Crystal Rock Holdings, Inc. - FORM 10-K

Attached files

file	filename
EX-23.1 - EXHIBIT 23.1 - Crystal Rock Holdings, Inc.	ex231.htm
EX-31.1 - EXHIBIT 31.1 - Crystal Rock Holdings, Inc.	ex311.htm
EX-31.2 - EXHIBIT 31.2 - Crystal Rock Holdings, Inc.	ex312.htm
EX-21.1 - EXHIBIT 21.1 - Crystal Rock Holdings, Inc.	ex211.htm
EX-32.1 - EXHIBIT 32.1 - Crystal Rock Holdings, Inc.	ex321.htm
EX-32.2 - EXHIBIT 32.2 - Crystal Rock Holdings, Inc.	ex322.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended October 31, 2009.

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________.

Commission File Number 000-31797

VERMONT PURE HOLDINGS, LTD.

(Exact name of registrant as specified in its charter)

Delaware				03-0366218
State or other jurisdiction of incorporation or organization				I.R.S. Employer Identification Number

1050 Buckingham St., Watertown, CT 06795

(Address of principal executive offices and zip code)

Registrant's telephone number, including area code: (860) 945-0661

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of exchange on which registered
Common Stock, par value $.001 per share	NYSE Amex

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [_] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [_] No [X]

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

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.

Large accelerated filer [ ] Accelerated filer [ ]

Non-accelerated filer [ ] Smaller Reporting Company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes [ ] No [X]

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the last sale price per share of common stock on April 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, as reported on the NYSE Amex, was $7,337,832.

The number of shares outstanding of the registrant's Common Stock, $.001 par value per share, was 21,472,439 on January 4, 2010.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement, to be filed not later than 120 days after the registrant’s fiscal year ended October 31, 2009, and delivered in connection with the registrant’s annual meeting of stockholders, are incorporated by reference into Part III of this Form 10-K.

	Table of Contents	Page
Part I
Item 1.	Business	3
Item 1A.	Risk Factors	9
Item 1B.	Unresolved Staff Comments	15
Item 2.	Properties	15
Item 3.	Legal Proceedings	16
Item 4.	Submission of Matters to a Vote of Security Holders	17
Part II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	18
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
Item 8.	Financial Statements and Supplementary Data	27
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	27
Item 9A(T).	Controls and Procedures	27
Item 9B.	Other Information	28
Part III
Item 10.	Directors, Executive Officers and Corporate Governance	29
Item 11.	Executive Compensation	29
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	29
Item 13.	Certain Relationships and Related Transactions, and Director Independence	30
Item 14.	Principal Accountant Fees and Services	30
Part IV
Item 15.	Exhibits and Financial Statement Schedules	31
	Signatures	33

Note: Items 6 and 7A are not required for smaller reporting companies and therefore are not furnished.

***************

In this Annual Report on Form 10-K, “Vermont Pure,” the “Company,” “we,” “us” and “our” refer to Vermont Pure Holdings, Ltd. and its subsidiary, taken as a whole, unless the context otherwise requires.

***************

This Annual Report on Form 10-K contains references to trade names, label design, trademarks and registered marks of Vermont Pure Holdings, Ltd. and its subsidiary and other companies, as indicated. Unless otherwise provided in this Annual Report on Form 10-K, trademarks identified by (R) are registered trademarks or trademarks, respectively, of Vermont Pure Holdings, Ltd. or its subsidiary. All other trademarks are the properties of their respective owners.

***************

Except for historical facts, the statements in this Annual Report on Form 10-K are forward-looking statements. Forward-looking statements are merely our current predictions of future events. These statements are inherently uncertain, and actual events could differ materially from our predictions. Important factors that could cause actual events to vary from our predictions include those discussed in this Annual Report on Form 10-K under the heading “Risk Factors.” We assume no obligation to update our forward-looking statements to reflect new information or developments. We urge readers to review carefully the risk factors described in this Annual Report on Form 10-K and in the other documents that we file with the Securities and Exchange Commission. You can read these documents at www.sec.gov.

PART I

ITEM 1. BUSINESS.

Introduction and Company Background

Vermont Pure Holdings, Ltd., incorporated in Delaware in 1990, is engaged in the production, marketing and distribution of bottled water and the distribution of coffee, ancillary products, and other office refreshment products. We operate primarily as a distribution business to homes and offices, using our own trucks for distribution throughout New England, New York, and New Jersey.

Our distribution sales and services evolved from our initial business, sales of bottled water and cooler rentals. We bottle our water and also have it bottled for us. All of our water products are still, non-sparkling waters as opposed to sparkling waters. In addition to water and related services our other significant offerings have grown to include distribution of coffee and ancillary products, and other refreshment products including soft drinks and snacks. To a lesser extent, we distribute these products through third party distributors and directly through vending machines.

Bottled water is a mainstream beverage and the centerpiece of many consumers’ healthy living lifestyles. In addition, we believe that the development and continued growth of the bottled water industry reflects growing public awareness of the potential contamination and unreliability of municipal water supplies. Conversely, bottled water has been the recent focus of publicity regarding concerns about the environmental and health effects of using polycarbonate plastic bottles (these are described in more detail in Item 1A, Risk Factors).

Coffee, a product that is counter seasonal to water, is the second leading product in the distribution channel, accounting for 24% of our total sales in fiscal year 2009. We sell different brands and sizes of coffee products. Recently, we have re-introduced our Cool Beans® brand coffee in an effort to increase profitability and create brand equity in the coffee category. Because coffee is a commodity, coffee sales are affected by volatility in the world commodity markets. An interruption in supply or a dramatic increase in pricing could have an adverse effect on our business.

The increase in coffee sales in recent years has been driven by the market growth of single-serve coffee products. This development has revolutionized the marketplace and, while we expect the growth of these products to continue, innovation and changes in distribution will play a significant role in the profitability of the products.

Water Sources, Treatment, and Bottling Operations

Water from local municipalities is the primary raw source for the Crystal Rock® brand. The raw water is purified through a number of processes beginning with filtration. Utilizing carbon and ion exchange filtration systems, we remove chlorine and other volatile compounds and dissolved solids. After the filtration process, impurities are removed by reverse osmosis and/or distillation. We ozonate our purified water (by injecting ozone into the water as an agent to prohibit the formation of bacteria) prior to storage. Prior to bottling, we add pharmaceutical grade minerals to the water, including calcium and potassium, for taste. The water is again ozonated and bottled in a fully enclosed clean room with a high efficiency particulate air, or HEPA, filtering system designed to prevent any airborne contaminants from entering the bottling area, in order to create a sanitary filling environment.

If for any reason the municipal sources for Crystal Rock® water were curtailed or eliminated, we could, though probably at greater expense, purchase water from other sources and have it shipped to our manufacturing facilities.

In conjunction with our acquisition of their Home and Office distribution assets, we entered into a contract with Mayer Brothers of Buffalo, New York to bottle our Crystal Rock® brand in that market.

The primary source of our natural spring water (primarily sold under the Vermont Pure® brand) is a spring owned by a third party in Stockbridge, Vermont that is subject to a 50- year water supply contract. We also obtain water, under similar agreements with third parties, from springs in Bennington and Tinmouth, Vermont. These three springs are approved by the State of Vermont as sources for natural spring water. The contractual terms for these springs provide spring water in excess of our current needs and within the apparent capacity of the springs, and accordingly we believe that we can readily meet our bulk water supply needs for the foreseeable future.

Percolation through the earth's surface is nature's best filter of water. We believe that the exceptionally long percolation period of natural spring water assures a high level of purity. Moreover, the long percolation period permits the water to become mineralized and pH balanced.

We believe that the age and extended percolation period of our natural spring water provides the natural spring water with certain distinct attributes: a purer water, noteworthy mineral characteristics (including the fact that the water is sodium free and has a naturally balanced pH), and a light, refreshing taste.

An interruption or contamination of any of our spring sites would materially affect our business. We believe that we could find adequate supplies of bulk spring water from other sources, but that we might suffer inventory shortages or inefficiencies, such as increased purchase or transportation costs, in obtaining such supplies.

We are highly dependent on the integrity of the sources and processes by which we derive our products. Natural occurrences beyond our control, such as drought, earthquake or other geological changes, a change in the chemical or mineral content or purity of the water, or environmental pollution may affect the amount and quality of the water emanating from the springs or municipal sources that we use. There is a possibility that characteristics of the product could be changed either inadvertently or by tampering before consumption. Even if such an event were not attributable to us, the product’s reputation could be irreparably harmed. Consequently, we would experience economic hardship. Occurrence of any of these events could have an adverse impact on our business. We are also dependent on the continued functioning of our bottling processes. An interruption may result in an inability to meet market demand and/or negatively impact the cost to bottle the products.

We have no material contractual commitments to the owners of our outside sources and bottling facilities other than for the products and services we receive.

We use outside trucking companies to transport bulk spring water from the source site to our bottling facilities.

Products

We sell our major brands in three and five gallon bottles to homes and offices throughout New England, New York, and New Jersey. In general, Crystal Rock® is distributed in southern New England and upstate and western New York, while Vermont Pure® is primarily distributed throughout northern New England and upstate New York and secondarily in southern New England. We rent and sell water coolers to customers to dispense bottled water. Our coolers are available in various consumer preferences such as cold, or hot and cold, dispensing units. In addition, we sell and rent units to commercial accounts that filter water from the existing source on site. We also rent and sell coffee brewing equipment and distribute a variety of coffee, tea and other hot beverage products and related supplies, as well as other consumable products used around the office. We offer vending services in some locations. We own the Cool Beans® brand of coffee which we distribute throughout our market area. In addition to Cool Beans®, we sell other brands of coffee, most notably, Baronet and Green Mountain Coffee Roasters.

Our extensive distribution system and large customer lists afford us the opportunity to introduce new products that may benefit our current customers or appeal to new customers. From time to time we may capitalize on these opportunities by expanding our product lines or replacing existing products with new ones. In response to the increasingly competitive sales environment, we will consider distributing new products that we believe may enhance our sales and profitability.

Marketing and Sales of Branded Products

Our water products are marketed and distributed in three and five gallon bottles as “premium” bottled water. We seek brand differentiation by offering a choice of high quality spring and purified water along with a wide range of coffee and office refreshment products, and value-added service. Home and Office sales are generated and serviced using our own facilities, employees and vehicles.

We support this sales effort through Yellow Pages and internet advertising, as well as selected radio, television and billboard advertising campaigns. We also sponsor local area sporting events, participate in trade shows, and endeavor to be highly visible in community and charitable events through donations.

We market our Home and Office delivery service throughout most of New England and New York and parts of New Jersey. Telemarketers and outside/cold-call sales personnel are used to market our Home and Office delivery.

Advertising and Promotion

We advertise our products primarily through Yellow Pages and internet advertising and, from time to time on radio, television, and billboards. Radio and billboard has primarily been used in the southern New England market on a selected basis. We have also actively promoted our products through sponsorship of various local organizations and sporting events to endeavor to be highly visible in the communities that we serve. In recent years, we have sponsored professional minor league baseball and various charitable and cultural organizations, such as Special Olympics and the Multiple Sclerosis Society donating both products and money.

Sales and Distribution

We sell and deliver products directly to our customers using our own employees and route delivery trucks. We make deliveries to customers on a regularly scheduled basis. We bottle our water at our facilities in Watertown, Connecticut, White River Junction, Vermont, and Halfmoon, New York and have water bottled for us in Buffalo and Clayton, New York. We maintain numerous distribution locations throughout our market area. From these locations we also distribute dispensing equipment, a variety of coffee, tea and other refreshment products, and related supplies. We ship between our production and distribution sites using both our own and contracted carriers.

Supplies

We currently source all of our raw materials from outside vendors. As one of the largest Home and Office distributors in the country, we are able to capitalize on volume to continue to reduce costs.

We rely on trucking to receive raw materials and transport and deliver our finished products. Consequently, the price of fuel significantly impacts the cost of our products. We purchase our own fuel for our Home and Office delivery and use third parties for transportation of raw materials and finished goods between our warehouses. While volume purchases can help control erratic fuel pricing, market conditions ultimately determine the price. In 2008, we experienced substantial increases in fuel prices as a result of market influences. However, we were able to establish a fuel adjustment charge for our customers that covered the incremental rising cost of fuel. In 2009, prices substantially decreased, but again our aggregate fuel adjustment charge revenue, although it declined, offset the incremental fuel cost over what we considered our “base” level for fuel cost. However, the risk remains that we may not be able to use fuel price adjustments to cover the cost of fuel increases in a volatile market for petroleum products, which could adversely affect our profitability.

No assurance can be given that we will be able to obtain the supplies we require on a timely basis or that we will be able to obtain them at prices that allow us to maintain the profit margins we have had in the past. We believe that we will be able to either renegotiate contracts with these suppliers when they expire or, alternatively, if we are unable to renegotiate contracts with our key suppliers, we believe that we could replace them. Any raw material disruption or price increase may result in an adverse impact on our financial condition and prospects. For instance, we could incur higher costs in renegotiating contracts with existing suppliers or replacing those suppliers, or we could experience temporary dislocations in our ability to deliver products to our customers, either of which could have a material adverse effect on our results of operations.

Seasonality

Our business is seasonal. The period from June to September, when we have our highest water sales, represents the peak period for sales and revenues due to increased consumption of cold beverages during the summer months in our core Northeastern United States market. Conversely, coffee, which represented 24% of our sales in 2009, has a peak sales period from November to March.

Competition

We believe that bottled water historically has been a regional business in the United States. The market includes several large regional brands owned by multi-national companies that operate throughout contiguous states. We also compete with smaller, locally-owned bottlers that operate in specific cities or market areas within single states.

With our Crystal Rock® and Vermont Pure® brands, we compete on the basis of pricing, customer service, quality of our products, attractive packaging, and brand recognition. We consider our trademarks, trade names and brand identities to be very important to our competitive position and defend our brands vigorously. In addition, we offer PET plastic as an alternative bottle and have converted customers with health concerns about polycarbonate plastic to this container.

We feel that installation of filtration units in the home or commercial setting poses a competitive threat to our business. To address this, we have continued to develop our plumbed-in filtration business by completing a small acquisition in this line of business in 2009 and actively offering it as an alternative product.

In the past five years, cheaper water coolers from offshore sources have become more prevalent, making customer purchasing a more viable alternative to leasing. Traditionally, the rental of water coolers for offices and homes has been a very profitable business for us. As coolers have become cheaper and more readily available at retail outlets, our cooler rental revenue has declined. Although this rental revenue is very profitable for us, it may continue to decline or become less profitable in the future as a result of this relatively new form of competition.

As discussed above, coffee is another significant component of our overall sales. The growth of this product line has been driven by single serve packages. Increased competition has developed for these products, not only from other food and beverage distributors, but office products distributors as well. In addition, retail and internet availability has increased as well. Machines to brew these packages are different from traditional machines and packages ideally need to be brewed in machines that accommodate the specific package. The popularity of a certain machine dictates what products are successful in the marketplace. Consequently, our success, both from a sales and profitability perspective, may be affected by our access to distribution rights for certain products and machines and our decisions concerning which equipment to invest in.

