Introduction and Company Background
Crystal Rock Holdings, Inc., incorporated in Delaware
in 1990, is engaged in the production, marketing and distribution of bottled water (the Crystal Rock® and Vermont Pure®
brands) and the distribution of coffee including our Cool Beans® brand, ancillary products and other office refreshment products,
and office products under the Crystal Rock Office® brand. We operate primarily as a distribution business to homes and offices,
using our own trucks for distribution throughout New England, New York, and New Jersey.
Our distribution sales and services evolved from
our initial business, sales of bottled water and cooler rentals. We bottle our water and also have it bottled for us. Our water
products are primarily still, non-sparkling waters. We also have branded sparkling waters. In addition to water and related services,
our other significant food and drink offerings have grown to include distribution of coffee and ancillary products, and other refreshment
products including soft drinks and snacks. To a lesser extent, we distribute these products through third party distributors.
Water
Bottled water is a mainstream beverage and the
centerpiece of many consumers’ healthy living lifestyles. Sales of bottled water accounted for 47% of our total sales in
fiscal year 2017 and 43% in 2016. We believe that the development of the bottled water industry has for many years reflected public
awareness of the potential contamination and unreliability of some municipal water supplies. Conversely, bottled water has periodically
been the focus of publicity regarding concerns about the possibly adverse environmental effects of using plastic bottles, as well
as the effect on the environment of water extraction and the production. See Item 1A, “Risk Factors,” for more information.
Coffee
Coffee, a product that is counter seasonal to
water, is the second leading product in the distribution channel, accounting for 18% of our total sales in fiscal year 2017 and
17% of our total sales in fiscal year 2016. We sell different brands and sizes of coffee products. We continue to promote our Cool
Beans® brand coffee in an effort to increase profitability and create brand equity in the coffee category. Because coffee is
a commodity, coffee sales are affected by volatility in the world commodity markets. An interruption in supply or a dramatic increase
in pricing could have an adverse effect on our business.
A large proportion of our coffee sales are single-serve
coffee products. These products have become more prevalent in the marketplace over the last decade, and changes in distribution
play a significant role in the availability and profitability of these products.
Refreshment and Equipment Rental
Ancillary products, such as soft drinks and snacks,
accounted for 14% of our total revenues in fiscal year 2017 and 15% of our total revenues in fiscal year 2016. Equipment rentals,
primarily water coolers, made up 12% of our total revenues in fiscal year 2017 and 11% of our total revenues in fiscal year 2016.
Office Products
In fiscal 2011, we added office products to our
product offerings. We grew the office product line in an effort to diversify our product sales to existing office customers. However,
we determined that sales of some office products generated low margins for us, so beginning in late fiscal 2015, we emphasized
growth efforts on our core water products. As a result, the contribution to total revenues from office products in fiscal 2017
decreased to 6% of total revenues in fiscal 2017 from 11% in fiscal 2016.
Other Revenue
Fees that are charged to offset energy costs for
delivery and freight, raw materials, and bottling operations primarily make up the balance of our revenue. This comprised 3% of
our total sales in fiscal years 2017 and 2016.
Water Sources, Treatment, and Bottling Operations
Water from local municipalities is the primary
source for the Crystal Rock Waters® brand in three- and five-gallon bottles. In fiscal 2017, this accounted for 67% of our
water bottled in these types of containers. Municipal water is purified through a number of processes beginning with filtration.
Utilizing carbon and ion exchange filtration systems, we remove chlorine and other volatile compounds and dissolved solids. After
the filtration process, impurities are removed by reverse osmosis and/or distillation. Prior to bottling, we add pharmaceutical
grade minerals to the water, including calcium, potassium, and magnesium for taste. The water is ozonated (by injecting ozone into
the water as an agent to inhibit the formation of bacteria) and bottled in a fully enclosed clean room with a high efficiency particulate
air, or HEPA, filtering system designed to prevent any airborne contaminants from entering the bottling area, in order to create
a sanitary filling environment.
