-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FQhFnFzrhuOkyir8wONanrTfTSomLBJ0YNXRwZgpnlJeqZWN7lUZN8djNzL/2uFX arL6EXVdq+5/xe5nNSIuvQ== 0000950115-97-001960.txt : 19971216 0000950115-97-001960.hdr.sgml : 19971216 ACCESSION NUMBER: 0000950115-97-001960 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19971215 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AQUAPENN SPRING WATER COMPANY INC CENTRAL INDEX KEY: 0000823844 STANDARD INDUSTRIAL CLASSIFICATION: BOTTLED & CANNED SOFT DRINKS CARBONATED WATERS [2086] IRS NUMBER: 251541772 STATE OF INCORPORATION: PA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-38771 FILM NUMBER: 97738521 BUSINESS ADDRESS: STREET 1: 1 AQUAPENN DRIVE CITY: MILESBURG STATE: PA ZIP: 16853 BUSINESS PHONE: 8143555556 MAIL ADDRESS: STREET 1: 1 AQUAPENN DRIVE CITY: MILESBURG STATE: PA ZIP: 16853 S-1/A 1 AMENDMENT NO. 2 TO REGISTRATION STATEMENT As filed with the Securities and Exchange Commission on December 15, 1997 Registration No. 333-38771 ====================================== SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ------------ AMENDMENT NO. 2 To FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------ AQUAPENN SPRING WATER COMPANY, INC. (Exact name of registrant as specified in its charter) Pennsylvania 5149 25-1541772 (State or other jurisdiction (Primary Standard (I.R.S. Employer of incorporation Industrial Classification Identification or organization) Code Number) Number) One AquaPenn Drive Milesburg, Pennsylvania 16853 (814) 355-5556 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Edward J. Lauth, III One AquaPenn Drive Milesburg, Pennsylvania 16853 (814) 355-5556 (Name, address, including zip code, and telephone number, including area code, of agent for service) ----------------- Copies to: Brian D. Doerner, Esq. Gregory M. Shaw, Esq. Ballard Spahr Andrews & Ingersoll Cravath, Swaine & Moore 1735 Market Street, 51st Floor Worldwide Plaza Philadelphia, PA 19103-7599 825 Eighth Avenue (215) 665-8500 New York, NY 10019-7475 (212) 474-1000 ---------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. |_| _________ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_|_________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. |_|__________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. |_|__________ ---------------- CALCULATION OF REGISTRATION FEE
==================================================================================================================================== Title of Each Class of Proposed Maximum Proposed Maximum Securities to Be Amount to Offering Price Aggregate Amount of Registered Be Registered Per Share (1) Offering Price (1) Registration Fee - ------------------------------------------------------------------------------------------------------------------------------------ Common Stock (no par value) 4,681,785 shares (2) $16.00 $74,908,560 $22,668.37(3) ====================================================================================================================================
(1) Estimated solely for the purpose of calculation of the registration fee in accordance with Rule 457 under the Securities Act of 1933, as amended. (2) Includes 610,668 shares which the Underwriters have the option to purchase to cover over-allotments, if any. (3) Of this amount, $21,517 was previously paid on October 27, 1997 and was calculated based on 1/33 of 1% of a proposed maximum aggregate offering price of $71,005,600. In connection with this Amendment, an additional 243,935 shares of Common Stock are being registered, for an additional aggregate offering price of $3,902,960, and an additional registration fee of $1,151.37. ----------------------------------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. =============================================================================== Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED , 1997 [LOGO] 4,071,117 Shares AQUAPENN SPRING WATER COMPANY, INC. Common Stock -------------------- Of the Common Stock offered hereby, 2,000,000 shares are being sold by AquaPenn Spring Water Company, Inc. ("AquaPenn" or the "Company") and 2,071,117 shares are being sold by certain shareholders of the Company (the "Selling Shareholders"). See "Principal Shareholders and Selling Shareholders." The Company will not receive any proceeds from the sale of Common Stock by the Selling Shareholders. Prior to this offering (the "Offering"), there has been no public market for the Common Stock. It is currently estimated that the Offering price will be between $14.00 and $16.00 per share. See "Underwriting" for certain factors to be considered in determining the Offering price. The Company intends to apply for listing of the Common Stock on the New York Stock Exchange ("NYSE") under the symbol "APN." The shares of Common Stock offered hereby involve a high degree of risk. See "Risk Factors" beginning on page 7 of this Prospectus for a discussion of certain factors that should be considered by prospective investors. -------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================================================================ Price to Underwriting Discounts Proceeds to Proceeds to Selling Public and Commissions (1) Company (2) Shareholder (2) - -------------------------------------------------------------------------------------------------------------------------------- Per Share....................... $ $ $ $ - -------------------------------------------------------------------------------------------------------------------------------- Total........................... $ $ $ $ - -------------------------------------------------------------------------------------------------------------------------------- Total Assuming Full Exercise of Over-Allotment Option (3)...................... $ $ $ $ ================================================================================================================================
(1) See "Underwriting." (2) Before deducting expenses estimated at an aggregate of $750,000, which are payable by the Company and the Selling Shareholders. (3) Assuming exercise in full of the 30-day option granted by the Company to the Underwriters to purchase up to 610,668 additional shares, on the same terms, solely to cover over-allotments. See "Underwriting." -------------------- The shares of Common Stock are offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to their right to reject any order in whole or in part. It is expected that delivery of the Common Stock will be made in New York City, on or about , 1997. -------------------- PaineWebber Incorporated Lazard Freres & Co. LLC Parker/Hunter Incorporated -------------------- The date of this Prospectus is , 1997 [Photographs with the following captions:] 1. (Lauth & Paterno) AquaPenn President and founder Edward J. Lauth, III with Joe Paterno, Head Coach of the football team at The Pennsylvania State University and AquaPenn spokesperson and shareholder. (Mr. Paterno makes no representation, recommendation or guarantee to investors with regard to the common stock of AquaPenn offered hereby.) 2. (Krones Bloc Equipment) The Krones Bloc rinses, fills and caps AquaPenn's PET (polyethylene terephthalate) bottles at the rate of up to 600 bottles per minute. AquaPenn's Milesburg Facility has two units installed and a third scheduled for installation in December 1997. 3. (Pure American 20 oz. Case) Pure American(R) Spring Water is AquaPenn's leading name brand. AquaPenn's PET bottle designs in 8 oz., 20.0 oz., 24.9 oz., 1 liter and 1.5 liter sizes are proprietary. 4. (Young Child With 8 oz. Bottle) AquaPenn's innovative 8 oz. PET bottle is popular with parents of young children because of its ease of handling. Introduced in January 1997, the "single serve solution" is also served in-flight on two major United States airlines. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." PROSPECTUS SUMMARY Unless otherwise indicated, all information in this Prospectus assumes that the Underwriters' over-allotment option will not be exercised and gives effect to (a) the 0.6008-for-1 reverse stock split (the "Reverse Stock Split") of each outstanding share of Common Stock of the Company that will occur immediately prior to this Offering, (b) an Offering price of $15.00 per share of Common Stock, (c) no exercise of outstanding options to purchase 844,124 shares of Common Stock, (d) the exercise of a warrant for 135,180 shares of Common Stock held by Weis Markets, Inc. and its subsidiaries (the "Weis Markets Warrant") and no exercise of remaining warrants to purchase 105,140 shares of Common Stock issuable pursuant to the Company's warrant agreements and (e) no purchase of the 74,965 shares of Common Stock subscribed for under the Company's 1996 Employee Stock Purchase Plan (the "Stock Purchase Plan"). Fiscal year references are to the fiscal year ended September 30. Unless otherwise provided, references to shares outstanding and to 1997 fiscal year results have been adjusted to give effect to the acquisition on October 15, 1997 of Dunsmuir Bottling Company d/b/a Castle Rock Spring Water ("Castle Rock"). All references to the "Company" or "AquaPenn" refer to AquaPenn Spring Water Company, Inc. and its subsidiaries. The Company AquaPenn produces, bottles and sells non-sparkling natural spring water products to regional and national customers under both retailers' and other customers' private labels and its proprietary brands Pure American(R), Great American(R), AquaPenn(R) and Castle Rock. The Company, founded in 1986, is one of the largest producers of private label natural spring water products in the United States, according to Beverage Marketing. Private label products accounted for approximately 42.5% of the Company's 1997 fiscal year net revenues. The Company's private label and branded customers include, among others, Delta Air Lines, Inc., Gerber Products Company, Sam's Club and Walgreen Co. The Company's net revenues have grown from $9.3 million in fiscal 1993 to $45.8 million in fiscal 1997, representing a compounded annual growth rate of 49.1%. Over the same time period, the Company's net income has grown from approximately $400,000 to approximately $2.3 million, representing a compounded annual growth rate of 55.1%. According to Beverage Marketing, the total U.S. market for bottled water has grown from 1.6 billion gallons sold in 1987 to over 3.1 billion gallons in 1996, and accounted for approximately $3.6 billion in wholesale sales during 1996. Non-sparkling water comprises over 87% of the U.S. bottled water market and generated $2.7 billion of wholesale sales in 1996, and is expected to continue to grow as a percentage of gallons sold in the future, according to Beverage Marketing. PET (an acronym for polyethylene terephthalate, a premium clear plastic) packaged products comprise approximately 39% of the domestically produced non-sparkling water market and have grown from approximately 83 million gallons in 1987 to approximately 580 million gallons in 1996, representing a compounded annual growth rate of approximately 24%. PET-packaged products accounted for approximately $921 million of wholesale sales in 1996. Approximately 81.7% of the Company's 1997 net revenues was generated by products packaged in PET containers. According to Beverage Marketing, PET bottled water is among the fastest growing beverage categories in the United States. Contributing to the growth in the consumption of non-sparkling water are consumer trends including health and fitness awareness, municipal tap water quality concern and maturing soft drink demand, as well as consumer demand for convenience and innovative packaging. The Company has adopted a strategy of producing regionally and selling its natural spring water products to both national and regional customers. By producing both private label and branded products in a full line of sizes and