We believe that it has become increasingly important to our competitive advantage to decrease the impact of our business on the environment. We traditionally use five gallon containers that are placed on coolers and are reused many times. In recent years, we have taken additional steps to “green” our business including:

·	Completed an extensive solar electricity generation installation in our Watertown facility to supply a significant amount of the energy for that facility.

·	Upgraded the lighting in most of our facilities to high efficiency lighting.

·	Instituted no-idling and other driving policies in all of our locations.

·	Upgraded many of our older vehicles to new, more energy efficient vehicles.

Trademarks

We own the trade names of the principal water brands that we sell, Vermont Pure Natural Spring Water® and Crystal Rock®. We also own the Cool Beans® coffee brand and own or have rights to other trade names that currently are not a significant part of our business. Our trademarks as well as label designs are, in general, registered with the United States Patent and Trademark Office.

Government Regulation

The Federal Food and Drug Administration (FDA) regulates bottled water as a “food.” Accordingly, our bottled water must meet FDA requirements of safety for human consumption, of processing and distribution under sanitary conditions and of production in accordance with the FDA “good manufacturing practices.” To assure the safety of bottled water, the FDA has established quality standards that address the substances that may be present in water which may be harmful to human health as well as substances that affect the smell, color and taste of water. These quality standards also require public notification whenever the microbiological, physical, chemical or radiological quality of bottled water falls below standard. The labels affixed to bottles and other packaging of the water are subject to FDA restrictions on health and nutritional claims for foods under the Fair Packaging and Labeling Act. In addition, all drinking water must meet Environmental Protection Agency standards established under the Safe Drinking Water Act for mineral and chemical concentration and drinking water quality and treatment that are enforced by the FDA.

We are subject to the food labeling regulations required by the Nutritional Labeling and Education Act of 1990. We believe we are in compliance with these regulations.

We are subject to periodic, unannounced inspections by the FDA. Upon inspection, we must be in compliance with all aspects of the quality standards and good manufacturing practices for bottled water, the Fair Packaging and Labeling Act, and all other applicable regulations that are incorporated in the FDA quality standards. We believe that we meet the current regulations of the FDA, including the classification as spring water. All of our plants and distribution locations are registered with the FDA under the 2002 "Public Health Security and Bioterrorism Preparedness and Response Act of 2002". Most recently, the FDA put into effect the Bottled Water Microbial Rule to monitor water sources for E. coli bacteria. We have been in compliance with the testing requirements for this rule prior to and since its inception in December 2009.

We also must meet state regulations in a variety of areas to comply with purity, safety, and labeling standards. From time to time, our facilities and sources are inspected by various state departments and authorities.

Our product labels are subject to state regulation (in addition to the federal requirements) in each state where the water products are sold. These regulations set standards for the information that must be provided and the basis on which any therapeutic claims for water may be made.

The bottled water industry has a comprehensive program of self-regulation. We are a member of the International Bottled Water Association, or IBWA. As a member, our facilities are inspected annually by an independent laboratory, the National Sanitation Foundation, or NSF. By means of unannounced NSF inspections, IBWA members are evaluated on their compliance with the FDA regulations and the association's performance requirements, which in certain respects are more stringent than those of the federal and various state regulations.

In recent years, there has been an increasing amount of proposed legislative and executive action in state and local governments that would ban the use of bottled water in municipal buildings, enact local taxes on bottled water, and limit the sale by municipalities of water supplies to private companies for resale. Such regulation could adversely affect our business and financial results. For additional information, see “Risk Factors” below.

The laws that regulate our activities and properties are subject to change. As a result, there can be no assurance that additional or more stringent requirements will not be imposed on our operations in the future. Although we believe that our water supply, products and bottling facilities are in substantial compliance with all applicable governmental regulations, failure to comply with such laws and regulations could have a material adverse effect on our business.

Employees

As of January 15, 2010, we had 326 full-time employees and 16 part-time employees. None of the employees belong to a labor union. We believe that our relations with our employees are good.

Additional Available Information

Our principal website is www.vermontpure.com. We make our annual, quarterly and current reports, and amendments to those reports, available free of charge on www.vermontpure.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Reports of beneficial ownership of our common stock, and changes in that ownership, by directors and officers on Forms 3, 4 and 5 are likewise available free of charge on our website.

The information on our website is not incorporated by reference in this Annual Report on Form 10-K or in any other report, schedule, notice or registration statement filed with or submitted to the SEC.

The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically at www.sec.gov. You may also read and copy the materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

ITEM 1A. RISK FACTORS.

We operate in a competitive business environment that is influenced by conditions that are both controllable and beyond our control. These conditions include, but are not limited to, the regional economy, monetary policy, and the political and regulatory environment. The following summarizes important risks and uncertainties that may materially affect our business in the future.

Over a period of years, we have borrowed substantial amounts of money to finance acquisitions. If we are unable to meet our debt service obligations to our senior and subordinated lenders, we would be in default under those obligations, and that could hurt our business or even result in foreclosure, reorganization or bankruptcy.

The underlying loans are secured by substantially all of our assets. If we do not repay our indebtedness in a timely fashion, our secured creditors could declare a default and foreclose upon our assets, which would likely result in harmful disruption to our business, the sale of assets for less than their fully realizable value, and possible bankruptcy. We must generate enough cash flow to service this indebtedness until maturity.

Fluctuations in interest rates could significantly increase our expenses. We will have significant interest expense for the foreseeable future, which in turn may increase or decrease due to interest rate fluctuations. To partially mitigate this risk, we have established fixed interest rates on 75% of our outstanding senior term debt.

As a result of our large amount of debt, we may be perceived by banks and other lenders to be highly leveraged and close to our borrowing ceiling. Until we repay some of our debt, our ability to access additional capital may be limited. In turn, that may limit our ability to finance transactions and to grow our business. In addition, our senior credit agreement limits our ability to incur incremental debt without our lender’s permission.

Our senior credit agreement contains numerous covenants and restrictions that affect how we conduct our business.

The Baker family currently owns a majority of our voting stock and controls the company. Such control affects our corporate governance, and could also have the effect of delaying or preventing a change of control of the company.

The Baker family group, consisting of four current directors Henry Baker (Chairman Emeritus), Peter Baker (CEO), John Baker (Executive Vice President) and Ross Rapaport (Chairman), as trustee, together own a majority of our common stock. Accordingly, these stockholders, acting together, can exert a controlling influence over the outcome of matters requiring stockholder approval, such as the election of directors, amendments to our certificate of incorporation, mergers and various other matters. The concentration of ownership could also have the effect of delaying or preventing a change of control of the company.

As permitted under the corporate governance rules of the NYSE Amex, we have, at the direction of the Baker family group, elected “controlled company” status under those rules. A controlled company is exempted from these NYSE Amex corporate governance rules: (1) the requirement that a listed company have a majority of independent directors, (2) the requirement that nominations to the company’s board of directors be either selected or recommended by a nominating committee consisting solely of independent directors, and (3) the requirement that officers’ compensation be either determined or recommended by a compensation committee consisting solely of independent directors. We do not currently utilize exemption (3) as we have a compensation committee consisting solely of three independent directors.

Our success depends on the continued services of key personnel.

Our continued success will depend in large part upon the expertise of our senior management. Peter Baker, our Chief Executive Officer and President, John Baker, our Executive Vice President, and Bruce MacDonald, our Chief Financial Officer, Treasurer and Secretary, have entered into employment agreements with Vermont Pure Holdings, Ltd. These “at will” employment agreements do not prevent these employees from resigning. The departure or loss of any of these executives individually could have an adverse effect on our business and operations.

The personal interests of our directors and officers create a conflict.

As mentioned above, the Baker family group owns a majority of our common stock. In addition, in connection with the acquisition of Crystal Rock Spring Water Company in 2000, we issued members of the Baker family group 12% subordinated promissory notes secured by all of our assets. The current balance on these notes is approximately $13,500,000. We also lease important facilities in Watertown and Stamford, Connecticut from Baker family interests. These interests of the Baker family create various conflicts of interest. Transactions between the Company and related parties are subject to review and approval by the Audit Committee, which consists entirely of independent directors.

We face competition from companies with far greater resources than we have. In addition, methods of competition in the distribution of home and office refreshment products continue to change and evolve. If we are unable to meet these changes, our business could be harmed.

We operate in highly competitive markets. The principal methods of competition in the markets in which we compete are distribution capabilities, brand recognition, quality, reputation, and price. We have a significant number of competitors, some of which have far greater resources than us. Among our principal competitors are Nestlé Waters North America, large regional brands owned by private groups, and local competitors in the markets that we serve. Price reductions and the introduction of new products by our competitors can adversely affect our revenues, gross margins, and profits.

In addition, the industry has been affected by the increasing availability of water coolers in discount retail outlets. This has negatively impacted our rental revenue stream in recent years as more customers choose to purchase coolers rather than rent them. The reduction of rental revenue has been somewhat offset by the increase in coolers that we sell but not to the extent that rentals have declined. We do not expect retail sales to replace rentals completely because we believe that the purchase option does not provide the quality and service that many customers want. However, third party retail cooler sales may continue to negatively impact our rental revenues in the future.

The bottled water industry is regulated at both the state and federal level. If we are unable to continue to comply with applicable regulations and standards in any jurisdiction, we might not be able to sell our products in that jurisdiction, and our business could be seriously harmed.

The FDA regulates bottled water as a food. Our bottled water must meet FDA requirements of safety for human consumption, labeling, processing and distribution under sanitary conditions and production in accordance with FDA “good manufacturing practices.” In addition, all drinking water must meet Environmental Protection Agency standards established under the Safe Drinking Water Act for mineral and chemical concentration and drinking water quality and treatment, which are enforced by the FDA. We also must meet state regulations in a variety of areas. These regulations set standards for approved water sources and the information that must be provided and the basis on which any therapeutic claims for water may be made. We have received approval for our drinking water in Connecticut, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont. However, we can give no assurance that we will receive such approvals in the future.

Legislative and executive action in state and local governments banning the use of municipal funds for purchasing bottled water, enacting local taxes on bottled water or water extraction, and restricting water withdrawal and usage rights from public and private sources could adversely affect our business and financial results.

Recent initiatives have taken place in several major cities regarding bottled water, principally the smaller sizes sold in stores to retail consumers. Regulations have been proposed in some localities that would ban the use of public funds to purchase bottled water and enact local taxes on bottled water or water extraction, and restrict the withdrawal of water from public and private sources. These actions are purportedly designed to discourage the use of bottled water due in large part to concerns about the environmental effects of producing and discarding large numbers of plastic bottles. In developing these stories, local and national media have reported on the growth of the bottled water industry and on the pros and cons of consuming bottled water as it relates to solid waste disposal and energy consumption in manufacturing as well as conserving the supply of water available to the public.

We believe that the adverse publicity associated with these reports is generally aimed at the retail, small bottle segment of the industry that is now a minimal part of our business, and that our customers can readily distinguish our products from the retail bottles that are currently the basis for concern in some areas. Our customers typically buy their water in reusable five gallon containers that are placed on coolers and are reused many times and only approximately 4% of our total sales is from water sold in single serve packages. In addition, we continue to take steps to “green” our business by means of solar electricity generation, high efficiency lighting, no-idling and other driving policies, and the use of biodiesel.

While we believe that to date we have not directly experienced any adverse effects from these concerns, and that our products are sufficiently different from those under scrutiny, there is no assurance that adverse publicity about any element of the bottled water industry will not affect consumer behavior by discouraging buyers from buying bottled water products generally. In that case, our sales and other financial results could be adversely affected.

In 2009, Connecticut passed legislation setting a schedule to eventually prohibit use of bisphenol A, in the packaging of food and beverage products. Other jurisdictions which we operate in are considering such legislation. Bisphenol A is contained in the three- and five- gallon polycarbonate plastic bottles that we use to bottle our water. Any significant change in perception by our customers or immediate government regulation of polycarbonate plastic in food and beverage products could adversely affect our operations and financial results.

We feel that scientific evidence suggests that polycarbonate plastic has been, and will continue to be, a safe packing material for all consumers. National and international organizations responsible for consumer safety, including the Food and Drug Administration, have continued to recognize the safety of this packaging. Nonetheless, media reports have prompted concern in our marketplace among customers and potential customers.

To date, this situation has not adversely affected our business. However, it is possible that developments surrounding this issue could lead to adverse effects on our business. Such developments could include:

·	Increased publicity that changes perception regarding packaging that uses bisphenol A, so that significant numbers of consumers stop purchasing products that are packaged in polycarbonate plastic before we could identify and react to the change.

·	The emergence of new scientific evidence that proves polycarbonate plastic is unsafe, or interpretations of existing evidence by regulatory agencies that lead to prohibitions on the use of polycarbonate plastic as packaging for consumable products faster than we could adapt to the change.

·	Inability of sellers of consumable products to find an adequate supply of alternative packaging if polycarbonate plastic becomes an undesirable package.

If such events, or any of them, were to occur, our sales and operating results could be materially adversely affected.

We have begun offering PET plastic as an alternative bottle and have converted customers with a concern about polycarbonate plastic to this container. However, at this point, no assurance can be given that this is an adequate solution if materially adverse developments such as those noted above should occur.

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

Our ability to retain customers and the goodwill associated with our brands is dependent upon our ability to maintain the integrity of our water resources and to guard against defects in, or tampering with, our manufacturing process. The loss of integrity in our water resources or manufacturing process could lead to product recalls and/or customer illnesses that could significantly reduce our goodwill, market share and revenues. Because we rely upon natural spring sites for sourcing some of our water supply, acts of God, such as earthquakes, could alter the geologic formation of the spring sites, constricting water flow.

In addition, we do not own any of our water sources. Although we feel the long term rights to our spring and municipal sources are well secured, any dispute over these rights that resulted in prolonged disruption in supply could cause an increase in cost of our product or shortages that would not allow us to meet the market demand for our product.

Fluctuations in the cost of essential raw materials and commodities, including fuel costs, for the manufacture and delivery of our products could significantly impact our business.

We rely upon the raw material of polycarbonate, a commodity that is subject to fluctuations in price and supply, for manufacturing our bottles. Bottle manufacturers also use petroleum-based products. Increases in the cost of petroleum will likely have an impact on our bottle costs.

Our transportation costs increase as the price of fuel rises. Because trucks are used extensively in the delivery of our products, the rising cost of fuel has impacted and can be expected to continue to impact the profitability of our operations unless we are able to pass along those costs to our customers. Further, limitations on the supply or availability of fuel could inhibit our ability to get raw materials and distribute our products, which in turn could have an adverse affect on our business. In 2008, we experienced substantial increases in fuel prices as a result of market influences. However, we were able to establish a fuel adjustment charge for our customers that covered the incremental rising cost of fuel. In 2009, prices substantially decreased, but again our aggregate fuel adjustment charge revenue, although it declined, offset the incremental fuel cost over what we considered our “base” level for fuel cost. However, the risk remains that we may not be able to use fuel price adjustments to cover the cost of fuel increases in a volatile market for petroleum products, which could adversely affect our profitability.

