issuance of preferred stock, Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,515
|
|
|
|
5
|
|
|
|
(489)
|
|
|
|
10,633
|
|
|
|
|
|
|
|
|
|
|
|
10,149
|
|
Warrants attached to Series C Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
|
|
|
|
|
|
181
|
|
Stock-based compensation expense, net of forfeitures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
181
|
|
Dividends accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,147)
|
|
|
|
(2,147)
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,074)
|
|
|
|
(14,074)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
1,452
|
|
|
|
1
|
|
|
|
18,755
|
|
|
|
19
|
|
|
|
23,280
|
|
|
|
23
|
|
|
|
4,515
|
|
|
|
5
|
|
|
|
(489)
|
|
|
|
49,786
|
|
|
|
3,433
|
|
|
|
(34,862)
|
|
|
|
17,916
|
|
Issuance of common stock
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
Issuance of preferred stock, Series C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,005
|
|
|
|
8
|
|
|
|
489
|
|
|
|
18,735
|
|
|
|
|
|
|
|
|
|
|
|
19,232
|
|
Warrants attached to Series C Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
320
|
|
|
|
|
|
|
|
320
|
|
Warrants issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
|
|
|
|
|
|
|
|
44
|
|
Stock-based compensation expense, net of forfeitures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
276
|
|
Beneficial conversion feature of Series C Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,548
|
|
|
|
|
|
|
|
(17,548)
|
|
|
|
|
|
Dividends accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,327)
|
|
|
|
(2,327)
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,346)
|
|
|
|
(19,346)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
1,453
|
|
|
|
1
|
|
|
|
18,755
|
|
|
|
19
|
|
|
|
23,280
|
|
|
|
23
|
|
|
|
12,520
|
|
|
|
13
|
|
|
|
|
|
|
|
86,357
|
|
|
|
3,797
|
|
|
|
(74,083)
|
|
|
$
|
16,127
|
|
Issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Stock-based compensation expense, net of forfeitures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
378
|
|
|
|
|
|
|
|
|
|
|
|
378
|
|
Dividend of subsidiary stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,050)
|
|
|
|
(2,050)
|
|
Dividends accrued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,042)
|
|
|
|
(3,042)
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,824)
|
|
|
|
(11,824)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
1,453
|
|
|
$
|
1
|
|
|
|
18,755
|
|
|
$
|
19
|
|
|
|
23,280
|
|
|
$
|
23
|
|
|
|
12,520
|
|
|
$
|
13
|
|
|
$
|
|
|
|
$
|
86,737
|
|
|
$
|
3,797
|
|
|
$
|
(90,999)
|
|
|
$
|
(409)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-5
PRIMO
WATER CORPORATION AND SUBSIDIARIES
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(14,074)
|
|
|
$
|
(19,346)
|
|
|
$
|
(11,824)
|
|
Less: Loss from discontinued operations
|
|
|
(1,904)
|
|
|
|
(5,738)
|
|
|
|
(3,650)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(12,170)
|
|
|
|
(13,608)
|
|
|
|
(8,174)
|
|
Adjustments to reconcile net loss from continuing operations to
net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,366
|
|
|
|
3,618
|
|
|
|
4,205
|
|
Stock-based compensation expense
|
|
|
156
|
|
|
|
259
|
|
|
|
298
|
|
Non-cash interest expense
|
|
|
|
|
|
|
26
|
|
|
|
696
|
|
Bad debt expense
|
|
|
362
|
|
|
|
139
|
|
|
|
153
|
|
Other
|
|
|
20
|
|
|
|
120
|
|
|
|
15
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(427)
|
|
|
|
(1,943)
|
|
|
|
1,164
|
|
Inventories
|
|
|
(316)
|
|
|
|
(1,277)
|
|
|
|
969
|
|
Prepaid expenses and other assets
|
|
|
(89)
|
|
|
|
(93)
|
|
|
|
(782)
|
|
Accounts payable
|
|
|
1,004
|
|
|
|
1,140
|
|
|
|
198
|
|
Accrued expenses and other liabilities
|
|
|
1,342
|
|
|
|
(213)
|
|
|
|
(714)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(6,752)
|
|
|
|
(11,832)
|
|
|
|
(1,972)
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(3,917)
|
|
|
|
(8,331)
|
|
|
|
(1,589)
|
|
Purchases of bottles, net of disposals
|
|
|
(1,076)
|
|
|
|
(1,089)
|
|
|
|
(835)
|
|
Proceeds from the sale of property and equipment
|
|
|
1
|
|
|
|
24
|
|
|
|
22
|
|
Additions to and acquisitions of intangible assets
|
|
|
|
|
|
|
(232)
|
|
|
|
(48)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(4,992)
|
|
|
|
(9,628)
|
|
|
|
(2,450)
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings from revolving line of credit
|
|
|
|
|
|
|
7,004
|
|
|
|
(6,580)
|
|
Issuance of long term debt
|
|
|
|
|
|
|
|
|
|
|
20,350
|
|
Note payable and capital lease payments
|
|
|
(74)
|
|
|
|
(13)
|
|
|
|
(5,353)
|
|
Debt issuance costs
|
|
|
|
|
|
|
(134)
|
|
|
|
(636)
|
|
Prepaid equity issuance costs
|
|
|
|
|
|
|
|
|
|
|
(105)
|
|
Net change in book overdraft
|
|
|
|
|
|
|
266
|
|
|
|
(147)
|
|
Proceeds from issuance of common stock
|
|
|
62
|
|
|
|
13
|
|
|
|
2
|
|
Net proceeds from issuance of preferred stock
|
|
|
14,104
|
|
|
|
19,552
|
|
|
|
|
|
Dividends paid
|
|
|
(1,563)
|
|
|
|
(2,327)
|
|
|
|
(1,257)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
12,529
|
|
|
|
24,361
|
|
|
|
6,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash from continuing operations
|
|
|
785
|
|
|
|
2,901
|
|
|
|
1,852
|
|
Cash, beginning of year
|
|
|
7,638
|
|
|
|
5,776
|
|
|
|
516
|
|
Cash used in discontinued operations from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
|
(2,269)
|
|
|
|
(6,764)
|
|
|
|
(1,514)
|
|
Investing Activities
|
|
|
(378)
|
|
|
|
(1,194)
|
|
|
|
(41)
|
|
Financing Activities
|
|
|
|
|
|
|
(203)
|
|
|
|
(813)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in discontinued operations
|
|
|
(2,647)
|
|
|
|
(8,161)
|
|
|
|
(2,368)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of year
|
|
$
|
5,776
|
|
|
$
|
516
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
8
|
|
|
$
|
69
|
|
|
$
|
1,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired under capital lease
|
|
$
|
|
|
|
$
|
8
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends accrued not paid
|
|
$
|
584
|
|
|
$
|
|
|
|
$
|
1,785
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-6
PRIMO
WATER CORPORATION AND SUBSIDIARIES
(in
thousands, except per share amounts)
|
|
1.
|
Description
of Business and Significant Accounting Policies
|
Business
Primo Water Corporation (together with its consolidated
subsidiaries, Primo, we,
our, the Company) is a rapidly growing
provider of three- and five-gallon purified bottled water and
water dispensers sold through major retailers nationwide.
Principles
of Consolidation
Our consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany
amounts and transactions have been eliminated in consolidation.
Our consolidated statements have been prepared in accordance
with generally accepted accounting principles in the United
States (GAAP).
Operating
Segments
We manage our business primarily through two reporting segments,
Primo Bottled Water Exchange (Exchange) and Primo Products
(Products). Our Exchange segment sells three- and five-gallon
purified bottled water through retailers in the each of the
contiguous United States. We service the retail locations
through our national network of primarily independent bottlers
and distributors. Our Products segment sells water dispensers
that are designed to dispense Primo and other
dispenser-compatible bottled water through major U.S. retailers.
We design, market and arrange for certification and inspection
of our products.
Unless otherwise indicated, information in these notes to
consolidated financial statements relates to continuing
operations. Certain of our operations have been presented as
discontinued. See Note 13.
Use of
Estimates
The preparation of our financial statements in conformity with
GAAP requires us to make certain estimates, judgments and
assumptions. We believe that the estimates, judgments and
assumptions used to determine certain amounts that affect the
financial statements are reasonable, based on information
available at the time they are made. To the extent there are
material differences between these estimates and actual results,
our consolidated financial statements may be affected. Some of
the more significant estimates include allowances for doubtful
accounts, valuation of inventories, depreciation, valuation of
deferred taxes and allowance for sales returns.
Revenue
Recognition
Revenue is recognized for the sale of three- and five-gallon
purified bottled water upon either the delivery of inventory to
the retail store or the purchase by the consumer. Revenue is
either recognized as an exchange transaction (where a discount
is provided on the purchase of a
three- or
five-gallon bottle of purified water for the return of an empty
three- or
five-gallon bottle) or a non-exchange transaction. Revenues on
exchange transactions are recognized net of the exchange
discount.
Our water dispensers are sold primarily through a direct-import
model, where we recognize revenue when title is transferred to
our retail customers. We have no contractual obligation to
accept returns of water dispensers nor do we guarantee water
dispenser sales. However, we will at times accept returns or
issue credits for water dispensers that have manufacturer
defects or that were damaged in transit. Revenues of water
dispensers are recognized net of an estimated allowance for
returns using an average return rate based upon historical
experience.
In addition, we offer certain incentives such as coupons and
rebates that are netted against and reduce net sales in the
consolidated statements of operations. With the purchase of
certain of our water dispensers we include a coupon for a free
three- or
five-gallon bottle of water. No revenue is recognized with
respect to the redemption of the
F-7
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
coupon for a free
three- and
five-gallon bottle of water and the estimated cost of the three-
and five-gallon bottle of water is included in cost of sales.
Cash and
Cash Equivalents
All highly liquid investments with an original maturity of three
months or less at the date of purchase are considered to be cash
equivalents.
Accounts
Receivable
All trade accounts receivable are due from customers located
within the United States. We maintain an allowance for doubtful
accounts for estimated losses resulting from the inability of
our customers to make required payments. The allowance for
doubtful accounts is based on a review of specifically
identified accounts in addition to an overall aging analysis.
Judgments are made with respect to the collectability of
accounts receivable based on historical experience and current
economic trends. Actual losses could differ from those estimates.
The following table shows the changes in the allowance for
doubtful accounts for the preceding three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Sales, Costs
|
|
|
|
|
|
End
|
|
|
|
of Year
|
|
|
or Expense
|
|
|
Deductions
|
|
|
of Year
|
|
|
December 31, 2007
|
|
$
|
|
|
|
|
362
|
|
|
|
(58)
|
|
|
$
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
$
|
304
|
|
|
|
139
|
|
|
|
(18)
|
|
|
$
|
425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
$
|
425
|
|
|
|
166
|
|
|
|
(479)
|
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
Our inventories consist primarily of finished goods and are
valued at the lower of cost or realizable value, with cost
determined using the
first-in,
first-out (FIFO) method. Miscellaneous selling supplies such as
labels are expensed when incurred.
Bottles
Bottles consist of three- and five- gallon refillable
polycarbonate bottles used in our exchange business and are
stated at cost, less accumulated depreciation. Depreciation is
calculated using the straight-line method over the estimated
useful life of three years.
Property
and Equipment
Property and equipment are stated at cost, less accumulated
depreciation and amortization. For internally developed
software, certain costs during the application development stage
and related to upgrades and enhancements that provide additional
functionality are capitalized and amortized over the estimated
useful life of the software. Depreciation and amortization are
calculated using straight-line methods over estimated useful
lives that range from two to 10 years.
Intangible
Assets
Intangible assets consist of customer lists, patents, and
trademarks. Intangible assets not subject to amortization are
tested for impairment on an annual basis or more frequently if
indicators of impairment are present. Patent costs
F-8
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
are amortized using a straight-line basis over estimated lives
of three years, while customer lists are amortized on an
accelerated basis over an estimated useful life of 10 years.
Long-Lived
Assets
We review long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may
not be recoverable. The carrying amount of a long-lived asset is
not recoverable if it exceeds the sum of the undiscounted cash
flows expected to result from the use and eventual disposition
of the asset at the date it is tested for recoverability,
whether in use or under development. An impairment loss is
measured as the amount by which the carrying amount of a
long-lived asset exceeds its fair value. We recorded an
impairment charge in 2008 of $98, reflected in selling, general
and administrative expenses of the Exchange segment in the
statement of operations, related to display racks no longer in
use and to be disposed.
Fair
Value Measurements
Effective January 1, 2008, we adopted Accounting Standards
Codification (ASC) 820, Fair Value Measurements
and Disclosures, for financial assets and liabilities. ASC
820 defines fair value, establishes a framework for measuring
fair value in accordance with generally accepted accounting
principles and expands disclosures about fair value
measurements. The adoption of ASC 820 did not have a material
impact on the Companys financial condition or results of
operations.
ASC 820 defines fair value as the price that would be received
for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants
on the measurement date. ASC 820 also describes three levels of
inputs that may be used to measure fair value:
|
|
|
|
|
Level 1 quoted prices in active markets for
identical assets and liabilities.
|
|
|
Level 2 observable inputs other than quoted
prices in active markets for identical assets and liabilities.
|
|
|
Level 3 unobservable inputs in which there is
little or no market data available, which require the reporting
entity to develop its own assumptions.
|
The table below presents our assets and liabilities measured at
fair value on a recurring basis as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Common stock warrants
|
|
$
|
600
|
|
|
|
|
|
|
|
|
|
|
$
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of the common stock warrants,
which are measured at fair value on a recurring basis using
significant unobservable inputs (Level 3 inputs):
|
|
|
|
|
Balance as of January 1, 2008
|
|
$
|
|
|
Total (gains) losses recognized
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
|
|
Total (gains) losses recognized
|
|
|
|
|
Initial fair value
|
|
|
600
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
600
|
|
|
|
|
|
|
The carrying amounts of the Companys financial
instruments, which include cash and cash equivalents, accounts
receivable, accounts payable, and other accrued expenses,
approximate their fair values due to their short maturities.
Based on borrowing rates currently available to the Company for
loans with similar terms, the carrying value of long-term debt,
capital leases and notes payable approximates fair value.
F-9
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
Advertising
Costs
Costs incurred for producing and distributing advertising and
advertising materials are expensed when incurred. Advertising
costs totaled approximately $948, $717 and $270 for 2007, 2008
and 2009, respectively, and are included in selling, general,
and administrative expenses.
Beneficial
Conversion Charges
Our Series C Preferred Stock (Series C) is
convertible into common stock and was issued with an adjustable
conversion feature, which was based upon consolidated sales for
the year ending December 31, 2008 with a conversion price
ranging from $13.04 to $25.04 per common equivalent share. A
beneficial conversion charge is measured as the difference
between the initial price of $25.04 per share and the conversion
price at December 31, 2008 of $13.04 per share.
At December 31, 2008 we recorded a beneficial conversion
charge (also referred to as a deemed dividend) of approximately
$17,500 related to the adjustment in the conversion price of the
Series C convertible preferred stock, based upon
consolidated sales for the year ending December 31, 2008.
The beneficial conversion charge for equity instruments is
recorded to additional paid in capital with no effect on total
stockholders equity or the consolidated statement of
operations.
Concentrations
of Risk
Our principal financial instruments subject to potential
concentration of credit risk are cash, trade receivables,
accounts payable and accrued expenses. We invest our funds in a
highly rated institution and believe the financial risks
associated with cash is minimal. At December 31, 2008 and
2009, approximately $250 and $0, respectively, of our cash on
deposit exceeded the federally insured limits.
We perform ongoing credit evaluations of our customers
financial condition and maintain allowances for doubtful
accounts that we believe are sufficient to provide for losses
that may be sustained on realization of accounts receivable. We
had one customer that accounted for approximately 59% of sales
in 2007 and two customers that accounted for 42% and 21% of
sales in 2008 and three customers that accounted for
approximately 33%, 19% and 15% of sales in 2009. We had two
customers that accounted for approximately 32% and 11% of total
trade receivables at December 31, 2008 and one customer
with a balance that accounted for approximately 21% of total
trade receivables at December 31, 2009.
Basic and
Diluted Net loss Per Share
Net loss per share has been computed using the weighted average
number of shares of common stock outstanding during each period.
Diluted amounts per share include the dilutive impact, if any,
of the Companys outstanding potential common shares, such
as options and warrants and convertible preferred stock.
Potential common shares that are anti-dilutive are excluded from
the calculation of diluted net loss per common share.
The following outstanding options, convertible preferred stock
and warrants were excluded from the computation of diluted net
loss per share for the periods indicated because including them
would have had an anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
Options to purchase common stock and common stock warrants
|
|
|
831
|
|
|
|
142
|
|
|
|
139
|
|
Convertible preferred stock
|
|
|
1,837
|
|
|
|
3,626
|
|
|
|
4,101
|
|
F-10
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
Income
Taxes
We account for income taxes using the asset and liability
method, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events
that have been included in the financial statements. Under this
method, deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax bases
of assets and liabilities, using enacted tax rates in effect for
the year in which the differences are expected to reverse.
Deferred tax assets are reduced by a valuation allowance to the
extent that utilization is not presently more likely than not.
Effective January 1, 2007, we adopted the provisions of
Accounting Standards Codification (ASC)
740-10,
Income Taxes. Previously, we had accounted for tax
contingencies in accordance with ASC
450-10,
Contingencies. As required by ASC
740-10, we
recognize the financial statement benefit of a tax position only
after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax
positions meeting the more-likely-than-not threshold, the amount
recognized in the financial statements is the largest benefit
that has a greater than 50 percent likelihood of being
realized upon ultimate settlement with the relevant tax
authority. At the adoption date, we applied ASC
740-10 to
all tax positions for which the statute of limitations remained
open. The implementation of ASC
740-10 did
not have a material impact on our consolidated financial
statements.
Error
Correction
In 2008, the Company originally reported net loss attributable
to common shareholders of $21,673 or $14.93 per share. This
amount did not include the non-cash beneficial conversion charge
or deemed dividend of $17,548 on our Series C preferred
stock that we recorded as a direct increase to additional
paid-in capital and accumulated deficit. The impact of including
the beneficial conversion charge reduces the net loss
attributable to common shareholders to $39,221 or $27.02 per
share. The change had no effect on the financial position at
December 31, 2008, or the results of operations or net loss
for the year ended December 31, 2008 as it was previously
accounted for.
Recent
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board
(FASB) issued authoritative guidance which
established the Accounting Standards Codification
(ASC or Codification) as the source of
authoritative GAAP recognized by the FASB to be applied to
nongovernmental entities, and rules and interpretive releases of
the SEC as authoritative GAAP for SEC registrants. The
Codification supersedes all existing non-SEC accounting and
reporting standards upon its effective date and, subsequently,
the FASB will not issue new standards in the form of Statements,
FASB Staff Positions or Emerging Issues Task Force Abstracts.
The guidance is not intended to change or alter existing GAAP.
The guidance became effective in our fourth quarter of 2009. The
guidance did not have an impact on our consolidated financial
position, results of operations or cash flows.
In May 2009, the FASB issued authoritative guidance on the
accounting for and disclosure of events that occur after the
balance sheet date. This guidance was effective for interim and
annual financial periods ending after June 15, 2009. This
guidance was amended in February 2010. It requires public
reporting companies to evaluate subsequent events through the
date that the financial statements are issued. The adoption did
not impact our consolidated financial position, results of
operations or cash flows.
In January 2010, the FASB issued guidance which clarifies that
the stock portion of a distribution to stockholders that allows
them to receive cash or stock with a potential limitation on the
total amount of cash that all stockholders can elect to receive
in the aggregate is considered a share issuance that is
reflected in earnings per share prospectively and is not a stock
dividend. This update is effective for our first quarter of
2010. The adoption is not expected to have a material impact on
our consolidated financial position, results of operations or
cash flows.
F-11
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
In January 2010, the FASB issued guidance that clarifies ASC 810
implementation issues relating to a decrease in ownership of a
subsidiary that is a business or non-profit activity. This
amendment affects entities that have previously adopted ASC
810-10. This
update is effective for our first quarter of 2010. The adoption
is not expected to have a material impact on our consolidated
financial position, results of operations or cash flows.
|
|
2.
|
Change in
Accounting Estimate
|
Effective January 1, 2008, we changed our method of
depreciation for property and equipment from accelerated methods
to the straight-line method. Originally, we utilized accelerated
methods due to our business model being new and the related
uncertainty in the sustainability of the business model. Also,
initial projections showed that upon installation of a new
retail customer the sales would initially peak and then diminish
over time, so using accelerated methods of depreciation was
expected to reflect the pattern of use. However, after we
developed some history and sustainability in our business model
we determined that sales did not peak after installation and
then diminish over time. Instead, sales have maintained at their
initial level or increased steadily following the installation
of our water bottle exchange services at a retail customer.