packaging, the Company can offer its customers "one-stop-shopping" supply arrangements. The Company's advanced packaging capability allows it to bottle natural spring water products in a variety of innovative packages. The Company maintains state-of-the-art production facilities, allowing it to achieve cost efficiencies, produce superior quality products, create innovative packaging and rapidly respond to customer shipment and production 3 demands. The Company's sales and marketing staff aims to provide its customers with exceptional customer service and market responsiveness. AquaPenn's growth strategy includes increasing sales to existing customers, broadening its current customer base, adding new distribution channels and expanding its product line. The Company's active acquisition program includes obtaining the rights to additional spring water sites and acquiring natural spring water companies. In accordance with this strategy, the Company recently acquired the rights to natural spring water from Ginnie Springs, a spring located in north central Florida ("Ginnie Springs"), adjacent to which a new production facility is expected to be constructed and completed by the Spring of 1998. In addition, on October 15, 1997, the Company acquired Castle Rock, a bottler and distributor of natural spring water products located in northern California. Castle Rock has been distributing its natural spring water products throughout the western United States since it was incorporated under California law in 1990. The acquisition of the right to Ginnie Springs spring water and the acquisition of Castle Rock will allow the Company to serve its customers more efficiently. The Company's executive offices are located at One AquaPenn Drive, Milesburg, Pennsylvania 16853. The Company's telephone number is (814) 355-5556 and its web site is www.aquapenn.com. The Offering Common Stock Offered by: the Company...................................................... 2,000,000 shares (1) the Selling Shareholders......................................... 2,071,117 shares Common Stock to be Outstanding after the Offering................... 7,719,555 shares (1)(2) Use of Proceeds..................................................... For capital expenditures, including funding a portion of the expansion of the Company's Milesburg, Pennsylvania facility and a portion of the construction of the Ginnie Springs facility, repayment of debt associated with the acquisition of Castle Rock, repayment of outstanding balances under the Company's credit facilities and for other general corporate purposes. See "Use of Proceeds." Proposed NYSE symbol................................................ "APN"
- -------------------- (1) Excludes the Underwriters' over-allotment option to purchase 610,668 shares of Common Stock. (2) Excludes 1,024,229 shares of Common Stock reserved for issuance upon exercise of outstanding options, warrants and subscriptions under the Stock Purchase Plan but gives effect to the conversion of all outstanding shares of the Company's Series A Non-Voting Convertible Preferred Stock (the "Convertible Preferred Stock") into 1,022,862 shares (after the Reverse Stock Split) of Common Stock effected in December 1997 (the "Preferred Stock Conversion"). See "Management -- Employment Agreements," "Management -- Stock Plans" and "Description of Capital Stock." 4 Summary Financial Information The following summary financial information including pro forma financial information should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto, the Financial Statements of Castle Rock (Dunsmuir Bottling Company) and the notes thereto, the Unaudited Pro Forma Combined Financial Data and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Prospectus.
Years Ended September 30, -------------------------------------------------------------------------- Pro Forma 1993 1994 1995 1996 1997 1997 (1) ---------- ---------- ---------- ---------- ----------- ----------- Statement of Operations Data:............. Net revenues............................ $9,275,537 $13,011,744 $22,956,053 $28,240,741 $38,015,315 $45,819,395 Gross profit............................ 2,136,846 3,032,276 4,802,698 6,969,428 9,698,377 11,427,629 Selling, general and administrative..... 1,389,220 1,994,812 3,290,609 4,313,480 5,126,583 7,276,731 Income from operations.................. 747,626 1,037,464 1,512,089 2,655,948 4,571,794 4,150,898 Net income.............................. $ 400,562 $ 688,995 $ 638,350 $ 1,485,228 $ 2,786,755 $ 2,318,779 Net income per common share (2)......... $ 0.12 $ 0.18 $ 0.16 $ 0.26 $ 0.47 $ 0.38 Weighted average number of common shares outstanding.................... 3,417,391 3,785,102 3,884,708 5,620,741 5,951,844 6,089,559 Other Operations Data: EBITDA (3)............................. $1,260,940 $ 1,606,457 $2,888,231 $ 4,613,823 $ 7,285,186 $ 7,158,553 September 30, 1997 ----------------------------------------------------------- Pro Forma Actual Pro Forma (4) As Adjusted (4) (5) ------ ------------- ------------------- Consolidated Balance Sheet Data: Working capital ............................ $ 3,096,318 $ 644,984 $ 21,049,984 Total assets................................ 26,580,185 34,572,900 54,977,900 Notes payable, including current portion.... 4,817,467 9,536,121 1,736,121 Shareholders' equity........................ 18,064,347 20,130,064 48,335,064
- -------------------- (1) Gives effect to the acquisition of Castle Rock as if it had occurred as of October 1, 1996. The pro forma financial data set forth above are not necessarily indicative of the financial position or results of operations that would have been achieved had such transaction been consummated as of the date indicated, or that may be achieved in the future. See "Unaudited Pro Forma Combined Financial Data" for a more detailed discussion of the pro forma adjustments. (2) For information concerning the number of shares used in the computation of net income per common share, see Note 1 to the Consolidated Financial Statements. (3) "EBITDA" represents earnings before interest expense, income tax expense, depreciation and amortization, including amortization of leasehold improvements, acquisition and development costs, and debt expense and discount or premium relating to any indebtedness. EBITDA is not presented herein as an alternative measure of operating results (as determined in accordance with generally accepted accounting principles ("GAAP")) or cash flow (as determined in accordance with GAAP). See the Consolidated Statements of Cash Flows of the Company for the amounts of cash flows from each of investing, financing and operating activities for fiscal 1995, 1996 and 1997. (4) Gives effect to the acquisition of Castle Rock as if it had occurred as of September 30, 1997. (5) As adjusted to give effect to (i) the sale of 2,000,000 shares of Common Stock offered by the Company hereby assuming an Offering price of $15.00 per share, (ii) the receipt of proceeds from the exercise of the Weis Markets Warrant for 135,180 shares of Common Stock, (iii) the Preferred Stock Conversion and (iv) the payment of estimated underwriting discounts and commissions and Offering expenses and the application of the estimated net proceeds from the Offering. See "Use of Proceeds" and "Capitalization." 5 The preceding summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and Consolidated Financial Statements of the Company and the notes thereto appearing elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. Discussions containing such forward-looking statements may be found in the material set forth under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Actual events or results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Unless otherwise noted, the source of statistical information relating to the bottled water industry included in this Prospectus is Beverage Marketing Corporation of New York, "Bottled Water In The United States", 1997 Edition, as updated periodically (referred to herein as "Beverage Marketing"). -------------------- Pure American(R), Great American(R) and AquaPenn(R) are registered trademarks of the Company. All other trademarks appearing in this Prospectus are the property of their respective holders. 6 RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. Prospective investors should carefully consider the following risk factors, in addition to the other information set forth in this Prospectus, before purchasing any of the shares of Common Stock offered hereby. Highly Competitive Industry The bottled water industry is highly competitive. Many of the Company's competitors have more experience in the U.S. bottled water market, have greater financial and management resources and have more established proprietary trademarks and distribution networks than the Company. The Company currently competes with established national companies such as The Perrier Group of America, Inc. (whose brands include Arrowhead Mountain Spring Water, Poland Spring, Ozarka Spring Water, Great Bear, Deer Park, Ice Mountain and Zephyrhills Natural Spring Water) and Great Brands of Europe (whose brands include Evian Natural Spring Water and Dannon Natural Spring Water), as well as numerous regional bottled water companies located in the United States and Canada. The Company competes not only with other bottled water producers, but also with producers of other beverages, including, but not limited to, soft drinks, coffee, juices, beer, liquor and wine. The bottled water industry also competes for the same consumer who may, when choosing to drink water, drink tap water or use a home filtration system to filter tap water for drinking. There can be no assurance that the Company can compete successfully. See "Business -- Competition." Ability to Manage Growth In order to achieve continued growth in its bottled water business, the Company must meet its strategic objectives of expanding its current capacity to produce high quality spring water products, expanding its customer base, expanding its product line and adding new distribution channels. The Company's ability to meet these objectives depends upon (a) the successful development and construction of a facility adjacent to Ginnie Springs, (b) the successful integration and operation of the Company's recent acquisition, Castle Rock, (c) the successful expansion of its Milesburg, Pennsylvania facility (the "Milesburg Facility"), (d) the securing of new sources of spring water in strategic locations and identifying and successfully acquiring and integrating existing water companies, and other factors beyond the Company's control. The Company has never operated multiple facilities in multiple states and has never completed and integrated an acquisition of a significant existing company; the Company may encounter unexpected difficulties operating multiple facilities or integrating Castle Rock or other acquisitions. No assurance can be given as to the future growth in the Company's business or as to its profitability. Further growth of the Company will require capital, employment and training of new personnel, expansion of facilities and expansion of management information systems. If the Company is unable to manage its growth effectively, the Company's profitability and its ability to achieve its strategic objectives may likely be materially adversely affected. Fluctuations in Quarterly Operating Results The Company's revenues are subject to several factors which may result in fluctuations in the Company's operating results. The Company's business is highly seasonal, with increased sales during warmer months. In the last three fiscal years, an average of 41.2% of the Company's net revenues have occurred during June, July and August. Inclement weather may negatively impact the Company's business, particularly summers which are unusually cool or rainy. Fluctuations in retail prices and