A significant portion of our sales, 24% in fiscal year 2009, is derived from coffee. The supply and price of coffee may be limited by climate, by international political and economic conditions, and by access to transportation, combined with consumer demand. An increase in the wholesale price of coffee could result in a reduction in our profitability. If our ability to purchase coffee were impaired by a market shortage, our sales might decrease, which would also result in a reduction of profitability.

We have a limited amount of bottling capacity. Significant interruptions of our bottling facilities could adversely affect our business.

We own three bottling facilities, and also contract with third parties, to bottle our water. If any of these facilities were incapacitated for an extended period of time, we would likely have to relocate production to an alternative facility. The relocation and additional transportation could increase the cost of our products or result in product shortages that would reduce sales. Higher costs and lower sales would reduce profitability.

We rely upon a single software vendor that supplies the software for our route accounting system.

Our route accounting system is essential to our overall administrative function and success. An extended interruption in servicing the system could result in the inability to access information. Limited or no access to this information would likely inhibit the distribution of our products and the availability of management information, and could even affect our compliance with public reporting requirements. Our supplier is Innovations in Software, or IIS, which has a limited number of staff that has proprietary information pertaining to the operation of the software. Changes in personnel or ownership in the firm might result in disruption of service. Such changes would be addressed by retaining a new vendor to service the existing software or purchasing a new system. But, any of these consequences could have a material adverse impact on our operations and financial condition.

Our customer base is located in New England, New York and New Jersey. If there were to be a material decline in the economy in these regions, our business would likely be adversely affected.

Essentially all of our sales are derived from New England, New York and New Jersey. A significant negative change in the economy of any of these regions, changes in consumer spending in these regions, or the entry of new competitors into these regional markets, among other factors, could result in a decrease in our sales and, as a result, reduced profitability.

Our business is seasonal, which may cause fluctuations in our stock price.

Historically, the period from June to September represents the peak period for sales and revenues due to increased consumption of beverages during the summer months in our core Northeastern United States markets. Warmer weather in our geographic markets tends to increase water sales, and cooler weather tends to decrease water sales. To the extent that our quarterly results are affected by these patterns, our stock price may fluctuate to reflect them.

Acquisitions may disrupt our operations or adversely affect our results

We regularly evaluate opportunities to acquire other businesses. The expenses we incur evaluating and pursuing acquisitions could have a material adverse effect on our results of operations. If we acquire a business, we may be unable to manage it profitably or successfully integrate its operations with our own. Moreover, we may be unable to realize the financial, operational, and other benefits we anticipate from these acquisitions. Competition for future acquisition opportunities in our markets could increase the price we pay for businesses we acquire and could reduce the number of potential acquisition targets. Further, acquisitions may involve a number of special financial and business risks, such as:

·	charges related to any potential acquisition from which we may withdraw;

·	diversion of our management’s time, attention, and resources;

·	decreased utilization during the integration process;

·	loss of key acquired personnel;

·	increased costs to improve or coordinate managerial, operational, financial, and administrative systems including compliance with the Sarbanes-Oxley Act of 2002;

·	dilutive issuances of equity securities, including convertible debt securities;

·	the assumption of legal liabilities;

·	amortization of acquired intangible assets;

·	potential write-offs related to the impairment of goodwill;

·	difficulties in integrating diverse corporate cultures; and

·	additional conflicts of interests.

We are required to be in full compliance with Section 404 of the Sarbanes-Oxley Act as of our fiscal year ending October 31, 2010. Under current regulations, the financial cost of compliance with Section 404 is significant. Failure to achieve and maintain effective internal control in accordance with Section 404 could have a material adverse effect on our business and our stock price.

In 2010, we will be in the process of implementing the final requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires management to assess the effectiveness of our internal controls over financial reporting, include an assertion in our annual report as to the effectiveness of its controls, and include a report on the effectiveness by our independent auditors. The cost to comply with this law will affect our net income adversely. In addition, management’s effort and cost are no assurance that our independent auditors will attest to the effectiveness of our internal controls in its report as required by the law. If that is the case, the resulting report from our auditors may have a negative impact on our stock price. As of January 14, 2010, the U.S. House of Representatives had passed legislation, the “Wall Street Reform and Consumer Protection Act of 2009,” that would permanently exempt small public companies like us from the requirement that our auditor attest to the effectiveness of our internal controls. However, there is no assurance that the Senate will pass the same bill or that it will become law.

ITEM 1B.

UNRESOLVED STAFF COMMENTS.

None.

ITEM 2.

PROPERTIES.

As part of our Home and Office delivery operations, we have entered into or assumed various lease agreements for properties used as distribution points and office space. The following table summarizes these arrangements and includes our bottling facilities:

Location	Lease expiration	Sq. Ft.		Annual Rent
Williston, VT	June 2014		10,720	$	81,686
Southborough, MA	December 2013		15,271	$	114,533
Bow, NH	May 2012		12,800	$	57,000
Rochester, NY	January 2012		15,000	$	60,000
Buffalo, NY	September 2010		10,000	$	62,500
Syracuse, NY	December 2010		10,000	$	38,333
Halfmoon, NY	October 2011		22,500	$	148,500
Plattsburgh, NY	May 2010		5,000	$	24,000
Watertown, CT	October 2016		67,000	$	414,000
Stamford, CT	October 2010		22,000	$	248,400
White River Junction, VT	May 2014		15,357	$	77,706
Watertown, CT	May 2013		15,000	$	55,715
Groton, CT	June 2014		7,500	$	56,375
Canton, MA	January 2015		23,966	$	143,796

All locations are used primarily for warehousing and distribution and have limited office space for location managers and support staff. The exception is the Watertown, Connecticut location, which has a substantial amount of office space for sales, accounting, information systems, customer service, and general administrative staff.

In 2000, we entered into 10-year lease agreements to lease the buildings that are utilized for operations in Watertown and Stamford, Connecticut. Subsequently, on August 29, 2007, we finalized an amendment to our existing lease for the Watertown facility. The lease was scheduled to expire in October, 2010. Annual rent payments for the remainder of the original lease were scheduled to be $414,000 annually.

The amended lease extends the term of the lease six years, to 2016, with an option to extend it an additional five years. Annual lease payments over the extended term of the lease are as follows:

Years 1-2 $452,250

Years 3-4 $461,295

Years 5-6 $470,521

The rent during the extended option term is to be negotiated by the parties or, in the event there is no agreement, by appraisers selected by them. Otherwise the lease remained substantially unchanged.

The principal reason for seeking to amend the lease was our decision to construct solar panels on the roof of the facility, in order to generate a portion of our electricity needs more cheaply than we currently pay to purchase that electricity. We determined that the economic payback period of the solar panels would exceed the remaining term of the lease unless we sought and obtained an amendment extending the term of the lease.

After finalizing the lease amendment, we entered into agreements for the construction of the solar panels as well as grant agreements from the State of Connecticut to subsidize the project in part. We believe that certain federal and state tax credits will also help to reduce the effective cost of the project.

The landlord for the buildings in Stamford and Watertown, Connecticut is a trust with which Henry, John, and Peter Baker, and Ross Rapaport are affiliated. We believe that the rent charged under these leases is not more than fair market rental value.

We expect that these facilities will meet our needs for the next several years.

ITEM 3.

LEGAL PROCEEDINGS.

On May 1, 2006, the Company filed a lawsuit in the Superior Court Department, County of Suffolk, Massachusetts, alleging malpractice and other wrongful acts against three law firms that had been representing the Company in litigation involving Nestlé Waters North America, Inc.: Hagens Berman Sobol Shapiro LLP, Ivey & Ragsdale, and Cozen O’Connor. The case is Vermont Pure Holdings, Ltd. vs. Cozen O'Connor et al., Massachusetts Superior Court CA No. 06-1814.

Until May 2, 2006, when the Company terminated their engagement, the three defendant law firms represented the Company in litigation in federal district court in Massachusetts known as Vermont Pure Holdings, Ltd. vs. Nestlé Waters North America, Inc. (the Nestlé litigation). The Company filed the Nestlé litigation in early August 2003.

The Company’s lawsuit alleges that the three defendant law firms wrongfully interfered with, and/or negligently failed to take steps to obtain, a proposed June 2003 settlement with Nestlé. The complaint includes counts involving negligence, breach of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, tortious interference with economic relations, civil conspiracy, and other counts, and seeks declaratory relief and compensatory and punitive damages.

In July 2006, certain of the defendants filed a counterclaim against the Company seeking recovery of their fees and expenses in the Nestlé litigation. In August 2007, certain of the defendants filed a counterclaim against the Company that includes an abuse of process count in which it is alleged that our claims against them are frivolous and were not advanced in good faith, as well as a quantum meruit count in which these defendants allege that their services were terminated wrongfully and in bad faith and seek approximately $2.2 million in damages.

Discovery of fact witnesses and expert witnesses has been completed. In September 2008, the defendants in the lawsuit filed summary judgment motions seeking dismissal of the Company’s claims in their entirety, which the Company opposed. The Superior Court Judge denied these motions in a ruling dated December 26, 2008.

On July 31, 2009, the Company reached a settlement with all defendants in the action other than Cozen O’Connor and a former partner in that firm, pursuant to which mutual releases have been executed. The Company received a one-time payment of $3 million which has been reflected in fiscal year 2009 as miscellaneous income.

An evidentiary hearing took place between October 1 and October 7, 2009, and certain matters relating to that hearing are currently under advisement with the Court. The Court has set a tentative trial date of March 4, 2010. Management intends to pursue the Company’s remaining claims, and to the extent of the counterclaims asserted against the Company, to defend the Company vigorously.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matter was submitted to a vote of security holders during the quarter ended October 31, 2009.

PART II

ITEM 5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our Common Stock is traded on the NYSE Amex under the symbol VPS. The table below indicates the range of the high and low daily closing prices per share of Common Stock as reported by the exchange.

Fiscal Year Ended October 31, 2009
	High		Low
First Quarter	$	1.13	$	.60
Second Quarter	$	.75	$	.34
Third Quarter	$	1.41	$	.54
Fourth Quarter	$	.83	$	.59

Fiscal Year Ended October 31, 2008

First Quarter	$	1.72	$	1.38
Second Quarter	$	1.60	$	1.36
Third Quarter	$	1.41	$	1.27
Fourth Quarter	$	1.41	$	.94

The last reported sale price of our Common Stock on the NYSE Amex on January 15, 2010 was $.54 per share.

As of that date, we had 408 record owners and believe that there were approximately 2,000 beneficial holders of our Common Stock.

No dividends have been declared or paid to date on our Common Stock. Our senior credit agreement prohibits us from paying dividends without the prior consent of the lender. It is unlikely that we will pay dividends in the foreseeable future.

Issuer Purchases of Equity Securities

The following table summarizes the stock repurchases, by month, that were made during the fourth quarter of the fiscal year ended October 31, 2009.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program (1)		Maximum Number of Shares that May Yet be Purchased Under the Program (1)
August 1-31		0	$	-		0		168,702
September 1-30		76,700	$	.71		76,700		92,002
October 1-31		0	$	-		0		92,002
Total		76,700	$	.71		76,700

(1)	On July 16, 2008 we announced a program to repurchase up to 250,000 shares of our common stock. There is no expiration date for the plan to repurchase additional shares and the share limit may not be reached.

ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following Management's Discussion and Analysis (MD&A) is intended to help the reader understand our company. The MD&A should be read in conjunction with our consolidated financial statements and the accompanying notes. This overview provides our perspective on the individual sections of the MD&A, as well as a few helpful hints for reading these pages. The MD&A includes the following sections:

§	Business Overview — a brief description of fiscal year 2009.

§	Results of Operations — an analysis of our consolidated results of operations for the two years presented in our consolidated financial statements.

§	Liquidity and Capital Resources — an analysis of cash flows, sources and uses of cash, and contractual obligations and a discussion of factors affecting our future cash flow.

Critical Accounting Policies — a discussion of accounting policies that require critical judgments and estimates. Our significant accounting policies, including the critical accounting policies discussed in this section, are summarized in the notes to the accompanying consolidated financial statements.

Business Overview

We were profitable in fiscal year 2009. This was an improvement over the substantial loss that we experienced in fiscal year 2008. However, in our fiscal year ended October 31, 2008, we experienced goodwill impairment (a non-cash charge) in the amount of $22,359,000, which materially reduced our income from continuing operations and net income. At October 31, 2008, the valuation by which we measure goodwill impairment was significantly affected by the lower value of our stock price which, among other things, was affected by general market conditions. Impairment of goodwill does not affect the Company’s liquidity or indicate its profitability prospects in the future. Nevertheless, it was a substantial component of our loss from operations of $15,862,000 and net loss of $19,836,000. But for the impairment of goodwill, all of those line items would have shown income, not losses.

Fiscal 2009 results were favorably impacted by a one-time legal settlement of $3,000,000. Without consideration of this and the goodwill impairment charge in 2008, the financial performance of our business for fiscal year 2009 declined when compared to fiscal year 2008. The decline was primarily a result of decreased sales and increased cost of sales and the resultant decrease in gross profit and was not offset by lower operating and interest costs. The decrease in sales was primarily a result of poor general economic conditions in our marketplace and a reduction of fuel adjustment charges which were offset by lower fuel costs. Product margins decreased, as a percentage of sales, as a result of the product mix skewing more toward single serve coffee and increased competition.

We made a mid-year acquisition that approximately doubles the size of our sales in the Boston market. Throughout the second half of fiscal 2009 we integrated our new and existing businesses in the market. This created a larger market presence for our Vermont Pure® spring water brand, coffee, and other products.

The generally slower business due to the overall softening of the economy was evident in each of our fiscal quarters. The recessionary economic environment has affected the sales of our more profitable products, water and cooler rentals, the most. Our single serve coffee business grew this fiscal year over last year but these products are less profitable than our traditional products. In order to offset the decrease in profitability, we have taken action to reduce our labor, product, selling and administrative costs. We will continue to explore new and existing distribution channels and new products in an effort to identify sales opportunities.

Results of Operations

Fiscal Year Ended October 31, 2009 Compared to Fiscal Year Ended October 31, 2008

Sales

Sales for fiscal year 2009 were $66,126,000 compared to $69,237,000 for 2008, a decrease of $3,111,000 or 4%. Sales attributable to acquisitions in fiscal year 2009 were $2,209,000. Net of the acquisitions, sales decreased 8%.