Therefore, the straight-line method is more reflective of the
pattern of use and also provides a better matching of
depreciation expense to the related sales. We accounted for the
change as a change in accounting estimate in the period of the
change and did not restate prior periods. The effect on
depreciation expense for 2008 was a decrease of approximately
$1,100.
Bottles are summarized as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Cost
|
|
$
|
2,600
|
|
|
$
|
2,637
|
|
Less accumulated depreciation
|
|
|
(531)
|
|
|
|
(640)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,069
|
|
|
$
|
1,997
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for bottles was approximately $721, $853
and $907 in 2007, 2008 and 2009, respectively, and is reflected
in selling, general and administrative expenses in the
consolidated statements of operations.
|
|
4.
|
Property
and Equipment
|
Property and equipment is summarized as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Leasehold improvements
|
|
$
|
72
|
|
|
$
|
72
|
|
Machinery and equipment
|
|
|
3,232
|
|
|
|
3,640
|
|
Racks and display panels
|
|
|
11,530
|
|
|
|
12,389
|
|
Office furniture and equipment
|
|
|
218
|
|
|
|
218
|
|
Software and computer equipment
|
|
|
2,521
|
|
|
|
2,770
|
|
Transportation racks
|
|
|
3,944
|
|
|
|
4,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,517
|
|
|
|
23,128
|
|
Less accumulated depreciation and amortization
|
|
|
(5,943)
|
|
|
|
(8,807)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,574
|
|
|
$
|
14,321
|
|
|
|
|
|
|
|
|
|
|
F-12
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
Depreciation expense for property and equipment was
approximately $1,935, $2,223 and $2,897 in 2007, 2008 and 2009,
respectively, and is reflected in selling, general and
administrative expenses in the consolidated statements of
operations.
Intangible assets are summarized as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2009
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amount
|
|
|
Amortization
|
|
|
Net
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists
|
|
$
|
2,985
|
|
|
$
|
(1,699)
|
|
|
$
|
1,286
|
|
|
$
|
2,985
|
|
|
$
|
(2,089)
|
|
|
$
|
896
|
|
Patent costs
|
|
|
35
|
|
|
|
(26)
|
|
|
|
9
|
|
|
|
71
|
|
|
|
(36)
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,020
|
|
|
|
(1,725)
|
|
|
|
1,295
|
|
|
|
3,056
|
|
|
|
(2,125)
|
|
|
|
931
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
132
|
|
|
|
|
|
|
|
132
|
|
|
|
146
|
|
|
|
|
|
|
|
146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,152
|
|
|
$
|
(1,725)
|
|
|
$
|
1,427
|
|
|
$
|
3,202
|
|
|
$
|
(2,125)
|
|
|
$
|
1,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense for intangible assets was approximately
$710, $542 and $401 respectively, in 2007, 2008 and 2009,
respectively, and is reflected in selling, general and
administrative expenses in the consolidated statements of
operations.
Amortization expense related to intangible assets, which is an
estimate for each future year and subject to change, is as
follows:
|
|
|
|
|
2010
|
|
$
|
295
|
|
2011
|
|
|
215
|
|
2012
|
|
|
150
|
|
2013
|
|
|
106
|
|
2014
|
|
|
77
|
|
2015 and thereafter
|
|
|
88
|
|
|
|
|
|
|
Total
|
|
$
|
931
|
|
|
|
|
|
|
F-13
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
|
|
6.
|
Accrued
Expenses and Other Current Liabilities
|
Accrued expenses and other current liabilities is summarized as
follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Dividends payable
|
|
$
|
582
|
|
|
$
|
2,367
|
|
Accrued payroll and related items
|
|
|
410
|
|
|
|
184
|
|
Accrued professional and other expenses
|
|
|
927
|
|
|
|
580
|
|
Accrued interest
|
|
|
80
|
|
|
|
107
|
|
Accrued sales tax payable
|
|
|
518
|
|
|
|
534
|
|
Accrued advertising
|
|
|
87
|
|
|
|
17
|
|
Accrued receipts not invoiced
|
|
|
244
|
|
|
|
182
|
|
Other
|
|
|
77
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,925
|
|
|
$
|
4,144
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Long-Term
Debt, Capital Leases and Notes Payable
|
Long-term debt, capital leases and notes payable are summarized
as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Senior loan agreement
|
|
$
|
7,004
|
|
|
$
|
423
|
|
Subordinated convertible notes payable, net of original issue
discount
|
|
|
|
|
|
|
14,400
|
|
Capital leases
|
|
|
7
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,011
|
|
|
|
14,829
|
|
Less current portion
|
|
|
(7,006
|
)
|
|
|
(426
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt, capital leases and notes payable, net of current
portion
|
|
$
|
5
|
|
|
$
|
14,403
|
|
|
|
|
|
|
|
|
|
|
We entered into a Loan and Security Agreement in June 2005 that
was amended in April 2006, April 2007, June 2008, January 2009
and December 2009 (the Senior Loan Agreement)
pursuant to which the bank originally provided a $25,000
revolving loan commitment (the Revolver). In June
2008, the Revolver commitment was reduced to $20,000 and
subsequently reduced to $10,000 in January 2009. The Revolver is
subject to certain borrowing base restrictions based on eligible
accounts receivable, eligible inventory less reserves, and the
aggregate face amount of undrawn trade letters of credit of
which the Company is the beneficiary. The Revolver also provides
for letters of credit issued to our vendors, which reduce the
amount available for cash borrowings. The availability under the
Revolver was approximately $1,500 and $5,900 at
December 31, 2008 and 2009, respectively. All amounts
outstanding under the Revolver are due in full on June 30,
2010; however, at December 31, 2008 the Revolver is
classified as current in the consolidated balance sheet due to
the terms and conditions included in the Senior Loan Agreement.
At December 31, 2008 and 2009, there were outstanding
letters of credit under the Revolver totaling approximately $296
and $371, respectively.
Interest on the outstanding borrowings under the Revolver is
payable quarterly at the option of the Company at (i) the
LIBOR Market Index Rate plus the applicable margin or
(ii) the greater of (a) the federal funds rate plus
0.50% or (b) the banks prime rate plus in either case
the applicable margin. At December 31, 2009 and 2008, the
interest rate on the outstanding balance on the Revolver was
based on the banks prime rate plus 2.50% and 0.75%,
respectively (5.75% at December 31, 2009 and 4.00% at
December 31, 2008). Beginning in January 2010 and
F-14
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
effective with the December 2009 amendment, the applicable
margin for both the prime rate and the federal funds rate
options was decreased to 1.00%.
We are required to pay a fee of 3.50% on the outstanding amount
of letters of credit issued under the Revolver. In addition,
there is a fee of 0.50% on the unused portion of the Revolver
lending commitment.
On January 7, 2009, we entered into a Loan and Security
Agreement with our primary bank that was subordinated to the
Senior Loan Agreement (the Prior Subordinated Loan
Agreement), pursuant to which a $10,000 term loan was
provided (the Prior Subordinated Loan). The bank
acted as syndication agent and provided $4,100 of the facility.
Twelve existing investors in the Company (including our CEO and
CFO) funded the $5,900 balance of the facility. The proceeds of
the Prior Subordinated Loan were used to repay the then
outstanding balance on the Revolver and for working capital
purposes. Interest on the Prior Subordinated Loan was at the
banks prime rate plus 10.0%, payable monthly. The Prior
Subordinated Loan had an original maturity of January 6,
2010; however, the balance was paid in full in December 2009. In
connection with the Prior Subordinated Loan the Company paid
fees totaling approximately $575, which were deferred and
amortized as a component of interest expense.
The Senior Loan Agreement contains and the Prior Subordinated
Loan Agreement contained various conditions precedent to
extensions of credit and restrictive covenants including minimum
EBITDA and gross sales requirements. We were in violation of
certain covenants and received a waiver from the bank at
December 31, 2009. Substantially all of the Companys
assets are pledged as collateral to for borrowings under the
Senior Loan Agreement and were pledged as collateral for
borrowings under the Prior Subordinated Loan Agreement.
On December 30, 2009, we issued Subordinated Convertible
Promissory Notes (Notes) to existing and new
investors that have a total face value of $15,000 and are
subordinated to the Senior Loan Agreement. The Notes pay
quarterly interest at 14% and are payable in full on
March 31, 2011 (the Maturity Date). We may
prepay the Notes at any time prior to the Maturity Date with a
prepayment premium of 2% of the principal amount being prepaid,
except where such prepayment is made in connection with an
initial public offering of our common stock. Upon (i) an
initial public offering of the Companys common stock
resulting in net proceeds to the Company of at least $30,000 (a
Qualified IPO), (ii) the consummation by the
Company of a merger or consolidation with or into another entity
or other corporate reorganization in which the Company is not
the surviving entity, (iii) the sale of all of the capital
stock of the Company, or (iv) the sale of all or
substantially all of the assets of the Company, the holders of
the Notes may elect to sell to the Company and the Company will
be required to purchase the Notes in full by payment of an
amount equal to the unpaid principal balance thereof, plus, all
unpaid interest accrued thereon through the date of redemption,
plus in the case of clauses (ii), (iii), and (iv) above the
principal amount of the Notes being redeemed multiplied by the
prepayment premium of 2%.
In addition, if a Qualified IPO has not occurred by the Maturity
Date and the Company has completed a sale of shares of its
capital stock within 90 days of the Maturity Date or
anytime thereafter resulting in net proceeds to the Company of
at least $5,000 (a Qualified Equity Financing), all
unpaid principal on any Notes and unpaid accrued interest is
convertible, at the option of the Note holders, into the
securities being issued in the Qualified Equity Financing. If
the Notes become convertible there would be a beneficial
conversion that would be calculated as the intrinsic value at
the measurement or commitment date.
The Notes are accompanied by detachable warrants with a value at
issuance equal to 4% of the face amount of the corresponding
Notes. The exercise price per share of the warrants is equal to
80% of the purchase price per share of common stock in a
Qualified IPO (if a Qualified IPO has occurred by the time of
such exercise) or ($13.04 if a Qualified IPO has not occurred by
the time of such exercise). The total number of shares of common
stock issuable under the warrants is 106. The initial fair value
of the warrants is $600 and resulted in an original issue
discount on the Notes which will be amortized as interest
expense over the term of the Notes. The fair value of the
warrants is included in other long-term liabilities in the
consolidated balance sheet based upon the estimated fair value
and will
F-15
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
be adjusted periodically until such time as the exercise price
becomes fixed at which time the then fair value will be
reclassified as a component of stockholders equity
(deficit).
Our CEO, CFO, Vice President of Products and certain members of
our Board of Directors (either individually or through an
affiliated entity) purchased an aggregate of $3,520 of the Notes
with an aggregate of 25 warrants to purchase common stock.
Substantially all of the Companys assets are pledged as
collateral to secure the Notes, which security interest is
junior to that securing the Senior Loan Agreement.
The aggregate future maturities of long-term debt, capital
leases and notes payable as of December 31, 2009 are as
follows:
|
|
|
|
|
2010
|
|
$
|
426
|
|
2011
|
|
|
15,003
|
|
|
|
|
|
|
|
|
|
15,429
|
|
Less: Amounts representing interest
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,429
|
|
|
|
|
|
|
Common
Stock
In 2008, we amended and restated our Certificate of
Incorporation to increase the number of shares authorized to be
issued to 200,000 shares of $0.001 par value common
stock.
Series A
Preferred Stock
We are authorized to issue up to 100,000 shares of
$0.001 par value preferred stock. We designated
18,780 shares of preferred stock as Series A Preferred
Stock (Series A). At December 31, 2009 and
2008, the Company had outstanding 18,755 shares of the
Series A that were issued at a price of $1.00 per share.
Dividends on the Series A are neither mandatory nor
cumulative; however, no dividends will be paid on common stock
unless equivalent dividends are paid on the Series A on a
pro rata basis with the common stock and Series C.
In liquidation, either voluntary or involuntary, holders of the
Series A will be entitled to receive an amount equal to the
original purchase price per share together with any dividends
declared but unpaid thereon in preference to the holders of the
common stock. Each share of the Series A is convertible, at
the option of the holder, at any time into common stock. The
initial conversion price of the shares is equal to the
consideration paid per share and the initial conversion ratio is
1:1. Conversion will be mandatory in the event of a public
offering of common stock at a price per share of at least $52.18
(as adjusted for any stock splits, reverse stock splits or other
similar events) resulting in gross proceeds to the Company of at
least $20,000 or upon a vote or written consent of the holders
of more than 50% of the then-outstanding shares of the
Series A.
Series B
Preferred Stock
The Company designated 30,000 shares of preferred stock as
Series B Preferred Stock (Series B). At
December 31, 2009 and 2008, the Company had outstanding
23,280 shares of Series B that were issued at a price
of $1.00 per share. The Series B shares are non-voting and
non-convertible. Each share of the Series B is accompanied
by a warrant to purchase 0.026 shares of common stock with
an exercise price of $13.04 per share (both subject to
adjustment in the case of stock splits, reverse stock splits or
other similar events). Each warrant will be exercisable through
the earliest to occur of (i) the sixteenth
(16th)
day after delivery of a notice of an exercise event (which
includes an initial public offering of the Companys common
stock resulting in proceeds of at least $20,000), (ii) ten
F-16
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
(10) years from the date of such warrant, or
(iii) five (5) years after the date of exercise of
either the put or repurchase rights with respect to the
Series B. The value of the warrants was determined to be
approximately $3,252 and is included in common stock warrants on
the consolidated balance sheet. No warrants had been exercised
as of December 31, 2009.
Dividends on the Series B accrue at an annual rate of $0.10
per share or 10%, payable when declared by the Board of
Directors, and are cumulative. All accrued dividends on the
Companys Series B will be paid prior to the payment
of any dividends on the Companys Series A,
Series C or common stock. In January 2009, the Company
offered Series B investors the option to suspend their
current dividend payment of 10% in exchange for a dividend
accrual of 15% for 2009. In January 2010 the dividends began to
accrue at 10%. Series B dividends paid during 2007, 2008
and 2009 were $1,563, $2,327 and $1,257, respectively. At
December 31, 2008 and 2009 the accrued and unpaid dividends
were $582 and $2,367, respectively, which is included in accrued
expenses and other current liabilities in the consolidated
balance sheet.
In liquidation, either voluntary or involuntary, holders of the
Series B will be entitled to receive an amount equal to the
original purchase price per share together with any dividends
declared but unpaid thereon in preference to the holders of the
Companys Series A and common stock.
Series C
Preferred Stock
In 2008, the Company amended and restated its Certificate of
Incorporation to increase the number of shares authorized to be
issued and designated 14,000 shares of preferred stock as
Series C. As of December 31, 2009 and 2008, the
Company had issued 12,520 shares of the Series C, at a
price of $2.40 per share. The Series C is convertible into
the Companys common stock based upon a formula taking into
account the Companys sales for the year ending
December 31, 2008, which resulted in a conversion ratio of
1:0.184 as of December 31, 2008. In accordance with GAAP
the Company determined that a beneficial conversion resulted
from the change in the conversion ratio from 1:0.096 on the
issuance date of the Series C to 1:0.184 on
December 31, 2008. The value of the beneficial conversion
feature is analogous to a dividend and is recognized as a return
to the preferred stockholders over the period from the date of
issuance to the commitment or measurement date, which was
December 31, 2008. At December 31, 2008, the Company
recorded a beneficial conversion or deemed dividend of
approximately $17,548.
Conversion of the Series C will be mandatory in the event of a
public offering of common stock at a price per share of at least
$52.18 (as adjusted for any stock splits, reverse stock splits
or similar events) resulting in gross proceeds to the Company of
at least $20,000 or upon a vote or written consent of the
holders of more than 50% of the then-outstanding shares of
Series C.
Each share of Series C is accompanied by a warrant to
purchase 0.01 shares of common stock with an exercise price
of $20.66 per share (subject to adjustment in the case of stock
splits, reverse stock splits or other similar events). Each
warrant will be exercisable through the earlier to occur of
(i) the sixteenth
(16th)
day after delivery of a notice of an exercise event (which
includes an initial public offering of the Companys common
stock resulting in gross proceeds to the Company of at least
$20,000) or (ii) December 14, 2017. The total value of
the warrants was determined to be approximately $501 and is
included in common stock warrants in the Consolidated Balance
Sheet. No warrants had been exercised as of December 31,
2009.
Dividends on Series C are neither mandatory nor cumulative;
however, no dividends will be paid on common stock or the
Series A unless equivalent dividends are paid on the
Series C.
In liquidation, either voluntary or involuntary, holders of the
Series C will be entitled to receive an amount equal to the
original purchase price per share together with any dividends
declared but unpaid thereon in preference to the
F-17
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
holders of the Companys Series A, Series B and
common stock. Each share of Series C is convertible, at the
option of the holder, at any time into common stock.
|
|
9.
|
Stock-Based
Compensation
|
The Company has a stock-based compensation plan (the
Plan) for employees, including officers,
non-employee directors and non-employee consultants. The Plan
provides for the issuance of incentive or nonqualified stock
options and restricted common stock. The Company has reserved
431 shares of common stock for issuance under the Plan.
We account for our stock-based employee and director
compensation plans in accordance with ASC 718,
Compensation-Stock Compensation. ASC 718 requires
recognition of the cost of employee services received in
exchange for an award of equity instruments in the financial
statements over the period the employee is required to perform
the services in exchange for the award (presumptively the
vesting period). In 2007, 2008 and 2009 compensation expense
related to stock options was approximately $157, $215 and $298
and is included in selling, general, and administrative expenses
from continuing operations, respectively, and approximately $25,
$61 and $80 is included in discontinued operations, respectively.
Stock options are granted with an exercise price equal to 100%
of the fair market value per share of the common stock on the
date of grant. The options generally vest over a period of one
to four years, based on graded vesting, and expire ten years
from the date of grant. The terms and conditions of the awards
made under the Plan vary but, in general, are at the discretion
of the board of directors or its appointed committee.
We measure the fair value of each stock option grant at the date
of grant using a Black-Scholes option pricing model. The
weighted-average fair value per share of the options granted
during 2007, 2008 and 2009 was $6.99, $8.66, and $5.11
respectively. The following assumptions were used in arriving at
the fair value of options granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2008
|
|
2009
|
|
Expected life of options in years
|
|
|
6.3
|
|
|
|
5.9
|
|
|
|
5.5
|
|
Risk-free interest rate
|
|
|
4.6
|
%
|
|
|
3.2
|
%
|
|
|
2.0
|
%
|
Expected volatility
|
|
|
45.0
|
%
|
|
|
39.0
|
%
|
|
|
39.0
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The risk free interest rate is based on the U.S. Treasury
rate for the expected life of the options at the time of grant.
As a non-public entity, historic volatility is not available for
our shares. As a result, we estimated volatility based on a peer
group of companies, which collectively provide a reasonable
basis for estimating volatility. We intend to continue to
consistently use the same group of publicly traded peer
companies to determine volatility in the future until sufficient
information regarding volatility of our share price becomes
available or the selected companies are no longer suitable for
this purpose. The expected life is based on the estimated
average life of the options, and forfeitures are estimated on
the date of grant based on certain historical data and
management estimates.