raw material prices may produce corresponding fluctuations in the Company's profits. See "Risk Factors -- Raw Material Prices." In addition, the Company expects to make significant investments from time to time in capital improvements to, among other things, increase capacity. Costs associated with such improvements may cause an immediate reduction in profit margins unless and until sales volume increases. The Company's product and packaging mix may change from time to time and, depending on certain factors, may negatively impact profit margins. The Company is subject to competitive pricing pressures which may affect its financial results. Due to all the foregoing factors, it is possible that in some future quarter or quarters, the Company's operating results 7 would likely be below the expectations of securities analysts and investors. In such event, the price of the Common Stock would likely be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Dependence on Key Personnel The continued success of the Company is largely dependent on the personal efforts and abilities of senior management, including Edward J. Lauth, III, Chairman, President and Chief Executive Officer of the Company, and Geoffrey F. Feidelberg, Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Company. Although the Company has entered into employment agreements with Messrs. Lauth and Feidelberg, the employment agreements may be terminated by either party effective at the end of each one-year term upon six months prior notice. The employment agreements contain a non-compete provision which extends for two years beyond termination of the employment agreements. The loss of either executive's services could have a material adverse effect on the Company. See "Management -- Employment Agreements." Dependence upon Existing Natural Spring Sources The Company currently obtains the natural spring water bottled at its Milesburg Facility from a spring located in Graysville, Pennsylvania (the "Graysville Spring"). A natural spring located in Dunsmuir, California (the "Castle Rock Spring") provides the natural spring water for the Company's west coast operations based in Dunsmuir and Redding, California. The loss of the Graysville Spring, which generated 83.0% of the Company's fiscal 1997 pro forma net revenues, or the Castle Rock Spring, which generated 17.0% of the Company's fiscal 1997 pro forma net revenues, would have a material adverse effect on the business of the Company. The Company expects to begin bottling water from Ginnie Springs in 1998. In addition, the Company has acquired the right to purchase natural spring water from the Bellefonte Big Spring (the "Big Spring") located in Bellefonte, Pennsylvania, in order to supplement or replace the Graysville Spring. Subject to completion by the Borough of Bellefonte of a covering over the spring and the permitting and approval process, the Company expects to begin bottling Big Spring water in 1999. Occurrences beyond the control of the Company including, but not limited to, drought, which prevents natural springs from recharging themselves, and other occurrences, such as contamination of the springs, geological changes which could interfere with operation of the springs or failure of the water supply to comply with all applicable governmental requirements for mineral and chemical concentration, could have a material adverse effect on the business of the Company. The Company believes that adequate supplemental commercial sources of spring water exist, but there is no assurance that such commercial sources will be available in sufficient amounts or if available, obtainable on commercially reasonable terms. See "Business -- Spring Water Sources." Limited Ownership and Control of Water Sources The Company leases the land on which the Graysville Spring is located. The Company has an agreement pursuant to which it has access to the source and purchases the natural spring water it bottles under the Castle Rock label, and has entered into similar agreements for access and purchase at Ginnie Springs and the Big Spring. See "Business -- Spring Water Sources." These arrangements result in the Company exercising less control over its operations than if the Company had ownership of these assets. If the lessor of the Graysville Spring or the owner of the relevant water rights to the Castle Rock Spring were to become bankrupt or fail to observe the terms of its agreement with the Company, such event could have a material adverse effect on the business of the Company, particularly with respect to the Company's Pennsylvania operations in the period prior to the time the Big Spring becomes operational for the Company. Castle Rock has an agreement with the City of Dunsmuir, California, pursuant to which the City of Dunsmuir sells natural spring water from the Castle Rock Spring to Castle Rock. The City of Dunsmuir is not the owner of the land on which the Castle Rock Spring is located. The deed in the chain of title that enables the City of Dunsmuir to sell natural spring water to Castle Rock limits the City of Dunsmuir's water rights to certain specified uses. A third party has questioned whether the sale of natural spring water by the City of Dunsmuir to Castle Rock is a proper use as defined in the deed. Castle Rock's agreement with the City of Dunsmuir provides that the City will 8 indemnify Castle Rock for losses it sustains as a result of any claim or challenge regarding the ability of the City to sell water to Castle Rock. While the Company intends to vigorously oppose any challenge to the City of Dunsmuir's rights to sell water to Castle Rock under the agreement, there can be no assurance that such a claim would not have a material adverse effect on the Company. Dependence on Key Suppliers The majority of the Company's natural spring water products are offered in premium PET bottles. PET bottles are manufactured by a limited number of suppliers. While the Company believes that its relationships with its suppliers are good, there can be no assurance that the Company will be able to obtain PET bottles from its suppliers on commercially reasonable terms, particularly at periods of peak demand. Failure to obtain the necessary packaging materials could have a material adverse effect on the business of the Company. In order to ensure its supply of PET bottles, the Company has entered into an exclusive supply agreement with Schmalbach-Lubeca Plastic Containers USA, Inc. ("Schmalbach-Lubeca") pursuant to which the Company leases space in its Milesburg facility to Schmalbach-Lubeca for the on-site production of PET bottles. Schmalbach-Lubeca has agreed to provide 100% of the Company's PET bottle requirements at its Milesburg Facility. Castle Rock has entered into a requirements contract with Containers Northwest Corporation pursuant to which Castle Rock will purchase 100% of its bottle requirements from Containers Northwest Corporation. In the event that the agreements with Schmalbach-Lubeca and Containers Northwest Corporation were terminated or the Company's requirements were not met under the agreements, there may be a material adverse effect on the Company until alternative supplies of PET bottles are found. Limited Ability to Raise Prices Due to the wide range of beverages available to consumers, including bottled water products, the Company has limited ability to raise prices for its products. From time to time, the Company has been affected by higher prices for raw materials including PET resin and corrugated boxes. In the past, the Company generally has not passed such higher costs on to its customers and it generally would be unlikely to do so in connection with any future price increases. As a result, the Company's future profitability may be adversely affected by future increases in raw material prices. Potential for Product Liability The bottling and distribution of bottled water products entails a risk of product liability, including liability due to the presence of contaminants in its products. The Company maintains insurance coverage against the risk of product liability and product recall. However, the amount of the insurance carried by the Company is limited, the insurance is subject to certain exclusions and may or may not be adequate. In addition to direct losses resulting from product liability and product recall, the Company may suffer adverse publicity and damage to its reputation in the event of contamination which could have a material adverse effect on sales and profitability. Dependence on Trademarks The Company owns federal registrations for many of the trademarks it uses. The Company believes that its registered and common law trademarks have significant value and goodwill and that some of these trademarks are instrumental in its ability to create demand for and to market its products. There can be no assurance that the Company's trademarks do not or will not violate the proprietary rights of others, that they would be upheld if challenged or that the Company would, in such an event, not be prevented from using the trademarks, any of which could have a material adverse effect on the Company. 9 Changes in Government Regulation The Company's operations are subject to numerous federal, state and local laws and regulations relating to its bottling operations, including the identity, quality, packaging and labeling of its bottled water. These laws and regulations and their interpretation and enforcement are subject to change. There can be no assurance that additional or more stringent requirements will not be imposed on the Company's operations in the future. Failure to comply with such laws and regulations could result in fines against the Company, a temporary shutdown of production, recalls of the product, loss of certification to market the product or, even in the absence of governmental action, loss of revenue as a result of adverse market reaction to negative publicity. Any such event could have a material adverse effect on the Company. See "Business -- Regulation." Lack of Inventory The Company maintains a limited amount of finished product inventory. An event causing the Company's Pennsylvania or California facilities to shut down, even for a short period, would result in an inability to fill customer orders and accordingly would have a material adverse effect on the Company's revenues and customer relations. Changes in Consumer Preferences The Company believes that the most important factor in the growth of natural spring water products has been a change in consumer preferences. Consumer preferences may be influenced, however, by the availability and appeal of alternative beverages or packaging as well as general economic conditions, among other things. No assurance can be given that consumer demand for natural spring water will continue to grow or will not diminish in the future. Immediate and Substantial Dilution Purchasers of the Common Stock offered hereby will experience immediate and substantial dilution in the pro forma net tangible book value per share at September 30, 1997 of $9.19 at an assumed Offering price of $15.00 per share, after deducting estimated underwriting discounts and commissions and after giving effect to the exercise of the Weis Markets Warrant and the Preferred Stock Conversion. In addition, as of September 30, 1997, the Company had issued warrants to purchase 105,140 shares of Common Stock, options to purchase 832,108 shares of Common Stock, and 76,254 shares of Common Stock were subscribed for under the Company's Stock Purchase Plan. If such warrants and options are exercised in full, and assuming that all shares subscribed for under the Stock Purchase Plan are purchased and a portion of the shares issued into escrow in the Castle Rock acquisition are released based on the assumed Offering price of $15.00 per share, purchasers of the Common Stock offered hereby would experience an immediate and substantial dilution in the pro forma net tangible book value per share of $9.45. See "Dilution." Arbitrary Determination of Offering Price; Possible Volatility of Stock Price The Offering price of the Common Stock has been determined by negotiation between the Company and the Underwriters and does not necessarily bear any relationship to the Company's assets, book value, financial condition or any other recognized criterion of value. There can be no assurance that the market price of the Common Stock will not decline below the Offering price. The market price of the Common Stock could be subject to wide fluctuations in response to actual or anticipated quarterly operating results of the Company, announcements of the Company or its competitors as well as other factors. In addition, the stock market has experienced from time to time extreme price and volume fluctuations that may be unrelated to the operating performance of particular companies. 