The comparative breakdown of sales is as follows:

Product Line	2009 (in 000’s $)		2008 (in 000’s $)		Difference (in 000’s $)			% Diff.
Water	$	27,870	$	29,250	$	(1,380	)		(5	%)
Coffee and Related		21,490		21,197		293			1	%
Equipment Rental		8,903		8,909		(6	)		-
Other		7,863		9,881		(2,018	)		(20	%)
Total	$	66,126	$	69,237	$	3,111			(4	%)

Water – The aggregate decrease in water sales was a result of a 1% decrease in price and a 4% decrease in volume. The increase in price was attributable to general increases in list prices. We believe the decrease in the amount of water sold was attributable to the weaker economy. Volume was favorably impacted by acquisitions completed during the year. Sales increased 5% as a result of these acquisitions. So, net of acquisitions, total water sales decreased 9% in fiscal year 2009.

Coffee and Related Products – The small increase in sales was primarily due to the growth of single serve coffee, which grew 14% to $10,452,000 in fiscal year 2009 compared to $9,184,000 in fiscal year 2008. Otherwise, traditional coffee products and related products decreased 8% in fiscal year 2009 compared to the year earlier. Acquisitions accounted for less than 1% of the growth in this category.

Equipment Rental – Equipment rental revenue decreased slightly in fiscal year 2009 compared to the prior year primarily as a result of a 1% decrease in the placements, including placements acquired during the year, of equipment that was almost offset by a similar increase in average rental price. Acquisitions increased equipment rental 4% in fiscal year 2009 compared to 2008.

Other – The substantial decrease in other revenue is reflective of fees that are charged as a result of higher energy costs for delivery and freight, raw materials, and bottling operations. These charges decreased to $1,448,000 in fiscal year 2009 from $3,207,000 in 2008 after experiencing an increase the prior year when energy costs peaked. Sales of other products such as single-serve drinks, cups, and vending items, in aggregate, decreased 1% in 2009 compared to last year. We believe the decrease in the amount of these products was attributable to the weaker economy.

Gross Profit/Cost of Goods Sold

Gross profit decreased $3,605,000, or 9% in fiscal year 2009 compared to 2008, from $38,910,000 to $35,305,000. As a percentage of sales, gross profit decreased to 53% of sales from 56% for the respective period. The decrease in gross profit was attributable to lower sales and a change in product sales mix. Lower overall sales reduced the absolute dollar amount of gross profit. This included lower fuel adjustment charges, which are mostly offset by lower fuel costs in selling, general, and administrative expenses, and therefore adversely affecting gross profit. Increased costs that we were not able to pass onto customers and a change in the product mix of sales, influenced primarily by higher volume growth of single serve coffee, resulted in a lower gross profit margin, as a percentage of sales.

Cost of goods sold includes all costs to bottle water, costs of purchasing and receiving products for resale, including freight, as well as costs associated with product quality, warehousing and handling costs, internal transfers, and the repair and service of rental equipment, but does not include the costs of distributing our product to our customers. We include distribution costs in selling, general, and administrative expense, and the amount is reported below. Other companies may include distribution costs in their cost of goods sold, in which case, on a comparative basis, such other companies may have a lower gross margin as a result.

Income (Loss) from Operations/Operating Expenses

The income from operations was $4,385,000 in 2009 compared to a loss from operations of $15,862,000 in 2008, an improvement of $20,247,000. The most significant component of this increase was goodwill impairment of $22,359,000 in 2008, which did not recur in 2009. There was no such impairment in 2009. Total operating expenses decreased to $30,920,000 for the year, from $54,773,000 the prior year, a decrease of $23,853,000. Once again, the most significant contributor to the higher operating expenses in 2008 was the impairment charge of $22,359,000 which did not occur in 2009. Net of impairment, operating expenses decreased. The decrease was a result of lower commission based compensation expenses due to lower sales as well as decreased professional fees.

Selling, general and administrative (SG&A) expenses were $28,599,000 in fiscal year 2009 and $30,132,000 in 2008, a decrease of $1,533,000, or 5%. Of total SG&A expenses:

Route sales costs decreased 5%, or $737,000, to $13,490,000 in fiscal year 2009 from $14,227,000 in fiscal year 2008, primarily related to lower labor costs on commission-based sales due to decreased sales and lower fuel costs. Included as a component of route sales costs are total direct distribution related costs which decreased $741,000, or 5%, to $12,785,000 in fiscal year 2009 from $13,526,000 in fiscal year 2008 primarily as a result of lower fuel costs;

·	Selling costs increased 2%, or $69,000, to $2,894,000 in fiscal year 2009 from $2,825,000 in fiscal year 2009 as a result of computer software implementation costs and;

·	Administrative costs decreased 7%, or $865,000, to $12,215,000 in fiscal year 2009 from $13,080,000 in fiscal year 2008, as a result of lower labor costs, professional fees related to compliance and litigation, and non recurrence of a provision for bad debts of $532,043 on notes receivable in 2008.

Advertising expenses decreased to $1,138,000 in fiscal year 2009 from $1,530,000 in 2008, a decrease of $392,000, or 26%. The decrease in advertising costs is primarily related to a decrease in Yellow Page advertising due to a reduction of exposure in that medium in favor of increased internet advertising which cost less during the year.

Amortization increased to $1,113,000 in fiscal year 2009 from $888,000 in 2008. The increase of $225,000 in amortization is attributable to intangible assets that were acquired as part of acquisitions in fiscal year 2009.

We had a loss from the sale of miscellaneous assets in fiscal year 2009 of $70,000 compared to a gain on the sale of assets of $136,000 in fiscal year 2008. The sales were of miscellaneous assets no longer used in the course of business.

We conducted an assessment of goodwill as of October 31, 2009 and 2008, using essentially the same step one valuation process for both years. We concluded that goodwill was not impaired as of October 31, 2009 since the assessment concluded that the Company’s fair value exceeded the Company’s equity at the valuation date. In fiscal year 2008, we incurred an impairment loss of $22,359,000. The impairment loss was a non-cash charge and was a result of the assessment of our goodwill as of October 31, 2008. Goodwill had been recorded for acquisitions from 1996 through 2008. Our 2008 assessment concluded that goodwill on our books was impaired when we determined the Company’s fair value was less than the Company’s equity as of the valuation date. In determining the amount of the impairment, we followed a two step approach. In step one, and in determining the fair value of the Company (the reporting unit), we used a weighted average of three different market approaches as shown below:

	Percentages for Weighted Average
	2009			2008
Quoted stock price		30	%		30	%
Value comparisons to publicly traded companies (see note1)		10	%		20	%
Discounted net cash flow		60	%		50	%

We believe that this approach provided a reasonable estimation of the value of the Company and took into consideration our thin trading volume (which reflects, in part, the fact that the Company is a “controlled company” under the governance rules of the NYSE Amex), market comparable valuations, and expected results of operations. We compared the resulting estimated fair value to the equity value of the Company as of October 31, 2008 and determined that there was an impairment of goodwill. In step two, we then allocated the estimated fair value to all of the assets and liabilities of the Company (including unrecognized intangible assets) as if the Company had been acquired in a business combination and the estimated fair value was the price paid. We then recognized impairment in the amount by which the carrying value of goodwill exceeded the implied value of goodwill as determined in this allocation.

1 These were the companies used in the year marked:

Company Name	Exchange	Symbol	2009	2008
Coca-Cola Bottling Co., Consolidated	NYSE	COKE	X	X
Farmer Bros. Co.	NASDAQ	FARM	X	X
Green Mountain Coffee Roasters, Inc.	NASDAQ	GMCR	X	X
Hansen Natural, Corp.	NASDAQ	HANS	X	X
Coca-Cola Enterprises, Inc.	NYSE	CCE	X	X
National Beverage Corp.	NASDAQ	FIZZ	X	X
PepsiAmericas, Inc.	NYSE	PAS		X
Pepsi Bottling Group, Inc.	NYSE	PBG		X

We believe that the impairment was primarily the result of a decline in the quoted market prices of our stock at October 31, 2008 below our book carrying value, and was not due to any changes in our core business. There was no event or change in circumstance that would more likely than not reduce the fair value of our underlying net assets below their carrying amount prior to the annual impairment test.

Other Income and Expense, Income Taxes, and (Loss) Income from Operations

Interest expense was $2,619,000 for fiscal year 2009 compared to $3,005,000 for fiscal year 2008, a decrease of $386,000. The decrease is attributable to lower outstanding debt, on average, and lower variable interest rates.

Income before income taxes in fiscal year 2009 was $4,766,000, compared to a loss before income taxes in fiscal year 2008 of $18,867,000, an improvement of $23,633,000. As noted above, the most significant items in reconciling the improvement are the $3,000,000 legal settlement received in 2009 and goodwill impairment of $22,359,000 in 2008. Aside from those two items, operating results declined as a result of lower sales and gross profit that was not completely offset by lower operating and interest expenses. The tax expense for fiscal year 2009 was $1,746,000 compared to $969,000 for fiscal year 2008 and resulted in an effective tax rate of 37% in 2009 and (5%) in 2008. The increase in the effective tax rate from 2008 to 2009 was a result of a lower effective tax rate in 2008 due to tax credits for the installation of solar electricity generating equipment during fiscal year 2008. The negative tax rate in 2008 is attributable to the exclusion of the impairment loss from the determination of taxable income. In addition to the effective tax rate being impacted by the affect of expected tax credits for the installation of solar electricity generating equipment during fiscal year 2008 it was also affected by a bad debt allowance set up for the write off of the notes receivable of $532,043 referenced above. Our total effective tax rate is a combination of federal and state rates for the states in which we operate.

Net Income (Loss)

The net income in fiscal year 2009 was $3,020,000 compared to a net loss of $(19,836,000) in 2008, an improvement of $22,856,000. As noted above, the most significant items when considering the improvement are the $3,000,000 legal settlement received in 2009 and goodwill impairment of $22,359,000 in 2008. Net income (loss) was completely attributable to continuing operations.

Based on the weighted average number of shares of Common Stock outstanding of 21,526,000 (basic and diluted), income per share in fiscal year 2009 was $.14 per share. This was an increase of $1.06 per share from fiscal year 2008, when the weighted average number of shares of Common Stock outstanding was 21,564,000 (basic and diluted) and we had net loss of $(.92) per share.

The fair value of our swaps decreased $194,000 during fiscal year 2009 compared to a decrease of $422,000 in 2008. This resulted in unrealized losses of $119,000 and $263,000, net of taxes, respectively, for the fiscal years ended October 31, 2009 and 2008. The decrease during the year has been recognized as an adjustment to net income (loss) to arrive at comprehensive income (loss) as defined by the applicable accounting standards. Further, the cumulative adjustment over the life of the instrument has been recorded as a current liability and reflected as accumulated other comprehensive loss, net of deferred taxes in the equity section on our consolidated balance sheet.

Liquidity and Capital Resources

As of October 31, 2009, we had working capital of $4,088,000 compared to $3,103,000 as of October 31, 2008, an increase of $985,000. The increase in working capital was primarily attributable to the increase in net income in fiscal year 2009, which benefited from the legal settlement noted above. Net cash provided by operating activities increased $2,740,000 to $9,261,000 in 2009 from $6,521,000 in 2008. In addition to the increase in net income, the increase was attributable to a significant tax refund for 2008 received in 2009.

We use cash provided by operations to repay debt and fund capital expenditures. In fiscal year 2009, we used $3,722,000 for scheduled repayments of our term debt. In addition, we used $500,000 to pay down a portion of a subordinated note. We also used $2,276,000 for capital expenditures. Capital expenditures were substantially higher for the same period last year because of $722,000 expended on our solar electricity generation project. We spent less for coolers, brewers, and racks related to home and office distribution in 2009 compared to 2008 as a result of lower demand for rental units. We expect to increase our spending for bottles in the next year as we convert our polycarbonate bottles to PET plastic. We also expect to spend up to $1,500,000 next year on the conversion.

During fiscal year 2009, we borrowed $2,500,000 to complete an acquisition and $800,000 to fund capital expenditures and pay down subordinated debt from our acquisition line of credit. As of October 31, 2009, we had outstanding balances of $13,542,000 on our term loan, $4,300,000 on our $10,000,000 acquisition line of credit, and no balance on our $6,000,000 revolving line of credit with Bank of America. In addition, there was an outstanding letter of credit for $1,583,000 issued against our revolving line of credit. As of October 31, 2009, there was $5,700,000 and $4,417,000 available on the acquisition and revolving lines of credit, respectively. As of October 31, 2009, we had $13,500,000 of debt subordinated to our senior credit facility.

As of October 31, 2009, we had an interest rate swap agreement with Bank of America in effect. The intent of the instrument is to fix the interest rate on 75% of the outstanding balance on the Term Loan as required by the credit facility. The swap fixes the interest rate for the swapped amount at 6.62% (4.87% plus the applicable margin of 1.75%). As of October 31, 2009, we had approximately $7,700,000 million of debt subject to variable interest rates. Under the credit facility with Bank of America, interest is paid at a rate of LIBOR plus a margin of 1.75% on term debt and 1.50% on the line of credit resulting in variable interest rates of 2.00% and 1.75%, respectively, at that date.

Our lines of credit mature on April 5, 2010. On that date, any balance on the acquisition line converts to a term loan with equal annual installments payable over the next five years. Any balance on the revolving line will be due and payable on April 5, 2010. We are currently negotiating to renew these facilities. If we are unable to negotiate acceptable renewal terms, and no alternative funding is available, we may experience a material adverse financial impact.

2. Our credit facility requires that we be in compliance with certain financial covenants at the end of each fiscal quarter. The covenants include senior debt service coverage as defined of greater than 1.25 to 1, total debt service coverage as defined of greater than 1 to 1, and senior debt to EBITDA as defined of no greater than 2.5 to 1. As of October 31, 2009, we were in compliance with all of the financial covenants of our credit facility and we expect to be in compliance in the foreseeable future.

We used $86,848 of cash to purchase shares of our common stock on the open market during fiscal year 2009.

The net deferred tax liability at October 31, 2009 represents temporary timing differences, primarily attributable to depreciation and amortization, between book and tax calculations. We have used all of our federal net operating loss carryforwards and will have to fund our tax liabilities with cash in the current fiscal year and in the future.

In addition to our senior and subordinated debt commitments, we have significant future cash commitments, primarily in the form of operating leases that are not reported on the balance sheet. These operating leases are described in Note 17 to our Audited Consolidated Financial Statements.

The following table sets forth our contractual commitments as of October 31, 2009:

	Payment due by Period
Contractual Obligations	Total		2010			2011-2012		2013-2014	After 2014
Debt	$	31,342,000	$	3,680,000	$	21,720,000	$	5,942,000	$	-
Interest on Debt (1)		6,504,000		2,305,000		4,048,000		151,000		-
Operating Leases		11,798,000		3,358,000		4,721,000		2,727,000		992,000
Total	$	49,644,000	$	9,343,000	$	30,489,000	$	8,820,000	$	992,000

(1) Interest based on 75% of outstanding senior debt at the hedged interest rate discussed above, 25% of outstanding senior debt at a variable rate of 2.00%, and subordinated debt at a rate of 12%.

As of the date of this Annual Report on Form 10-K, we have no other material contractual obligations or commitments.

Inflation has had no material impact on our performance.