F-18
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
A summary of awards under the Plan at December 31, 2007,
2008 and 2009, and changes during the years then ended is
presented in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average Price
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Life (Years)
|
|
|
Value
|
|
|
Outstanding at December 31, 2006
|
|
|
202
|
|
|
$
|
10.85
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
65
|
|
|
|
14.40
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6
|
)
|
|
|
10.44
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(25
|
)
|
|
|
10.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
236
|
|
|
|
11.79
|
|
|
|
8.1
|
|
|
$
|
3,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
|
131
|
|
|
$
|
10.75
|
|
|
|
8.1
|
|
|
$
|
3,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for grant at December 31, 2007
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
|
236
|
|
|
$
|
11.79
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
53
|
|
|
|
20.66
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1
|
)
|
|
|
13.04
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(17
|
)
|
|
|
18.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
271
|
|
|
|
13.15
|
|
|
|
7.5
|
|
|
$
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008
|
|
|
160
|
|
|
$
|
10.85
|
|
|
|
6.7
|
|
|
$
|
349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for grant at December 31, 2008
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2008
|
|
|
271
|
|
|
$
|
13.15
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
14
|
|
|
|
13.04
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
13.04
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(5
|
)
|
|
|
12.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
|
280
|
|
|
|
13.15
|
|
|
|
6.6
|
|
|
$
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2009
|
|
|
211
|
|
|
$
|
12.63
|
|
|
|
6.2
|
|
|
$
|
329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for grant at December 31, 2009
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2009 a total of 14 common stock options were granted, all
issued on one date during the first quarter, at an exercise
price of $13.04 per share. The estimated fair value of the
common stock on the issuance date was $13.04 per share. The fair
value determination was based in part upon the finalization of
the conversion ratio of the Series C Preferred Stock on
December 31, 2008. The board of directors also considered
the Companys most recent independent valuation and then
current expectations of the Companys future performance in
determining the fair value.
The total intrinsic value of the options exercised during 2007,
2008 and 2009 was approximately $16, $8 and $0, respectively,
with proceeds to the Company of $62, $13 and $2, respectively.
As of December 31, 2009 there was approximately $244 of
total unrecognized compensation cost related to non-vested
stock-based compensation grants. This unrecognized compensation
is expected to be recognized over a weighted-average period of
approximately 1.0 years.
F-19
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
Employee
Stock Purchase Plan
In March 2010 our Board of Directors adopted the 2010 Employee
Stock Purchase Plan (the 2010 ESPP). The 2010 ESPP
provides for the purchase of common stock and is generally
available to all employees. The Company has reserved
24 shares of common stock for issuance under the 2010 ESPP.
2010
Omnibus Long-Term Incentive Plan
In March 2010 our Board of Directors adopted the 2010 Omnibus
Long-Term Incentive Plan (the 2010 Plan). The 2010
Plan is limited to employees, officers, non-employee directors,
consultants and advisors. The 2010 Plan provides for the
issuance of incentive or nonqualified stock options, restricted
stock, stock appreciation rights, restricted stock units, cash-
or stock-based performance awards and other stock-based awards.
The Company has reserved 719 shares of common stock for
issuance under the 2010 Plan.
|
|
10.
|
Commitments
and Contingencies
|
Operating
Leases
The Company leases office space and vehicles under various lease
arrangements. Total rental expense from continuing operations
for 2007, 2008 and 2009 was approximately $1,658, $1,496 and
$1,101, respectively. The rental expense includes $693 and $325
in 2007 and 2008, respectively, paid to PWC Leasing, LLC, which
is an entity with common ownership. On June 30, 2008, we
purchased the leased assets of PWC Leasing, LLC at the fair
value of $3,500 and terminated the related lease agreement. At
December 31, 2009, future minimum rental commitments under
noncancelable operating leases are as follows:
|
|
|
|
|
2010
|
|
$
|
691
|
|
2011
|
|
|
472
|
|
2012
|
|
|
369
|
|
2013
|
|
|
266
|
|
2014
|
|
|
128
|
|
2015 and thereafter
|
|
|
82
|
|
|
|
|
|
|
Total
|
|
$
|
2,008
|
|
|
|
|
|
|
Sales
Tax
We routinely purchase equipment for use in operations from
various vendors. These purchases are subject to sales tax
depending on the equipment type and local sales tax regulations,
however, certain vendors have not assessed the appropriate sales
tax. For purchases that are subject to sales tax in which the
vendor did not assess the appropriate amount, we accrue an
estimate of the sales tax liability we ultimately expect to pay.
Other
Contingencies
In the normal course of business the Company may be involved in
various claims and legal actions. Management believes that the
outcome of such legal actions will not have a significant
adverse effect on the Companys financial position, results
of operations or cash flows.
F-20
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
There is no income tax provision (benefit) for federal or state
income taxes as the Company has incurred operating losses since
inception.
A reconciliation of the statutory U.S. federal tax rate and
effective tax rates is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
Federal statutory taxes
|
|
|
34
|
.0
|
|
%
|
|
|
34
|
.0
|
|
%
|
|
|
34
|
.0
|
|
%
|
State income taxes, net of federal tax benefit
|
|
|
3
|
.5
|
|
%
|
|
|
3
|
.9
|
|
%
|
|
|
3
|
.9
|
|
%
|
Permanent differences
|
|
|
(0
|
.5
|
)
|
%
|
|
|
(0
|
.2
|
)
|
%
|
|
|
(0
|
.2
|
)
|
%
|
Change in valuation allowance
|
|
|
(35
|
.9
|
)
|
%
|
|
|
(37
|
.7
|
)
|
%
|
|
|
(37
|
.9
|
)
|
%
|
Other
|
|
|
(1
|
.1
|
)
|
%
|
|
|
0
|
.0
|
|
%
|
|
|
0
|
.2
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
.0
|
|
%
|
|
|
0
|
.0
|
|
%
|
|
|
0
|
.0
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes are recorded based upon differences
between the financial reporting and income tax basis of assets
and liabilities. The following deferred income taxes are
recorded:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Federal net operating loss carryforward
|
|
$
|
15,131
|
|
|
$
|
18,802
|
|
State net economic loss carryforward
|
|
|
1,967
|
|
|
|
2,314
|
|
Intangible assets
|
|
|
1,240
|
|
|
|
1,325
|
|
Allowance for bad debts
|
|
|
538
|
|
|
|
506
|
|
Reserve for obsolescence
|
|
|
546
|
|
|
|
3
|
|
Stock-based compensation
|
|
|
254
|
|
|
|
399
|
|
Other
|
|
|
84
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
19,760
|
|
|
|
23,442
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
$
|
(861
|
)
|
|
$
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
(861
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(18,899
|
)
|
|
|
(23,375
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax liability
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion of the deferred tax assets will be realized. The
ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in
which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities,
available taxes in the carryback periods, projected future
taxable income, and tax planning strategies in making this
assessment.
Accordingly, in connection with the losses incurred in 2008 and
2009, the Company has provided a valuation allowance of $18,899
and $23,375 at December 31, 2008 and 2009, respectively to
reduce the net deferred tax asset to a realizable value. The net
increase in the valuation allowance of $4,476 primarily reflects
the net increase in the federal and state NOL deferred tax
assets.
F-21
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
The Company has approximately $55,000 in federal net operating
loss carryforwards that begin to expire in 2025, and
approximately $51,000 state net economic loss carryforwards
that begin to expire in 2020. Utilization of net operating loss
carryforwards and other deferred tax assets may be subject to
certain limitations under Internal Revenue Code Section 382
and similar state income tax provisions.
We manage our business primarily through two reporting segments,
Primo Bottled Water Exchange (Exchange) and Primo Products
(Products). Our Exchange segment sells three- and five-gallon
purified bottled water through retailers in each of the
contiguous United States. We service the retail locations
through our national network of primarily independent bottlers
and distributors. Our Products segment sells water dispensers
that are designed to dispense Primo and other
dispenser-compatible bottled water through major U.S. retailers.
We design, market and arrange for certification and inspection
of our products.
We utilize segment net sales and segment income (loss) from
operations before depreciation and amortization because we
believe they provide useful information for effectively
allocating resources among business segments, evaluating the
health of our business segments based on metrics that management
can actively influence, and gauging our investments and our
ability to service, incur or pay down debt.
Operating segments that do not meet quantitative thresholds for
segment reporting are included in Other.
Cost of sales for Exchange consists of costs for bottling,
related packaging materials and distribution costs for our
bottled water. Cost of sales for Products consists of contract
manufacturing, freight, duties, and warehousing costs of our
water dispensers.
Selling, general and administrative expenses consist primarily
of personnel costs for sales, marketing, operations support,
customer service, as well as other supporting cost for operating
the segment.
Selling, general and administrative expenses not specifically
related to operating segments are shown separately as Corporate.
Corporate expenses are comprised mainly of the compensation and
other related expenses for corporate support, information
systems and human resources and administration. Corporate
expenses also include certain professional fees and expenses and
compensation of our Board of Directors.
The following table presents segment information for each of the
last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Segment Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange
|
|
$
|
10,875
|
|
|
$
|
19,237
|
|
|
$
|
22,638
|
|
Products
|
|
|
949
|
|
|
|
13,758
|
|
|
|
22,824
|
|
Other
|
|
|
1,818
|
|
|
|
1,874
|
|
|
|
1,611
|
|
Inter-company elimination
|
|
|
(189
|
)
|
|
|
(222
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
13,453
|
|
|
$
|
34,647
|
|
|
$
|
46,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Segment Income (Loss) From Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange
|
|
$
|
(2,834
|
)
|
|
$
|
(1,267)
|
|
|
$
|
3,374
|
|
Products
|
|
|
(631
|
)
|
|
|
(1,447)
|
|
|
|
(272
|
)
|
Other
|
|
|
(175
|
)
|
|
|
(116)
|
|
|
|
(34
|
)
|
Inter-company elimination
|
|
|
|
|
|
|
(13)
|
|
|
|
9
|
|
Corporate
|
|
|
(5,229
|
)
|
|
|
(7,077)
|
|
|
|
(4,789
|
)
|
Depreciation and amortization
|
|
|
(3,366
|
)
|
|
|
(3,618)
|
|
|
|
(4,205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(12,235
|
)
|
|
$
|
(13,538)
|
|
|
$
|
(5,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange
|
|
$
|
2,084
|
|
|
$
|
2,592
|
|
|
$
|
3,124
|
|
Products
|
|
|
|
|
|
|
69
|
|
|
|
133
|
|
Other
|
|
|
774
|
|
|
|
618
|
|
|
|
491
|
|
Corporate
|
|
|
508
|
|
|
|
339
|
|
|
|
457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,366
|
|
|
$
|
3,618
|
|
|
$
|
4,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange
|
|
$
|
4,487
|
|
|
$
|
8,174
|
|
|
$
|
1,916
|
|
Products
|
|
|
105
|
|
|
|
336
|
|
|
|
95
|
|
Other
|
|
|
189
|
|
|
|
238
|
|
|
|
165
|
|
Corporate
|
|
|
212
|
|
|
|
672
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,993
|
|
|
$
|
9,420
|
|
|
$
|
2,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
Identifiable Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange
|
|
|
|
|
|
$
|
18,939
|
|
|
$
|
16,685
|
|
Products
|
|
|
|
|
|
|
3,541
|
|
|
|
2,655
|
|
Other
|
|
|
|
|
|
|
2,000
|
|
|
|
1,601
|
|
Corporate
|
|
|
|
|
|
|
1,517
|
|
|
|
1,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
25,997
|
|
|
$
|
22,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
Discontinued
Operations
|
In July, 2008, the Company and its Board of Directors made the
decision to divest the operations of its subsidiary, Prima
Bottled Water, Inc. (Prima). As a result, the
related assets, liabilities and results of the operations of
Prima are accounted for as discontinued operations. In December
2009, the Company completed the divestiture by distributing the
stock in Prima to existing stockholders of the Company. Each
stockholder received a number of shares in Prima based upon such
stockholders proportionate ownership of our Series A,
Series C and common stock on an as converted basis as of
the date of distribution. This transaction is reflected as a
dividend of subsidiary stock in the statement of
stockholders equity (deficit) in the amount of $2,050, the
book value of the net assets of Prima as of the distribution
date.
F-23
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
Net sales and operating results classified as discontinued
operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
Net sales
|
|
$
|
239
|
|
|
$
|
1,888
|
|
|
$
|
561
|
|
Cost of sales
|
|
|
443
|
|
|
|
4,456
|
|
|
|
428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
(204
|
)
|
|
|
(2,568
|
)
|
|
|
133
|
|
Selling, general and administrative expenses
|
|
|
1,700
|
|
|
|
2,930
|
|
|
|
1,313
|
|
Impairment of assets held for sale
|
|
|
|
|
|
|
174
|
|
|
|
2,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,904
|
)
|
|
|
(5,672
|
)
|
|
|
(3,587
|
)
|
Interest (expense) income, net
|
|
|
|
|
|
|
(66
|
)
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations, before income taxes
|
|
|
(1,904
|
)
|
|
|
(5,738
|
)
|
|
|
(3,650
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(1,904
|
)
|
|
$
|
(5,738
|
)
|
|
$
|
(3,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The assets and liabilities that comprise the discontinued
operations are summarized as follows at December 31, 2008:
|
|
|
|
|
Discontinued Assets
|
|
|
|
|
Accounts receivable
|
|
$
|
246
|
|
Inventory
|
|
|
1,962
|
|
Property and equipment
|
|
|
2,185
|
|
Other
|
|
|
180
|
|
|
|
|
|
|
|
|
$
|
4,573
|
|
|
|
|
|
|
Discontinued Liabilities
|
|
|
|
|
Accounts payable
|
|
$
|
476
|
|
Notes payable
|
|
|
829
|
|
Other
|
|
|
17
|
|
|
|
|
|
|
|
|
$
|
1,322
|
|
|
|
|
|
|
|
|
14.
|
Employee
Retirement Savings Plan
|
Effective April 1, 2005, the Company established the Primo
Water Corporation 401(k) Plan & Trust retirement plan
covering substantially all full-time employees who are at least
21 years of age and who have completed at least two months
of service. Plan participants may make before tax elective
contributions up to the maximum percentage of compensation and
dollar amount allowed under the Internal Revenue Code. The
Companys matching contributions to the Plan are
discretionary and determined with respect to each Plan year. The
Company did not make any matching contributions during 2007,
2008 or 2009. Plan participants are 100% vested in their
elective contributions at all times, and are vested 25% per year
of service for four years in the Companys discretionary
contributions. A year of service for vesting purposes is
1,000 hours of service in a Plan year. In 2010, our Board
of Directors established a Company match of up to 50% of the
employee contributions up to 6% of their salaries, with 50% of
the matching amount being contingent upon our achievement of
certain specified objectives to be determined by our Board of
Directors.
F-24
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
The Companys board of directors and stockholders approved
an amended and restated certificate of incorporation that will,
prior to the effectiveness of the registration statement, effect
a 1-for-10.435 reverse stock split of all the outstanding shares
of common stock and a proportional adjustment to the existing
conversion ratios for each series of preferred stock and the
Company will amend and restate our certificate of incorporation
to provide that the authorized capital stock will consist of
(1) 70,000 shares of common stock, $0.001 par value
per share and (2) 65,000 shares of preferred stock,
$0.001 par value per share. Accordingly, all common share and
per common share amounts for all periods presented in these
consolidated financial statements and notes thereto, have been
adjusted retroactively, where applicable, to reflect this
reverse stock split and adjustment of the preferred stock
conversion ratios.
F-25
|
|
|
|
|
|
|
June 30,
|
|
|
|
2010
|
|
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash
|
|
$
|
760
|
|
Accounts receivable, net
|
|
|
5,274
|
|
Inventories
|
|
|
3,513
|
|
Prepaid expenses and other current assets
|
|
|
1,701
|
|
|
|
|
|
|
Total current assets
|
|
|
11,248
|
|
|
|
|
|
|
Bottles, net
|
|
|
2,088
|
|
Property and equipment, net
|
|
|
14,518
|
|
Intangible assets, net
|
|
|
940
|
|
Other assets
|
|
|
1,738
|
|
|
|
|
|
|
Total assets
|
|
$
|
30,532
|
|
|
|
|
|
|
Liabilities and stockholders deficit
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
6,755
|
|
Accrued expenses and other current liabilities
|
|
|
5,219
|
|
Current portion of long-term debt, capital leases and notes
payable
|
|
|
23,516
|
|
|
|
|
|
|
Total current liabilities
|
|
|
35,490
|
|
|
|
|
|
|
Long-term debt, capital leases and notes payable, net of current
portion
|
|
|
47
|
|
Other long-term liabilities
|
|
|
1,198
|
|
|
|
|
|
|
Total liabilities
|
|
|
36,735
|
|
Commitments and contingencies
|
|
|
|
|
Stockholders deficit
|
|
|
|
|
Common stock, $0.001 par value
200,000 shares authorized, 1,457 shares issued and
outstanding
|
|
|
1
|
|
Preferred stock, $0.001 par value
100,000 shares authorized
Series A preferred stock, 18,755 shares issued and
outstanding
|
|
|
19
|
|
Series B preferred stock, 23,280 shares issued and
outstanding
|
|
|
23
|
|
Series C preferred stock, 12,520 shares issued and
outstanding
|
|
|
13
|
|
Additional paid-in capital
|
|
|
87,064
|
|
Common stock warrants
|
|
|
3,797
|
|
Accumulated deficit
|
|
|
(97,120
|
)
|
|
|
|
|
|
Total stockholders deficit
|
|
|
(6,203
|
)
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
30,532
|
|
|
|
|
|
|
See accompanying notes.
F-26
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Net sales
|
|
$
|
24,500
|
|
|
$
|
21,002
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
20,368
|
|
|
|
16,672
|
|
Selling, general and administrative expenses
|
|
|
5,041
|
|
|
|
5,814
|
|
Depreciation and amortization
|
|
|
2,078
|
|
|
|
2,010
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
27,487
|
|
|
|
24,496
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,987
|
)
|
|
|
(3,494
|
)
|
Interest expense
|
|
|
(1,037
|
)
|
|
|
(1,464
|
)
|
Other expenses, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes
|
|
|
(4,024
|
)
|
|
|
(4,958
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(4,024
|
)
|
|
|
(4,958
|
)
|
Loss from discontinued operations, net of income taxes
|
|
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(4,381
|
)
|
|
|
(4,958
|
)
|
Preferred dividends
|
|
|
(1,521
|
)
|
|
|
(1,164
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(5,902
|
)
|
|
$
|
(6,122
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share:
|
|
|
|
|
|
|
|
|
Loss from continuing operations attributable to common
stockholders
|
|
$
|
(3.82
|
)
|
|
$
|
(4.21
|
)
|
Loss from discontinued operations attributable to common
stockholders
|
|
|
(0.24
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(4.06
|
)
|
|
$
|
(4.21
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average common shares outstanding
|
|
|
1,453
|
|
|
|
1,455
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-27
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,381
|
)
|
|
$
|
(4,958
|
)
|
Less: Loss from discontinued operations
|
|
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
|
(4,024
|
)
|
|
|
(4,958
|
)
|
Adjustments to reconcile net loss from continuing operations to
net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
2,078
|
|
|
|
2,010
|
|
Stock-based compensation expense
|
|
|
149
|
|
|
|
280
|
|
Non-cash interest expense
|
|
|
335
|
|
|
|
305
|
|
Bad debt expense
|
|
|
(6
|
)
|
|
|
28
|
|
Other
|
|
|
7
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(2,729
|
)
|
|
|
(3,414
|
)
|
Inventories
|
|
|
(456
|
)
|
|
|
(1,664
|
)
|
Prepaid expenses and other assets
|
|
|
(456
|
)
|
|
|
(618
|
)
|
Accounts payable
|
|
|
3,184
|
|
|
|
3,336
|
|
Accrued expenses and other liabilities
|
|
|
(508
|
)
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(2,426
|
)
|
|
|
(4,558
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(845
|
)
|
|
|
(1,145
|
)
|
Purchases of bottles, net of disposals
|
|
|
(476
|
)
|
|
|
(558
|
)
|
Proceeds from the sale of property and equipment
|
|
|
|
|
|
|
4
|
|
Additions to and acquisitions of intangible assets
|
|
|
(24
|
)
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(1,345
|
)
|
|
|
(1,712
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
Net borrowings (payments) on revolving line of credit
|
|
|
(3,033
|
)
|
|
|
8,450
|
|
Issuance of long term debt
|
|
|
10,000
|
|
|
|
|
|
Note payable and capital lease payments
|
|
|
(1
|
)
|
|
|
(2
|
)
|
Debt issuance costs
|
|
|
(589
|
)
|
|
|
(110
|
)
|
Prepaid equity issuance costs
|
|
|
|
|
|
|
(1,391
|
)
|
Net change in book overdraft
|
|
|
(268
|
)
|
|
|
261
|
|
Proceeds from issuance of common stock
|
|
|
2
|
|
|
|
47
|
|
Dividends paid
|
|
|
(807
|
)
|
|
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
5,304
|
|
|
|
7,030
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash from continuing operations
|
|
|
1,533
|
|
|
|
760
|
|
Cash, beginning of period
|
|
|
516
|
|
|
|
|
|
Cash used in discontinued operations from:
|
|
|
|
|
|
|
|
|
Operating Activities
|
|
|
(813
|
)
|
|
|
|
|
Investing Activities
|
|
|
(26
|
)
|
|
|
|
|
Financing Activities
|
|
|
(433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in discontinued operations
|
|
|
(1,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
777
|
|
|
$
|
760
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-28
PRIMO
WATER CORPORATION AND SUBSIDIARIES
(in
thousands, except per share amounts)
Business
Primo Water Corporation (together with its consolidated
subsidiaries, Primo, we,
our, the Company) is a rapidly growing
provider of three- and five-gallon purified bottled water and
water dispensers sold through major retailers nationwide.