If for any reason the municipal sources for Crystal
Rock® water were curtailed or eliminated, we could, though probably at greater expense, purchase water from other sources and
have it shipped to our manufacturing facilities.
The main source of our natural spring water (primarily
sold under the Vermont Pure® brand) is a spring owned by a third party in Stockbridge, Vermont that is subject to a 50-year
water supply contract, approximately 32 years of which remain. We also obtain water, under a similar agreement with a third party,
from a spring in Bennington, Vermont. These springs are approved by the State of Vermont as sources for natural spring water. The
contractual terms for these springs provide spring water in excess of our current needs and within the apparent capacity of the
springs, and accordingly we believe that we can readily meet our bulk water supply needs for the foreseeable future. Water from
these springs accounted for 33% of our total water bottled in fiscal 2017.
Percolation through the earth's surface is nature's
best filter of water. We believe that the age and extended percolation period of our natural spring water provides it with certain
distinct attributes: a purer water, noteworthy mineral characteristics (including the fact that the water is sodium free and has
a naturally balanced pH), and a light, refreshing taste.
An interruption in or contamination of any of
our spring sites would materially affect our business. We believe that we could find adequate supplies of bulk spring water from
other sources, but that we might suffer inventory shortages or inefficiencies, such as increased purchase or transportation costs,
in obtaining such supplies.
We are highly dependent on the integrity of the
sources and processes by which we derive our products. Natural occurrences beyond our control, such as drought, flood, earthquake
or other geological changes, a change in the chemical or mineral content or purity of the water, or environmental pollution may
affect the amount and quality of the water available from the springs or municipal sources that we use. There is a possibility
that characteristics of the product could be changed either inadvertently or by tampering before consumption. Even if such an event
were not attributable to us, the product’s reputation could be irreparably harmed. Consequently, we would experience economic
hardship. Occurrence of any of these events could have an adverse impact on our business. We are also dependent on the continued
functioning of our bottling processes. An interruption could result in an inability to meet market demand and/or negatively affect
the cost to bottle the products.
We also bottle and distribute other brands of
water for third parties. These sales account for 4% of our bottled water sales.
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
Water, Coffee, and Refreshment and Ancillary
Equipment
We sell our Crystal Rock® and Vermont Pure®
water brands in three- and five-gallon bottles to homes and offices throughout New England, New York, and New Jersey. In general,
Crystal Rock® is distributed in southern New England and New York, while Vermont Pure® is primarily distributed throughout
northern New England and secondarily in southern New England and New York. We rent and sell water coolers to customers to dispense
bottled water. Our coolers are available in various consumer preferences such as cold, or hot and cold, dispensing units. In addition,
we sell and rent units to commercial accounts that filter water from the existing source on site. We also rent and sell coffee
brewing equipment and distribute a variety of coffee, tea and other hot beverage products and related supplies, as well as other
consumable products used around the office. We 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 Keurig Green Mountain.
Our extensive distribution system and large
customer lists afford us the opportunity to introduce new products that may benefit our current customers or appeal to new customers.
From time to time, we may capitalize on these opportunities by expanding our product lines or replacing existing products
with new ones. In response to the increasingly competitive sales environment, we will consider distributing new products that we
believe may enhance our sales and profitability.
Office Products Line
We have been distributing office products under
the Crystal Rock Office
®
brand since 2011. Recognizing the value inherent in our distribution system, we do not
maintain large inventories of office products. Rather, we primarily purchase office products from large national vendors such as
S. P. Richards that provide just-in-time delivery, with the result that the introduction of our office product line has not resulted,
and is not expected to result, in a material outlay of resources to accommodate increased inventory. The broader range of office
products compliments our product offerings to existing office customers who purchase our water and coffee products. Competition
in the traditional office products markets has resulted in lower margins in this product line.
We believe that we have a well-established distribution
system and that the Crystal Rock® family of brands is well known in the regions in which we operate, and we hope to leverage
those advantages successfully. Nevertheless, price competition in the office product market can be robust, and there can be no
assurance that our office products strategy will be successful. See Item 1A, “Risk Factors,” for more information.