3. Factors Affecting Future Cash Flow

Generating cash from operating activities and access to credit is integral to the success of our business. We continue to generate cash from operating activities to service scheduled debt repayment and fund capital expenditures. In addition, we have borrowed from our acquisition line of credit for capital expenditures and acquisitions. We also lease a significant amount of our vehicles. Our current revolving and acquisition lines of credit mature in April 2010.

Recent adverse economic conditions nationally have negatively impacted many businesses revenue and profitability and severely restricted credit availability. We experienced the effect of this environment throughout fiscal year 2009. We do not feel this has materially jeopardized our cash flow or our credit standing but we expect that it will continue into 2010. Like most businesses, we are taking steps to preserve cash flow but no assurance can be given that the future economic environment will not adversely affect our cash flow and results of operations or that we will have adequate access to credit.

4. Factors Affecting Quarterly Performance

Our business and financial trends vary from quarter to quarter based on, but not limited to, seasonal demands for our products, climate, and economic and geographic trends. Consequently, results for any particular fiscal quarter are not necessarily indicative, through extrapolation, or otherwise, of results for a longer period.

Critical Accounting Policies

Our financial statements are prepared in accordance with generally accepted accounting principles. Preparation of the statements in accordance with these principles requires that we make estimates, using available data and our judgment for such things as valuing assets, accruing liabilities, and estimating expenses. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies and estimates. Because of the uncertainty inherent in these matters, actual results could differ from the estimates we use in applying the critical accounting policies. We base our ongoing estimates on historical experience and other various assumptions that we believe to be reasonable under the circumstances.

Accounts Receivable – Allowance for Doubtful Accounts

We routinely review our accounts receivable, by customer account aging, to determine if the amounts due are collectible based on information we receive from the customer, past history, and economic conditions. In doing so, we adjust our allowance accordingly to reflect the cumulative amount that we feel is uncollectible. This estimate may vary from the proceeds that we actually collect. If the estimate is too low, we may incur higher bad debt expenses in the future resulting in lower net income. If the estimate is too high, we may experience lower bad debt expense in the future resulting in higher net income.

Fixed Assets – Depreciation

We maintain buildings, machinery and equipment, and furniture and fixtures to operate our business. We estimate the life of individual assets to allocate the cost over the expected life. The basis for such estimates is use, technology, required maintenance, and obsolescence. We periodically review these estimates and adjust them if necessary. Nonetheless, if we overestimate the life of an asset or assets, at a point in the future, we would have to incur higher depreciation costs and consequently, lower net income. If we underestimate the life of an asset or assets, we would absorb too much depreciation in the early years resulting in higher net income in the later years when the asset is still in service.

Goodwill – Intangible Asset Impairment

We have acquired a significant number of companies. The excess of the purchase price over the fair value of the assets and liabilities acquired has been recorded as goodwill. If goodwill is not impaired, it would remain as an asset on our balance sheet at the value assigned in the acquisitions. If it is impaired, we would be required to write down the asset to an amount that accurately reflects its estimated value. We completed a valuation of the Company performed as of October 31, 2009, and goodwill was not impaired as of that date. As of October 31, 2008, using a similar valuation process, comparing the fair value to the carrying value of the Company, we determined that goodwill was impaired at that time. As a result of this process, the Company recorded an impairment loss on goodwill of $22,359,000 in 2008. In determining these valuations we relied, in part, on our projections of future cash flows. If these projections change in the future, there may be a material impact on the valuation of the Company, which may result in an additional impairment of goodwill.

Income Taxes

We recognize deferred tax assets and liabilities based on temporary differences between the financial statement carrying amount of assets and liabilities and their corresponding tax basis. The valuation of these deferred tax assets and liabilities is based on estimates that are dependent on rate and time assumptions. If these estimates do not prove to be correct in the future, we may have over or understated income tax expense and, as a result, earnings.

Financial Accounting Standards Board (“FASB”) guidance clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. The guidance prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return in order for those tax positions to be recognized in the financial statements. The Company adopted these provisions at the beginning of fiscal year 2008.

Stock Based Compensation

When a situation arises, we recognize the cost of employee services received in exchange for an award under our stock option plans based on the fair value of the award. The cost of equity is determined using interest rate, volatility, and expected life assumptions. We estimate a risk free rate of return based on current (at the time of option issuance) U. S. Treasury bonds and calculate the volatility of its stock price over the past twelve months from the option issuance date. The fluctuations in the volatility assumption used in the calculation over the years reported is a direct result of the increases and decreases in the stock price over that time. All other factors being equal, a 10% increase in the volatility percentage results in approximately a 12% increase in the fair value of the options, net of tax.

Off-Balance Sheet Arrangements

We lease various facilities and equipment under cancelable and non-cancelable short and long term operating leases, which are described in Note 16 to our Audited Consolidated Financial Statements contained in this Annual Report on Form 10-K.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Our Consolidated Financial Statements and their footnotes are set forth on pages F-1 through F-27.

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A(T). CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and our Chief Financial Officer, and other members of our senior management team, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were adequate and effective to provide reasonable assurance that information required to be disclosed by us, including our consolidated subsidiary, in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

The effectiveness of a system of disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of internal controls, and fraud. Due to such inherent limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud, or in making all material information known in a timely manner to the appropriate levels of management.

Internal Control Over Financial Reporting

a) Management's Annual Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

• pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company's management assessed the effectiveness of the Company's internal control over financial reporting as of October 31, 2009. In making this assessment, the Company's management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

Based on our assessment, management concluded that, as of October 31, 2009, the Company's internal control over financial reporting is effective based on those criteria.

This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.

b) Changes in Internal Control Over Financial Reporting

No change in our internal control over financial reporting occurred during the fiscal quarter ended October 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION.

None.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

The information required by this Item is incorporated by reference to the sections captioned “Directors”, “Our Executive Officers”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance” in our 2010 proxy statement to be filed with the SEC within 120 days after the end of our fiscal year ended October 31, 2009.

ITEM 11.

EXECUTIVE COMPENSATION.

The information required by this Item is incorporated by reference to the sections captioned “Compensation of Executive Officers” and “Compensation of Non-Employee Directors” in our 2010 proxy statement to be filed with the SEC within 120 days after the end of our fiscal year ended October 31, 2009.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Securities Authorized for Issuance Under Equity Compensation Plans.

The following table sets forth certain information as of October 31, 2009 about shares of our Common Stock that may be issued upon the exercise of options and other rights under our existing equity compensation plans and arrangements, divided between plans approved by our stockholders and plans or arrangements that were not required to be and were not submitted to our stockholders for approval.

Equity Compensation Plan Information

	(a)		(b)		(c)
Plan Category	Number of Securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of Securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)).
Equity compensation plans approved by security holders		574,500	$	2.91		1,649,500
Equity compensation plans not approved by security holders		-0-		-		-0-
Total		574,500	$	2.91		1,649,500

Additional information required by this Item is incorporated by reference to the section captioned “Security Ownership of Certain Beneficial Owners and Management” in our 2010 proxy statement to be filed with the SEC within 120 days after the end of our fiscal year ended October 31, 2009.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The information required by this Item is incorporated by reference to the section captioned “Corporate Governance” in our 2010 proxy statement to be filed with the SEC within 120 days after the end of our fiscal year ended October 31, 2009.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The information required by this Item is incorporated by reference to the sections captioned “Independent Registered Public Accounting Firm Fees” and “Pre-Approval Policies and Procedures” in our 2010 proxy statement to be filed with the SEC within 120 days after the end of our fiscal year ended October 31, 2009.

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

a)	The following documents are filed as part of this report:

(1) Financial Statements

Reports of Independent Registered Public Accounting Firms	F-1

Consolidated Balance Sheets as of October 31, 2009 and 2008	F-2

Consolidated Statements of Operations for the years ended October 31, 2009 and 2008	F-3

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss) for the years ended October 31, 2009 and 2008	F-4

Consolidated Statements of Cash Flows for the years ended October 31, 2009 and 2008	F-5

Notes to the Consolidated Financial Statements	F-6 - F-26

(2) Schedules

None

(3) Exhibits:

Exhibit No.	Description	Filed with this Form 10-K	Incorporated by Reference
Exhibit No.	Description	Filed with this Form 10-K	Form	Filing Date	Exhibit No.
3.1	Certificate of Incorporation		S-4	September 6, 2000	Exhibit B to Appendix A
3.2	Certificate of Amendment to Certificate of Incorporation		8-K	October 19, 2000	4.2
3.3	By-laws		10-Q	September 14, 2001	3.3
4.1	Registration Rights Agreement with Peter K. Baker, Henry E. Baker, John B. Baker and Ross Rapaport		8-K	October 19, 2000	4.6
10.1*	1998 Incentive and Non-Statutory Stock Option Plan, as amended		14A	March 10, 2003	A
10.2*	1999 Employee Stock Purchase Plan		14A	March 15, 1999	A
10.3*	2004 Stock Incentive Plan		14A	March 9, 2004	B
10.4*	Instrument of Amendment dated September 22, 2005 amending the 1999 Employee Stock Purchase Plan		8-K	September 28, 2005	10.1
10.5*	Employment Agreement dated May 2, 2007 with Peter K. Baker		8-K	May 2, 2007	10.1
10.6*	Employment Agreement dated May 2, 2007 with Bruce S. MacDonald		8-K	May 2, 2007	10.3
10.7*	Employment Agreement dated May 2, 2007 with John B. Baker		8-K	May 2, 2007	10.2
10.8	Lease of Grounds in Stamford, Connecticut from Henry E. Baker		S-4	September 6, 2000	10.24
10.9	Lease of Buildings and Grounds in Watertown, Connecticut from the Baker’s Grandchildren Trust		S-4	September 6, 2000	10.22

10.10	Lease of Building in Stamford, Connecticut from Henry E. Baker		S-4	September 6, 2000	10.23
10.11	First Amendment to the Lease of Buildings and Grounds in Watertown, Connecticut from the Baker’s Grandchildren Trust		10-Q	September 14, 2007	10.4
10.12	Credit Agreement dated April 5, 2005 with Bank of America and Webster Bank		10-Q	July 8, 2005	10.1
10.13	Form of Term Note dated April 5, 2005 issued to Bank of America and Webster Bank		10-Q	July 8, 2005	10.2
10.14	Form of Subordination and Pledge Agreement dated April 5, 2005 between Henry E. Baker, Joan Baker, John B. Baker, Peter K. Baker and Bank of America		10-Q	July 8, 2005	10.3
10.15	Form of Second Amended and Restated Promissory Note dated April 5, 2005 issued to Henry E. Baker, Joan Baker, John B. Baker and Peter K. Baker		10-Q	July 8, 2005	10.4
10.16	Form of Acquisition Note dated April 5, 2005 issued to Bank of America and Webster Bank		10-Q	July 8, 2005	10.5
10.17	Form of Revolving Credit Note dated April 5, 2005 issued to Bank of America and Webster Bank		10-Q	July 8, 2005	10.6
10.18	First Amendment to the Credit Agreement dated April 5, 2005 with Bank of America		10-Q	September 14, 2007	10.1
10.19	Second Amendment to the Credit Agreement dated April 5, 2005 with Bank of America		10-Q	September 14, 2007	10.2
10.20	Third Amendment to the Credit Agreement dated April 5, 2005 with Bank of America		10-Q	September 14, 2007	10.3
10.21	Form of Indemnification Agreement dated November 2, 2005 with each of Henry E. Baker, John B. Baker, Peter K. Baker, Phillip Davidowitz,David Jurasek, Bruce S. MacDonald and Ross S. Rapaport		10-K	January 30, 2006	10.21
10.22	Form of Indemnification Agreement dated November 2, 2005 with each of John M. Lapides and Martin A. Dytrych		10-K	January 30, 2006	10.22
10.23	Installation Agreement with American Capital Energy, Inc. dated August 29, 2007		10-K	January 29, 2008	10.29
10.24	Financial Assistance Agreement with Connecticut Innovations dated August 20, 2007		10-K	January 29, 2008	10.30
10.25	Fourth Amendment to the Credit Agreement dated April 5, 2005 with Bank of America		10-Q	September 15, 2008	10.1
10.26*	Amendment No. 1 to Employment Agreement with Peter K. Baker dated September 10, 2009.		10-Q	September 14, 2009	10.1
10.27*	Amendment No. 1 to Employment Agreement with John B. Baker dated September 10, 2009.		10-Q	September 14, 2009	10.2
10.28	Settlement Agreement and General Release dated as of July 31, 2009 by and between Vermont Pure Holdings, Ltd. and Ivey & Ragsdale, et al.		10-Q	September 14, 2009	10.3
10.29	Settlement Agreement and General Release dated as of July 31, 2009 by and between Vermont Pure Holdings, et al. and Hagens Berman Sobol Shapiro et al.		10-Q	September 14, 2009	10.4
21.1	Subsidiary	X
23.1	Consent of Wolf & Company, P.C.	X
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	X
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	X

* Management contract or compensatory plan.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Vermont Pure Holdings, Ltd. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	VERMONT PURE HOLDINGS, LTD.

Dated: January 25, 2010	By:	/s/ Peter K. Baker
		Peter K. Baker, Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name	Title	Date
/s/ Ross S. Rapaport Ross S. Rapaport	Chairman of the Board of Directors	January 25, 2010
/s/ Henry E. Baker Henry E. Baker	Director, Chairman Emeritus	January 25, 2010
/s/ John B. Baker John B. Baker	Executive Vice President and Director	January 25, 2010
/s/ Peter K. Baker Peter K. Baker	Chief Executive Officer and Director	January 25, 2010
/s/ Phillip Davidowitz Phillip Davidowitz	Director	January 25, 2010
/s/ Martin A. Dytrych Martin A. Dytrych	Director	January 25, 2010
/s/ John M. Lapides John M. Lapides	Director	January 25, 2010

/s/ Bruce S. MacDonald Bruce S. MacDonald	Chief Financial Officer, Chief Accounting Officer and Secretary	January 25, 2010

EXHIBITS TO VERMONT PURE HOLDINGS, LTD.

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED OCTOBER 31, 2009

Exhibits Filed Herewith

Exhibit
Number		Description
21.1		Subsidiary
23.1		Consent of Wolf & Company, P.C.
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	PAGE
Report of the Independent Registered Public Accounting Firms	F-1

Financial Statements:

Consolidated Balance Sheets October 31, 2009 and 2008	F-2

Consolidated Statements of Operations Fiscal Years Ended October 31, 2009 and 2007	F-3

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss) Fiscal Years Ended October 31, 2009 and 2008	F-4

Consolidated Statements of Cash Flows, Fiscal Years Ended October 31, 2009 and 2007	F-5

Notes to the Consolidated Financial Statements	F-6 - F-26

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have audited the accompanying consolidated balance sheets of Vermont Pure Holdings, Ltd. and subsidiary as of October 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income (loss), and cash flows for each of the two years in the period ended October 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vermont Pure Holdings, Ltd. and subsidiary as of October 31, 2009 and 2008, and the results of their operations and their cash flows for each of the two years in the period ended October 31, 2009, in conformity with U.S. generally accepted accounting principles.