10 No Prior Public Market Prior to this Offering, there has been no public trading market for the Common Stock. Accordingly, there can be no assurance that an active trading market in the Common Stock will develop, or if such a trading market develops, that it will be sustained. No Cash Dividends Since the Company commenced operations in 1986, the Company has not paid any cash dividends on its capital stock. The Company anticipates that its future earnings, if any, will be retained for use in the business, or for other corporate purposes, and it is not anticipated that any cash dividends on the Common Stock will be paid in the foreseeable future. See "Dividend Policy" and "Description of Capital Stock." Control by Current Shareholders; Anti-Takeover Devices Upon the consummation of this Offering, including the sale of Common Stock by the Selling Shareholders and the Preferred Stock Conversion, the Company's common and preferred shareholders as of September 30, 1997, together with those persons who acquired shares in the Castle Rock acquisition, will own 47.2% of the outstanding shares of Common Stock (43.8% if the Underwriters' over-allotment option is exercised in full). Accordingly, such persons, acting in concert, may be able to elect the Company's directors, increase the Company's authorized capital, dissolve, merge or sell the assets of the Company and generally direct the affairs of the Company. In addition, the Board of Directors and officers of the Company will own 14.4% of the outstanding shares of Common Stock (29.1% upon the exercise of currently exercisable options and warrants and conversion of the Convertible Preferred Stock owned by the Board of Directors and officers). See "Principal Shareholders and Selling Shareholders." In addition, certain provisions in the Company's Articles of Incorporation and certain provisions of applicable Pennsylvania law may, under certain circumstances, have the effect of discouraging, delaying or preventing a change in control of the Company. See "Description of Capital Stock -- Preferred Stock" and "Description of Capital Stock -- Pennsylvania Corporate Law Provisions." Shares Eligible for Future Sale After the completion of this Offering, 7,719,555 shares of Common Stock will be outstanding. Of such shares, the 4,071,117 shares sold pursuant to this Offering will be tradable without restriction by persons other than "affiliates" of the Company. The remaining 3,648,438 shares of Common Stock to be outstanding after this Offering are "restricted securities" within the meaning of Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"), and may not be publicly resold, except in compliance with the registration requirements of the Securities Act or pursuant to an exemption from registration, including that provided by Rule 144 promulgated under the Securities Act. 1,897,232 shares of Common Stock will be available for immediate resale upon the consummation of this Offering without restriction pursuant to the exemption provided by Rule 144(k). The directors and executive officers of the Company and other shareholders of the Company, who collectively hold 2,950,937 shares, or approximately 51.6% of the outstanding shares of Common Stock prior to this Offering, have agreed not to offer to sell, sell, contract to sell, grant any option to sell, encumber, pledge or otherwise dispose of, or exercise any demand rights with respect to, any Common Stock or securities convertible into or exercisable or exchangeable for Common Stock for a period of 180 days after the date of this Prospectus without the prior written consent of PaineWebber Incorporated. Upon expiration of the 180-day period, 2,950,937 shares of Common Stock will be eligible for immediate resale under the Securities Act, subject, in certain cases, to certain volume, manner of sale and other requirements of Rule 144 promulgated under the Securities Act. The Company may file one or more Registration Statements on Form S-8 immediately following this Offering, registering under the Securities Act shares of Common Stock covered by the Company's stock option and stock purchase plans. No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Common Stock prevailing from time to time. Sales of 11 substantial amounts of Common Stock, or the perception that such sales could occur, could adversely affect the prevailing market price of the Common Stock. See "Principal Shareholders and Selling Shareholders," "Shares Eligible for Future Sale" and "Underwriting." 12 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,000,000 shares of Common Stock offered by the Company hereby are estimated to be approximately $27.5 million, after deducting underwriting discounts and commissions and estimated Offering expenses, and, together with $675,000 from the exercise of the Weis Markets Warrant, result in total proceeds of $28.2 million. The Company intends to use approximately $5.9 million of the net proceeds to repay borrowings under its credit facilities used to fund a portion of the purchase price and repay certain liabilities associated with the acquisition of Castle Rock. Net proceeds of $3.1 million are expected to be used to repay certain borrowings under the Company's credit facilities which incur interest at rates between LIBOR plus 1.0% and LIBOR plus 1.7%. At September 30, 1997, the Company had approximately $3.1 million of such borrowings outstanding, $2.9 million of which will begin to amortize in February 1999 and $200,000 of which is due upon demand. In connection with the acquisition of Castle Rock, the Company made additional borrowings under its credit facilities. The Company intends to use the remaining portion of the proceeds, or approximately $19.1 million, to fund a portion of the capital expenditures associated with the expansion of the Milesburg Facility (the total estimated cost of which is $17.8 million) and the construction of the Ginnie Springs bottling facility (the total estimated cost of which is $6.6 million). The amount to be used for each project depends on the closing date of the Offering and the portion of each of the projects remaining to be completed at that date. Any additional amounts that may be required to complete each project will come from borrowings under the Company's credit facilities and cash generated from the Company's operations. The balance, if any, of the net proceeds from this Offering will be used for working capital and general corporate purposes. Pending such uses, the total proceeds will be invested in short-term, interest-bearing investment grade securities or commercial paper. DIVIDEND POLICY The Company has never declared or paid cash dividends on its Common Stock. The Company currently intends to retain its earnings, if any, to provide funds for the operation and expansion of its business and, therefore, does not anticipate declaring or paying cash dividends in the foreseeable future. Any payment of future dividends will be at the discretion of the Board of Directors and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, level of indebtedness, contractual restrictions with respect to the payment of dividends and other relevant factors. Further, pursuant to the terms of its existing credit facilities, the Company is restricted in its ability to pay cash dividends on its Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 13 DILUTION The difference between the Offering price per share of Common Stock and the adjusted net tangible book value per share of Common Stock after this Offering constitutes the dilution to investors in this Offering. Net tangible book value per share on any given date is determined by dividing the net tangible book value (total tangible assets less total liabilities and book value attributable to preferred stock) of the Company on such date by the number of shares of Common Stock outstanding on such date. The net tangible book value of the Company at September 30, 1997 prior to the acquisition of Castle Rock was approximately $18.1 million ($16.4 million attributable to Common Stock). The net tangible book value of the Company at September 30, 1997 was $3.70 per share of outstanding Common Stock, excluding net tangible book value attributable to, and shares issued in connection with, the acquisition of Castle Rock. After giving effect to the acquisition of Castle Rock as if it occurred on September 30, 1997, the exercise of the Weis Markets Warrant and the application of the net proceeds therefrom and the Preferred Stock Conversion, the pro forma net tangible book value of the Company at September 30, 1997 would have been approximately $17.3 million or $3.02 per share of outstanding Common Stock. This represents an immediate decrease in pro forma net tangible book value of $0.68 per share to existing shareholders due to the recognition of $3.8 million in goodwill resulting from the acquisition of Castle Rock and the Preferred Stock Conversion. After giving effect to the sale of the 2,000,000 shares of Common Stock being offered by the Company, the pro forma net tangible book value of the Company at September 30, 1997 would have been $44.8 million, or $5.81 per share. This represents an immediate increase in pro forma net tangible book value of $2.79 per share to existing shareholders and an immediate dilution of $9.19 per share to new shareholders purchasing shares of Common Stock in this Offering. The following table illustrates this per share dilution: Assumed Offering price per share........................................................ $15.00 Net tangible book value per share at September 30, 1997............................ $ 3.70 Decrease per share attributable to the acquisition of Castle Rock.................. (.43) Increase per share attributable to the exercise of the Weis Markets Warrant........ .05 Decrease per share attributable to the Preferred Stock Conversion.................. (.30) ------ Pro forma net tangible book value per share at September 30, 1997.................. 3.02 Increase to pro forma net tangible book value per share attributable to this Offering................................................................ 2.79 ------ Pro forma net tangible book value per share after this Offering......................... 5.81 ------ Dilution per share to new shareholders.................................................. $ 9.19 ======
The following table sets forth the pro forma number of shares of Common Stock purchased from the Company, the total consideration paid to the Company (including proceeds from the exercise of the Weis Markets Warrant) and the average price per share paid by existing shareholders, by shareholders receiving Common Stock in the Preferred Stock Conversion and by purchasers of the shares offered hereby, at an assumed Offering price of $15.00 per share, before deducting underwriting discounts and commissions and Offering expenses, and as if this Offering had occurred as of September 30, 1997.