Marketing and Sales of Branded Products
Crystal Rock products are marketed and distributed under four house
brands: Crystal Rock Waters®, Vermont Pure Natural Spring Water®, Cool Beans® Coffee and Crystal Rock Office®.
Through this combination of brands – and resale of other manufactured brands – we provide a choice of high quality
products and value-added services to homes and offices.
Both our water brands feature three- and five-gallon premium bottled
water in addition to a small pack case offerings. Our coffee line includes over 70 varieties in many different types of packaging.
Additionally, we also re-sell other coffee and tea selections. Our office products line features over 40,000 products, including
supplies, equipment, and furniture, targeted for small and medium-sized business.
Over the last several years, we have diversified our product offerings
and focused our efforts on sales and marketing in order to increase sales across all of our product lines and enhance the value
of our distribution system and customer base. Initially, we hired and trained an expanded sales force and incurred significant
expenditures to build an IT infrastructure designed to enhance sales administration and run our business more efficiently. Late
in 2013, we decided to shift the infrastructure platform that we had been constructing to one we had acquired during the year.
For more information, see Item 1A, “Risk Factors.” In 2014, we worked to stabilize our IT and e-commerce platforms
while growing our office product sales revenues. Subsequently, during fiscal 2015, we experienced significant losses through the
first three quarters, due in large part to lower than desired margins on office products, which led to a reduction in the number
of full-time employees. In the latter part of fiscal 2015 and during fiscal 2016, we focused more heavily on strategic pricing
taking into account the value provided with our quality products and integrated services. Our goal is to avoid competing based
on price and focus on customers who want more regularly scheduled route deliveries. These changes have produced higher gross margins
as a percentage of sales; however, sales decreases have impacted the gross margin dollars resulting in lower operating income in
fiscal 2017 compared to fiscal 2016.
We support our marketing and sales efforts through a number of channels,
including e-commerce, direct mail, internet advertising, traditional advertising, social media, sales collateral, email marketing,
digital/internet technologies, referrals and public relations. We also sponsor local area sporting events, participate
in trade shows, maintain high community visibility, and donate to many charitable organizations and events.
We market our home and office delivery service throughout most of
New England, New York and parts of New Jersey. A combination of telemarketers and sales personnel sell our products and services.
We also maintain an internal marketing department that works closely with a professional marketing agency who together develop
and manage our brands and market position. Our goal is to optimize our marketing and sales returns through efficient technology
investments, personal customer interactions and maintaining consistent visibility.
Advertising and Promotion
We advertise our products through a digital, online strategy focused
on promoting expanded product and services, and we look to collect customer data in order to engage and market customer relationships
both on and offline. Through a combination of websites, social platforms and internet advertising, we are centralizing and transitioning
our marketing efforts to offer and incentivize current and new customers through a larger online presence while providing customers
a direct purchasing capability. We also promote our products through sales collateral, direct mail, various public relations and
sponsorship opportunities. We endeavor to be highly visible in the communities that we serve. We have been a significant sponsor
of a United Way giving campaign to support Live United through the Greater Waterbury Connecticut United Way, and we feature local
giving options to support the United Way throughout our entire market area. We also support charities devoted to the treatment
and cure of multiple sclerosis, and Peter and John Baker sit on a number of charitable boards.
Sales and Distribution
We sell and deliver products directly to our customers using our
own employees and route delivery trucks. Deliveries to customers are made on a regularly scheduled basis for water, coffee,
and ancillary products. We accommodate our customers with next day delivery when they run out of those products and for office
products. We bottle our water at our facilities in Watertown, Connecticut, White River Junction, Vermont, and Halfmoon, New
York and have water bottled for us in Buffalo and Endicott, New York. We maintain numerous distribution locations throughout
our market area. From these locations, we also distribute dispensing equipment, a variety of coffee, tea and other refreshment
products, and related supplies. We receive office supplies, equipment, and furniture on a “just-in-time” basis
from our vendors at our distribution locations. We ship between our production and distribution sites using both our own and contracted
carriers.