/s/ Wolf & Company, P.C.

Boston, Massachusetts

January 25, 2010

F - 1

VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	October 31,			October 31,
	2009			2008

ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	3,095,307		$	1,181,737
Accounts receivable, trade - net of reserve of $435,790 and		7,426,530			7,842,819
$414,301 for 2009 and 2008, respectively
Inventories		2,171,812			1,669,949
Current portion of deferred tax asset		751,082			744,087
Other current assets		721,468			1,612,605

TOTAL CURRENT ASSETS		14,166,199			13,051,197

PROPERTY AND EQUIPMENT - net		9,857,414			10,563,388

OTHER ASSETS:
Goodwill		32,123,294			32,080,669
Other intangible assets - net		4,035,194			2,084,542
Other assets		112,333			152,333

TOTAL OTHER ASSETS		36,270,821			34,317,544

TOTAL ASSETS	$	60,294,434		$	57,932,129

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current portion of long term debt	$	3,680,000		$	3,315,079
Accounts payable		2,427,157			2,542,711
Accrued expenses		2,548,764			2,859,277
Current portion of customer deposits		696,779			699,921
Unrealized loss on derivatives		725,473			531,673

TOTAL CURRENT LIABILITIES		10,078,173			9,948,661

Long term debt, less current portion		27,661,667			28,561,928
Deferred tax liability		3,666,779			3,403,696
Customer deposits		2,660,585			2,666,870

TOTAL LIABILITIES		44,067,204			44,581,155

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
Common stock - $.001 par value, 50,000,000 authorized shares,
21,951,987 issued and 21,472,439 outstanding shares as of
October 31, 2009 and 21,862,739 issued and 21,489,489
outstanding as of October 31, 2008		21,952			21,863
Additional paid in capital		58,457,807			58,395,551
Treasury stock, at cost, 479,548 shares as of October 31, 2009
and 373,250 shares as of October 31, 2008		(804,149	)		(717,301	)
Accumulated deficit		(40,999,634	)		(44,019,502	)
Accumulated other comprehensive loss		(448,746	)		(329,637	)
TOTAL STOCKHOLDERS' EQUITY		16,227,230			13,350,974

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	60,294,434		$	57,932,129

See the accompanying notes to the consolidated financial statements.

F - 2

VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

	Fiscal Year Ended October 31
	2009			2008

NET SALES	$	66,125,827		$	69,237,456

COST OF GOODS SOLD		30,820,655			30,327,137

GROSS PROFIT		35,305,172			38,910,319

OPERATING EXPENSES:
Selling, general and administrative expenses		28,599,190			30,131,964
Advertising expenses		1,137,878			1,530,000
Amortization		1,113,396			887,813
Loss (gain) on disposal of property and equipment		69,882			(136,204	)
Impairment loss - goodwill		-			22,359,091

TOTAL OPERATING EXPENSES		30,920,346			54,772,664

INCOME (LOSS) FROM OPERATIONS		4,384,826			(15,862,345	)

OTHER INCOME (EXPENSE):
Interest		(2,618,847	)		(3,004,626	)
Miscellaneous income		3,000,000			-

TOTAL OTHER INCOME (EXPENSE), NET		381,153			(3,004,626	)

INCOME (LOSS) BEFORE INCOME TAXES		4,765,979			(18,866,971	)

INCOME TAX EXPENSE		1,746,111			968,554

NET INCOME (LOSS)	$	3,019,868		$	(19,835,525	)

NET INCOME (LOSS) PER SHARE - BASIC:	$	0.14		$	(0.92	)

NET INCOME (LOSS) PER SHARE - DILUTED:	$	0.14		$	(0.92	)

WEIGHTED AVERAGE SHARES USED IN COMPUTATION - BASIC		21,525,932			21,564,384
WEIGHTED AVERAGE SHARES USED IN COMPUTATION - DILUTED		21,525,932			21,564,384

See the accompanying notes to the consolidated financial statements.

F - 3

VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

AND COMPREHENSIVE INCOME (LOSS)

															Accumulated
	Common				Additional				Treasury						Other
	Shares		Stock		Paid in		Treasury		Stock			Accumulated			Comprehensive						Comprehensive
	Issued		Par Value		Capital		Shares		Amount			Deficit			Loss			Total			Income (Loss)
Balance, October 31, 2007		21,800,555	$	21,800	$	58,307,395		194,250	$	(474,441	)	$	(24,183,977	)	$	(67,136	)	$	33,603,641

Shares issued under employee
stock purchase plan		62,184		63		88,156													88,219

Shares repurchased								179,000		(242,860	)								(242,860	)

Net loss													(19,835,525	)					(19,835,525	)	$	(19,835,525	)

Unrealized loss on derivatives, net of taxes																(262,501	)		(262,501	)		(262,501	)

Balance, October 31, 2008		21,862,739		21,863		58,395,551		373,250		(717,301	)		(44,019,502	)		(329,637	)		13,350,974		$	(20,098,026	)

Shares issued under employee stock purchase plan		89,248		89		62,256													62,345

Shares repurchased								106,298		(86,848	)								(86,848	)

Net income													3,019,868						3,019,868		$	3,019,868

Unrealized loss on derivatives, net of taxes																(119,109	)		(119,109	)		(119,109	)

Balance, October 31, 2009		21,951,987	$	21,952	$	58,457,807		479,548	$	(804,149	)	$	(40,999,634	)	$	(448,746	)	$	16,227,230		$	2,900,759

See the accompanying notes to the consolidated financial statements.

F - 4

VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

	Fiscal Year Ended October 31,
	2009			2008

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	3,019,868		$	(19,835,525	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation		3,853,864			4,063,178
Provision for bad debts		394,825			345,812
Provision for bad debts on notes receivable		30,893			532,043
Amortization		1,113,396			887,813
Impairment loss - goodwill		-			22,359,091
Non cash interest expense		78,242			110,450
Deferred tax expense		330,779			195,408
Loss (gain) on disposal of property and equipment		69,882			(136,204	)

Changes in assets and liabilities:
Accounts receivable		397,932			(665,800	)
Inventories		(495,379	)		41,417
Other current assets		891,137			(929,392	)
Other assets		9,107			11,763
Accounts payable		(115,554	)		441,312
Accrued expenses		(310,513	)		(595,210	)
Customer deposits		(153,777	)		(305,049	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		9,114,702			6,521,107

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - net of debt		(2,306,192	)		(3,560,014	)
Proceeds from sale of property and equipment		136,876			253,725
Cash used for acquisitions		(1,694,236	)		(429,608	)
Cash used for purchase of trademark		-			(40,000	)
NET CASH USED IN INVESTING ACTIVITIES		(3,863,552	)		(3,775,897	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on debt		(3,313,077	)		(3,282,217	)
Purchase of treasury stock		(86,848	)		(242,860	)
Proceeds from issuance of common stock		62,345			88,219
NET CASH USED IN FINANCING ACTIVITIES		(3,337,580	)		(3,436,858	)

NET INCREASE (DECREASE) IN CASH		1,913,570			(691,648	)

CASH AND CASH EQUIVALENTS - beginning of year		1,181,737			1,873,385

CASH AND CASH EQUIVALENTS - end of year	$	3,095,307		$	1,181,737

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION,
EXCLUDING NON-CASH FINANCING AND INVESTING ACTIVITIES
Cash paid for interest	$	2,575,652		$	2,922,374

Cash paid for taxes	$	483,553		$	2,354,300

NON-CASH FINANCING AND INVESTING ACTIVITIES:

Notes payable issued in acquisitions	$	2,500,000		$	36,000
Equipment purchased by acquisition line	$	300,000		$	421,527

See the accompanying notes to the consolidated financial statements.

F - 5

VERMONT PURE HOLDINGS, LTD. AND SUBSIDIARY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.	BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION

Vermont Pure Holdings, Ltd. and Subsidiary (collectively, the “Company”) is engaged in the production, marketing and distribution of bottled water and distribution of coffee, ancillary products, and other office refreshment products. The Company operates exclusively as a home and office delivery business, using its own trucks to distribute throughout New England, New York, and New Jersey.

The consolidated financial statements of the Company include the accounts of Vermont Pure Holdings, Ltd. and its wholly-owned subsidiary, Crystal Rock, LLC. All inter-company transactions and balances have been eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2.	SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents – The Company considers all highly liquid temporary cash investments with an original maturity of three months or less to be cash equivalents.

Accounts Receivable - Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts. Management establishes the allowance for doubtful accounts by regularly evaluating past due balances, collection history as well as general economic and credit conditions. Individual accounts receivable are written off when deemed uncollectible, with any future recoveries recorded as income when received.

Inventories – Inventories primarily consist of products that are purchased for resale and are stated at the lower of cost or market on a first in, first out basis.

Property and Equipment – Property and equipment are stated at cost net of accumulated depreciation. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets, which range from three to ten years for machinery and equipment, and from seven to thirty years for buildings and improvements, and three to seven years for other fixed assets. Leasehold improvements are depreciated over the shorter of the estimated useful life of the leasehold improvement or the term of the lease.

Goodwill and Other Intangibles – Intangible assets with lives restricted by contractual, legal, or other means are amortized over their useful lives. The Company defines an asset’s useful life as the period over which the asset is expected to contribute to the future cash flows of the entity. Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The amount of impairment for goodwill and other intangible assets is measured as the excess of their carrying values over their implied fair values. The Company conducted assessments of the carrying value of its goodwill using an independent third party valuation as of October 31, 2009 and determined that goodwill was not impaired. A similar valuation was conducted and concluded that goodwill was impaired as of October 31, 2008. Other than goodwill, intangible assets consist primarily of customer lists and covenants not to compete, with estimated lives ranging from 3 to 10 years.

F - 6

Impairment for Long-Lived and Intangible Assets – The Company reviews long-lived assets and certain identifiable intangible assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered. Recoverability is assessed based on estimated undiscounted future cash flows. As of October 31, 2009 and 2008, the Company believes that there has been no impairment of its long-lived and intangible assets, other than goodwill as described above.

Stock-Based Compensation – The Company has several stock-based compensation plans under which incentive and non-qualified stock options and restricted shares may be granted, and an Employee Stock Purchase Plan (ESPP). The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. That cost is recognized over the period during which an employee is required to provide services in exchange for the award, the requisite service period (usually the vesting period). The Company provides an estimate of forfeitures at initial grant date. This policy had no material impact on the Company’s 2009 and 2008 results of operations since no options were issued or vested during those years.

Net Income (Loss) Per Share – Net income (loss) per share is based on the weighted average number of common shares outstanding during each period. Potential common shares are included in the computation of diluted per share amounts outstanding during each period that income is reported. In periods in which the Company reports a loss, potential common shares are not included in the diluted earnings per share calculation since the inclusion of those shares in the calculation would be anti-dilutive. The Company considers outstanding “in-the-money” stock options, if any, as potential common stock in its calculation of diluted earnings per share and uses the treasury stock method to calculate the applicable number of shares.

Advertising Expenses – The Company expenses advertising costs at the commencement of an advertising campaign.

Customer Deposits – Customers receiving home or office delivery of water pay the Company a deposit for the water bottle that is refunded when the bottle is returned. Based on historical experience, the Company uses an estimate of the deposits it expects to refund over the next twelve months to determine the current portion of the liability, and classifies the remainder of the deposit obligation as a long term liability.

F - 7

Income Taxes – When calculating its tax expense and the value of tax related assets and liabilities the Company considers the tax impact of future events when determining the value of assets and liabilities in its financial statements and tax returns. Accordingly, a deferred tax asset or liability is calculated and reported based upon the tax effect of the differences between the financial statement and tax basis of assets and liabilities as measured by the enacted rates that will be in effect when these differences reverse. A valuation allowance is recorded if realization of the deferred tax assets is not likely.

Beginning at the start of fiscal year 2008, the Company adopted new accounting guidance on the accounting for uncertainty in income taxes. The Company uses a more-likely-than-not measurement attribute for all tax positions taken or expected to be taken on a tax return in order for those tax positions to be recognized in the financial statements.

Derivative Financial Instruments - The Company records all derivatives on the balance sheet at fair value. The Company utilizes interest rate swap agreements to hedge variable rate interest payments on its long-term debt. The interest rate swaps are recognized on the balance sheet at their fair value as stated by the bank and are designated as cash flow hedges. Accordingly, the resulting changes in fair value of the Company’s interest rate swaps are recorded as a component of other comprehensive income (loss). The Company assesses, both at a hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the related hedged items. Gains and losses that are related to the ineffective portion of a hedge or terminated hedge are recorded in earnings.

Fair Value of Financial Instruments – The carrying amounts reported in the consolidated balance sheet for cash equivalents, trade receivables, and accounts payable approximate fair value based on the short-term maturity of these instruments. The carrying value of senior debt approximates its fair value since it provides for variable market interest rates. The Company uses a swap agreement to hedge the interest rates on its long term debt. The swap agreement is carried at its estimated settlement value based on information from the financial institution. Subordinated debt is carried at its approximate market value based on periodic comparisons to similar instruments in the market place.

Fair Value Hierarchy

The Company groups its financial assets and liabilities, generally measured at fair value, in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine the fair value.

Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 – Valuation is based on observable inputs other than level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

F - 8

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment, or estimation.

The level of fair value hierarchy in which the fair value measurement falls is determined by the lowest level input that is significant to the fair value measurement.

Revenue Recognition – Revenue is recognized when products are delivered to customers. A certain amount of the Company’s revenue is derived from leasing water coolers and coffee brewers. These leases are generally for the first 12 months of service and are accounted for as operating leases. To open an account that includes the rental of equipment, a customer is required to sign a contract that recognizes the receipt of the equipment, outlines the Company’s ownership rights, the customer’s responsibilities concerning the equipment, and the rental charge for twelve months. In general, the customer does not renew the agreement after twelve months, and the rental continues on a month to month basis until the customer returns the equipment in good condition. The Company recognizes the income ratably over the life of the lease. After the initial lease term expires, rental revenue is recognized monthly as billed.

Shipping and Handling Costs – The Company distributes its home and office products directly to its customers on its own trucks. The delivery costs related to the Company’s route system, which are reported under selling, general, and administrative expenses, were approximately $12,785,000 and $13,526,000 for fiscal years 2009 and 2008, respectively.

3.	RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued guidance that establishes principles and requirements for how the acquirer in a business combination recognizes and measures identifiable assets acquired, liabilities assumed, and non-controlling interests in the acquiree. This guidance further addresses how goodwill acquired or a gain from a bargain purchase is to be recognized and measured and determines what disclosures are needed to enable users of the financial statements to evaluate the effects of the business combination. This guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 which is fiscal 2010 for the Company.

In March of 2008, the FASB issued guidance that changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This guidance is effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently assessing the impact, if any, this pronouncement will have on its reporting and when, if necessary, to implement enhanced reporting.