Unaudited
Interim Financial Information
The accompanying interim consolidated financial statements have
been prepared in accordance with our accounting practices
described in our audited consolidated financial statements for
the year ending December 31, 2009, and are unaudited. The
unaudited interim consolidated financial statements should be
read in conjunction with the audited consolidated financial
statements and accompanying notes for the year ended
December 31, 2009. The accompanying interim consolidated
financial statements are presented in accordance with the rules
and regulations of the Securities and Exchange Commission and,
accordingly, do not include all the disclosures required by
generally accepted accounting principles in the United States
(GAAP) with respect to annual financial statements.
In managements opinion, the interim consolidated financial
statements include all adjustments, which consist only of normal
recurring adjustments, necessary for a fair statement of the
Companys results of operations for the periods presented.
Revenue
Recognition
Revenue is recognized for the sale of three- and five-gallon
purified bottled water upon either the delivery of inventory to
the retail store or the purchase by the consumer. Revenue is
either recognized as an exchange transaction (where a discount
is provided on the purchase of a three- or five-gallon bottle of
purified water for the return of an empty three- or five-gallon
bottle) or a non-exchange transaction. Revenues on exchange
transactions are recognized net of the exchange discount.
Our water dispensers are sold primarily through a direct-import
model, where we recognize revenue when title is transferred to
our retail customers. We have no contractual obligation to
accept returns of water dispensers nor do we guarantee water
dispenser sales. However, we will at times accept returns or
issue credits for water dispensers that have manufacturer
defects or that were damaged in transit. Revenues of water
dispensers are recognized net of an estimated allowance for
returns using an average return rate based upon historical
experience.
In addition, we offer our customers certain incentives such as
coupons and rebates that are netted against and reduce net sales
in the consolidated statements of operations. With the purchase
of certain of our water dispensers we include a coupon for a
free three-
or five-gallon bottle of water. No revenue is recognized with
respect to the redemption of the coupon for a free
three- and
five-gallon bottle of water and the estimated cost of the three-
and five-gallon bottle of water is included in cost of sales.
Fair
Value Measurements
Effective January 1, 2008, we adopted Accounting Standards
Codification (ASC) 820, Fair Value Measurements
and Disclosures, for financial assets and liabilities. ASC
820 defines fair value, establishes a framework for measuring
fair value in accordance with generally accepted accounting
principles and expands disclosures about fair value
measurements. The adoption of ASC 820 did not have a material
impact on the Companys financial condition or results of
operations.
ASC 820 defines fair value as the price that would be received
for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or
liability in an orderly transaction between
F-29
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
market participants on the measurement date. ASC 820 also
describes three levels of inputs that may be used to measure
fair value:
|
|
|
|
|
Level 1 quoted prices in active markets for
identical assets and liabilities.
|
|
|
Level 2 observable inputs other than quoted
prices in active markets for identical assets and liabilities.
|
|
|
Level 3 unobservable inputs in which there is
little or no market data available, which require the reporting
entity to develop its own assumptions.
|
The table below presents our assets and liabilities measured at
fair value on a recurring basis as of June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Common stock warrants
|
|
$
|
600
|
|
|
|
|
|
|
|
|
|
|
$
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of the common stock warrants,
which are measured at the estimated fair value on a recurring
basis:
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
600
|
|
Total unrealized loss (gain)
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010
|
|
$
|
600
|
|
|
|
|
|
|
The change in estimated fair value in the common stock warrants
is included in other expense in the consolidated statements of
operations.
The carrying amounts of the Companys financial
instruments, which include cash, accounts receivable, accounts
payable, and other accrued expenses, approximate their fair
values due to their short maturities. Based on borrowing rates
currently available to the Company for loans with similar terms,
the carrying value of long-term debt, capital leases and notes
payable approximates fair value.
Concentrations
of Risk
Our principal financial instruments subject to potential
concentration of credit risk are cash, accounts receivable,
accounts payable and accrued expenses. We invest our funds in a
highly rated institution and believe the financial risks
associated with cash is minimal. At June 30, 2010,
approximately $510 of our cash on deposit exceeded the federally
insured limits.
We perform ongoing credit evaluations of our customers
financial condition and maintain allowances for doubtful
accounts that we believe are sufficient to provide for losses
that may be sustained on realization of accounts receivable. We
had three customers that accounted for approximately 35%, 18%
and 16% of net sales for the six months ending June 30,
2009. We had two customers that accounted for approximately 46%
and 17% of net sales for the six months ending June 30,
2010. We had one customer that accounted for approximately 54%
of total trade receivables at June 30, 2010.
Basic and
Diluted Net loss Per Share
Net loss per share has been computed using the weighted average
number of shares of common stock outstanding during each period.
Diluted amounts per share include the dilutive impact, if any,
of the Companys outstanding potential common shares, such
as options and warrants and convertible preferred stock.
Potential common shares that are anti-dilutive are excluded from
the calculation of diluted net loss per common share.
Stock options, unvested shares of restricted stock and warrants
with respect to 865 and 1,059 shares, as well as 4,101 and
4,101 shares of convertible preferred stock, have been
excluded from the computation of the number of
F-30
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
shares used in the diluted earnings per share for the six months
ended June 30, 2009 and 2010, respectively, because the
Company incurred a net loss for each of these periods and their
inclusion would be anti-dilutive.
|
|
2.
|
Accrued
expenses and other current liabilities
|
Accrued expenses and other current liabilities is summarized as
follows at June 30, 2010:
|
|
|
|
|
Dividends payable
|
|
$
|
3,306
|
|
Accrued payroll and related items
|
|
|
235
|
|
Accrued professional and other expenses
|
|
|
715
|
|
Accrued interest
|
|
|
70
|
|
Accrued sales tax payable
|
|
|
450
|
|
Accrued receipts not invoiced
|
|
|
253
|
|
Other
|
|
|
190
|
|
|
|
|
|
|
|
|
$
|
5,219
|
|
|
|
|
|
|
|
|
3.
|
Long-Term
Debt, Capital Leases and Notes Payable
|
Long-term debt, capital leases and notes payable are summarized
as follows at June 30, 2010:
|
|
|
|
|
Senior loan agreement
|
|
$
|
8,874
|
|
Subordinated convertible notes payable, net of original issue
discount
|
|
|
14,640
|
|
Capital leases and notes payable
|
|
|
49
|
|
|
|
|
|
|
|
|
|
23,563
|
|
Less current portion
|
|
|
23,516
|
|
|
|
|
|
|
Long-term debt, capital leases and notes payable, net of current
portion
|
|
$
|
47
|
|
|
|
|
|
|
We entered into a Loan and Security Agreement in June 2005 that
was amended in April 2006, April 2007, June 2008, January 2009
and December 2009 (the Senior Loan Agreement)
pursuant to which the bank originally provided a $25,000
revolving loan commitment (the Revolver). In June
2008, the Revolver commitment was reduced to $20,000 and
subsequently reduced to $10,000 in January 2009. On June 1,
2010, we entered into the Seventh Amendment to the Senior Loan
Agreement, which extended the term of the agreement to
January 30, 2011, allows for up to a $3.0 million
overadvance, which is guaranteed by our CEO, and amended the
agreements financial covenants. The Revolver is subject to
certain borrowing base restrictions based on eligible accounts
receivable, eligible inventory less reserves, and the aggregate
face amount of undrawn trade letters of credit of which the
Company is the beneficiary. The Revolver also provides for
letters of credit issued to our vendors, which reduce the amount
available for cash borrowings. The availability under the
Revolver was approximately $920 at June 30, 2010. All
amounts outstanding under the Revolver are due in full on
January 30, 2011. At June 30, 2010, there were
outstanding letters of credit under the Revolver totaling
approximately $200.
Interest on the outstanding borrowings under the Revolver is
payable quarterly at the option of the Company at (i) the
LIBOR Market Index Rate plus the applicable margin or
(ii) the greater of (a) the federal funds rate plus
0.50% or (b) the banks prime rate plus in either case
the applicable margin. At June 30, 2010, the interest rate
on the outstanding balance on the Revolver was based on the
banks prime rate plus 2.00% (5.25% at June 30, 2010).
We are required to pay a fee of 3.50% on the outstanding amount
of letters of credit issued under the Revolver. In addition,
there is a fee of 0.50% on the unused portion of the Revolver
lending commitment.
F-31
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
On January 7, 2009, we entered into a Loan and Security
Agreement with our primary bank that was subordinated to the
Senior Loan Agreement (the Prior Subordinated Loan
Agreement), pursuant to which a $10,000 term loan was
provided (the Prior Subordinated Loan). The bank
acted as syndication agent and provided $4,100 of the facility.
Twelve existing investors in the Company (including our CEO and
CFO) funded the $5,900 balance of the facility. The proceeds of
the Prior Subordinated Loan were used to repay the then
outstanding balance on the Revolver and for working capital
purposes. Interest on the Prior Subordinated Loan was at the
banks prime rate plus 10.0%, payable monthly. The Prior
Subordinated Loan had an original maturity of January 6,
2010; however, the balance was paid in full in December 2009. In
connection with the Prior Subordinated Loan the Company paid
fees totaling approximately $575, which were deferred and
amortized as a component of interest expense.
The Senior Loan Agreement contains various conditions precedent
to extensions of credit and restrictive covenants including
minimum EBITDA, net worth and gross revenue requirements. We
were in violation of the EBITDA and net worth covenant and
received a waiver from the bank at March 31, 2010.
Substantially all of the Companys assets are pledged as
collateral to for borrowings under the Senior Loan Agreement.
On December 30, 2009, we issued Subordinated Convertible
Promissory Notes (Notes) to existing and new
investors that have a total face value of $15,000 and are
subordinated to the Senior Loan Agreement. The Notes pay
quarterly interest at 14% and are payable in full on
March 31, 2011 (the Maturity Date). We may
prepay the Notes at any time prior to the Maturity Date with a
prepayment premium of 2% of the principal amount being prepaid,
except where such prepayment is made in connection with an
initial public offering of our common stock. Upon (i) an
initial public offering of the Companys common stock
resulting in net proceeds to the Company of at least $30,000 (a
Qualified IPO), (ii) the consummation by the
Company of a merger or consolidation with or into another entity
or other corporate reorganization in which the Company is not
the surviving entity, (iii) the sale of all of the capital
stock of the Company, or (iv) the sale of all or
substantially all of the assets of the Company, the holders of
the Notes may elect to sell to the Company and the Company will
be required to purchase the Notes in full by payment of an
amount equal to the unpaid principal balance thereof, plus, all
unpaid interest accrued thereon through the date of redemption,
plus in the case of clauses (ii), (iii), and (iv) above the
principal amount of the Notes being redeemed multiplied by the
prepayment premium of 2%.
In addition, if a Qualified IPO has not occurred by the Maturity
Date and the Company has completed a sale of shares of its
capital stock within 90 days of the Maturity Date or
anytime thereafter resulting in net proceeds to the Company of
at least $5,000 (a Qualified Equity Financing), all
unpaid principal on any Notes and unpaid accrued interest is
convertible, at the option of the Note holders, into the
securities being issued in the Qualified Equity Financing. If
the Notes become convertible there would be a beneficial
conversion that would be calculated as the intrinsic value at
the measurement or commitment date.
The Notes are accompanied by detachable warrants with a value at
issuance equal to 4% of the face amount of the corresponding
Notes. The exercise price per share of the warrants is equal to
80% of the purchase price per share of common stock in a
Qualified IPO (if a Qualified IPO has occurred by the time of
such exercise) or ($13.04 if a Qualified IPO has not occurred by
the time of such exercise). The total number of shares of common
stock issuable under the warrants is 106. The initial fair value
of the warrants was $600 and resulted in an original issue
discount on the Notes which will be amortized as interest
expense over the term of the Notes. The fair value of the
warrants is included in other long-term liabilities in the
consolidated balance sheet based upon the estimated fair value
and will be adjusted periodically until such time as the
exercise price becomes fixed at which time the then fair value
will be reclassified as a component of stockholders equity
(deficit). At June 30, 2010, the estimated fair value of
the warrants is $600. Changes in the fair value of the warrants
is included in other expense in the consolidated statement of
operations.
F-32
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
Our CEO, CFO, Vice President of Products and certain members of
our Board of Directors (either individually or through an
affiliated entity) purchased an aggregate of $3,520 of the Notes
with an aggregate of 25 warrants to purchase common stock.
Substantially all of the Companys assets are pledged as
collateral to secure the Notes, which security interest is
junior to that securing the Senior Loan Agreement.
In June 2010, we entered into two notes for the purchase of
delivery vehicles in our Company operations totaling $46. The
notes bear interest at 4.90% and are payable in 60 monthly
installments of approximately $0.9.
Series B
Preferred Stock
The Series B Preferred Stock (the
Series B) was issued at a price of $1.00 per
share and was non-convertible. On March 22, 2010, subject
to stockholder approval, the Board of Directors approved the
redemption of 50% and the conversion of 50% of the Series B
into the Companys common stock upon an IPO, with the
conversion at 90% of the IPO offering price. This redemption and
conversion was approved by the stockholders in July 2010. See
Subsequent Events note.
In December 2009, all payment of dividends on the Series B
were suspended and in January 2010 the dividends began to accrue
at 10%. Series B dividends paid during the six months ended
June 30, 2009 and 2010, were $807 and $225, respectively.
At June 30, 2010, the accrued and unpaid dividends were
$3,306.
|
|
5.
|
Stock-Based
Compensation
|
2004
Stock Plan
In 2004, our Board of Directors adopted the Primo Water
Corporation 2004 Stock Plan (the 2004 Plan) for
employees, including officers, non-employee directors and
non-employee consultants. The Plan provides for the issue of
incentive or nonqualified stock options and restricted common
stock. The Company has reserved 431 shares of common stock
for issuance under the Plan.
2010
Omnibus Long-Term Incentive Plan
In April 2010 our stockholders approved the 2010 Omnibus
Long-Term Incentive Plan (the 2010 Plan). The 2010
Plan is limited to employees, officers, non-employee directors,
consultants and advisors. The 2010 Plan provides for the
issuance of incentive or nonqualified stock options, restricted
stock, stock appreciation rights, restricted stock units, cash-
or stock-based performance awards and other stock-based awards.
The Company has reserved 719 shares of common stock for
issuance under the 2010 Plan.
Stock
Option Activity
We measure the fair value of each stock option grant at the date
of grant using a Black-Scholes option pricing model. The
weighted-average fair value per share of the options granted
during the six months ended June 30, 2010 was $6.16. The
following assumptions were used in arriving at the fair value of
options granted during the six months ended June 30, 2010:
|
|
|
|
|
|
|
2010
|
|
Expected life of options in years
|
|
|
6.3
|
|
Risk-free interest rate
|
|
|
2.8
|
%
|
Expected volatility
|
|
|
45.5
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
F-33
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
For the six months ended June 30, 2010 compensation expense
related to stock options was approximately $153, which is
included in selling, general, and administrative expenses from
continuing operations.
A summary of stock option activity at June 30, 2010, and
changes during the six months then ended is presented in the
table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Price per
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Share
|
|
|
Life (Years)
|
|
|
Value
|
|
|
Outstanding at December 31, 2009
|
|
|
280
|
|
|
$
|
13.15
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
31
|
|
|
|
12.84
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4
|
)
|
|
|
10.96
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
20.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2010
|
|
|
307
|
|
|
$
|
13.15
|
|
|
|
6.46
|
|
|
$
|
323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2010
|
|
|
250
|
|
|
$
|
12.84
|
|
|
|
6.00
|
|
|
$
|
323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the six months ended June 30, 2010 a total of 31
common stock options were granted under the 2004 Plan, all in
the first quarter of 2010, at an exercise price of $12.84 per
share. The estimated fair value of the common stock on the
issuance date was $12.84 per share. The Company obtained a
valuation from an unrelated party in December 2009 that
determined the fair value of the Companys common stock to
be $12.84 per share.
During the six months ended June 30, 2009 a total of 14
common stock options were granted under the 2004 Plan, all in
the first quarter of 2009, at an exercise price of $13.04 per
share. The estimated fair value of the common stock on the
issuance date was $13.04 per share. The fair value determination
was based in part upon the finalization of the conversion ratio
of the Series C Preferred Stock on December 31, 2008.
The board of directors also considered the Companys most
recent independent valuation and then current expectations of
the Companys future performance in determining the fair
value.
The total intrinsic value of the options exercised during the
six months ended June 30, 2010 was approximately $8, with
proceeds to the Company of $47. There were no options exercised
during the three months ended June 30, 2010.
As of June 30, 2010, there was approximately $303 of total
unrecognized compensation cost related to non-vested stock-based
compensation grants. This unrecognized compensation is expected
to be recognized over a weighted-average period of approximately
2.8 years. In April 2010, the Board of Directors
approved the 100% vesting of all unvested stock options awards
upon the successful completion of an initial public offering of
the Companys common stock. All unrecognized compensation
cost at the time the stock option awards become fully vested
would then be expensed.
Restricted
Stock Award Activity
During the six months ended June 30, 2010, we granted
restricted stock awards under the 2004 Plan, all in the first
quarter of 2010, that generally cliff-vest over a three-year
period and we recognized compensation expense of $127 related to
these awards, which is included in selling, general, and
administrative expenses from continuing operations.
A reconciliation of restricted stock activity and related
information is as follows
F-34
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested at December 31, 2009
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
106
|
|
|
|
12.84
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at June 30, 2010
|
|
|
106
|
|
|
$
|
12.84
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2010, there was approximately $995 of total
unrecognized compensation cost, net of estimated forfeitures,
related to non-vested restricted stock awards. That cost is
expected to be recognized over a weighted average period of
2.6 years.
Employee
Stock Purchase Plan
In April 2010, our stockholders approved the 2010 Employee Stock
Purchase Plan (the 2010 ESPP) which will be
effective upon the consummation of the Companys initial
public offering. The 2010 ESPP provides for the purchase of
common stock and is generally available to all employees. The
Company has reserved 24 shares of common stock for issuance
under the 2010 ESPP.
|
|
6.
|
Commitments
and Contingencies
|
In the normal course of business the Company may be involved in
various claims and legal actions. Management believes that the
outcome of such legal actions will not have a significant
adverse effect on the Companys financial position, results
of operations or cash flows.
There is no income tax provision (benefit) for federal or state
income taxes as the Company has incurred operating losses since
inception. As a result of these operating losses the Company has
federal and state net operating loss carryforwards, however
utilization of these net operating loss carryforwards and other
deferred tax assets may be subject to certain limitations under
Internal Revenue Code Section 382 and similar state income
tax provisions.
We manage our business primarily through two reporting segments,
Primo Bottled Water Exchange (Exchange) and Primo Products
(Products). Our Exchange segment sells three- and five-gallon
purified bottled water through retailers in each of the
contiguous United States. We service the retail locations
through our national network of primarily independent bottlers
and distributors. Our Products segment sells water dispensers
that are designed to dispense Primo and other
dispenser-compatible bottled water through major
U.S. retailers. We design, market and arrange for
certification and inspection of our products.
We utilize segment net sales and segment income (loss) from
operations before depreciation and amortization because we
believe they provide useful information for effectively
allocating resources among business segments, evaluating the
health of our business segments based on metrics that management
can actively influence, and gauging our investments and our
ability to service, incur or pay down debt. Operating segments
that do not meet quantitative thresholds for segment reporting
are included in Other.
F-35
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
Cost of sales for Exchange consists of costs for bottling,
related packaging materials and distribution costs for our
bottled water. Cost of sales for Products consists of contract
manufacturing, freight, duties, and warehousing costs of our
water dispensers.