Pro Forma Shares Purchased (1) Total Consideration ------------------------------ ----------------------------- Average Price Number Percent Amount Percent Per Share ------ ------- ------ ------- ------------- Existing shareholders............. 4,693,603 60.8% $15,202,300 32.4% $ 3.24 Conversion of Preferred........... 1,022,862 13.3% 1,702,500 3.6% 1.66 New shareholders.................. 2,000,000 25.9% 30,000,000 64.0% 15.00 --------- ----- ----------- ----- 7,716,465 100.0% $46,904,800 100.0% ========= ===== =========== =====
- --------------- (1) If the Underwriters' over-allotment option is exercised in full, the total number of shares outstanding after this Offering held by new investors would increase to 2,610,668 shares, or approximately 31.4% of the total number of shares outstanding after this Offering. 14 The above tables exclude (i) 937,248 shares of Common Stock issuable upon exercise of outstanding options and warrants and (ii) 76,254 shares of Common Stock subscribed for under the Company's Stock Purchase Plan. The exercise and purchase of the total 1,013,502 shares would result in further dilution of $.26 per share to new shareholders. See "Management -- Employment Agreements," "Management -- Stock Plans", "Certain Transactions" and "Description of Capital Stock." 15 CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1997 on an actual basis, on a pro forma basis which gives effect to the acquisition of Castle Rock as if it had occurred as of September 30, 1997 and on a pro forma as adjusted basis, giving effect to the sale of 2,000,000 shares of Common Stock offered by the Company hereby at an assumed Offering price of $15.00 per share, the exercise of the Weis Markets Warrant and the application of the estimated net proceeds therefrom, the Preferred Stock Conversion and after deducting estimated underwriting discounts and commissions and Offering expenses. This table should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto, the Financial Statements of Castle Rock (Dunsmuir Bottling Company) and the notes thereto and the Unaudited Pro Forma Combined Financial Data and the notes thereto included elsewhere in this Prospectus. See "Description of Capital Stock."
September 30, 1997 -------------------------------------- Pro Forma Actual Pro Forma As Adjusted ------- --------- ----------- Notes payable: Notes payable, current.................................................. $ 298,966 $ 2,649,476 $ 95,476 Notes payable, excluding current portion................................ 4,518,501 6,886,645 1,640,645 --------- --------- --------- Total notes payable.................................................. 4,817,467 9,536,121 1,736,121 Shareholders' equity: Series A Non-Voting Convertible Preferred Stock, $1 par value, 2,000,000 shares authorized, 1,713,750 shares issued; no shares issued, as adjusted ............................................................ 1,713,750 1,713,750 -- Common Stock, no par value, 100,000,000 shares authorized, 4,423,712 shares issued; 4,561,427 shares issued pro forma; 7,719,469 shares issued pro forma as adjusted (1)....................... -- -- -- Additional paid-in capital.............................................. 12,196,269 14,261,986 44,169,486 Retained earnings....................................................... 4,242,456 4,242,456 4,242,456 Less 11,250 shares of preferred stock in treasury, at cost.............. (11,250) (11,250) -- Less 3,004 shares of common stock in treasury, at cost.................. (5,000) (5,000) (5,000) Subscriptions receivable................................................ (71,878) (71,878) (71,878) Total shareholders' equity........................................... 18,064,347 20,130,064 48,335,064 ---------- ---------- ---------- Total capitalization.............................................. $22,881,814 $29,666,185 $50,071,185 =========== =========== ===========
- --------------- (1) Excludes 937,248 shares of Common Stock issuable upon exercise of outstanding options and warrants and (ii) 76,254 shares of Common Stock subscribed for under the Stock Purchase Plan. See "Management -- Employment Agreements," "Management -- Stock Plans," "Certain Transactions" and "Description of Capital Stock." 16 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below as of and for the years ended September 30, 1993, 1994, 1995, 1996 and 1997 have been derived from the Company's financial statements, which have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The consolidated financial statements of the Company for each of the three years in the period ended September 30, 1997 and the related balance sheets at September 30, 1996 and 1997, which have been audited by KPMG Peat Marwick LLP, have been included elsewhere in this Prospectus. The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and the notes thereto included elsewhere in this Prospectus. The pro forma Statement of Operations data (which gives effect to the acquisition of Castle Rock as if it had occurred as of October 1, 1996) and the pro forma Balance Sheet data (which gives effect to the acquisition of Castle Rock as if it had occurred as of September 30, 1997) set forth below should be read in conjunction with the Financial Statements of Castle Rock (Dunsmuir Bottling Company) and the notes thereto and Unaudited Pro Forma Combined Financial Data and the notes thereto included elsewhere in this Prospectus. The pro forma financial data set forth below are not necessarily indicative of the financial position or results of operations that would have been achieved had the acquisition of Castle Rock been consummated as of such date, or that may be achieved in the future. Years Ended September 30, ------------------------------------------------------------------------------- Pro Forma 1993 1994 1995 1996 1997 1997 ---------- ---------- ---------- ---------- ---------- --------- Statement of Operations Data: Net revenues......................... $9,275,537 $13,011,744 $22,956,053 $28,240,741 $38,015,315 $45,819,395 Cost of goods sold................... 7,138,691 9,979,468 18,153,355 21,271,313 28,316,938 34,391,766 --------- --------- ---------- ---------- ---------- ---------- Gross profit......................... 2,136,846 3,032,276 4,802,698 6,969,428 9,698,377 11,427,629 Selling, general and administrative..................... 1,389,220 1,994,812 3,290,609 4,313,480 5,126,583 7,276,731 --------- --------- --------- --------- --------- --------- Income from operations............... 747,626 1,037,464 1,512,089 2,655,948 4,571,794 4,150,898 Non-operating income (expense), net..................... (228,664) (226,469) (738,739) (180,720) 119,713 (117,796) -------- -------- -------- --------- --------- --------- Income before income taxes and cumulative effect of change in accounting principle............ 518,962 810,995 773,350 2,475,228 4,691,507 4,033,102 Income tax expense................... 69,400 122,000 135,000 990,000 1,904,752 1,714,323 ------ ------- ------- ------- --------- --------- Income before cumulative effect of change in accounting principle............... 449,562 688,995 638,350 1,485,228 2,786,755 2,318,779 Cumulative effect of change in accounting for income taxes in accordance with FASB 109........ 49,000 -- -- -- -- -- ________ ________ ________ _________ _________ _________ Net income........................... $ 400,562 $ 688,995 $ 638,350 $1,485,228 $2,786,755 $2,318,779 ========== ========== ========== ========== ========== ========== Net income per common share (1).......................... $ 0.12 $ 0.18 $ 0.16 $ 0.26 $ 0.47 $ 0.38 ========== ========== ========== ========== ========== ========== Weighted average number of common shares outstanding.......... 3,417,391 3,785,102 3,884,708 5,620,741 5,951,844 6,089,559 Other Operations Data: EBITDA (2).......................... $1,260,940 $1,606,457 $2,888,231 $4,613,823 $7,285,186 $7,158,553
17
September 30, ---------------------------------------------------------------------------------- Pro Forma 1993 1994 1995 1996 1997 1997 ---------- ---------- ----------- ------------ ------------ ----------- Consolidated Balance Sheet Data: Working capital...................... $ 901,761 $1,498,399 $ 2,068,414 $ 2,304,684 $ 3,096,318 $ 644,984 Total assets......................... 6,101,103 7,098,447 17,916,037 19,516,355 26,580,185 34,572,900 Notes payable, including current portion.................... 2,220,062 2,836,604 2,830,872 1,808,464 4,817,467 9,536,121 Shareholders' equity................. 2,779,804 3,507,290 12,796,169 14,649,421 18,064,347 20,130,064
- --------------- (1) For information concerning the number of shares used in the computation of net income per common share, see Note 1 to the Consolidated Financial Statements. (2) "EBITDA" represents earnings before interest expense, income tax expense, depreciation and amortization, including amortization of leasehold improvements, acquisition and development costs, and debt expense and discount or premium relating to any indebtedness. EBITDA is not presented herein as an alternative measure of operating results (as determined in accordance with GAAP) or cash flow (as determined in accordance with GAAP). See the Consolidated Statements of Cash Flows of the Company for the amounts of cash flows from each of investing, financing and operating activities for fiscal 1995, 1996 and 1997. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and the related notes thereto included elsewhere in this Prospectus. This Prospectus contains forward-looking statements regarding matters that involve risks and uncertainties. The Company's actual results may differ materially from those anticipated by the forward-looking statements as a result of certain factors, including, but not limited to, those set forth in Risk Factors and elsewhere in this Prospectus. The financial results discussed in "Overview," "Results of Operations" and "Liquidity and Capital Resources" are for the Company excluding Castle Rock. Overview AquaPenn produces, bottles and sells non-sparkling natural spring water. The Company has adopted a strategy of producing regionally and selling its natural spring water products to national and regional customers, offering both private label and branded products to allow its customers "one-stop-shopping," creating innovative packaging, maintaining state-of-the-art production facilities which allow it to achieve cost effectiveness and producing superior quality products. Part of the Company's strategy includes acquiring the rights to additional spring water sites and acquiring natural spring water companies. History. The Company commenced operations in fiscal 1987 as a distributor of 5 gallon containers of natural spring water to the home and office market, and in fiscal 1988 the Company commenced manufacturing and selling spring water ice to supermarkets and other customers. In fiscal 1989, the Company began to refocus its product and distribution strategies by bottling natural spring water in containers for sale directly or through wholesalers to the off-premise retail market in 1 gallon and 2 1/2 gallon sizes. In fiscal 1991, the Company sold assets used in its 5 gallon home and office delivery business, and in fiscal 1994 the Company sold assets used in its ice business. In August 1990, the Company commenced shipping premium PET products, and since that time the Company has primarily focused its efforts on premium PET natural spring water products, which accounted for approximately 81% of the Company's net revenues in fiscal 1997. During fiscal 1995 and 1996, the Company completed a private placement of Common Stock, with proceeds of $8.9 million, which were used to build the Milesburg Facility. This facility was expanded in February 1997, and, as part of the use of net proceeds from this Offering, the Company expects to spend an additional $17.8 million to add additional production capacity and warehouse space. The current expansion is expected to be completed by the end of the Spring of 1998. Factors Affecting Operating Results. Because the Company has limited ability to change the price of its products, the Company's profits are based on generating sufficient sales volume to exceed its costs, including its relatively high fixed costs of production. As the Company completes its capital expenditures in the near term, its profit margins will likely be negatively impacted until sales volumes increase. The Company's largest variable cost is packaging, principally PET bottles, caps and corrugated boxes. Variations in raw materials prices may cause the Company's results to fluctuate. The Company maintains a relatively low level of raw material and finished goods inventory averaging $1.5 million in fiscal 1997. This inventory consists primarily of raw materials, which the Company finds cost effective to purchase in bulk. The Company maintains a limited product inventory because the Company tailors much of its production specifically to customer orders. The Company's PET bottle supplier, Schmalbach-Lubeca, produces PET bottles as needed for the Company on site at the Milesburg Facility. Disruptions in supplies of certain raw materials may negatively impact the Company's ability to deliver finished products to its customers. Competitive pricing pressures may also negatively impact the Company's performance. Finally, the mix of products and packaging sizes sold by the Company may change, particularly as new customers and distribution channels are obtained or as a different mix of products is sold to existing customers. Changes in these aspects of the Company's sales profile may impact profit margins. The Company does not believe that inflation has had a material effect on the Company's operating results during the past three fiscal years. 19 Seasonality. The Company's business is highly seasonal, with a concentration of sales in summer months. In the past, inclement weather has negatively impacted the Company's net revenues, particularly in summers that are unusually cool or rainy. In the last three fiscal years, an average of 41.5% of the Company's sales have occurred during June, July and August. Results of Operations The following table sets forth for the periods indicated certain financial data for the Company, excluding Castle Rock, as a percentage of net revenues.
Years Ended September 30, 1995 1996 1997 ---- ---- ---- Net revenues.................................................. 100.0% 100.0% 100.0% Cost of goods sold............................................ 79.1 75.3 74.5 ------- ------- ------- Gross profit.................................................. 20.9 24.7 25.5 Selling, general and administrative........................... 14.3 15.3 13.5 ------- ------- ------- Income from operations........................................ 6.6 9.4 12.0 Other income (expense)........................................ (3.2) (0.6) 0.3 -------- -------- ------- Income before income tax expense.............................. 3.4 8.8 12.3 Income tax expense............................................ 0.6 3.5 5.0 ------- ------- ------- Net income.................................................... 2.8% 5.3% 7.3% ======== ======== ========
Fiscal 1997 Compared with Fiscal 1996 Net Revenues. The Company's net revenues increased from $28.2 million in fiscal 1996 to $38.0 million in fiscal 1997, an increase of $9.8 million, or 34.6%. This increase resulted principally from increased sales volume to the Company's existing customer base as well as from sales to new customers. This increase also resulted from the introduction of the Company's new 8 ounce product which accounted for 33.0% of the Company's fiscal 1997 growth. During the fourth quarter of fiscal 1997, the Company experienced a decrease in net revenues from the prior quarter which, in part, was a result of unseasonably cool weather in select markets and the loss of net revenues from two customers which were acquired by other entities. Gross Profit. Gross profit increased from $7.0 million in fiscal 1996 to $9.7 million in fiscal 1997. The gross margin increased from 24.7% in fiscal 1996 to 25.5% in fiscal 1997. Cost of goods sold includes direct materials, direct labor, overhead, depreciation, amortization and transportation. This percentage increase was largely attributable to a new bottle supply contract which went into effect on April 1, 1996. In addition, the Company's direct labor costs and overhead were spread over a greater sales volume, decreasing the cost per unit produced. Transportation expenses, which represent outbound delivery costs, remained relatively unchanged as a percentage of net revenues. Depreciation and amortization was $1.8 million in fiscal 1996 compared to $2.4 million in fiscal 1997, and decreased from 6.5% of net revenues in fiscal 1996 to 6.3% in fiscal 1997. During the fourth quarter of fiscal 1997, the Company experienced a decrease in gross margins. Factors impacting this decrease included a disproportionate increase in certain expenses in addition to a shift in product mix. In particular, transportation expenses were higher due, in part, to an increase in deliveries to the West and Southwest; direct labor expenses were higher due to more labor-intensive requirements for certain packaging; and raw material expenses were higher due to PET resin and corrugated box price increases. Product mix shifts occurred as the Company obtained new customers in different distribution channels, introduced new product sizes and sold a different mix of products to existing customers. 20 Selling, General and Administrative. Selling, general and administrative expenses increased from $4.3 million in fiscal 1996 to $5.1 million in fiscal 1997 but decreased from 15.3% of net revenues in fiscal 1996 to 13.5% in fiscal 1997. This decrease was primarily attributable to a greater percentage increase in net revenues. Other Income (Expense). Other income increased from $116,484 in fiscal 1996 to $328,180 in fiscal 1997. Other income consists primarily of rental income from the lease of the Company's former State College location and the lease of space in the Milesburg Facility to Schmalbach-Lubeca for production of blow-molding products. Interest Expense, Net. Net interest expense decreased from $297,204 in fiscal 1996 to $208,467 in fiscal 1997. This decrease was due to a lower average outstanding revolver balance and more favorable interest rate terms. Income Tax Expense. The Company's effective tax rate was 40.0% for fiscal 1996 and 40.6% for fiscal 1997. Fiscal 1996 Compared with Fiscal 1995 Net Revenues. The Company's net revenues increased from $23.0 million in fiscal 1995 to $28.2 million in fiscal 1996, an increase of $5.2 million, or 23.0%. This increase resulted principally from increased sales volume to existing customers as well as from sales to new customers. Gross Profit. Gross profit increased from $4.8 million in fiscal 1995 to $7.0 million in fiscal 1996. The gross margin increased from 20.9% in fiscal 1995 to 24.7% in fiscal 1996. This percentage increase was largely due to a decrease in cost of direct materials attributable to the new bottle supply contract which went into effect on April 1, 1996. Depreciation and amortization increased from $1.4 million in fiscal 1995 to $1.8 million in fiscal 1996, and increased from 5.9% of net revenues in fiscal 1995 to 6.5% in fiscal 1996. Substantially all of this increase is attributable to the Milesburg Facility which opened in May 1995. Selling, General and Administrative. Selling, general and administrative expenses increased from $3.3 million in fiscal 1995 to $4.3 million in fiscal 1996, and increased from 14.3% of net revenues in fiscal 1995 to 15.3% in fiscal 1996. This increase resulted primarily from a larger percentage increase of sales volume being sold through food brokers, a greater percentage of net revenues attributable to sales rebates and accruals, and an increase in personnel expenses. Other Income (Expense). Other income increased from $7,090 in fiscal 1995 to $116,484 in fiscal 1996. This increase is the result of commencement of the lease of the Company's former State College location and rental income therefrom. Interest Expense, Net. Net interest expense decreased from $745,829 in fiscal 1995 to $297,204 in fiscal 1996 as a result of the repayment of an $8.0 million interim loan from the proceeds of the Company's private placement of Common Stock in fiscal 1995. Income Tax Expense. The Company's effective tax rate was 17.5% in fiscal 1995 and 40.0% in fiscal 1996. The effective tax rate in fiscal 1995 differed from the statutory tax rate primarily due to the use of net operating loss carryforwards. As of September 30, 1995, substantially all of the Company's federal net operating loss carryforwards were fully utilized. Quarterly Results The following table sets forth certain quarterly information for the Company's two most recent years. This unaudited quarterly information has been prepared on the same basis as the audited Consolidated Financial Statements included elsewhere in this Prospectus, and, in the opinion of the Company, reflects a fair presentation of the financial 21 results for the period covered. The table should be read in conjunction with the Consolidated Financial Statements of the Company and the notes thereto. The operating results for any quarter may not necessarily be indicative of results for any future periods.