F - 9

In April 2009, the FASB issued a statement that provides guidance on how to determine the fair value of assets and liabilities in an environment where the volume and level of activity for the asset or liability have significantly decreased and re-emphasizes that the objective of a fair value measurement remains an exit price. The statement is effective for periods ending after June 15, 2009, with earlier adoption permitted. Accordingly, the Company adopted this statement as of August 1, 2009 and this adoption did not have a material impact on the consolidated financial statements.

In April 2009, the FASB issued a statement that requires companies to disclose the fair value of financial instruments within interim financial statements, adding to the current requirement to provide those disclosures annually. The statement is effective for periods ending after June 15, 2009, with earlier adoption permitted. Accordingly, the Company adopted this statement as of July 31, 2009.

In May 2009, the FASB issued an accounting pronouncement establishing general standards of accounting for and disclosure of subsequent events, which are events occurring after the balance sheet date but before the date the financial statements are issued or available to be issued. In particular, the pronouncement requires entities to recognize in the financial statements the effect of all subsequent events that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial preparation process. Entities may not recognize the impact of subsequent events that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. This pronouncement also requires entities to disclose the date through which subsequent events have been evaluated. This pronouncement was effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted the provisions of this pronouncement for the interim period ended July 31, 2009, as required, and adoption did not have a material impact on the Company’s consolidated financial statements taken as a whole.

In June 2009, the FASB issued two related accounting pronouncements changing the accounting principles and disclosures requirements related to securitizations and special-purpose entities. Specifically, these pronouncements eliminate the concept of a “qualifying special-purpose entity”, change the requirements for derecognizing financial assets and change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. These pronouncements also expand existing disclosure requirements to include more information about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. These pronouncements will be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The recognition and measurement provisions regarding transfers of financial assets shall be applied to transfers that occur on or after the effective date. The Company will adopt these new pronouncements on November 1, 2010, as required. Management has not yet determined the impact adoption may have on the Company’s consolidated financial statements.

F - 10

In June 2009, the FASB approved the FASB Accounting Standards Codification (Codification) as the single source of authoritative nongovernmental U.S. Generally Accepted Accounting Principles (U.S. GAAP). The Codification does not change current U.S. GAAP but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be considered non-authoritative. The Codification is effective for interim and annual periods ending after September 15, 2009. The Codification was effective for the Company during its interim period ending September 30, 2009 and it did not have an impact on its financial condition or results of operations.

In August 2009, the FASB issued guidance for measuring the fair value of a liability in circumstances in which a quoted price in an active market for the identical liability is not available. In such instances, a reporting entity is required to measure fair value utilizing a valuation technique that uses (i) the quoted price of the identical liability when traded as an asset, (ii) quoted prices for similar liabilities or similar liabilities when traded as assets, or (iii) another valuation technique that is consistent with the existing principles for measuring fair value, such as an income approach or market approach. The new guidance also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. The guidance is effective November 1, 2009. The Company is currently reviewing the impact, if any, that this new accounting standard will have on their consolidated financial statements.

4.	MERGERS AND ACQUISITIONS

During fiscal years 2009 and 2008, Vermont Pure Holdings, Ltd. made four acquisitions in each year. The purchase price paid for the acquisitions for the respective years is as follows:

	2009		2008
Cash (including acquisition costs)	$	1,694,236	$	429,608
Issuance of debt		2,500,000		36,000
Other		1,965		-
	$	4,196,201	$	465,608

F - 11

The allocation of purchase price related to these acquisitions for the respective years is as follows:

	2009			2008
Accounts Receivable, net	$	378,433		$	-
Equipment		748,456			65,528
Identifiable Intangible Assets		3,164,552			389,317
Goodwill		42,626			15,763
Inventory		6,484			-
Customer deposits		(144,350	)		(5,000	)
Purchase Price	$	4,196,201		$	465,608

The following table summarizes the pro forma consolidated condensed results of operations (unaudited) of the Company for the fiscal years ended October 31, 2009 and 2008 as though all the acquisitions had been consummated at the beginning of fiscal year 2008:

	2009		2008
Net Sales	$	67,514,475	$	72,854,493
Net Income (Loss)	$	3,060,777	$	(19,725,199	)
Net Income (Loss) Per Share-Diluted	$	.14	$	(.91	)
Weighted Average Common Shares Outstanding-Diluted		21,525,932		21,564,384

The operating results of the acquired entities have been included in the accompanying statements of operations since their respective dates of acquisition.

5.	EQUIPMENT RENTAL

The carrying cost of the equipment rented to customers, which is included in property and equipment in the consolidated balance sheets, is calculated as follows:

	2009		2008
Original Cost	$	2,815,877	$	3,125,883
Accumulated Depreciation		2,007,121		2,130,685
Carrying Cost	$	808,756	$	995,198

We expect to have revenue of $661,000 from the rental of such equipment over the next twelve months.

F - 12

6.	ACCOUNTS RECEIVABLE

The activity in the allowance for doubtful accounts for the years ended October 31, 2009, and 2008 is as follows:

	2009			2008
Balance, beginning of year	$	414,301		$	354,825
Provision		489,434			345,812
Write-offs		(467,945	)		(286,336	)
Balance, end of year	$	435,790		$	414,301

7.	INVENTORIES

Inventories at October 31 consisted of:

	2009		2008
Finished Goods	$	2,015,395	$	1,557,914
Raw Materials		156,417		112,035
Total Inventories	$	2,171,812	$	1,669,949

Finished goods inventory consists of products that the Company sells such as, but not limited to, coffee, cups, soft drinks, and snack foods. Raw material inventory consists primarily of bottle caps.

8.	PROPERTY AND EQUIPMENT, NET

Property and equipment at October 31 consisted of:

	Useful Life	2009		2008

Leasehold improvements	Shorter of useful life of asset or lease term	$	1,637,482	$	1,812,689
Machinery and equipment	3 - 10 yrs.		20,477,139		20,467,805
Bottles, racks and vehicles	3 - 7 yrs.		4,693,090		6,125,618
Furniture, fixtures and office equipment	3 - 7 yrs.		2,324,425		2,235,166
Construction in progress			164,771		136,005
Property and equipment before accumulated depreciation			29,296,907		30,777,283
Less accumulated depreciation			19,439,493		20,213,895
Property and equipment, net of accumulated depreciation		$	9,857,414	$	10,563,388

During 2008, the Company completed an extensive solar electricity generation installation in its Watertown facility to supply a significant amount of the energy for that facility. The expenditures of the solar project are net of $1,311,000 received from a grant for the project through October 31, 2009. The total cost of the project was $2,092,000.

Depreciation expense for the fiscal years ended October 31, 2009 and 2008 was $3,853,864, and $4,063,178, respectively.

F - 13

9.	GOODWILL AND OTHER INTANGIBLE ASSETS

Components of other intangible assets at October 31 consisted of:

	2009				2008
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Amortized Intangible Assets:
Customer Lists and Covenants Not to Compete	$	8,969,270	$	5,223,343	$	5,866,981	$	4,113,807
Other Identifiable Intangibles		490,013		200,746		528,254		196,886
Total	$	9,459,283	$	5,424,089	$	6,395,235	$	4,310,693

Amortization expense for amortizable intangible assets for fiscal years 2009 and 2008, was $1,113,396, and $887,813, respectively.

Estimated amortization expense for the next five years is as follows:

Fiscal Year Ending	Amount
October 31, 2010	$	1,065,000
October 31, 2011		926,000
October 31, 2012		779,000
October 31, 2013		702,000
October 31, 2014		296,000

The average remaining term of identifiable intangible assets with balances remaining to be amortized is 33 months.

An assessment of the carrying value of goodwill was conducted as of October 31, 2009, and 2008. In 2009 it was determined that goodwill was not impaired. In 2008, based on the analysis, it was determined at that time that goodwill was impaired. In the second phase of the assessment process it was determined that goodwill on the Company’s books was overvalued by $22,359,091 on the assessment date, resulting in a non-cash impairment loss of that amount for 2008. The changes in the carrying amount of goodwill for the fiscal years ended October 31, 2009 and 2008 are as follows:

	2009		2008
Beginning balance	$	32,080,669	$	54,423,997
Goodwill acquired during the year		42,625		15,763
Goodwill disposed of during the year		-		-
Impairment loss		-		(22,359,091	)
Balance as of October 31	$	32,123,294	$	32,080,669

The assessment of the carrying value of goodwill is a two step process. In step one, the fair value of the Company is determined, using a weighted average of three different market approaches – quoted stock price, value comparisons to publicly traded companies believed to have comparable reporting units, and discounted net cash flow. This approach provided a reasonable estimation of the value of the Company and took into consideration the Company’s thinly traded stock and concentrated holdings, market comparable valuations, and expected results of operations. The Company compared the resulting estimated fair value to its equity value as of October 31, 2009 and 2008 and determined no impairment of goodwill at October 31, 2009 and that there was an impairment of goodwill at October 31, 2008. Based on that finding for 2008, the assessment proceeded to step two, where the estimated fair value of the Company’s assets and liabilities (including unrecognized intangible assets) were allocated as if it had been acquired in a business combination and the estimated fair value was the price paid. An impairment was recognized as of October 31, 2008 in the amount by which the carrying value of goodwill exceeded the implied value of goodwill as determined in this allocation. The Company is a single reporting unit as it does not have separate management of product lines and shares its sales, purchasing and distribution resources among the lines.

F - 14

Impairment recorded in 2008 was primarily the result of a decline in the quoted market prices of the Company’s stock at year-end below its book carrying value, and was not due to any changes in the core business. There was no event or change in circumstance that would more likely than not reduce the fair value of our underlying net assets below their carrying amount prior to the annual impairment test.

10.	OTHER ASSETS

At October 31 the balance of other assets is itemized as follows:

	2009		2008
Note receivable, unsecured, due August 8, 2011, interest 0% per annum (net of an allowance for bad debt of $87,936 in 2009 and $57,043 for 2008)	$	73,333	$	113,333
Ownership interests		39,000		39,000
Total	$	112,333	$	152,333

In fiscal year 2008, the Company recorded a provision for bad debt expense on an unsecured, subordinated note receivable from Trident LLC. The note, which was due in full in 2011 and had a principal balance of $475,000, represented the remaining portion of the sales price that was receivable from the sale of our retail operations in March, 2004. The note was considered fully impaired primarily based on advice from Trident that it had closed its principal facility and generally ceased its operations due to cash flow problems. The provision for bad debt expense is reflected in selling, general and administrative expenses for the year ended October 31, 2008. The Trident note and related provision were both written off in fiscal year 2009.

F - 15

11.	ACCRUED EXPENSES

Accrued expenses as of October 31 are as follows:

	2009		2008
Payroll and Vacation	$	1,002,147	$	1,575,787
Interest		457,123		491,875
Health Insurance		392,293		403,325
Accounting and Legal		159,000		160,500
Termination Benefit		221,000		-
Miscellaneous		317,201		227,790
Total	$	2,548,764	$	2,859,277

Termination Benefit

On February 6, 2009 the Company entered into a Severance and Release Agreement with an employee that has worked for the Company 59 years. Under the agreement the Company is obligated to pay the employee, or his estate, $68,000 a year for the next 4 years. On the date of the agreement, the Company recognized the full expense related to this special termination benefit.

12.

DEBT

Senior Debt

The Company has a senior credit facility with Bank of America that provides a Term Loan, a Revolving Credit Loan of $6 million for working capital and letters of credit, and up to $10 million in an Acquisition Loan to be used for acquisitions and capital expenditures. The Term Loan may also provide funds for future principal payment of the Company’s subordinated debt if certain financial covenants are met after the first two years of the loan.

On July 5, 2007 the Company and the Bank amended the facility. The amendment extended the working capital and acquisition lines of credit by changing the Acquisition Loan termination date and Revolving Credit Loan maturity date to April 5, 2010 from April 5, 2008 and extended the Term Loan maturity date to January 5, 2014. In conjunction with the extension of the maturity date, the monthly amortization amount on the Term Loan was fixed at $270,833 for the duration of the loan. Prior to the amendment, the Term Loan maturity date was May 5, 2012 and the remaining amortization was scheduled to be monthly amounts, increasing from year to year, ranging from $312,500 to $395,833. In addition, the amendment increased the Acquisition Loan availability to $10,000,000 and made up to $3,000,000 available from the Revolving Credit Loan for repurchase of Company stock or for repayment of subordinated debt and $2,200,000 available from the Acquisition Loan for installation of solar panels for electricity generation at the Company’s leased property in Watertown, Connecticut. The amendment has provisions for amortization of the additional borrowed amounts over the remaining life of the loans starting approximately two years after disbursement. It also altered some of the financial covenant calculations to provide for the additional borrowing.

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Interest on the loans is based on the 30-day LIBOR plus an applicable margin based on the Company’s financial performance. The applicable margin may vary from 125 to 225 basis points for the Acquisition and Revolving Credit Loans and 150 to 250 basis points for the Term Loan based on the level of senior debt to earnings before interest, taxes, depreciation, and amortization (EBITDA). The applicable margins as of October 31, 2009 were 1.75% for the Term Loan and 1.5% for the Acquisition and Revolving Credit Loans, resulting in total variable interest rates of 2.00% and 1.75%, respectively. The facility is secured by substantially all of the Company’s assets. As of October 31, 2009, there was $13,542,000 outstanding on the Term Loan, and $4,300,000 outstanding on the Acquisition Loan. There were no borrowings outstanding on the Revolving Credit Loan but there was an outstanding letter of credit of $1,563,000 issued against the Revolving Credit Loans availability as of the end of the fiscal year.

The facility with Bank of America requires that the Company be in compliance with certain financial covenants at the end of each fiscal quarter. The covenants include senior debt service coverage as defined of greater than 1.25 to 1, total debt service coverage as defined of greater than 1 to 1, and senior debt to EBITDA as defined of no greater than 2.50 to 1. As of October 31, 2009 and 2008, the Company was in compliance with all of the financial covenants of the facility.

On April 5, 2010 any balance on the Acquisition Loan converts to a term loan with equal annual installments payable over the next five years. Any balance on the Revolving Loan will be due and payable on April 5, 2010. We are currently negotiating to renew these facilities. If we are unable to negotiate acceptable renewal terms, and no alternative funding is available, the Company’s business and its results of operations may be materially affected.

Subordinated Debt

As part of the acquisition agreement in 2000 with the former shareholders of Crystal Rock Spring Water Company, the Company issued subordinated notes in the amount of $22,600,000. The notes have an effective date of October 5, 2000, were for an original term of seven years (subsequently extended to 2012 as part of the senior credit facility refinancing described above) and bear interest at 12% per year. Scheduled repayments are made quarterly and are interest only for the life of the note unless specified financial targets are met. In April 2004, the Company repaid $5,000,000 of the outstanding principal. In April, 2005, the Company repaid an additional $3,600,000 of this principal.