Selling, general and administrative expenses consist primarily
of personnel costs for sales, marketing, operations support,
customer service, as well as other supporting cost for operating
the segment. Selling, general and administrative expenses not
specifically related to operating segments are shown separately
as Corporate. Corporate expenses are comprised mainly of the
compensation and other related expenses for corporate support,
information systems and human resources and administration.
Corporate expenses also include certain professional fees and
expenses and compensation of our Board of Directors.
F-36
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
The following table presents segment information for the six
months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
2009
|
|
|
2010
|
|
|
Segment Net Sales
|
|
|
|
|
|
|
|
|
Exchange
|
|
$
|
11,121
|
|
|
$
|
12,022
|
|
Products
|
|
|
12,642
|
|
|
|
8,177
|
|
Other
|
|
|
820
|
|
|
|
811
|
|
Inter-company elimination
|
|
|
(83
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
24,500
|
|
|
$
|
21,002
|
|
|
|
|
|
|
|
|
|
|
Segment Income (Loss) from Operations
|
|
|
|
|
|
|
|
|
Exchange
|
|
$
|
1,517
|
|
|
$
|
1,733
|
|
Products
|
|
|
60
|
|
|
|
26
|
|
Other
|
|
|
(30
|
)
|
|
|
62
|
|
Inter-company elimination
|
|
|
5
|
|
|
|
(5
|
)
|
Corporate
|
|
|
(2,461
|
)
|
|
|
(3,300
|
)
|
Depreciation and amortization
|
|
|
(2,078
|
)
|
|
|
(2,010
|
)
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
$
|
(2,987
|
)
|
|
$
|
(3,494
|
)
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization Expense:
|
|
|
|
|
|
|
|
|
Exchange
|
|
$
|
1,550
|
|
|
$
|
1,528
|
|
Products
|
|
|
66
|
|
|
|
68
|
|
Other
|
|
|
243
|
|
|
|
201
|
|
Corporate
|
|
|
219
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,078
|
|
|
$
|
2,010
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
Exchange
|
|
$
|
1,129
|
|
|
$
|
1,465
|
|
Products
|
|
|
50
|
|
|
|
|
|
Other
|
|
|
25
|
|
|
|
111
|
|
Corporate
|
|
|
117
|
|
|
|
127
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,321
|
|
|
$
|
1,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
Identifiable Assets:
|
|
|
|
|
June 30, 2010
|
|
Exchange
|
|
|
|
|
|
$
|
18,384
|
|
Products
|
|
|
|
|
|
|
7,652
|
|
Other
|
|
|
|
|
|
|
1,557
|
|
Corporate
|
|
|
|
|
|
|
2,939
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
30,532
|
|
|
|
|
|
|
|
|
|
|
F-37
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
|
|
9.
|
Discontinued
Operations
|
In July, 2008, the Company and its Board of Directors made the
decision to divest the operations of its subsidiary, Prima
Bottled Water, Inc. (Prima). As a result, the
related assets, liabilities and results of the operations of
Prima are accounted for as discontinued operations. In December
2009, the Company completed the divestiture by distributing the
stock in Prima to existing stockholders of the Company. Each
stockholder received a number of shares in Prima based upon such
stockholders proportionate ownership of our Series A,
Series C and common stock on an as converted basis as of
the date of distribution.
Revenues and operating results classified as discontinued
operations were as follows:
|
|
|
|
|
|
|
Six Months
|
|
|
|
Ended June 30,
|
|
|
|
2009
|
|
|
Net sales
|
|
$
|
320
|
|
Cost of sales
|
|
|
(9
|
)
|
|
|
|
|
|
Gross profit
|
|
|
329
|
|
Selling, general and administrative expenses
|
|
|
640
|
|
|
|
|
|
|
Operating loss
|
|
|
(311
|
)
|
Interest (expense) income, net
|
|
|
(46
|
)
|
|
|
|
|
|
Loss from discontinued operations, before income taxes
|
|
|
(357
|
)
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(357
|
)
|
|
|
|
|
|
|
|
10.
|
Potential
Acquisition
|
On June 1, 2010, we entered into an asset purchase
agreement with Culligan Store Solutions, LLC and Culligan of
Canada, Ltd. (together with Culligan International Company,
Culligan) to purchase certain of Culligans
assets related to its business of providing:
(i) self-serving retail vending machines to dispense fresh
reverse osmosis drinking water to consumers at retail locations;
(ii) water treatment services to retailers for their own
use within their store locations; and (iii) empty one-,
three-, and five-gallon refillable water bottles for use by
consumers at self-serve vended water machines in the United
States and Canada (collectively, the Culligan Refill
Business). Pursuant to the asset purchase agreement, we
will purchase these assets for a total purchase price of
$105,000, consisting of a cash payment of $60,000 and the
issuance of shares of our common stock with a value of $45,000,
subject to a working capital adjustment. The cash portion of the
purchase price will be increased and the value of the shares of
common stock will be decreased by an amount equal to the net
cash proceeds we receive from any exercise of the
underwriters over-allotment option in connection with our
initial public offering. The closing of this transaction is
subject to meeting certain conditions, which include the
successful completion of our initial public offering.
In October 2010, the shareholders approved the Fifth Amended and
Restated Certificate of Incorporation (Revised
Charter) of the Company. The Revised Charter amended the
following: (i) the mandatory conversion of the
Series A preferred stock into common stock at a conversion
ratio of 1:0.096 upon an IPO, (ii) the mandatory conversion
of the Series C preferred stock into shares of common stock
at a conversion ratio of 1:0.184 if the IPO price per share is
greater than $13.04, a conversion ratio of 1:0.2300 if the IPO
price per share is less than $10.44, and an adjusting conversion
ratio if the IPO price per share is between $10.44 and $13.04,
(iii) the mandatory conversion of at least 50% of the
Series B preferred stock into common stock at a conversion
ratio calculated by
F-38
PRIMO
WATER CORPORATION AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(in
thousands, except per share amounts)
dividing the liquidation preference of the Series B
preferred stock by 90% of the greater of the IPO price and
$10.44, (iv) the repurchase of the balance of the
outstanding Series B preferred stock within 30 days
following such an IPO for $1.00 per share, and (v) payment
of accrued and unpaid dividends within 30 days following
such an IPO.
The Series C preferred stock conversion ratio of 1:0.184 is
adjusted if the IPO price per share is between $10.44 and
$13.04, by multiplying the conversion ratio by the fraction of
$13.04 divided by the IPO price per share and is adjusted to a
conversion ratio of 1:0.2300 if the IPO price per share is less
than $10.44. This adjustment to the conversion ratio is a
contingent beneficial conversion that would be measured and
recorded at the time the contingency is removed or at the time
the IPO price is known and is less than $13.04 per share.
Assuming the conversion of the Series C preferred stock at
an IPO price per share of $12.00, the estimated beneficial
conversion charge related to the conversion of the Series C
preferred stock is approximately $2.4 million. The
beneficial conversion charge or deemed dividend would be
recorded to additional paid in capital with no effect on total
stockholders equity, but will increase the net loss
attributable to common stockholders in the period of conversion.
The conversion of the Series B preferred stock at 90% of
the IPO price is also a contingent beneficial conversion that
would be measured and recorded at the time of the IPO. Assuming
the conversion of 50% of the Series B preferred stock and
an IPO price per share of at least $10.44, the estimated the
beneficial conversion charge related to the conversion of the
Series B preferred stock is approximately $2,900. The
beneficial conversion charge or deemed dividend would be
recorded to additional paid in capital with no effect on total
stockholders equity, but will increase the net loss
attributable to common stockholders in the period of conversion.
In connection with the amendments to the Revised Charter, we
also agreed to modify the terms of common stock warrants for the
aggregate purchase of 716 shares of common stock,
originally issued to the purchasers of the Series B
preferred stock and Series C preferred stock, to remove a
provision that accelerated the termination of the warrants
exercise period upon the consummation of an IPO. The warrants
will now expire on the date such warrants would have otherwise
expired absent an IPO. At the time of the modification a charge
of approximately $2,300, the change in the estimated fair value
immediately before and after the modification, as determined
using the Black-Scholes pricing model, will be recorded to
additional paid in capital with no effect on total
stockholders equity, but will increase the net loss
attributable to common stockholders in the third quarter of
2010. In October 2010, we reduced the exercise price of the
warrants issued to the holders of the Series C convertible
preferred stock from $20.66 to $13.04. At the time of
modification a charge of approximately $0.2 million will be
recorded to additional paid in capital with no effect on total
stockholders equity, but will increase the net loss attributable
to common stockholders in the fourth quarter of 2010.
In July 2010, the board of directors approved the issuance of up
to an additional $5,000 in Subordinated Convertible Promissory
Notes under substantially the same terms as the December 2009
Subordinated Convertible Promissory Notes. We expect to complete
the additional issuance in October 2010.
The Companys board of directors and stockholders approved
an amended and restated certificate of incorporation that will,
prior to the effectiveness of the registration statement, effect
a 1-for-10.435 reverse stock split of all the outstanding shares
of common stock and a proportional adjustment to the existing
conversion ratios for each series of preferred stock and the
Company will amend and restate our certificate of incorporation
to provide that the authorized capital stock will consist of (1)
70,000 shares of common stock, $0.001 par value per share and
(2) 65,000 shares of preferred stock, $0.001 par value per
share. Accordingly, all common share and per common share
amounts for all periods presented in these unaudited
consolidated financial statements and notes thereto, have been
adjusted retroactively, where applicable, to reflect this
reverse stock split and adjustment of the preferred stock
conversion ratios.
F-39
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Culligan Holding S.àr.l
Culligan International Company
Culligan of Canada, Ltd.:
We have audited the accompanying combined balance sheets of the
Culligan Store Solutions Group (the Group) a business of
Culligan Holding S.àr.l as of December 31, 2009 and
2008, and the related combined statements of operations, parent
equity and comprehensive income, and cash flows for the years
then ended. These combined financial statements are the
responsibility of the Groups management. Our
responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. 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 consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Groups internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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 combined financial statements referred to
above present fairly, in all material respects, the combined
financial position of the Culligan Store Solutions Group as of
December 31, 2009 and 2008, 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/ KPMG LLP
Chicago, Illinois
June 4, 2010
F-40
CULLIGAN
STORE SOLUTIONS GROUP (A BUSINESS OF CULLIGAN HOLDING
S.ÀR.L)
December 31,
2009 and 2008
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
2,885
|
|
|
|
2,627
|
|
Inventory
|
|
|
306
|
|
|
|
306
|
|
Service parts
|
|
|
456
|
|
|
|
478
|
|
Prepaid expenses and other current assets
|
|
|
251
|
|
|
|
234
|
|
Deferred income taxes
|
|
|
325
|
|
|
|
315
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
4,223
|
|
|
|
3,960
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
8,202
|
|
|
|
7,932
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
21,900
|
|
|
|
21,900
|
|
Other intangibles, net
|
|
|
1,795
|
|
|
|
2,135
|
|
Deferred income taxes
|
|
|
703
|
|
|
|
740
|
|
Intercompany receivable from Parent, net
|
|
|
21,558
|
|
|
|
16,561
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
45,956
|
|
|
|
41,336
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
58,381
|
|
|
|
53,228
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Parent Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
1,224
|
|
|
|
1,140
|
|
Accrued liabilities
|
|
|
1,030
|
|
|
|
940
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,254
|
|
|
|
2,080
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
1,759
|
|
|
|
1,636
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,013
|
|
|
|
3,716
|
|
Parent equity
|
|
|
54,368
|
|
|
|
49,512
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and Parent equity
|
|
$
|
58,381
|
|
|
|
53,228
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-41
CULLIGAN
STORE SOLUTIONS GROUP (A BUSINESS OF CULLIGAN HOLDING
S.ÀR.L)
Years
ended December 31, 2009 and 2008
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Net Sales
|
|
$
|
26,017
|
|
|
|
25,746
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
13,643
|
|
|
|
13,635
|
|
Selling, general, and administrative expenses
|
|
|
2,877
|
|
|
|
3,270
|
|
Depreciation and amortization
|
|
|
2,488
|
|
|
|
3,872
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
19,008
|
|
|
|
20,777
|
|
Income before income taxes
|
|
|
7,009
|
|
|
|
4,969
|
|
Income tax expense
|
|
|
2,665
|
|
|
|
1,837
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,344
|
|
|
|
3,132
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-42
CULLIGAN
STORE SOLUTIONS GROUP (A BUSINESS OF CULLIGAN HOLDING
S.ÀR.L)
Years
ended December 31, 2009 and 2008
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Parent
|
|
|
Comprehensive
|
|
|
|
Equity
|
|
|
Income
|
|
|
Balance December 31, 2007
|
|
$
|
47,225
|
|
|
|
|
|
Net income
|
|
|
3,132
|
|
|
$
|
3,132
|
|
Foreign currency translation adjustments
|
|
|
(845
|
)
|
|
|
(845
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
$
|
2,287
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2008
|
|
|
49,512
|
|
|
|
|
|
Net income
|
|
|
4,344
|
|
|
$
|
4,344
|
|
Foreign currency translation adjustments
|
|
|
512
|
|
|
|
512
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
$
|
4,856
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2009
|
|
$
|
54,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-43
CULLIGAN
STORE SOLUTIONS GROUP (A BUSINESS OF CULLIGAN HOLDING
S.ÀR.L)
Years
ended December 31, 2009 and 2008
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,344
|
|
|
|
3,132
|
|
Adjustments to reconcile net income to net cash provided by
operating activities, excluding the effects of acquisitions and
divestitures:
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
(27
|
)
|
|
|
(3
|
)
|
Depreciation and amortization
|
|
|
2,488
|
|
|
|
3,872
|
|
Deferred income taxes
|
|
|
244
|
|
|
|
(248
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(184
|
)
|
|
|
130
|
|
Inventories
|
|
|
4
|
|
|
|
8
|
|
Service parts
|
|
|
22
|
|
|
|
126
|
|
Prepaid expenses and other current assets
|
|
|
(13
|
)
|
|
|
16
|
|
Trade payables
|
|
|
71
|
|
|
|
172
|
|
Accrued liabilities
|
|
|
68
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
7,017
|
|
|
|
7,212
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activity:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(2,101
|
)
|
|
|
(2,405
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activity
|
|
|
(2,101
|
)
|
|
|
(2,405
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activity:
|
|
|
|
|
|
|
|
|
Transactions with Parent, net
|
|
|
(4,916
|
)
|
|
|
(4,807
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activity
|
|
|
(4,916
|
)
|
|
|
(4,807
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to combined financial statements.
F-44
CULLIGAN
STORE SOLUTIONS GROUP (A BUSINESS OF CULLIGAN HOLDING
S.ÀR.L)
December 31, 2009 and 2008
(amounts in thousands)
|
|
(1)
|
The Group
and a Summary of Significant Accounting Policies
|
Culligan Store Solutions Group (the Group) is primarily engaged
in the business of providing (a) vended water machines,
owned by the Group, to filter and dispense drinking water to
consumers at retail locations, (b) water treatment
equipment, owned by the Group, to filter water for the
retailers use within their store locations, and
(c) empty one-, three-, and five-gallon refillable water
bottles to the retailer for their sale to consumers to carry the
dispensed filtered water. The machines and water treatment
equipment are owned by the Group and placed at retail locations
for the purpose of providing the filtration of water. At
December 31, 2009, the Group had vended water machines at
approximately 4,500 retail locations.
The Group is owned by Culligan Store Solutions, LLC (CSS), which
is owned by Culligan International Company (CIC), and by
Culligan of Canada Ltd. (Culligan of Canada), all of which are
wholly owned indirect subsidiaries of Culligan Holding
S.àr.l (Culligan Holding) (collectively referred to herein,
as the Parent).
|
|
(b)
|
Principles
of Combination and Basis of Presentation
|
These combined financial statements include the accounts and
results of the Group. During the periods presented, the
Groups operations were components of the Parent. The
financial statements have been carved out from the books and
records of the Parent and have been prepared by management using
the results of operations and basis of assets of the Group. The
statements of operations include all items of revenue and income
generated by the Group, all items of expense directly incurred
by it, and expenses charged or allocated to it by the Parent.
The accompanying combined financial statements do not reflect
any allocation of general corporate debt or interest expense
incurred by the Parent in financing its activities as it is not
specifically identifiable to the Group.
The Group operates in a single business segment providing
filtration of drinking water to consumers through self-service
vending machines, along with empty bottles sold to retailers for
resale and filtration systems for in-store use in retail stores.
The preparation of combined financial statements in conformity
with accounting principles generally accepted in the United
States of America requires that management make certain
estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets
and liabilities at the dates of the combined financial
statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from
those estimates. These estimates and assumptions include, but
are not limited to: the recoverability of accounts receivable,
useful lives of property and equipment, valuation of goodwill,
intangible assets, deferred tax assets, fixed assets and repair
parts, and the ability to estimate accrued revenues.
Water dispensing machines placed at the retailers are used by
retail customers on a self-serve basis. Water treatment
equipment is placed at retailers location for the retailer
to filter water used in its store. Revenue is earned at the time
the water is filtered which is measured by the machine or
equipment meter. At December 31, 2009, the Group had
approximately 4,500 vending machines, making the reading of each
machine meter at the end of each reporting period impractical.
Consequently, the Group estimates the revenue from the last time
each machine meter was read until the end of the reporting
period, based on the most current average daily volume of
filtered water of
F-45
CULLIGAN
STORE SOLUTIONS GROUP (A BUSINESS OF CULLIGAN HOLDING
S.ÀR.L)
NOTES TO
COMBINED FINANCIAL STATEMENTS (Continued)
December 31,
2009 and 2008
(amounts in thousands)
each machine. For the years ended December 31, 2009 and
2008, the Group recorded approximately $1,051 and $1,050,
respectively, of such estimated revenues, which for both
year-ends represents an average of approximately 22 days of
use per machine.
The Group recognizes revenue when empty bottles are shipped and
the customer takes ownership and assumes risk of loss,
collection of the relevant receivable is probable, persuasive
evidence of an arrangement exists and the sales price is fixed
or determinable. Shipping and other transportation costs charged
to buyers are recorded in cost of sales.
Accounts receivable consist principally of amounts due from
retailers located in the United States and Canada. Accounts
receivable are recorded at the invoiced amount and do not bear
interest. The Group maintains an allowance for doubtful accounts
for estimated losses inherent in its accounts receivable
portfolio. In establishing the required allowance, management
considers historical losses adjusted to take into account
current market conditions and the Groups customers
financial condition, the amount of receivables in dispute,
current receivables aging, and current payment patterns. Account
balances are charged off against the allowance after all means
of collection have been exhausted and the potential for recovery
is considered remote. The Group does not have any
off-balance-sheet credit exposure related to its customers.
Inventories consist primarily of finished goods, which are empty
bottles for sale and are valued at the lower of cost or
realizable value, with cost determined using the
first-in,
first-out (FIFO) method. Miscellaneous selling supplies such as
labels are expensed when incurred.
CSS is a single member limited liability company and wholly
owned by CIC, a Delaware Corporation. For U.S. federal income
tax purposes, CSS is treated as a division of CIC, which files a
consolidated federal income tax return. CIC pays all federal and
state income taxes for CSS and the payments have been reflected
as intercompany transactions within Parent equity. Culligan of
Canada, which includes the Groups business in Canada,
files individual Canadian income tax returns. For purposes of
the combined financial statements presented herein, the Group
provided for income taxes as if they were separate filing
taxable entities.
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax basis and operating loss
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which these temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.
Beginning with the adoption of the Financial Accounting
Standards Board (FASB) Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, included in FASB Accounting
Standards Codification (ASC) Subtopic
740-10,
Income Taxes Overall, as of January 1, 2009, the
Group recognizes the effect of income tax positions only if
those positions are more likely than not of being sustained.
Recognized income tax positions are measured at the largest
amount that is greater than 50% likely of being realized.
Changes in recognition or measurement are reflected in the
period in which the change in judgment occurs. Prior to the
adoption of
F-46
CULLIGAN
STORE SOLUTIONS GROUP (A BUSINESS OF CULLIGAN HOLDING
S.ÀR.L)
NOTES TO
COMBINED FINANCIAL STATEMENTS (Continued)
December 31,
2009 and 2008
(amounts in thousands)
Interpretation No. 48, the Group recognized the effect of
income tax positions only if such positions were probable of
being sustained.
|
|
(i)
|
Foreign
Currency Translation
|
The Groups operations are in the U.S. and Canada.