Quarters Ended ------------------------------------------------------------------------------------------------------ Dec. 31, March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, 1995 1996 1996 1996 1996 1997 1997 1997 -------- -------- -------- --------- -------- --------- -------- --------- Net revenues........ $3,413,572 $5,788,242 $9,173,126 $9,865,801 $5,002,521 $7,419,815 $12,889,053 $12,703,926 Cost of goods sold.. 3,267,086 4,999,297 6,388,573 6,616,357 4,025,163 5,712,637 9,209,757 9,369,381 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross profit........ 146,486 788,945 2,784,553 3,249,444 977,358 1,707,178 3,679,296 3,334,545 Selling, general and administrative..... 832,406 876,453 1,258,246 1,346,375 943,952 1,050,679 1,504,633 1,627,319 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) from operations......... (685,920) (87,508) 1,526,307 1,903,069 33,406 656,499 2,174,663 1,707,226 Non-operating expense (income), net................ 71,361 49,211 46,163 13,985 (38,670) (21,247) (19,302) (40,494) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes....... (757,281) (136,719) 1,480,144 1,889,084 72,076 677,746 2,193,965 1,747,720 Income tax expense (benefit).......... (302,000) (54,000) 591,000 755,000 32,400 272,600 878,717 721,035 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss)... $ (455,281) $ (82,719) $ 889,144 $1,134,084 $ 39,676 $ 405,146 $ 1,315,248 $ 1,026,685 =========== =========== ========== ========== =========== =========== =========== =========== Net income (loss) per common share.............. $ (0.11) $ (0.02) $ 0.16 $ 0.20 $ 0.01 $ 0.07 $ 0.22 $ 0.17 =========== =========== ========== ========== =========== =========== =========== =========== Weighted average number of common shares outstanding(1)..... 4,226,985 4,259,071 5,624,606 5,642,211 5,806,796 5,811,092 5,919,765 5,951,844 =========== =========== ========== ========== =========== =========== =========== ===========
- ---------------------------------- (1) The weighted average number of common shares outstanding in loss periods does not include the Convertible Preferred Stock or Common Stock options or warrants under the treasury stock method as outstanding since these securities have an anti-dilutive effect on per share information. Liquidity and Capital Resources The Company's primary capital needs have been to fund its working capital requirements and capital expenditures necessitated by its growth. The Company's net cash provided by operating activities was $2.1 million, $3.6 million and $4.8 million in fiscal 1995, 1996 and 1997, respectively. The Company's capital expenditures totaled $7.9 million in fiscal 1997, primarily incurred for the expansion of the Milesburg Facility, including the purchase of and progress payments on new equipment. The Company's capital expenditures totaled $2.9 million in fiscal 1996, primarily incurred for the completion of the Milesburg Facility and for the purchase of new box-forming and shrink-wrapping equipment. The Company's capital expenditures totaled $10.4 million in fiscal 1995 for the purchase of property, plant and equipment, primarily related to the opening of the Milesburg Facility in May 1995. The Company utilized bridge debt financing as well as other debt borrowings to finance the construction of the Milesburg Facility and the procurement of new equipment. During September 1995 and the beginning of fiscal 22 1996, the Company privately placed 1.8 million shares of its Common Stock in exchange for an aggregate of $8.9 million (net of $171,042 of aggregate offering costs). The Company used the proceeds of the private placement, together with operating cash flow, to repay substantially all of the debt borrowings used to finance the Milesburg Facility. In addition, the Company borrowed $1.8 million from the Pennsylvania Industrial Development Authority, through which the Commonwealth of Pennsylvania provides low cost financing to job-creating enterprises. This financing bears an annual fixed rate of interest of 5%, payable monthly, and amortizes over a 15 year period. The Company's future capital requirements include $6.6 million to procure land and spring water sources and construct a new bottled water facility in Florida and $17.8 million to expand the Milesburg Facility, to build additional warehouse and blow-molding space, to purchase additional production lines and equipment, to install a pipeline from the Big Spring to its facility and to purchase other equipment. In addition, the Company's future capital requirements will require the financing and growth of working capital items such as accounts receivable and inventories. The Company anticipates that the funds available from this Offering should support the Company's existing operations at least through fiscal 1998. Long-term capital expenditures are expected to be funded through additional debt borrowings and operating cash flow. The Company has begun to address possible remedial efforts in connection with computer software that could be affected by the Year 2000 problem. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Company is currently taking steps to address the Year 2000 problem with respect to its computer systems to prevent any adverse operational or financial impacts. The Company has been informed by its principal software supplier that all of the supplier's software that is used by the Company is Year 2000 compliant. However, there can be no assurances that Year 2000 problems will not occur with respect to the Company's computer systems. The Company has not yet determined an estimate or range of estimates of the costs, if any, to be incurred in connection with resolving possible Year 2000 problems. The Year 2000 problem may impact other entities with which the Company transacts business, and the Company cannot predict the effect of the Year 2000 problem on such entities. The Company has $22 million in revolving credit facilities, lines of credit and demand notes which incur interest at annual rates between LIBOR plus 1.0% and LIBOR plus 1.7%. At September 30, 1997, the Company had $3.1 million of such borrowings outstanding which are expected to be repaid with the proceeds of this Offering. There are no direct restrictions on payment of dividends under the Company's credit facilities, lines of credit and demand notes. One credit agreement, however, does require the Company to maintain a certain financial ratio which currently restricts and may restrict in the future the Company's ability to pay dividends. The terms of this credit agreement require that the ratio of the Company's total liabilities to stockholders' equity determined in accordance with GAAP (excluding all intangible assets) may not be greater than 2.0 to 1.0 as of the end of each fiscal year. Lease of Spring Water Sources and Acquisitions. On July 10, 1995, the Company entered into an agreement with the Borough of Bellefonte, Pennsylvania to purchase natural spring water from the Big Spring. The term of the Company's agreement with the Borough of Bellefonte is 50 years with a five year, automatic renewal unless prior notice of termination is given. Subject to the Borough of Bellefonte obtaining certain permits, construction of a cover over the spring and all other permits and approvals being obtained, the Company expects to begin bottling Big Spring water in the Spring of 1999. On July 30, 1997, the Company entered into an agreement with Seven Springs Water Company ("Seven Springs") to purchase natural spring water from Ginnie Springs, and to purchase land adjacent to Ginnie Springs to construct a new bottling facility. The Company expects that the construction of this state-of-the-art facility will require approximately $6.6 million of capital expenditures and production will be concluded in the Spring of 1998. On October 15, 1997, the Company acquired Castle Rock, providing a West Coast production facility, natural spring water source and brand name. The purchase price for all of the outstanding common stock of Castle Rock was $3.0 million, subject to certain post-closing adjustments, consisting of approximately $1.45 million in cash and approximately $1.55 million in Common Stock to be valued at 75.0% of the Offering price. Valuing the Common Stock issued to the Castle Rock shareholders at the assumed Offering price of $15.00 would result in a purchase price 23 of approximately $3.5 million for the acquisition of Castle Rock. One half of the cash consideration and one half of the Common Stock consideration were paid into escrow pending adjustments based on a final determination of Castle Rock's liabilities and the determination of Offering price. As part of the acquisition of Castle Rock, the Company assumed up to $4.65 million of the liabilities of Castle Rock, a substantial portion of which the Company repaid shortly after closing. Subsequent Event - Acquisition of Castle Rock The acquisition of Castle Rock represents the implementation, in part, of the Company's strategy to acquire natural spring bottled water companies or the rights to spring water sites. In evaluating Castle Rock, the Company considered many factors including the quality of the natural spring water, Castle Rock's established customer base, the ability to increase sales to both Castle Rock's and the Company's existing customer base, Castle Rock's brand name, available production capacity and Castle Rock's historical levels of revenues and net loss in fiscal 1997. The Company also considered the costs of acquiring the rights to a natural spring source on the West Coast and independently constructing a bottling facility. The Company's objectives for Castle Rock include increasing sales to certain of the Company's national customers which it currently may not serve on the West Coast, reducing per unit production costs by increasing production volume at the Castle Rock facility, and broadening the Castle Rock product line. The Company also expects to achieve reductions in certain selling and administrative expenses. The Company's ability to achieve profitability for the Castle Rock operations is primarily dependent on Castle Rock's achieving higher sales volume without significantly increasing Castle Rock's operating costs. Castle Rock Financial Data Castle Rock's net revenues were $7.8 million in fiscal 1997, resulting in gross profit of $2.8 million and a gross margin of 35.9% in fiscal 1997. After pro forma reclassification of certain operating expenses to be consistent with the Company's presentation, Castle Rock's gross profit is $1.7 million and the gross margin is 22.2% in fiscal 1997. Cost of goods sold for Castle Rock includes direct materials, direct labor, overhead, depreciation, amortization and transportation. Castle Rock had substantial operating expenses in fiscal 1997 of $2.0 million (after pro forma reclassification of certain operating expenses to be consistent with the Company's presentation), or 26.1% of net revenues, primarily because of substantial sales discounts and costs associated with and the installation of new production lines. Because these lines were not fully operational during the 1997 peak summer season, Castle Rock was unable to offset such operating expenses with higher revenues from increased production volume. These factors, plus interest expense of $200,793, resulted in Castle Rock incurring a loss of $511,033 in fiscal 1997. Castle Rock's net cash provided by operating activities was $113,737 in fiscal 1997, largely due to an increase in accounts payable of $525,503. Capital expenditures totaled $1.5 million in fiscal 1997, primarily incurred for the purchase of new bottling equipment at Castle Rock's facility located in Dunsmuir, California. Castle Rock financed such capital expenditures through long-term financing and its line of credit. AquaPenn Unaudited Pro Forma Combined Financial Data Unaudited Pro Forma Combined Results of Operations The following table sets forth for the period indicated certain pro forma financial data for the Company as a percentage of net revenues, adjusted to give effect to the Castle Rock acquisition as if it occurred October 1, 1996. The pro forma financial data set forth below are not necessarily indicative of the financial position or results of operations that would have been achieved had such transaction been consummated at the beginning of fiscal 1997, or that may be achieved in the future. 24