Supplies
We currently source all of our raw materials from outside vendors.
As one of the largest Home and Office distributors in the country, we are able to capitalize on volume to continue to reduce costs.
We rely on trucking to receive raw materials and to transport and
deliver our finished products. Consequently, the fluctuating fuel prices significantly affect the cost of our products. We purchase
our own fuel for our Home and Office delivery and use third parties for transportation of raw materials and finished goods between
our warehouses. While volume purchases can help control erratic fuel pricing, market conditions ultimately determine the price.
In the past, we have experienced substantial market fluctuation of fuel prices. However, fuel prices have become more stable
recently, and our regular customers pay a minimum monthly fuel charge. The risk remains that we may not be able to use fuel price
adjustments to cover the cost of fuel increases in a volatile market for petroleum products, which could adversely affect our profitability.
Our principal coffee suppliers are Keurig Green Mountain and Baronet
Coffee. Our principal bottle supplier is Parker Plastics.
No assurance can be given that we will be able to obtain the supplies
we require on a timely basis or that we will be able to obtain them at prices that allow us to maintain the profit margins we have
had in the past. We believe that we will be able to either renegotiate contracts with these suppliers when they expire or, alternatively,
if we are unable to renegotiate contracts with our key suppliers, we believe that we could replace them. Any raw material disruption
or price increase may result in an adverse impact on our financial condition and prospects. For instance, we could incur higher
costs in renegotiating contracts with existing suppliers or replacing those suppliers, or we could experience temporary dislocations
in our ability to deliver products to our customers, either of which could have a material adverse effect on our results of operations.
Seasonality
Our business is seasonal. The period from June to September,
when we have our highest water sales, represents the peak period for sales and revenues due to increased consumption of cold
beverages during the summer months in our core Northeastern United States market. Conversely, coffee has a peak sales period from
November to March. Sales of office products and supplies fluctuate during the year.
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®, Vermont Pure® and Cool Beans®
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.
We feel that installation of filtration units in the home or commercial
setting poses competition to our business. To address this, we have continued to develop our plumbed-in filtration business expanding
it internally and through acquisitions and actively offering it as an alternative product to our bottled water.
Traditionally, the rental of water coolers for offices and homes
has been a profitable business for us. As coolers have become cheaper and more readily available at retail outlets and with increased
promotional pricing in the marketplace, our cooler rental revenue has declined. Although this rental revenue is profitable for
us, it may continue to decline or become less profitable in the future as a result of retail competition.
Coffee product sales have dramatically shifted to sales of single
serve packages. We face increased competition for sales of these products from retail stores and home delivery options from other
food and beverage distributors, office products distributors and retail outlets. In addition, internet availability has increased,
leading to sales declines for coffee products.
Machines to brew these single serve packages are different from
traditional machines, and packages ideally need to be brewed in machines that accommodate the specific package. As a result, the
popularity of a certain machine often dictates what products are successful in the marketplace. We have developed our own Cool
Beans® pod in order to create brand equity in this category. Our success, both from a sales and profitability perspective,
may be affected by our access to distribution rights for certain products and machines, our decisions concerning which equipment
to invest in and our ability to develop brand awareness.
We believe that it has become increasingly important to our competitive
advantage to decrease the impact of our business on the environment. We traditionally use five-gallon containers that are placed
on coolers and are reused many times. To further “green” our business we generate solar electricity in our Watertown,
Connecticut facility, use high efficiency lighting and vehicles and have instituted no-idling and other driving policies in all
of our locations.
The office products business is highly competitive. Companies like
Staples, Office Depot and W.B. Mason are larger and have greater capital resources than Crystal Rock and compete with us on price
as well as level of service. Moreover, the evolution of modern business practices towards the “paperless office” could
have the effect of reducing the available market for some office products. If the overall market for office products contracts,
price competition can be expected to exert pressure on our margins for office products, with potential adverse effects on our earnings
or cash flow, even if we are able to continue increasing revenues from this product line. See Item 1A, “Risk Factors,”
for more information.