Assets and liabilities denominated in Canadian dollars are
translated into U.S. dollars at the current rate of
exchange existing at period-end. Revenues, expenses, gains, and
losses are translated at average monthly exchange rates.
Translation adjustments are included in the combined statements
of Parent company equity and comprehensive income and cash flows.
Service parts consist primarily of operating components used to
maintain vending machines. Service parts are stated at the lower
of cost or market with cost determined using the FIFO method.
|
|
(k)
|
Property
and Equipment
|
Property and equipment are stated at cost. Depreciation of
property and equipment is calculated on the straight-line method
over the estimated useful lives of the assets as follows:
|
|
|
|
|
Machinery and equipment
|
|
|
2 6 years
|
|
Vending machines
|
|
|
2 10 years
|
|
Furniture and fixtures
|
|
|
2 6 years
|
|
Vehicles
|
|
|
2 6 years
|
|
Information technology
|
|
|
2 6 years
|
|
Depreciation expense totaled $2,114 and $3,495 for the years
ended December 31, 2009 and 2008, respectively.
The Group incurs maintenance costs on its major equipment.
Maintenance, repair and minor refurbishment costs are charged to
expense as incurred, while additions, renewals, and improvements
are capitalized. Upon the sale or retirement of an asset, the
related cost and accumulated depreciation are removed from the
accounts.
|
|
(l)
|
Goodwill
and Other Intangible Assets
|
The Group is a component of a larger reporting unit at the
Parent level. Goodwill reflected in these financial statements
represents an allocation of the goodwill, recorded by Culligan
Holding. The relative fair value approach was used as the basis
for the allocation and measured based on the relative fair value
of the Group and the portion of the reporting unit to be
retained. This allocated amount has been reflected retroactively
back to December 31, 2008. Goodwill is not amortized but is
instead tested for impairment at the reporting unit level at
least annually in accordance with Accounting Standards
Codification (ASC) Topic 350, Intangibles
Goodwill and Other (ASC 350). Culligan Holding completed its
annual goodwill impairment tests as of December 31, 2009
and 2008 and determined that goodwill was not impaired during
these years.
|
|
(m)
|
Impairment
of Long-Lived Assets
|
The Group reviews whether events or circumstances of any
long-lived assets have occurred that indicate the remaining
estimated useful lives of those assets may warrant revision or
that the carrying value of those assets may not be recoverable.
If events or circumstances indicate that the long-lived assets
should be reviewed for possible impairment, the Group uses
financial projections to assess whether future cash flows on a
nondiscounted basis related to the tested assets are likely to
exceed the recorded carrying amount of those assets, to
determine whether a
F-47
CULLIGAN
STORE SOLUTIONS GROUP (A BUSINESS OF CULLIGAN HOLDING
S.ÀR.L)
NOTES TO
COMBINED FINANCIAL STATEMENTS (Continued)
December 31,
2009 and 2008
(amounts in thousands)
write-down is appropriate. Should an impairment be identified, a
loss would be recorded to the extent that the carrying value of
the impaired assets exceeds their fair value as determined by
valuation techniques appropriate in the circumstance, which
could include the use of similar projections on a discounted
basis. No such events or circumstances were identified during
the years ended December 31, 2009 and 2008.
|
|
(n)
|
Fair
Value of Financial Instruments
|
Financial instruments consist primarily of accounts receivable,
accounts payable, and accrued liabilities. The carrying amounts
of such instruments are considered to be representative of their
respective fair values due to the short-term maturity of the
instruments.
|
|
(o)
|
Concentrations
of Risk
|
One customer accounted for approximately 65% and 63% of the
Groups revenues in 2009 and 2008 and approximately 57% and
59% of accounts receivable as of December 31, 2009 and
2008, respectively. There is no significant supplier, product
line, credit, geographic, or other concentrations that could
expose the Group to adverse near term severe financial impacts.
Advertising costs are expensed as incurred. Advertising costs
were $52 and $42 for the years ended December 31, 2009 and
2008, respectively. Advertising expenses are presented as part
of selling, general, and administrative expenses in the
accompanying combined statements of operations.
The Group participates in insurance programs sponsored by the
Parent. The Group retains the risk for U.S. claims arising
for general liability (up to $250), automobile (up to $100), and
workers compensation (up to $500). Coverage for individual
claims in excess of these limits is covered by policies
purchased from insurance providers by the Parent. There were no
claims in excess of the retained risk for 2009 and 2008. The
cost of medical insurance for U.S. employees and insurance
policies for general liability, automobile, and workers
compensation is allocated to the Group based upon premium
computations.
|
|
(r)
|
Stock-Based
Compensation
|
The Group does not have any stock compensation plans. One
employee of the Group participates in a stock incentive plan and
special bonus plan sponsored by Culligan Ltd. (the ultimate
owner of Culligan Holding). The total compensation cost of both
plans was $9 and $35 in 2009 and 2008, respectively, and has
been reflected in selling, general, and administrative expenses.
|
|
(s)
|
Recently
Adopted Accounting Standards
|
The following are summaries of accounting pronouncements that
were either recently adopted or may become applicable to the
Groups combined financial statements. It should be noted,
effective with the quarter ended September 30, 2009, the
Group adopted Financial Accounting Standards Board (FASB) ASC
Topic 105, Generally Accepted Accounting Principles (ASC
105). ASC 105 establishes the FASB Accounting Standards
Codification (the Codification) as the source of authoritative
U.S. Generally Accepted Accounting Principles (GAAP)
recognized by the FASB to be applied to nongovernmental entities
and it is not intended to change or alter previously existing
U.S. GAAP titles and references to accounting standards
that have been updated to reflect ASC references, where
applicable.
F-48
CULLIGAN
STORE SOLUTIONS GROUP (A BUSINESS OF CULLIGAN HOLDING
S.ÀR.L)
NOTES TO
COMBINED FINANCIAL STATEMENTS (Continued)
December 31,
2009 and 2008
(amounts in thousands)
In February 2008, the FASB issued updated guidance related to
fair value measurements, which is included in the Codification
in ASC Topic 820, Fair Value Measurements and Disclosures
(ASC 820), which among other things, partially deferred the
effective date of ASC 820 to fiscal years beginning after
November 15, 2008 for certain nonfinancial assets and
nonfinancial liabilities. In 2008, the Group adopted the
provisions of ASC 820 with respect to financial assets and
liabilities. The application of the provisions of ASC 820
related to nonfinancial assets and liabilities, effective
January 1, 2009, did not have a material impact on the
Groups combined financial statements for the year ended
December 31, 2009.
In December 2007, the FASB issued revised guidance on how
acquirers recognize and measure the consideration transferred,
identifiable assets, liabilities assumed, noncontrolling
interest, and goodwill acquired in a business combination. This
guidance is included in ASC Topic 805, Business Combinations
(ASC 805), and ASC 810, Consolidations (ASC 810). ASC
805 and 810 require most identifiable assets, liabilities,
noncontrolling interests, and goodwill acquired in a business
combination to be recorded at full fair value and
require noncontrolling interests (previously referred to as
minority interests) to be recorded as a component of equity,
which changes the accounting for transactions with
noncontrolling interest holders. Both statements are effective
for periods beginning on or after December 15, 2008, and
earlier adoption is prohibited. ASC 805 will be applied to
business combinations occurring after the effective date. ASC
810 will be applied prospectively to all noncontrolling
interests, including any that arose before the effective date.
All of the Groups subsidiaries are wholly owned, so the
adoption of ASC 810 is not expected to impact its financial
position and results of operations. The Group is currently
evaluating the impact of adopting ASC 805 on its financial
position and results of operations.
|
|
(t)
|
Recently
Issued Accounting Standards
|
In October 2009, the FASB issued Accounting Standards Update
(ASU)
2009-13,
Revenue Recognition (Topic 605): Multiple-Deliverable
Revenue Arrangements (EITF Issue
No. 08-1,
Revenue Arrangements with Multiple Deliverables). ASU
2009-13
amends ASC
605-25,
Revenue Recognition Multiple-Element
Arrangements, to eliminate the requirement that all
undelivered elements have vendor specific objective evidence of
selling price (VSOE) or third-party evidence of selling price
(TPE) before an entity can recognize the portion of an overall
arrangement fee that is attributable to items that already have
been delivered. In the absence of VSOE and TPE for one or more
delivered or undelivered elements in a multiple-element
arrangement, entities will be required to estimate the selling
prices of those elements. The overall arrangement fee will be
allocated to each element (both delivered and undelivered items)
based on their relative selling prices, regardless of whether
those selling prices are evidenced by VSOE or TPE or are based
on the entitys estimated selling price. Application of the
residual method of allocating an overall arrangement
fee between delivered and undelivered elements will no longer be
permitted upon adoption of ASU
2009-13.
Additionally, the new guidance will require entities to disclose
more information about their multiple-element revenue
arrangements. ASU
2009-13 is
effective prospectively for revenue arrangements entered into or
materially modified in fiscal years beginning on or after
June 15, 2010. Early adoption is permitted. The Group
expects that the adoption of ASU
2009-13 will
not have a material impact on its combined financial statements.
F-49
CULLIGAN
STORE SOLUTIONS GROUP (A BUSINESS OF CULLIGAN HOLDING
S.ÀR.L)
NOTES TO
COMBINED FINANCIAL STATEMENTS (Continued)
December 31,
2009 and 2008
(amounts in thousands)
The following table details the changes in the allowance for
doubtful accounts for 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
|
|
|
|
|
|
End of
|
|
|
|
of Year
|
|
|
Credits
|
|
|
Deductions
|
|
|
Year
|
|
|
December 31, 2008
|
|
$
|
223
|
|
|
|
(3
|
)
|
|
|
(17
|
)
|
|
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
$
|
203
|
|
|
|
(27
|
)
|
|
|
(2
|
)
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
Property
and Equipment
|
Property and equipment at December 31, 2009 and 2008
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Machinery and equipment
|
|
$
|
60
|
|
|
|
52
|
|
Vending machines
|
|
|
24,111
|
|
|
|
21,581
|
|
Furniture and fixtures
|
|
|
4
|
|
|
|
4
|
|
Vehicles
|
|
|
10
|
|
|
|
10
|
|
Information technology
|
|
|
343
|
|
|
|
343
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
24,528
|
|
|
|
21,990
|
|
Less accumulated depreciation and amortization
|
|
|
(16,326
|
)
|
|
|
(14,058
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,202
|
|
|
|
7,932
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
Goodwill
and Other Intangible Assets
|
The net carrying amount of goodwill and other intangible assets
for the years ended December 31, 2009 and 2008 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Goodwill
|
|
|
Intangibles, Net
|
|
|
Total
|
|
|
Balance, December 31, 2007
|
|
$
|
21,900
|
|
|
|
2,569
|
|
|
|
24,469
|
|
Acquired during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
(377
|
)
|
|
|
(377
|
)
|
Cumulative translation adjustment
|
|
|
|
|
|
|
(57
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
21,900
|
|
|
|
2,135
|
|
|
|
24,035
|
|
Acquired during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
(374
|
)
|
|
|
(374
|
)
|
Cumulative translation adjustment
|
|
|
|
|
|
|
34
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
$
|
21,900
|
|
|
|
1,795
|
|
|
|
23,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-50
CULLIGAN
STORE SOLUTIONS GROUP (A BUSINESS OF CULLIGAN HOLDING
S.ÀR.L)
NOTES TO
COMBINED FINANCIAL STATEMENTS (Continued)
December 31,
2009 and 2008
(amounts in thousands)
The net carrying amount of other intangibles at
December 31, 2009 and 2008 is comprised of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Useful
|
|
|
|
|
|
|
|
|
Life (Years)
|
|
2009
|
|
|
2008
|
|
|
Customer relationships
|
|
|
10 years
|
|
|
$
|
1,795
|
|
|
|
2,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On September 30, 2004, Culligan Holding acquired CIC,
Culligan of Canada and their then affiliates in a transaction
accounted for under the purchase method of accounting. The
goodwill and customer relationship intangible assets recorded
herein arose from this acquisition. Goodwill was allocated to
the Group based on the relative fair value of the Group and the
portion of the reporting unit to be retained. The customer
relationship intangible assets that arose from the
September 30, 2004 acquisition were specifically identified
to the Group.
None of the Parents trademarks are used exclusively in the
Groups business. At December 31, 2009 and 2008, the
gross carrying value of the customer relationships was $3,779
and $3,714, respectively, and the accumulated amortization was
$1,984 and $1,579, respectively. Estimated amortization expense,
for customer relationships, is $374, $374, $374, $374, and $299
in each of the next five years, respectively, and $0 in 2015 and
beyond.
Accrued liabilities at December 31, 2009 and 2008 consist
of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Compensation and benefits
|
|
$
|
358
|
|
|
|
362
|
|
Rebates
|
|
|
259
|
|
|
|
173
|
|
Dealer service fees
|
|
|
185
|
|
|
|
184
|
|
Other taxes
|
|
|
90
|
|
|
|
133
|
|
Insurance
|
|
|
73
|
|
|
|
53
|
|
Other
|
|
|
65
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,030
|
|
|
|
940
|
|
|
|
|
|
|
|
|
|
|
The components of income before income taxes for the years ended
December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
U.S.
|
|
$
|
6,861
|
|
|
|
4,604
|
|
Canada
|
|
|
148
|
|
|
|
365
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,009
|
|
|
|
4,969
|
|
|
|
|
|
|
|
|
|
|
F-51
CULLIGAN
STORE SOLUTIONS GROUP (A BUSINESS OF CULLIGAN HOLDING
S.ÀR.L)
NOTES TO
COMBINED FINANCIAL STATEMENTS (Continued)
December 31,
2009 and 2008
(amounts in thousands)
Income tax expense (benefit) consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
Deferred
|
|
|
Total
|
|
|
Year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
2,175
|
|
|
|
111
|
|
|
|
2,286
|
|
State and local
|
|
|
329
|
|
|
|
5
|
|
|
|
334
|
|
Canada
|
|
|
(83
|
)
|
|
|
128
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,421
|
|
|
|
244
|
|
|
|
2,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
1,810
|
|
|
|
(300
|
)
|
|
|
1,510
|
|
State and local
|
|
|
289
|
|
|
|
(36
|
)
|
|
|
253
|
|
Canada
|
|
|
(14
|
)
|
|
|
88
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,085
|
|
|
|
(248
|
)
|
|
|
1,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense differed from the amounts computed by
applying the U.S. federal statutory income tax rate of 35%
to income before income taxes as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Computed expected tax expense
|
|
$
|
2,453
|
|
|
|
1,739
|
|
Increase (decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
Non-U.S.
rate differential
|
|
|
(7
|
)
|
|
|
(54
|
)
|
State and local income taxes, net of federal income tax benefit
|
|
|
224
|
|
|
|
159
|
|
Other
|
|
|
(5
|
)
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,665
|
|
|
|
1,837
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. In assessing the realizability of
deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary
differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this
assessment. Based on this review, a valuation allowance on the
deferred tax assets has not been recorded as there was no
significant negative evidence that such an allowance was
required in the
F-52
CULLIGAN
STORE SOLUTIONS GROUP (A BUSINESS OF CULLIGAN HOLDING
S.ÀR.L)
NOTES TO
COMBINED FINANCIAL STATEMENTS (Continued)
December 31,
2009 and 2008
(amounts in thousands)
foreseeable future. The tax effects of temporary differences
that give rise to significant portions of the deferred tax
assets and deferred tax liabilities at December 31, 2009
and 2008 are presented below:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred income tax assets attributable to:
|
|
|
|
|
|
|
|
|
Accounts receivable, principally due to allowance for doubtful
accounts
|
|
$
|
64
|
|
|
|
77
|
|
Inventories, principally due to reserves and additional costs
inventoried for tax purposes
|
|
|
61
|
|
|
|
51
|
|
Property and equipment, principally due to differences in
depreciation
|
|
|
703
|
|
|
|
740
|
|
Accrued expenses
|
|
|
326
|
|
|
|
314
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
1,154
|
|
|
|
1,182
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities attributable to:
|
|
|
|
|
|
|
|
|
Property and equipment, principally due to differences in
depreciation
|
|
|
1,110
|
|
|
|
869
|
|
Intangibles
|
|
|
775
|
|
|
|
894
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
1,885
|
|
|
|
1,763
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(731
|
)
|
|
|
(581
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities are presented as follows in
the balance sheets:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Current assets
|
|
$
|
325
|
|
|
|
315
|
|
Noncurrent assets
|
|
|
703
|
|
|
|
740
|
|
Noncurrent liabilities
|
|
|
(1,759
|
)
|
|
|
(1,636
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(731
|
)
|
|
|
(581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(7)
|
Related-Party
Transactions
|
The Group participates in the cash management systems of the
Parent. All cash funding requirements have been met by CIC and
all cash received by the Group has either been transferred to
CIC (in the United States) or retained by Culligan of Canada (in
Canada). All of the Group disbursements are paid through CIC or
Culligan of Canada on the Groups behalf. The Groups
transactions with the Parent reflected on the combined
statements of cash flows consist principally of the intercompany
receivable from the Parent, net on the accompanying balance
sheets.
|
|
(b)
|
Expenses
Charged by the Parent
|
The combined statements of operations for the Group include all
direct costs of the Group, as well as certain corporate costs
directly identified with the Group and allocated to the Group by
the Parent. Charges for stop-loss premiums for general
liability, automobile, and workers compensation insurance
are allocated to the Group based upon historical experience.
Costs for employee health and dental insurance are based on a
predetermined rate, which combines premiums and claims. Expenses
allocated by CIC for the years ended December 31, 2009 and
2008 were $654 and $540, respectively, and are reflected in
selling, general and administrative expenses in the accompanying
statements of operations. In the opinion of management, the
costs allocated have been determined on a basis that is believed
to be reasonable for a group of businesses operating within the
structure of a larger parent
F-53
CULLIGAN
STORE SOLUTIONS GROUP (A BUSINESS OF CULLIGAN HOLDING
S.ÀR.L)
NOTES TO
COMBINED FINANCIAL STATEMENTS (Continued)
December 31,
2009 and 2008
(amounts in thousands)
company. However, the costs allocated are not necessarily
indicative of the level of expenses that might have been
incurred by the Group operating as a stand-alone entity. The
Parent has not allocated interest expense to the Group.
The Groups Canadian operations use the services of
Culligan of Canada to provide certain administrative functions,
such as general accounting, credit and collection, billing, and
information technology. These allocated costs are billed to the
Group based upon the level of services provided to the Group.
Expenses allocated by Culligan of Canada to the Group for the
years ended December 31, 2009 and 2008 were $258 and $301,
respectively, and are reflected in selling, general and
administrative expenses in the accompanying statements of
operations.
|
|
(c)
|
Services
Provided to the Group
|
The Group uses the services of company owned dealer divisions
(COD) of CIC and Culligan of Canada and other third-party
providers to install and service its vending machines and
equipment at customer locations. The amounts paid to COD for
these services are at the same rate as that paid to third-party
providers. Services provided by COD for installation,
maintenance, and other services for the years ended
December 31, 2009 and 2008 were $1,188 and $1,266,
respectively, and are included in cost of sales in the
accompanying statements of operations.
The Group uses the services of CIC and Culligan of Canada
franchisees to install and service its vending machines and
equipment at customer locations. The amounts paid to franchisees
for these services are at the same rate as that paid to company
owned dealers. Services provided by the franchisees for
installation and maintenance services for the years ended
December 31, 2009 and 2008 were $3,225 and $3,195,
respectively, and are included in cost of sales in the
accompanying statements of operations.
|
|
(d)
|
Purchases
from the Parent
|
The Group purchases equipment and service parts from CIC.
Purchases from CIC for the years ended December 31, 2009
and 2008 were $167 and $413, respectively.
The Group uses the Culligan brand name, which is owned by CIC.
CIC does not charge the Group for the use of the brand name.
Accordingly, there are no expenses related to the use of this
trademark in the accompanying statements of operations.
Substantially all
U.S.-based
employees are eligible to participate in the Culligan Retirement
Savings Plan (the Plan) sponsored by CIC. The Plan is a
qualified defined contribution plan, under Internal Revenue Code
Section 401(k). Contributions to the Plan during the years ended
December 31, 2009 and 2008 were $9 and $35, respectively.