On May 7, 2009, with the mutual consent of the three subordinated debt holders, the Company paid $500,000 to John B. Baker as a payment of principal on his note. As of October 31, 2009, the Company had $13,500,000 of subordinated debt outstanding bearing an interest rate of 12%.

The notes are secured by all of the assets of the Company but specifically subordinated, with a separate agreement between the debt holders, to the senior credit facility described above.

Annual Maturities

Annual maturities of debt as of October 31, 2009 are summarized as follows:

	Term		Credit Lines		Subordinated		Total
Fiscal year ending October 31,
2010	$	3,250,000	$	430,000	$	-	$	3,680,000
2011		3,250,000		860,000		-		4,110,000
2012		3,250,000		860,000		13,500,000		17,610,000
2013		3,250,000		860,000		-		4,110,000
2014 and after		542,000		1,290,000		-		1,832,000
Total Debt	$	13,542,000	$	4,300,000	$	13,500,000	$	31,342,000

13.	INTEREST RATE SWAP AGREEMENTS

The Company uses interest rate swaps to effectively convert variable rate debt to a fixed rate. The swap rates are based on the floating 30-day LIBOR rate and are structured such that if the loan rate for the period exceeds the swap rate, then the bank pays the Company to lower the effective interest rate. Conversely, if the loan rate is lower than the swap rate, the Company pays the bank additional interest.

On October 5, 2007, the Company entered into an interest rate hedge swap agreement in conjunction with an amendment to its facility with Bank of America. The intent of the instrument is to fix the interest rate on 75% of the outstanding balance on the Term Loan with Bank of America as required by the facility. The swap fixes the interest rate for the swapped amount at 6.62% (4.87% plus the applicable margin, 1.75%).

As of October 31, 2009, the total notional amount committed to the swap agreement was $10.2 million. On that date, the variable rate on the remaining 25% of the term debt was 1.99%.

Based on the floating rate for respective years ended October 31, 2009 and 2008, the Company paid $477,542 more and $208,000 more in interest, respectively, than it would have without the interest rate swap agreements.

These swaps are considered cash flow hedges because they are intended to hedge, and are effective as a hedge, against variable cash flows. As a result, the unrealized loss on derivative in connection with the interest rate swap agreement, recorded as a current liability, was $725,473 and $531,673 at October 31, 2009 and 2008. The changes in the fair values of the derivatives, net of tax, are recognized as comprehensive income or loss until the hedged item is recognized in earnings.

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14.	FAIR VALUES OF ASSETS AND LIABILITIES

Fair Value Hierarchy

The Company’s assets and liabilities measured at fair value are as follows:

	October 31, 2009
	Level 1		Level 2		Level 3
Liabilities:
Unrealized loss on derivatives	$	-	$	725,473	$	-

15.	STOCK BASED COMPENSATION

Stock Option and Incentive Plans

In April 1998, the Company’s shareholders approved the 1998 Incentive and Non Statutory Stock Option Plan (the “1998 Plan”). In April 2003, the Company’s shareholders approved an increase in the authorized number of shares to be issued under the 1998 Plan from 1,500,000 to 2,000,000. This plan provides for issuance of up to 2,000,000 options to purchase the Company’s common stock under the administration of the compensation committee of the Board of Directors. The intent of this plan is to issue options to officers, employees, directors, and other individuals providing services to the Company. Of the total amount of shares authorized under this plan, 425,500 option shares are outstanding and 1,574,500 option shares are available for grant at October 31, 2009.

In April 2004, the Company’s shareholders approved the 2004 Stock Incentive Plan (the “2004 Plan”). This plan provides for issuances of awards of up to 250,000 restricted or unrestricted shares, or incentive or non-statutory stock options, of the Company’s common stock. Of the total amount of shares authorized under this plan, 149,000 option shares are outstanding, 26,000 restricted shares have been granted, and 75,000 shares are available for grant at October 31, 2009.

All incentive and non-qualified stock option grants had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table summarizes the activity related to stock options and outstanding stock option balances during the last two fiscal years:

	Outstanding Options (Shares)			Weighted Average Exercise Price
Balance at October 31, 2007		659,500		$	3.01
Expired		(66,800	)		3.84
Balance at October 31, 2008		592,700			2.91
Expired		(18,200	)		3.13
Balance at October 31, 2009		574,500			2.91

In 2009 and 2008, the 18,200 and 66,800 respective options that expired related to the 1998 Plan.

The total shares available for grant under all plans are 1,649,500 at October 31, 2009.

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The following table summarizes information pertaining to outstanding stock options, all of which are exercisable, as of October 31, 2009:

Exercise Price Range		Outstanding Options (Shares)		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Intrinsic Value
$	1.80 - $2.60		234,500		5.24	$	2.32	$	-
$	2.81 - $3.38		295,000		1.13		3.22		-
$	3.50 - $4.25		40,000		2.27		3.80		-
$	4.28 - $4.98		5,000		2.17		4.98		-
			574,500		2.89	$	2.91	$	-

All of the outstanding options as of October 31, 2009 and 2008 were vested.

Outstanding options were granted with lives of 10 years and provide for vesting over a term of 0-5 years.

Employee Stock Purchase Plan (ESPP)

The Company maintains an ESPP, under which, as originally approved, 500,000 shares of common stock were reserved for issuance. On March 29, 2007 the Company’s stockholders approved an increase in the number of shares available under the plan from 500,000 to 650,000 shares. The ESPP enables eligible employees to subscribe, through payroll deductions, to purchase shares of the Company's common stock at a purchase price equal to 95% of the fair market value on the last day of the payroll payment period. At October 31, 2009, 641,747 shares have issued since the inception of the plan including 89,248 shares issued for proceeds of $62,345 in fiscal year 2009. In fiscal year 2008 62,184 shares for proceeds of $88,219 were issued from the plan. The plan reached its limit of shares in the option period ending December 31, 2009. There are no plans to increase the limit or create a similar plan.

16.	RETIREMENT PLAN

The Company has a defined contribution plan which meets the requirements of Section 401(k) of the Internal Revenue Code. All employees of the Company who are at least twenty-one years of age are eligible to participate in the plan. The plan allows employees to defer a portion of their salary on a pre-tax basis and the Company contributes 25% of amounts contributed by employees up to 6% of their salary. Company contributions to the plan amounted to $97,000, and $145,000, for the fiscal years ended October 31, 2009 and 2008, respectively.

17.	COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company’s operating leases consist of trucks, office equipment and rental property.

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Future minimum rental payments, including related party leases described below, over the terms of various lease contracts are approximately as follows:

Fiscal Year Ending October 31,

2010	$	3,358,000
2011		2,629,000
2012		2,092,000
2013		1,810,000
2014		917,000
Thereafter		992,000
Total	$	11,798,000

Rent expense was $3,665,000 and $3,586,000 for the fiscal years ended October 31, 2009 and 2008, respectively.

18.	RELATED PARTY TRANSACTIONS

Directors and Officers

The Baker family group, consisting of four current directors Henry Baker (Chairman Emeritus), Peter Baker (CEO), John Baker (Executive Vice President) and Ross Rapaport (Chairman), as trustee, together own a majority of our common stock. In addition, in connection with the acquisition of Crystal Rock Spring Water Company in 2000, we issued members of the Baker family group 12% subordinated promissory notes secured by all of our assets. The current balance on these notes is $13,500,000.

Henry Baker, had an employment contract with the Company through July 1, 2008. His contract entitled him to annual compensation of $47,000 as well as a leased Company vehicle. Since then he has been employed by the Company as an at-will employee at the discretion of management. Mr. Baker’s sons, John Baker and Peter Baker, have employment contracts with the Company through December 31, 2010. They are also directors. The two contracts entitle the respective shareholders to annual compensation of $320,000 each and other bonuses and perquisites.

The Company leases a 67,000 square foot facility in Watertown, Connecticut and a 22,000 square foot facility in Stamford, Connecticut from a Baker family trust. The lease in Stamford expires in October 2010. On August 29, 2007 the Company finalized an amendment to our existing lease in Watertown which extended that lease to October 2016.

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Future minimum rental payments under these leases are as follows:

Fiscal year ending October 31,	Stamford		Watertown		Total
2010	$	248,400	$	414,000	$	662,400
2011		-		452,250		452,250
2012		-		452,250		452,250
2013		-		461,295		461,295
2014		-		461,295		461,295
2015		-		470,521		470,521
2016		-		470,521		470,521
Totals	$	248,400	$	3,182,132	$	3,430,532

The Company’s Chairman of the Board, Ross S. Rapaport, who also acts as Trustee in various Baker family trusts is employed by Pepe & Hazard LLP a business law firm that the Company uses from time to time. During fiscal 2009 and 2008 the Company paid approximately $69,000 and $63,000, respectively, for services provided by Pepe & Hazard LLP.

As of October 31, 2009, the Company had accrued $120,000 to pay Mr. Rapaport for work in 2009 that consumed more time than would routinely be required by his duties as chair of the Board. Payment of this amount occurred after October 31, 2009 and was approved by the Company’s compensation committee.

Investment in Voyageur

The Company had an equity position in a software company named Voyageur Software, Inc. (Voyageur) formerly Computer Design Systems, Inc. One of the Company’s directors was a member of the board of directors of Voyageur. The Company’s equity investment in Voyageur represented approximately 24% of the outstanding shares of the company. In 2004, the Company determined that its investment in Voyageur was impaired and wrote off the carrying value of its investment. On February 29, 2008, Voyageur sold substantially all of its assets to another software company and the proceeds were insufficient to provide a return to Voyageurs shareholders. As a result of the sale, Voyageur ceased its operations. Software development and maintenance previously provided by Voyageur to the Company may now be provided by the buyer, an unrelated party.

During fiscal year 2008 the Company paid $45,011 for service, software, and hardware from Voyageur. There were no payments to Voyageur in fiscal year 2009.

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19.	INCOME TAXES

The following is the composition of income tax expense:


	2009		2008
Current:
Federal	$	1,217,515	$	412,009
State		197,818		361,137
Total current		1,415,333		773,146

Deferred:
Federal		295,844		183,582
State		34,934		11,826
Total deferred		330,778		195,408
Total income tax expense	$	1,746,111	$	968,554

Deferred tax assets (liabilities) at October 31, 2009 and October 31, 2008, are as follows:

	October 31,
	2009			2008
Deferred tax assets:
Allowance for doubtful accounts	$	165,600		$	157,434
Accrued compensation		229,506			296,118
Accrued liabilities and reserves		79,249			88,499
Interest rate swap		276,727			202,036
Capital loss carry forward		81,959			83,057
Valuation allowance		(81,959	)		(83,057	)
Total deferred tax assets		751,082			744,087

Deferred tax liabilities:
Depreciation		(1,639,881	)		(1,576,065	)
Amortization		(2,026,898	)		(1,827,631	)
Total deferred tax liabilities		(3,666,779	)		(3,403,696	)

Net deferred tax liability	$	(2,915,697	)	$	(2,659,609	)

During 2009 and 2008, the Company established a valuation allowance of $81,959 and $83,057, respectively, related to the capital loss carry forward deferred tax asset.

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Income tax expense differs from the amount computed by applying the statutory tax rate to net (loss) income before income tax expense as follows:


	2009			2008
Income tax expense (benefit) computed at the statutory rate	$	1,620,434		$	(6,414,770	)
Goodwill impairment		-			7,602,091
Energy Credit		-			(508,260	)
Other differences		(27,939	)		43,337
State income taxes		153,616			246,156
Income tax expense	$	1,746,111		$	968,554

The Company did not recognize an increase to tax liability for uncertain tax positions. The Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. Generally, the Company is no longer subject to U.S. federal, state and local tax examinations by tax authorities for years before October 31, 2005.

A reconciliation of the beginning and ending amount of unrecognized tax benefits including interest and penalties is as follows:

Balance at November 1, 2007	$	119,000
Increases related to current year tax positions		-
Increases related to the prior year tax positions		17,000
Decreases related to prior year tax positions		-
Settlements		-
Expiration of Statutes		-
Balance at October 31, 2008	$	136,000
Increases related to current year tax positions		-
Increases related to the prior year tax positions		34,000
Decreases related to prior year tax positions		-
Settlements		-
Expiration of Statutes		118,000
Balance at October 31, 2009	$	52,000

The Company recognizes interest and penalties related to the unrecognized tax benefits in tax expense. During the year ended October 31, 2009 the Company reduced interest and penalties by $27,000. In the year ended October 31, 2008, it recognized $17,000 of interest and penalties. The Company had approximately $35,000 and $62,000 of interest and penalties accrued at October 31, 2009 and 2008, respectively.

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20.	NET INCOME (LOSS) PER SHARE

The following calculation provides the reconciliation of the denominators used in the calculation of basic and fully diluted earnings per share:


	2009		2008
Net Income (Loss)	$	3,019,868	$	(19,835,525	)
Denominator:
Basic Weighted Average Shares Outstanding		21,525,932		21,564,384
Effect of Stock Options	-		-
Diluted Weighted Average Shares Outstanding		21,525,932		21,564,384

Basic Net Income (Loss) Per Share	$	.14	$	(.92	)

Diluted Net Income (Loss) Per Share	$	.14	$	(.92	)

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There were 574,500 and 592,700 options outstanding for the years ended October 31, 2009 and 2008, respectively, that were not included in the dilution calculation because the options’ exercise price exceeded the market price of the underlying common shares.

21.	CONCENTRATION OF CREDIT RISK

The Company maintains its cash accounts at various financial institutions. The balances at times may exceed federally insured limits. At October 31, 2009, the Company had cash in deposits exceeding the insured limit by approximately $3,472,000. Effective October 3, 2008, the Emergency Economic Stabilization Act temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The legislation provides that the basic deposit insurance limit will return to $100,000 after December 31, 2013. In addition, the Company’s deposits are maintained in various financial institutions that are participating in the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program. This program provides a full guarantee for all noninterest-bearing transaction accounts maintained at the various financial institutions through December 31, 2009. Accordingly, all of the Company’s cash accounts are fully guaranteed at October 31, 2009.

22.	LITIGATION

23.	REPURCHASE OF COMMON STOCK

In January 2006, the Company’s Board of Directors approved the purchase of up to 250,000 of the Company’s common shares at the discretion of management. In May 2008, the Company’s Board of Directors approved the purchase of up to an additional 250,000 of the Company’s common shares at the discretion of management. In fiscal years 2009 and 2008, the Company purchased an additional 106,298 and 179,000 shares, respectively, for an aggregate purchase price of $86,848 and $242,860, respectively. Since the inception of the purchases, 407,998 shares, for a total of $539,455, have been purchased. The Company expects to continue to purchase stock in the open market but total purchases may not ultimately reach the limit established. The Company has used internally generated cash to fund these purchases.

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24.	SUBSEQUENT EVENTS

Management has evaluated subsequent events through January 25, 2010, which is the date the financial statements were issued. There were no subsequent events that require adjustment to or disclosure in the consolidated financial statements.

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Crystal Rock Holdings, Inc. - FORM 10-K - January 25, 2010

Attached files

Crystal Rock Holdings, Inc. Reports