Trademarks
We own the trade names of the principal water brands that we sell,
Vermont Pure Natural Spring Water® and Crystal Rock®. We also own the Cool Beans® coffee brand, Crystal Rock Office®
products brand and own or have rights to other trade names that currently are not a significant part of our business. Our trademarks
as well as label designs are, in general, registered with the United States Patent and Trademark Office.
Government Regulation
The Federal Food and Drug Administration (FDA) regulates bottled
water as a “food.” Accordingly, our bottled water must meet FDA requirements of safety for human consumption, of processing
and distribution under sanitary conditions and of production in accordance with the FDA “good manufacturing practices.”
To assure the safety of bottled water, the FDA has established quality standards that address the substances that may be present
in water which may be harmful to human health as well as substances that affect the smell, color and taste of water. These quality
standards also require public notification whenever the microbiological, physical, chemical or radiological quality of bottled
water falls below standard. The labels affixed to bottles and other packaging of the water is subject to FDA restrictions on health
and nutritional claims for foods under the Fair Packaging and Labeling Act. In addition, all drinking water must meet Environmental
Protection Agency standards established under the Safe Drinking Water Act for mineral and chemical concentration and drinking water
quality and treatment that are enforced by the FDA.
We are subject to the food labeling regulations required by the
Nutritional Labeling and Education Act of 1990. We believe we are in compliance with these regulations.
We are subject to periodic, unannounced inspections by the FDA.
Upon inspection, we must be in compliance with all aspects of the quality standards and good manufacturing practices for bottled
water, the Fair Packaging and Labeling Act, and all other applicable regulations that are incorporated in the FDA quality standards.
We believe that we meet the current regulations of the FDA, including the classification as spring water. All of our plants and
distribution locations are registered with the FDA under the Public Health Security and Bioterrorism Preparedness and Response
Act of 2002. In December 2009, 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.
We also must meet state regulations in a variety of areas to comply
with purity, safety, and labeling standards. From time to time, our facilities and sources are inspected by various state departments
and authorities.
Our product labels are subject to state regulation (in addition
to federal requirements) in each state where the water products are sold. These regulations set standards for the information that
must be provided and the basis on which any therapeutic claims for water may be made.
We use a comprehensive program of self-regulation and use third
party auditors for testing and inspections to evaluate our compliance with federal and various state regulations.
In recent years, there has been legislative and executive action
in state and local governments that has or would ban the use of bottled water in municipal buildings, enact local taxes on bottled
water, and limit the sale by municipalities of water supplies to private companies for resale. Such regulation could adversely
affect our business and financial results. For additional information, see Item 1A, “Risk Factors,” below.
The laws that regulate our activities and properties are subject
to change. As a result, there can be no assurance that additional or more stringent requirements will not be imposed on our operations
in the future. Although we believe that our water supply, products and bottling facilities are in substantial compliance with all
applicable governmental regulations, failure to comply with such laws and regulations could have a material adverse effect on our
business.
Employees
As of January 10, 2018, we had 285 full-time employees and 9 part-time
employees. None of the employees belongs to a labor union. We believe that we have good standing relationships with our employees.
A
dditional
Available Information
Our principal website is www.crystalrock.com. We make our annual,
quarterly and current reports, and amendments to those reports, available free of charge on www.crystalrock.com, as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (SEC). Reports
of beneficial ownership of our common stock, and changes in that ownership, by directors, officers and greater-than-10% shareholders
on Forms 3, 4 and 5, are likewise available free of charge on the SEC’s website and 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.
We operate in a competitive business environment that is influenced
by conditions some of which are controllable and others are beyond our control. These conditions include, but are not limited to,
the regional economy, monetary policy, and the political and regulatory environment. The following summarizes important risks and
uncertainties that may materially affect our business in the future.