CIC temporarily suspended matching contributions in April 2009,
due to economic conditions.
|
|
(9)
|
Commitments
and Contingencies
|
The Group leases certain facilities and equipment under various
noncancelable long-term and month-to-month leases. These leases
typically include renewal options and escalation clauses, and
are accounted for as operating leases. Rent expense for the
years ended December 31, 2009 and 2008 aggregated was $151
and $157, respectively.
F-54
CULLIGAN
STORE SOLUTIONS GROUP (A BUSINESS OF CULLIGAN HOLDING
S.ÀR.L)
NOTES TO
COMBINED FINANCIAL STATEMENTS (Continued)
December 31,
2009 and 2008
(amounts in thousands)
Future minimum rental payments under noncancelable leases at
December 31, 2009 are as follows:
|
|
|
|
|
|
|
Operating
|
|
|
|
Leases
|
|
|
2010
|
|
$
|
138
|
|
2011
|
|
|
109
|
|
2012
|
|
|
111
|
|
2013
|
|
|
113
|
|
2014
|
|
|
96
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
567
|
|
|
|
|
|
|
The Group encounters various claims and litigation actions
arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not
have a material adverse effect on the Groups combined
financial position, results of operations, or liquidity.
Parent equity at December 31, 2009 and 2008 consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Contributed capital
|
|
$
|
36,104
|
|
|
|
36,104
|
|
Combined accumulated earnings
|
|
|
16,702
|
|
|
|
12,358
|
|
Cumulative currency translation adjustment
|
|
|
1,562
|
|
|
|
1,050
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
54,368
|
|
|
|
49,512
|
|
|
|
|
|
|
|
|
|
|
On June 1, 2010, CSS, CIC and Culligan of Canada entered
into an agreement to sell the assets of the Group to Primo Water
Corporation (Primo). The purchase price is $105 million,
consisting of a cash payment of $60 million and shares of
Primo common stock with a value of $45 million, subject to
certain working capital adjustments. The cash portion of the
purchase price will be increased and the value of the shares of
Primo common stock will be decreased by an amount equal to the
net cash proceeds Primo receives from any exercise of the
underwriters over-allotment option in connection with
Primos initial public offering (the IPO). The closing of
the transaction is subject to meeting certain conditions, which
include Primos successful completion of the IPO.
The Group has performed an evaluation of events that have
occurred subsequent to December 31, 2009 and as of
June 4, 2010. There have been no subsequent events that
occurred during such period, other than disclosed in the
paragraph above, that would require disclosure or recognition in
the combined financial statements as of or for the year ended
December 31, 2009.
F-55
CULLIGAN
STORE SOLUTIONS GROUP
(a business of Culligan Holding S.àr.l )
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Accounts receivables, net of allowance for doubtful accounts of
$116 at June 30, 2010 and $174 at December 31, 2009
|
|
$
|
3,041
|
|
|
|
2,885
|
|
Inventories
|
|
|
324
|
|
|
|
306
|
|
Service parts
|
|
|
465
|
|
|
|
456
|
|
Prepaid expenses and other current assets
|
|
|
151
|
|
|
|
251
|
|
Deferred income taxes
|
|
|
312
|
|
|
|
325
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
4,293
|
|
|
|
4,223
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation of
$17,380 at June 30, 2010 and $16,326 at December 31,
2009
|
|
|
8,187
|
|
|
|
8,202
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
21,900
|
|
|
|
21,900
|
|
Other intangibles, net of accumulated amortization of
|
|
|
|
|
|
|
|
|
$2,169 at June 30, 2010 and $1,984 at December 31,
2009
|
|
|
1,604
|
|
|
|
1,795
|
|
Deferred income taxes
|
|
|
674
|
|
|
|
703
|
|
Intercompany receivable from Parent, net
|
|
|
23,677
|
|
|
|
21,558
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
|
47,855
|
|
|
|
45,956
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
60,335
|
|
|
|
58,381
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Parent Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Trade payables
|
|
$
|
1,187
|
|
|
|
1,224
|
|
Accrued liabilities
|
|
|
1,038
|
|
|
|
1,030
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,225
|
|
|
|
2,254
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
1,830
|
|
|
|
1,759
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,055
|
|
|
|
4,013
|
|
Parent equity
|
|
|
56,280
|
|
|
|
54,368
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and Parent equity
|
|
$
|
60,335
|
|
|
|
58,381
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited combined financial
statements.
F-56
CULLIGAN
STORE SOLUTIONS GROUP
(a business of Culligan Holding S.àr.l )
Combined
Statements of Operations
Six months ended June 30, 2010 and 2009
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Net sales
|
|
$
|
12,569
|
|
|
|
12,687
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
6,654
|
|
|
|
6,778
|
|
Selling, general, and administrative expenses
|
|
|
1,395
|
|
|
|
1,255
|
|
Depreciation and amortization
|
|
|
1,360
|
|
|
|
1,215
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
9,409
|
|
|
|
9,248
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
3,160
|
|
|
|
3,439
|
|
Income tax expense
|
|
|
1,210
|
|
|
|
1,305
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,950
|
|
|
|
2,134
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited combined unaudited financial
statements.
F-57
CULLIGAN
STORE SOLUTIONS GROUP
(a business of Culligan Holding S.àr.l )
Combined
Statements of Cash Flows
Six months ended June 30, 2010 and 2009
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,950
|
|
|
|
2,134
|
|
Adjustments to reconcile net income to net cash provided by
operating activities, excluding the effects of acquisitions and
divestitures:
|
|
|
|
|
|
|
|
|
Provision for doubtful accounts
|
|
|
(53
|
)
|
|
|
(31
|
)
|
Depreciation and amortization
|
|
|
1,360
|
|
|
|
1,215
|
|
Deferred income taxes
|
|
|
111
|
|
|
|
135
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(111
|
)
|
|
|
(405
|
)
|
Inventories
|
|
|
(18
|
)
|
|
|
(27
|
)
|
Service parts
|
|
|
(10
|
)
|
|
|
68
|
|
Prepaid expenses and other current assets
|
|
|
100
|
|
|
|
115
|
|
Trade payables
|
|
|
(38
|
)
|
|
|
178
|
|
Accrued liabilities
|
|
|
9
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
3,300
|
|
|
|
3,503
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activity:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(1,171
|
)
|
|
|
(1,007
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activity
|
|
|
(1,171
|
)
|
|
|
(1,007
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activity:
|
|
|
|
|
|
|
|
|
Transactions with Parent, net
|
|
|
(2,129
|
)
|
|
|
(2,496
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activity
|
|
|
(2,129
|
)
|
|
|
(2,496
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited combined financial
statements.
F-58
June 30, 2010 and 2009
(In thousands)
(1) The
Group and Basis of Presentation
Culligan Store Solutions Group (the Group) is primarily engaged
in the business of providing (a) vended water machines,
owned by the Group, to filter and dispense drinking water to
consumers at retail locations, (b) water treatment
equipment, owned by the Group, to filter water for the
retailers use within their store locations, and
(c) empty one-, three-, and five-gallon refillable water
bottles to the retailer for their sale to consumers to carry the
dispensed filtered water. The machines and water treatment
equipment are owned by the Group and placed at retail locations
for the purpose of providing the filtration of water. At
December 31, 2009, the Group had vended water machines at
approximately 4,500 retail locations.
The Group is owned by Culligan Store Solutions, LLC (CSS), which
is owned by Culligan International Company (CIC), and by
Culligan of Canada Ltd. (Culligan of Canada), all of which are
wholly owned indirect subsidiaries of Culligan Holding
S.àr.l (Culligan Holding) (collectively referred to herein,
as the Parent).
|
|
(b)
|
Principles
of Combination and Basis of Presentation
|
These combined financial statements include the accounts and
results of the Group. During the periods presented, the
Groups operations were components of the Parent. The
financial statements have been carved out from the books and
records of the Parent and have been prepared by management using
the results of operations and basis of assets of the Group. The
statements of operations include all items of revenue and income
generated by the Group, all items of expense directly incurred
by it, and expenses charged or allocated to it by the Parent.
The accompanying combined financial statements do not reflect
any allocation of general corporate debt or interest expense
incurred by the Parent in financing its activities as it is not
specifically identifiable to the Group.
In the preparation of the accompanying combined financial
statements, certain information and disclosures normally
included in comprehensive annual financial statements prepared
in accordance with U.S. generally accepted accounting
principles have been condensed or omitted. Management believes
that the disclosures included in these combined interim
financial statements are adequate to make the information
presented not misleading. It is suggested that these financial
statements be read in conjunction with the combined financial
statements and notes thereto of the Group for the year ended
December 31, 2009. In the opinion of management, all
adjustments necessary to present fairly the Groups
financial position as of June 30, 2010 and
December 31, 2009, results of operations for the six months
ended June 30, 2010 and 2009, and cash flows for the six
months ended June 30, 2010 and 2009 have been included.
Operating results for any interim period are not necessarily
indicative of results that may be expected for the full year.
The preparation of combined financial statements in conformity
with accounting principles generally accepted in the United
States of America requires that management make certain
estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets
and liabilities at the dates of the combined financial
statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from
those estimates. These estimates and assumptions include, but
are not limited to: the recoverability of accounts receivable,
useful lives of property and equipment, valuation of goodwill,
intangible assets, deferred tax assets, fixed assets and repair
parts, and the ability to estimate accrued revenues.
|
|
(c)
|
Concentrations
of Risk
|
One customer accounted for approximately 64% and 67% of the
Groups revenues and approximately 56% and 54% of accounts
receivable as of June 30, 2010 and 2009, respectively.
There is no significant supplier, product line,
F-59
CULLIGAN
STORE SOLUTIONS GROUP
(a business of Culligan Holding S.àr.l)
Notes to Unaudited Combined Financial
Statements (Continued)
June 30, 2010 and 2009
(In thousands)
credit, geographic, or other concentrations that could expose
the Group to adverse near term severe financial impacts.
(2) Comprehensive
Income
Comprehensive income for the six months ended June 30, 2010
and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Net income
|
|
$
|
1,950
|
|
|
|
2,134
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
(38
|
)
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
1,912
|
|
|
|
2,283
|
|
|
|
|
|
|
|
|
|
|
(3) Accrued
Liabilities
Accrued liabilities at June 30, 2010 and December 31,
2009 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Compensation and benefits
|
|
$
|
334
|
|
|
|
358
|
|
Rebates
|
|
|
255
|
|
|
|
259
|
|
Dealer service fees
|
|
|
170
|
|
|
|
185
|
|
Other taxes
|
|
|
124
|
|
|
|
90
|
|
Insurance
|
|
|
73
|
|
|
|
73
|
|
Other
|
|
|
82
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,038
|
|
|
|
1,030
|
|
|
|
|
|
|
|
|
|
|
(4) Income
Taxes
CSS is a single member limited liability company and wholly
owned by CIC, a Delaware Corporation. For U.S. federal income
tax purposes, CSS is treated as a division of CIC, which files a
consolidated federal income tax return. CIC pays all federal and
state income taxes for CSS and the payments have been reflected
as intercompany transactions within Parent equity. Culligan of
Canada, which includes the Groups business in Canada,
files individual Canadian income tax returns. For purposes of
the combined financial statements presented herein, the Group
provided for income taxes as if they were separate filing
taxable entities.
(5) Related-Party
Transactions
The Group participates in the cash management systems of the
Parent. All cash funding requirements have been met by CIC and
all cash received by the Group has either been transferred to
CIC (in the United States) or retained by Culligan of Canada (in
Canada). All of the Group disbursements are paid through the
Parent on the Groups behalf. The Groups transactions
with the Parent reflected on the combined statements of cash
flows consists principally of the intercompany receivable from
the Parent, net on the accompanying balance sheets.
F-60
CULLIGAN
STORE SOLUTIONS GROUP
(a business of Culligan Holding S.àr.l)
Notes to Unaudited Combined Financial
Statements (Continued)
June 30, 2010 and 2009
(In thousands)
|
|
(b)
|
Expenses
Charged by the Parent
|
The combined statements of operations for the Group include all
direct costs of the Group as well as certain corporate costs
directly identified with the Group and allocated to the Group by
the Parent. Charges for stop loss premiums for
general liability, automobile and workers compensation
insurance are allocated to the Group based upon historical
experience. Costs for employee health and dental insurance are
based on a predetermined rate, which combines premiums and
claims. Expenses allocated by CIC for the six months ended
June 30, 2010 and 2009 were $281 and $319, respectively,
and are reflected in selling, general and administrative
expenses in the accompanying statements of operations. In the
opinion of management, the costs allocated have been determined
on a basis that is believed to be reasonable for a group of
businesses operating within the structure of a larger parent
company. However, the costs allocated are not necessarily
indicative of the level of expenses that might have been
incurred by the Group operating as a stand-alone entity. The
Parent has not allocated interest expense to the Group.
The Groups Canadian operations use the services of
Culligan of Canada to provide certain administrative functions,
such as general accounting, credit and collection, billing, and
information technology. These services are billed to the Group
based upon an allocation of the level of services provided to
the Group. Expenses allocated by Culligan of Canada to the Group
for the six months ended June 30, 2010 and 2009 were $140
and $125, respectively, and are reflected in selling, general
and administrative expenses in the accompanying statements of
operations.
|
|
(c)
|
Services
Provided to the Group
|
The Group uses the services of the company owned dealer division
(COD) of CIC and Culligan of Canada and other third-party
providers to install and service its vending machines and
equipment at customer locations. The amounts paid to COD for
these services are at the same rate as that paid to third-party
providers. Services provided by COD for installation,
maintenance, and other services for the six months ended
June 30, 2010 and 2009 were $626 and $587, respectively,
and are included in cost of sales in the accompanying statements
of operations.
The Group uses the services of CIC and Culligan of Canada
franchisees to install and service its vending machines and
equipment at customer locations. The amounts paid to franchisees
for these services are at the same rate as that paid to company
owned dealers. Services provided by the franchisees for
installation and maintenance services for the six months ended
June 30, 2010 and 2009 were $1,608 and $1,587,
respectively, and are included in cost of sales in the
accompanying statements of operations.
|
|
(d)
|
Purchases
from the Parent
|
The Group purchases equipment and service parts from CIC.
Purchases from CIC for the six months ended June 30, 2010
and 2009 were $309 and $92, respectively.
The Group uses the Culligan brand name, which is owned by CIC.
CIC does not charge the group for the use of the brand name.
Accordingly, there are no expenses related to the use of this
trademark in the accompanying statements of operations.
F-61
CULLIGAN
STORE SOLUTIONS GROUP
(a business of Culligan Holding S.àr.l)
Notes to Unaudited Combined Financial
Statements (Continued)
June 30, 2010 and 2009
(In thousands)
(6) Parent
Equity
Parent equity at June 30, 2010 and 2009 consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Contributed capital
|
|
$
|
36,104
|
|
|
|
36,104
|
|
Combined accumulated earnings
|
|
|
18,652
|
|
|
|
14,492
|
|
Cumulative currency translation adjustment
|
|
|
1,524
|
|
|
|
1,199
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
56,280
|
|
|
|
51,795
|
|
|
|
|
|
|
|
|
|
|
(7) Sale
of Assets
On June 1, 2010, CSS, CIC and Culligan of Canada entered
into an agreement to sell the assets of the Group to Primo Water
Corporation (Primo). The purchase price is $105 million,
consisting of a cash payment of $60 million and shares of
Primo common stock with a value of $45 million, subject to
certain working capital adjustments. The cash portion of the
purchase price will be increased and the value of the shares of
Primo common stock will be decreased by an amount equal to the
net cash proceeds Primo receives from any exercise of the
underwriters over-allotment option in connection with
Primos initial public offering (the IPO). The closing of
the transaction is subject to meeting certain conditions, which
include Primos successful completion of the IPO.
F-62
8,333,333 Shares
Common Stock
PROSPECTUS
,
2010
Stifel Nicolaus
Weisel
BB&T Capital
Markets
Janney Montgomery
Scott
Signal Hill
Neither we nor the underwriters have authorized anyone to
provide information different from that contained in this
prospectus. When you make a decision about whether to invest in
our common stock, you should not rely upon any information other
than the information in this prospectus. Neither the delivery of
this prospectus nor the sale of our common stock means that
information contained in this prospectus is correct after the
date of this prospectus. This prospectus is not an offer to sell
or solicitation of an offer to buy these shares of common stock
in any circumstances under which the offer or solicitation is
unlawful.
Through and
including ,
2010 (25 days after the date of this prospectus), all
dealers that effect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
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Item 13.
|
Other
Expenses Of Issuance And Distribution
|
The following table sets forth all costs and expenses, other
than the underwriting discount payable by us, in connection with
the offer and sale of the securities being registered. All
amounts shown are estimates except the SEC registration fee, the
Financial Industry Regulatory Authority, Inc. filing fee and the
Nasdaq Global Market listing fee.
|
|
|
|
|
Item
|
|
Amount
|
|
|
SEC Registration Fee
|
|
$
|
8,200
|
|
FINRA Fee
|
|
|
12,000
|
|
Nasdaq Global Market Listing Fee
|
|
|
100,000
|
|
Printing Fees and Expenses
|
|
|
350,000
|
|
Legal Fees and Expenses
|
|
|
1,100,000
|
|
Accounting Fees and Expenses
|
|
|
800,000
|
|
Transfer Agent and Registrar Fees and Expenses
|
|
|
5,000
|
|
Miscellaneous
|
|
|
24,800
|
|
|
|
|
|
|
Total
|
|
$
|
2,400,000
|
|
|
|
|
|
|
|
|
|
*
|
|
To be filed by amendment.
|
|
|
Item 14.
|
Indemnification
Of Directors And Officers
|
We are a corporation organized under the laws of the State of
Delaware. Section 145 of the Delaware General Corporation
Law provides that a corporation may indemnify any person who was
or is a party or is threatened to be made a party to an action
by reason of the fact that he or she was a director, officer,
employee or agent of the corporation or is or was serving at the
request of the corporation against expenses (including
attorneys fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her in
connection with such action if he or she acted in good faith and
in a manner he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with
respect to any criminal action or proceeding, had no reasonable
cause to believe his or her conduct was unlawful, except that,
in the case of an action by or in right of the corporation, no
indemnification may generally be made in respect of any claim as
to which such person is adjudged to be liable to the
corporation. Our amended and restated bylaws, in the form that
will become effective upon the closing of this offering, provide
that we will indemnify and advance expenses to our directors and
officers (and may choose to indemnify and advance expenses to
other employees and other agents) to the fullest extent
permitted by law; provided, however, that if we enter into an
indemnification agreement with such directors or officers, such
agreement controls.
Section 102(b)(7) of the Delaware General Corporation Law
permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for
monetary damages for breach of fiduciary duties as a director,
except for liability for any:
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|
|
|
|
breach of a directors duty of loyalty to the corporation
or its stockholders;
|
|
|
act or omission not in good faith or that involves intentional
misconduct or a knowing violation of law;
|
|
|
unlawful payment of dividends or redemption of shares; or
|
|
|
transaction from which the director derives an improper personal
benefit.
|
Our amended and restated certificate of incorporation, in the
form that will become effective upon the closing of this
offering, provides that our directors are not personally liable
for breaches of fiduciary duties to the fullest extent permitted
by the Delaware General Corporation Law.
These limitations of liability do not apply to liabilities
arising under federal securities laws and do not affect the
availability of equitable remedies such as injunctive relief or
rescission.
II-1
Section 145(g) of the Delaware General Corporation Law
permits a corporation to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee
or agent of the corporation. Our amended and restated bylaws, in
the form that will become effective upon the closing of this
offering, permit us to secure insurance on behalf of any
officer, director, employee or other agent for any liability
arising out of his or her actions in connection with their
services to us, regardless of whether our bylaws permit
indemnification. We have directors and officers
liability insurance.