The Baker family currently owns a majority of our voting stock
and controls the company. Such control affects our corporate governance, and could also have the effect of delaying or preventing
a change of control of the company.
The Baker family group, consisting of three current directors Peter
Baker (CEO), John Baker (Executive Vice President) and Ross Rapaport (Chairman), as trustee, together own a majority of our common
stock. Accordingly, these stockholders, acting together, can exert a controlling influence over the outcome of matters requiring
stockholder approval, such as the election of directors, amendments to our certificate of incorporation, mergers and various other
matters. The concentration of ownership could also have the effect of delaying or preventing a change of control of the company.
As permitted under the corporate governance rules of the NYSE MKT,
we have, at the direction of the Baker family group, elected “controlled company” status under those rules. A controlled
company is exempted from these NYSE MKT corporate governance rules: (1) the requirement that a listed company have a majority
of independent directors, (2) the requirement that nominations to the company’s board of directors be either selected or
recommended by a nominating committee consisting solely of independent directors, and (3) the requirement that officers’
compensation be either determined or recommended by a compensation committee consisting solely of independent directors. We do
not currently utilize exemption (3) as we have a compensation committee consisting solely of three independent directors.
The personal interests of our directors and officers create conflicts.
As mentioned above, the Baker family group owns a majority of our
common stock. In addition, in connection with the acquisition of the Crystal Rock Spring Water Company in 2000, we issued members
of the Baker family group 12% subordinated promissory notes secured by all of our assets. As of October 31, 2017, the balance on
these notes is $4,500,000. 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 significant competition in the home and office distribution
business from companies with greater resources than we have. Methods of competition in the distribution of home and office
refreshment products continue to change and evolve. If we are unable to meet these changes, our business could be harmed.
We operate in highly competitive markets. The principal methods
of competition in the markets in which we compete are distribution capabilities, brand recognition, quality, reputation, and price.
We have a significant number of competitors in our traditional water market, some of which have far greater resources than us.
Among our principal competitors are Nestlé Waters North America, DS Services of America, Inc., a segment of Cott Corporation,
W.B. Mason, large regional brands owned by private groups, and local competitors in the markets that we serve. As we expanded our
product lines, most notably to office products, we learned that price reductions and the introduction of new products by our competitors
can adversely affect our revenues, gross margins, and profits.
Our industry has also been affected by the increasing availability
of water coolers in discount retail outlets. This has negatively affected our rental revenue stream in recent years as more customers
choose to purchase coolers rather than rent them. 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 impact our rental revenues negatively in the future.
Internet technology and virtual stores have lowered the barriers
of entry into non-water marketplace we service.
E-commerce businesses have added an additional layer of competition
from product resellers who do not require investment in brick and mortar facilities and trucks. The lack of investment in physical
assets has allowed these competitors to reduce overhead costs and subsequently sell products at a lower cost. These competitors
generally will have products delivered to customers using third party distribution systems. While we have not seen an increase
in competition in the bottled water products from virtual stores, we have seen increased competition in coffee and office product
items.
We rely upon a single software vendor that supplies the software
for our route accounting and online storefront ordering systems, which exposes us to risk from interruption of service.
Our route accounting and online ordering systems are 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 sale and distribution of our products
and the availability of management information, and could even affect our compliance with public reporting requirements.
Our software vendor has a limited number of staff possessing the proprietary information pertaining to the operation of the software.
Changes in personnel or ownership in the firm might result in disruption of service. Such changes would be addressed by retaining
a new vendor to service the existing software or purchasing a new system, but we cannot assure you that we could implement successfully
a new vendor or new system without possible disruption to our business and added cost. Any of these events could have a material
adverse impact on our operations and financial condition.
We depend upon maintaining the integrity of our water sources and manufacturing process.
If our water sources or bottling processes were contaminated for any reason, our business would be seriously harmed.
Our ability to retain customers and the goodwill associated with
our brands is dependent upon our ability to maintain the integrity of our water resources and to guard against defects in, or tampering
with, our manufacturing process. The loss of integrity in our water sources or manufacturing process could lead to product recalls
and/or customer illnesses that could materially adversely affect our goodwill, market share and revenues. Because we rely upon
natural spring sites for sourcing some of our water supply, acts of God, such as earthquakes, could alter the geologic formation
of the spring sites, constricting or even contaminating water flow.
In addition, we do not own any of our water sources. Although we
believe the long term rights to our spring and municipal sources are well secured, any dispute over these rights that resulted
in prolonged disruption in supply could cause an increase in cost of our product or shortages that would not allow us to meet the
market demand for our product.
The bottled water industry is regulated at both the state and
federal level. If we are unable to continue to comply with applicable regulations and standards in any jurisdiction, we might not
be able to sell our products in that jurisdiction, and our business could be seriously harmed.
The FDA regulates bottled water as a food. Our bottled water must
meet FDA requirements of safety for human consumption, labeling, processing and distribution under sanitary conditions and production
in accordance with FDA “good manufacturing practices.” In addition, all drinking water must meet Environmental Protection
Agency standards established under the Safe Drinking Water Act for mineral and chemical concentration and drinking water quality
and treatment, which are enforced by the FDA. We also must meet state regulations in a variety of areas. These regulations set
standards for approved water sources and the information that must be provided and the basis on which any therapeutic claims for
water may be made. We have received approval for our drinking water in Connecticut, Massachusetts, New Hampshire, New Jersey, New
York, Rhode Island and Vermont. However, we can give no assurance that we will receive such approvals in the future.
Legislative and executive action in state and local governments
banning the use of municipal funds for purchasing bottled water, enacting local taxes on bottled water or water extraction, and
restricting water withdrawal and usage rights from public and private sources could adversely affect our business and financial
results.
Recent initiatives have taken place in several major cities regarding
bottled water, principally the smaller sizes sold in stores to retail consumers. Regulations have been proposed in some localities
that would ban the use of public funds to purchase bottled water, enact local taxes on bottled water or water extraction, and restrict
the withdrawal of water from public and private sources. These actions are purportedly designed to discourage the use of bottled
water due in large part to concerns about the environmental effects of producing and discarding large numbers of plastic bottles.
In developing these stories, local and national media have reported on the growth of the bottled water industry and on the pros
and cons of consuming bottled water as it relates to solid waste disposal and energy consumption in manufacturing, as well as conserving
the supply of water available to the public.
We believe that the adverse publicity associated with these reports
is generally aimed at the retail, small bottle segment of the industry that is now a minimal part of our business, and that our
customers can readily distinguish our products from the retail bottles that are currently the basis for concern in some areas.
Our customers typically buy their water in reusable five-gallon containers that are placed on coolers and reused many times. Only
approximately 4% of our total sales are 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.
Climate changes and severe weather may impact future ability
to bottle water products and deliver all of our products.
There has been increasing concerns in recent years regarding climate
change and the impact on water supplies. Most recently there have been drought conditions throughout much of our delivery areas.
Should severe drought conditions exist, there may be restrictions on municipal water supplies used for the bottling of our Crystal
Rock® branded water.
In addition, severe weather conditions during winter months in the
northeast such as snow and ice storms significantly impact delivery schedules and revenue streams.
Our Company is significantly leveraged. Over the years, we have
borrowed substantial amounts of money to finance acquisitions. If we are unable to meet our debt service obligations to our senior
and subordinated lenders, we would be in default under those obligations, and that could hurt our business or even result in foreclosure,
reorganization or bankruptcy.
At October 31, 2017 and 2016, our outstanding senior debt was $10,133,000
and $9,733,000, respectively, and our outstanding subordinated debt was $4,500,000 and $9,000,000 respectively. The underlying
loans are secured by substantially all of our assets. If we do not repay our indebtedness in a timely fashion, our secured creditors
could declare a default and foreclose upon our assets, which would result in harmful disruption to our business, the sale of assets
for less than their fully realizable value, and possible bankruptcy. We must generate enough cash flow to service this indebtedness
until maturity.