As permitted by the Delaware General Corporation Law, we have
entered into indemnity agreements with each of our directors
that require us to indemnify such persons against various
actions including, but not limited to, third-party actions where
such director, by reason of his or her corporate status, is a
party or is threatened to be made a party to an action, or by
reason of anything done or not done by such director in any such
capacity. We intend to indemnify directors against all costs,
judgments, penalties, fines, liabilities, amounts paid in
settlement by or on behalf such directors and for any expenses
actually and reasonably incurred by such directors in connection
with such action, if such directors acted in good faith and in a
manner they reasonably believed to be in or not opposed to the
best interests of the corporation, and with respect to any
criminal proceeding, had no reasonable cause to believe their
conduct was unlawful. We also intend to advance to our directors
expenses (including attorneys fees) incurred by such
directors in advance of the final disposition of any action
after the receipt by the corporation of a statement or
statements from directors requesting such payment or payments
from time to time, provided that such statement or statements
are accompanied by an undertaking, by or on behalf of such
directors, to repay such amount if it shall ultimately be
determined that they are not entitled to be indemnified against
such expenses by the corporation.
The indemnification agreements also set forth certain procedures
that will apply in the event of a claim for indemnification or
advancement of expenses, including, among others, provisions
about providing notice to the corporation of any action in
connection with which a director seeks indemnification or
advancement of expenses from the corporation and provisions
concerning the determination of entitlement to indemnification
or advancement of expenses.
Prior to the closing of this offering we plan to enter into an
underwriting agreement, which will provide that the underwriters
are obligated, under some circumstances, to indemnify our
directors, officers and controlling persons against specified
liabilities.
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|
Item 15.
|
Recent
Sales of Unregistered Securities
|
In the three years preceding the filing of this registration
statement, we issued the securities indicated below that were
not registered under the Securities Act. All share and price
information does not reflect the conversion of all of our issued
and outstanding shares Series A and Series C
convertible preferred stock into common stock or the reverse
stock split of our common stock, both of which will occur
immediately prior to the closing of this offering.
Stock,
Warrants and Convertible Subordinated Notes
1. On October 5, 2010, we issued subordinated
convertible promissory notes, bearing interest at 14% per annum,
in an aggregate principal amount of $3,418,167, and warrants to
purchase an aggregate of 24,265 shares of common stock to
22 accredited investors. The aggregate consideration received by
us was $3,418,167.
2. On February 18, 2010, we granted to 18 employees
and four non-employee directors 105,654 shares of
restricted common stock. We received no consideration from the
individuals in connection with the grant of the restricted stock.
3. On December 30, 2009, we issued subordinated
convertible promissory notes, bearing interest at 14% per annum,
in an aggregate original principal amount of $15,000,000, and
warrants to purchase an aggregate of 106,482 shares of
common stock to 28 accredited investors. The aggregate
consideration received by us was $15,000,000.
4. On June 4, 2008, we issued a warrant to purchase
9,583 shares of common stock to two residents of Ontario,
Canada. The consideration received by us was $10.
II-2
5. Between December 14, 2007 and June 2, 2008, we
issued an aggregate of 12,520,001 shares of Series C
convertible preferred stock and warrants to purchase an
aggregate of 119,980 shares of common stock to 37
accredited investors. The aggregate consideration received by us
was $30,048,002.
6. Between July 11, 2007 and August 9, 2010, we
issued an aggregate of 12,715 shares of our common stock to
seven employees. The aggregate consideration received by us was
$141,586.75.
7. Between June 1, 2007 and July 13, 2007, we
issued an aggregate of 3,530,495 shares of Series B
preferred stock to 26 accredited investors. The aggregate
consideration received by us was $3,530,495.
8. On January 10, 2007, we issued 3,000 shares of
Series B preferred stock and warrants to purchase
77 shares of common stock to one accredited investor. The
consideration received by us was $3,000.
The grants of restricted common stock described in
(2) above were made pursuant to our 2004 Stock Plan to our
officers, directors and employees in reliance upon an available
exemption from the registration requirements of the Securities
Act, including those contained in Rule 701 promulgated
under Section 3(b) of the Securities Act. Among other
things, we relied on the fact that, under Rule 701,
companies that are not subject to the reporting requirements of
Section 13 or Section 15(d) of the Exchange Act are
exempt from registration under the Securities Act with respect
to certain offers and sales of securities pursuant to
compensatory benefit plans as defined under that
rule. We believe that our 2004 Stock Plan qualifies as a
compensatory benefit plan.
We believe that the offer and sale of the securities referenced
in (1), (3), (5), (7) and (8) above were exempt from
registration under the Securities Act by virtue of
Section 4(2) of the Securities Act
and/or
Regulation D promulgated thereunder as transactions not
involving any public offering. All of the purchasers of
unregistered securities for which we relied on Section 4(2)
and/or
Regulation D represented that they were accredited
investors as defined under the Securities Act. The purchasers in
each case represented that they intended to acquire the
securities for investment only and not with a view to the
distribution thereof and that they either received adequate
information about the registrant or had access, through
employment or other relationships, to such information;
appropriate legends were affixed to the stock certificates
issued in such transactions; and offers and sales of these
securities were made without general solicitation or advertising.
The sales of common stock referenced in (6) above was made
pursuant to the exercise of stock options granted under our 2004
Stock Plan to our officers, directors, employees and consultants
and, we believe, were made in reliance upon an available
exemption from the registration requirements of the Securities
Act, including those contained in Rule 701 promulgated
under Section 3(b) of the Securities Act. Among other
things, we relied on the fact that, under Rule 701,
companies that are not subject to the reporting requirements of
Section 13 or Section 15(d) of the Exchange Act are
exempt from registration under the Securities Act with respect
to certain offers and sales of securities pursuant to
compensatory benefit plans as defined under that
rule. We believe that our 2004 Stock Plan qualifies as a
compensatory benefit plan.
We believe the sales of common stock referenced in
(4) above were exempt from registration under the
Securities Act by virtue of Regulation S promulgated
thereunder. All of the purchasers of unregistered securities for
which we relied on Regulation S represented that they were
not acquiring the securities for the account or benefit of any
U.S. Person as defined by Regulation S.
There were no underwriters engaged in connection with any of the
transactions referenced above.
Stock
Options
1. On February 18, 2010, we granted one of our employees an
option to purchase 9,583 shares of our common stock at an
exercise price of $12.84 per share. We received no consideration
from this individual in connection with the issuance of such
option.
2. On January 28, 2010, we granted to three of our
employees options to purchase 21,560 shares of our common
stock at an exercise price of $12.84 per share. We received no
consideration from these individuals in connection with the
issuance of such options.
II-3
3. On January 29, 2009, we granted to seven of our
employees options to purchase an aggregate of 13,605 shares
of our common stock at an exercise price of $13.04 per share. We
received no consideration from these individuals in connection
with the issuance of such options.
4. On August 1, 2008, we granted to two of our
employees options to purchase an aggregate of 2,874 shares
of our common stock at an exercise price of $20.66 per share. We
received no consideration from these individuals in connection
with the issuance of such options.
5. On July 23, 2008, we granted to one employee an option
to purchase 3,833 shares of our common stock at an exercise
price of $20.66 per share. We received no consideration from
this individual in connection with the issuance of such options.
6. On June 25, 2008, we granted to one employee an
option to purchase 796 shares of our common stock at an
exercise price of $20.66 per share. We received no consideration
from this individual in connection with the issuance of such
options.
7. On May 1, 2008, we granted to 18 employees
options to purchase an aggregate of 45,208 shares of our
common stock at an exercise price of $20.66 per share. We
received no consideration from these individuals in connection
with the issuance of such options.
8. On January 31, 2008, we granted to one employee an
option to purchase 186 shares of our common stock at an
exercise price of $20.66 per share. We received no consideration
from this individual in connection with the issuance of such
options.
9. On December 31, 2007, we granted to three employees
options to purchase an aggregate of 7,186 shares of our
common stock at an exercise price of $25.04 per share. We
received no consideration from these individuals in connection
with the issuance of such options.
10. On October 31, 2007, we granted to three employees
options to purchase an aggregate of 6,902 shares of our
common stock at an exercise price of $13.04 per share. We
received no consideration from these individuals in connection
with the issuance of such options.
11. On August 15, 2007, we granted to one employee an
option to purchase 958 shares of our common stock at an
exercise price of $13.04 per share. We received no consideration
from this individual in connection with the issuance of such
options.
12. On August 10, 2007, we granted to two employees
options to purchase and aggregate of 1,437 shares of our
common stock at an exercise price of $13.04 per share. We
received no consideration from these individuals in connection
with the issuance of such options.
13. On April 26, 2007, we granted to one employee an
option to purchase 958 shares of our common stock at an
exercise price of $13.04 per share. We received no consideration
from this individual in connection with the issuance of such
options.
14. On January 25, 2007, we granted to
16 employees options to purchase an aggregate of
33,274 shares of our common stock at an exercise price of
$13.04 per share. We received no consideration from these
individuals in connection with the issuance of such options.
15. On January 25, 2007, we granted to four
non-employee directors options to purchase an aggregate of
14,179 shares of our common stock at an exercise price of
$13.04 per share. We received no consideration from these
individuals in connection with the issuance of such options.
All of the stock options described above were granted under our
2004 Stock Plan to our officers, directors, employees and
consultants in reliance upon an available exemption from the
registration requirements of the Securities Act, including those
contained in Rule 701 promulgated under Section 3(b)
of the Securities Act. Among other things, we relied on the fact
that, under Rule 701, companies that are not subject to the
reporting requirements of Section 13 or Section 15(d)
of the Exchange Act are exempt from registration under the
Securities Act with respect to certain offers and sales of
securities pursuant to compensatory benefit plans as
defined under that rule. We believe that our 2004 Stock Plan
qualifies as a compensatory benefit plan.
II-4
The
Culligan Refill Acquisition
Concurrently with the closing of this offering, we are
purchasing certain assets of Culligan Store Solutions, LLC and
Culligan of Canada, Ltd. (together with Culligan International
Company, Culligan) for a total purchase price of
$105.0 million, consisting of a cash payment of
$60.0 million and the issuance of shares of our common
stock with a value of $45.0 million. The cash portion of
the purchase price will be increased and the number of shares of
common stock we will issue will be decreased by an amount equal
to the net cash proceeds we receive from any exercise of the
underwriters over-allotment option.
We believe that the issuance of the securities to Culligan in
connection with this transaction will be exempt from
registration under the Securities Act by virtue of
Section 4(2) of the Securities Act and/or Regulation D
promulgated thereunder as a transaction not involving any public
offering. Culligan has represented that it is an
accredited investor as defined under the Securities
Act. Culligan has represented that is intends to acquire the
securities for investment only and not with a view to the
distribution thereof and that it either received adequate
information about the registrant or had access to such
information; appropriate legends were affixed to the stock
certificates issued in such transaction; and issuance of these
securities was made without general solicitation or advertising.
There were no underwriters engaged in connection with any of the
transactions referenced above.
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Item 16.
|
Exhibits
and Financial Statement Schedules
|
See Exhibit Index following the signature page.
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) For the purpose of determining liability under the
Securities Act to any purchaser, each prospectus filed pursuant
to Rule 424(b) as part of a registration statement relating
to an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in
the registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the
registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement
or prospectus that is
II-5
part of the registration statement will, as to a purchaser with
a time of contract of sale prior to such first use, supersede or
modify any statement that was made in the registration statement
or prospectus that was part of the registration statement or
made in any such document immediately prior to such date of
first use.
(4) For the purpose of determining liability of the
registrant under the Securities Act to any purchaser in the
initial distribution of the securities, in a primary offering of
securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method
used to sell the securities to the purchaser, if the securities
are offered or sold to such purchaser by means of any of the
following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell
such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned registrant relating to the offering required to be
filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned registrant or used
or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned registrant or its securities provided by or on
behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the
offering made by the undersigned registrant to the purchaser.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Winston-Salem, State of North
Carolina, on October 18, 2010.
PRIMO WATER CORPORATION
Billy D. Prim
Chairman, Chief Executive Officer and President
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 indicated, in
each case on October 18, 2010:
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|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Billy
D. Prim
Billy
D. Prim
|
|
Chairman, Chief Executive Officer, President and Director
(Principal Executive Officer)
|
|
|
|
/s/ Mark
Castaneda
Mark
Castaneda
|
|
Chief Financial Officer (Principal Financial Officer)
|
|
|
|
/s/ David
J. Mills
David
J. Mills
|
|
Controller (Principal Accounting Officer)
|
|
|
|
*
Richard
A. Brenner
|
|
Director
|
|
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|
*
David
W. Dupree
|
|
Director
|
|
|
|
*
Malcolm
McQuilkin
|
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Director
|
|
|
|
*
David
L. Warnock
|
|
Director
|
Billy D. Prim
Attorney-in-fact
II-7
INDEX TO
EXHIBITS
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1
|
|
Form of Underwriting Agreement
|
|
3
|
.1
|
|
Fourth Amended and Restated Certificate of Incorporation of
Primo Water Corporation
|
|
3
|
.2
|
|
First Amendment to Fourth Amended and Restated Certificate of
Incorporation of Primo Water Corporation
|
|
3
|
.3
|
|
Second Amendment to Fourth Amended and Restated Certificate of
Incorporation of Primo Water Corporation
|
|
3
|
.4
|
|
Form of Fifth Amended and Restated Certificate of Incorporation
of Primo Water Corporation
|
|
3
|
.5
|
|
Form of Amended and Restated Bylaws of Primo Water Corporation
|
|
4
|
.1
|
|
Specimen Certificate representing shares of common stock of
Primo Water Corporation
|
|
5
|
.1
|
|
Opinion of K&L Gates LLP
|
|
10
|
.1
|
|
Loan and Security Agreement, dated as of June 23, 2005,
among Primo Water Corporation, Primo To Go, LLC, Primo Products,
LLC, Primo Direct, LLC, and Wachovia Bank, National Association
(the Credit Agreement)
|
|
10
|
.2
|
|
First Amendment to Loan and Security Agreement, dated as of
April 26, 2006, among Primo Water Corporation and Wachovia
Bank, National Association
|
|
10
|
.3
|
|
Second Amendment to Loan and Security Agreement, dated as of
April 30, 2007, among Primo Water Corporation and Wachovia
Bank, National Association
|
|
10
|
.4
|
|
Third Amendment to Loan and Security Agreement, dated as of
June 24, 2008, among Primo Water Corporation, Primo To Go,
LLC, Primo Products, LLC, Primo Direct, LLC, and Wachovia Bank,
National Association
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|
10
|
.5
|
|
Fourth Amendment to Loan and Security Agreement, dated as of
January 7, 2009, among Primo Water Corporation, Primo To
Go, LLC, Primo Products, LLC, Primo Direct, LLC, and Wachovia
Bank, National Association
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|
10
|
.6
|
|
Fifth Amendment to Loan and Security Agreement, dated as of
December 30, 2009, among Primo Water Corporation, Primo To
Go, LLC, Primo Products, LLC, Primo Direct, LLC, and Wachovia
Bank, National Association
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|
10
|
.7
|
|
Sixth Amendment to Loan and Security Agreement, dated as of
December 30, 2009, among Primo Water Corporation, Primo To
Go, LLC, Primo Products, LLC, Primo Direct, LLC, and Wachovia
Bank, National Association
|
|
10
|
.8
|
|
Form of 14% Subordinated Convertible Note, dated as of
December 30, 2009
|
|
10
|
.9
|
|
Form of Subordinated Convertible Debt Common Stock
Purchase Warrant, dated as of December 30, 2009
|
|
10
|
.10
|
|
Form of Series C Convertible Preferred Stock Subscription
Agreement
|
|
10
|
.11
|
|
Form of Series C Common Stock Purchase Warrant
|
|
10
|
.12
|
|
Form of First Amendment to Series C Common
Stock Purchase Warrant
|
|
10
|
.13
|
|
Form of Series B Preferred Stock Subscription Agreement
|
|
10
|
.14
|
|
Form of Series B Common Stock Purchase Warrant
|
|
10
|
.15
|
|
2004 Stock Plan*
|
|
10
|
.16
|
|
2010 Omnibus Long-Term Incentive Plan (2010 Omnibus
Plan)*
|
|
10
|
.17
|
|
Form of Option Agreement under 2010 Omnibus Plan*
|
|
10
|
.18
|
|
Form of Restricted Stock Award Agreement under 2010 Omnibus Plan*
|
|
10
|
.19
|
|
2010 Employee Stock Purchase Plan*
|
|
10
|
.20
|
|
2010 Executive Incentive Plan*
|
|
10
|
.21
|
|
Non-Employee Director Compensation Policy*
|
|
10
|
.22
|
|
Employment Agreement dated as of April 1, 2010 between
the Company and Billy D. Prim*
|
|
10
|
.23
|
|
Employment Agreement dated as of April 1, 2010 between
the Company and Mark Castaneda*
|
II-8
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.24
|
|
Employment Agreement dated as of April 1, 2010 between
the Company and Michael S. Gunter*
|
|
10
|
.25
|
|
Employment Agreement dated as of April 1, 2010 between
the Company and Duane Goodwin*
|
|
10
|
.26
|
|
Form of Indemnification Agreement between the Company and each
of Messrs. Prim, Brenner, Dupree, McQuilkin and Warnock
|
|
10
|
.27
|
|
Master Equipment Lease Agreement with PWC Leasing, LLC, dated as
of March 29, 2006
|
|
10
|
.28
|
|
Termination Agreement of Master Equipment Lease Agreement with
PWC Leasing, LLC, dated as of June 30, 2008
|
|
10
|
.29
|
|
Assignment Separate from Certificate for Shares of Prima Bottled
Water, Inc., dated December 31, 2009
|
|
10
|
.30
|
|
Seventh Amendment to Loan and Security Agreement, Waiver and
Consent, dated June 1, 2010, among Primo Water Corporation,
Primo Products, LLC, Primo Direct, LLC and Wells Fargo Bank, N.A.
|
|
10
|
.31
|
|
Asset Purchase Agreement, dated as of June 1, 2010, between
the Company, P1 Sub, LLC, P2 Sub, LLC, Culligan Store Solutions,
LLC, Culligan of Canada, Ltd. and Culligan International Company
|
|
10
|
.32
|
|
Form of Trademark License Agreement to be entered into between
Culligan International Company, P1 Sub, LLC and P2 Sub, LLC
|
|
10
|
.33
|
|
Form of Non-Competition Agreement to be entered into between the
Company, P1 Sub, LLC, P2 Sub, LLC, Culligan Store Solutions,
LLC, Culligan of Canada, Ltd. and Culligan International Company
|
|
10
|
.34
|
|
Form of U.S. Transition Services Agreement to be entered into
between P1 Sub, LLC and Culligan International Company
|
|
10
|
.35
|
|
Form of Canada Transition Services Agreement between P2 Sub, LLC
and Culligan of Canada, Ltd.
|
|
10
|
.36
|
|
Form of Dealer Services Agreement between P1 Sub, LLC, P2 Sub,
LLC and Culligan International Company
|
|
10
|
.37
|
|
Lock-Up
Agreement, dated as of June 1, 2010, between Culligan Store
Solutions, LLC, Culligan International Company, Thomas Weisel
Partners, LLC and Wells Fargo Securities, LLC
|
|
10
|
.38
|
|
Form of Registration Rights Agreement to be entered into between
the Company and Culligan International Company
|
|
10
|
.39
|
|
Form of Supply Agreement to be entered into between P1 Sub, LLC,
P2 Sub, LLC and Culligan International Company
|
|
10
|
.40
|
|
Amendment No. 1 dated October 5, 2010 to Lock-up Agreement
dated as of June 1, 2010 between Culligan Store Solutions,
LLC, Culligan International Company, Thomas Weisel Partners LLC
and Wells Fargo Securities, LLC
|
|
10
|
.41
|
|
Form of 14% Convertible Subordinated Note, dated as of
October 5, 2010
|
|
10
|
.42
|
|
Form of Consent of the Holders of the Subordinated Convertible
Promissory Notes Issued in December 2009 and October 2010
|
|
10
|
.43
|
|
Form of Amended and Restated Series B Common Stock Purchase
Warrant
|
|
10
|
.44
|
|
Form of Amended and Restated Series C Common Stock Purchase
Warrant
|
|
16
|
.1
|
|
Letter from Independent Registered Accounting Firm
|
|
21
|
.1
|
|
List of subsidiaries of Primo Water Corporation
|
|
23
|
.1
|
|
Consent of McGladrey & Pullen LLP
|
|
23
|
.2
|
|
Consent of KPMG LLP
|
|
23
|
.3
|
|
Consent of K&L Gates LLP (contained in Exhibit 5.1)
|
|
24
|
.1
|
|
Powers of Attorney
|
|
|
|
|
|
Previously filed.
|
|
*
|
|
Indicates management contract or
compensatory plan or arrangement
|
II-9