Fluctuations in interest rates could significantly increase our
expenses. We will have significant interest expense for the foreseeable future, which in turn may increase or decrease due to interest
rate fluctuations. To partially mitigate this risk, we have used swaps to establish fixed interest rates on a portion 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.
Fluctuations in the cost of essential raw materials and commodities,
including fuel costs, for the manufacture and delivery of our products could significantly impact our business.
Bottle manufacturers use plastic and other petroleum-based products
for the manufacturing of our bottles. Increases in the cost of petroleum will likely have an impact on our bottle costs.
We rely on trucking to receive raw materials and transport and deliver
our finished products. Consequently, the price of fuel significantly impacts the cost of our products. We purchase our own fuel
for our Home and Office delivery and use third parties for transportation of raw materials and finished goods between our warehouses.
While volume purchases can help control erratic fuel pricing, market conditions ultimately determine the price. In the past, we
have experienced substantial market fluctuation of fuel prices. However, when fuel prices have increased, we have been able
to establish a fuel adjustment charge for our customers that covered the incremental rising cost of fuel. When fuel prices
have decreased, they have not decreased enough to offset the incremental fuel cost over what we considered our “base”
level for fuel cost. The risk remains that we may not be able to use fuel price adjustments to cover the cost of fuel increases
in a volatile market for petroleum products, which could adversely affect our profitability. Further, limitations on the supply
or availability of fuel could inhibit our ability to get raw materials and distribute our products, which in turn could have an
adverse effect on our business.
A significant portion of our sales is derived from coffee. The supply
and price of coffee may be limited by climate, by international political and economic conditions, and by access to transportation,
combined with consumer demand. An increase in the wholesale price of coffee could result in a reduction in our profitability. If
our ability to purchase coffee were impaired by a market shortage, our sales might decrease, which would also result in a reduction
of profitability and customer satisfaction.
Our success depends on the continued services of key personnel.
Our continued success will depend in large part upon the expertise
of our senior management and their ability to execute our strategic planning. Peter Baker, our Chief Executive Officer and President,
John Baker, our Executive Vice President, and David Jurasek, our Chief Financial Officer, Treasurer and Assistant Secretary, have
entered into employment agreements with Crystal Rock Holdings, Inc. These “at will” employment agreements do not prevent
these employees from resigning. The departure or loss of any of these executives individually could have an adverse effect on our
business and operations and could contribute to disruption of our business while we searched for replacement personnel with appropriate
skills.
We have a limited amount of bottling capacity. Significant interruptions
of our bottling facilities could adversely affect our business.
We own three bottling facilities, and also contract with third parties,
to bottle our water. If any of these facilities were incapacitated for an extended period of time, we would likely have to relocate
production to an alternative facility. The relocation and additional transportation could increase the cost of our products or
result in product shortages that would reduce sales. Higher costs and lower sales would reduce profitability.
Our customer base is located in New England, New York and New
Jersey. If there were to be a material decline in the economy in these regions, our business would likely be adversely affected.
Essentially all of our sales are derived from New England, New York
and New Jersey. We believe that the economic recession experienced in these areas, particularly in 2008 and 2009, adversely affected
our financial results. Connecticut particularly has experienced difficulties recovering after the recession. Continued adverse
effects in the regional economies, or a significant negative change in the economy of any of these regions, changes in consumer
spending in these regions, or the entry of new competitors into these regional markets, among other factors, could result in a
decrease in our sales and, as a result, reduced profitability.
Our business is seasonal, which may cause fluctuations in our
stock price.
Historically, the period from June to September represents the peak
period for sales and revenues due to increased consumption of cold beverages during the summer months in our core Northeastern
United States markets. Warmer weather in our geographic markets tends to increase water sales, and cooler weather tends to decrease
water sales. To the extent that our quarterly results are affected by these patterns, our stock price may fluctuate to reflect
them.