Pro Forma Year Ended September 30, 1997 ----------------------------- Net revenues.................................................. 100.0% Cost of goods sold............................................ 75.1 ---- Gross profit.................................................. 24.9 Selling, general and administrative........................... 15.9 ---- Income from operations........................................ 9.0 Other income (expense)........................................ (0.3) ----- Income before income tax expense.............................. 8.7 Income tax expense............................................ 3.7 Net income.................................................... 5.0% ========
The Company's net revenues on a pro forma basis for fiscal 1997 were $45.8 million, an increase of $17.6 million or 62.2% from the Company's actual net revenues for fiscal 1996. The gross profit for the Company on a pro forma basis for 1997 was $11.4 million, an increase of $4.5 million or 63.9% from actual gross profit for fiscal 1996. Net income for the Company on a pro forma basis for fiscal 1997, as adjusted for the income tax benefit due to the net loss of Castle Rock, as if Castle Rock's results had been consolidated with the Company's income tax provision, was $2.3 million, an increase of $833,551 or 56.1% from the actual net income of the Company for fiscal 1996. Net income was also adjusted due to the amortization of the estimated goodwill of $3,786,743 relating to the Castle Rock acquisition. Unaudited Pro Forma Liquidity and Capital Resources The Company's pro forma net cash provided by operating activities was $4.9 million in fiscal 1997, compared to $3.6 million actual in fiscal 1996. The Company's pro forma capital expenditures totaled $9.3 million in fiscal 1997, primarily due to the expansion of the Milesburg Facility and the purchase of bottling equipment for the Castle Rock facility. There are no significant short-term capital expenditures planned for Castle Rock. The Company is currently evaluating the long-term capital expenditures that may be necessary for Castle Rock. After the merger of Castle Rock into a subsidiary of the Company, the Company repaid Castle Rock's line of credit and all of Castle Rock's long-term debt other than its equipment leases. Such payments, including amounts paid for accounts payable, totaled approximately $3.8 million as of November 15, 1997. At September 30, 1997, the Company's pro forma amount of long term liabilities was approximately $7.5 million and total debt was $9.5 million. Recent Accounting Pronouncements The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of and SFAS No. 123, Accounting for Stock-Based Compensation during fiscal 1997. SFAS No. 121 was adopted in the beginning of fiscal 1997 and there was no impact on the consolidated statements of operations upon the adoption of this statement. The Company elected to adopt the disclosure requirements of SFAS No. 123 as allowed by the Statement. In February 1997, SFAS No. 128, Earnings Per Share, was issued and requires dual presentation of basic and diluted earnings per share for complex capital structures on the face of the consolidated statement of operations. According to SFAS No. 128, basic earnings per share, which replaces primary earnings per share, is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share, which replaces fully diluted earnings per share, reflects the potential dilution for the exercise or conversion of securities into common stock. SFAS No. 128 is required to be adopted for the Company's fiscal 1998 year end financial statements and it is expected to have no significant impact on the Company's financial position or results of operations. 25 In June 1997, SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information were issued. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components including revenues, expenses, gains and losses in a full set of general-purpose financial statements and requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 is required to be adopted for the Company's fiscal 1999 year-end financial statements and, as a reporting standard, SFAS No. 130 will have no impact on the Company's financial position or results of operations. SFAS No. 131 establishes standards for the way that public companies report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 is required to be adopted for the Company's fiscal 1999 financial statements. The Company is currently evaluating the impact, if any, of the adoption of this pronouncement on the Company's existing disclosures. 26 BUSINESS The Company AquaPenn produces, bottles and sells non-sparkling natural spring water products to regional and national customers under both retailers' and other customers' private labels and its proprietary brands Pure American, Great American, AquaPenn and Castle Rock. The Company, founded in 1986, is one of the largest producers of private label natural spring water products in the United States, according to Beverage Marketing. Private label products accounted for approximately 42.5% of the Company's 1997 fiscal year net revenues. The Company's private label and branded customers include, among others, Delta Air Lines, Inc., Gerber Products Company, Sam's Club and Walgreen Co. The Company's net revenues have grown from $9.3 million in fiscal 1993 to $45.8 million in fiscal 1997, representing a compounded annual growth rate of 49.1%. Over the same time period, the Company's net income has grown from approximately $400,000 to approximately $2.3 million, representing a compounded annual growth rate of 55.1%. AquaPenn's wholly owned subsidiary, Castle Rock, was first incorporated in California in 1990. Castle Rock has focused on expanding distribution of its natural spring water products throughout the western United States. Castle Rock Spring Water comes in a range of PET bottle size, with regular or sport cap, and a one gallon HDPE bottle size. The Company intends to integrate Castle Rock as part of the Company's strategy of developing regional production capacity to provide bottled water products to national and regional customers throughout the United States. See "Business--Strategy." Industry Overview Market Overview. The U.S. bottled water market is comprised of three segments: domestically produced non-sparkling water, domestically produced sparkling water and imported water, which constituted approximately 65%, 21% and 14%, respectively, of 1996 U.S. bottled water wholesale sales, according to Beverage Marketing. The domestically produced non-sparkling water category includes natural spring water obtained from naturally occurring springs, well water, distilled water and purified water. Unlike other beverages, bottled water serves both as a tap water substitute and a refreshment beverage. According to Beverage Marketing, the total U.S. market for bottled water has grown from 1.6 billion gallons sold in 1987 to over 3.1 billion gallons in 1996, and accounted for approximately $3.6 billion in wholesale sales during 1996. Non-sparkling water comprises over 87% of the U.S. bottled water market and generated $2.7 billion of wholesale sales in 1996, and is expected to continue to grow as a percentage of gallons sold in the future, according to Beverage Marketing. PET-packaged products comprise approximately 39% of the domestically produced non-sparkling water market and have grown from approximately 83 million gallons in 1987 to approximately 580 million gallons in 1996, representing a compounded annual growth rate of approximately 24%. PET-packaged products accounted for approximately $921 million of wholesale sales in 1996. Approximately 81.7% of the Company's 1997 net revenues was generated by products packaged in PET containers. According to Beverage Marketing, PET bottled water is among the fastest growing beverage categories in the United States. Consumer Trends. Contributing to the growth in consumption of non-sparkling water are consumer trends including health and fitness awareness, municipal tap water quality concern and maturing soft drink demand, as well as consumer demand for convenience and innovative packaging. Bottled water, particularly when packaged in premium PET bottles with sport caps, appeals to consumers who are sports enthusiasts or whose lifestyles are oriented to health and fitness. According to Beverage Marketing, consumers' concern over the quality of municipal water supplies has also contributed to an increase in bottled water consumption. 27 Bottled water has also become an alternative to other beverages, including soft drinks. According to Information Resources, Inc. ("IRI"), total U.S. gallons sold of soft drinks through food store channels has increased approximately 10% from 1994 through 1996. Over the same time period, gallons sold of ready-to-drink juices have increased approximately 1%. In contrast, non-sparkling bottled water gallons sold have increased approximately 21% from 1994 to 1996, according to Beverage Marketing. Bottled spring water is natural and caffeine and additive free. These attributes and the increased availability of convenient packaging for natural spring water have contributed to the increase in bottled water consumption. Distribution Channels. Non-sparkling bottled water is generally sold to end users through four channels. According to Beverage Marketing, the total share of the bottled water market for each channel is as follows: (i) off-premise retail, which consists of supermarket, convenience store and drug store chains and other similar retail outlets (44.9%); (ii) home and office delivery which primarily consists of 5 gallon containers (39.0%); (iii) on-premise retail, which includes restaurants, delicatessens and other similar sites (8.3%); and (iv) vending (7.8%). Non-sparkling bottled water is generally delivered to customer locations through direct-store-delivery ("DSD") or warehouse distribution systems. DSD involves delivery of the product directly to the store's location where consumers may purchase the product. Warehouse distribution systems involve the delivery of truckloads of palletized products to the warehouses of regional customers which, in turn, deliver the product directly to the customer's retail sales locations. Private Label. Private label products have become increasingly popular among retailers and other customers. For example, supermarket sales of private label products grew 8.5% in 1996 versus 1.4% growth among branded products, according to IRI. Retailers benefit from having a range of private label and branded products as well as from the customer affinity developed from the reinforcement of the retailer's own brand. Other non-retailing customers find it more efficient to source products from a private label manufacturer than to produce the products themselves. Both types of customers often choose private label bottled water producers on the basis of price, consistent product quality, packaging capability, distribution capability and customer service. Consolidation. The trend toward consolidation in the bottled water industry is evidenced by the reduction in the number of bottled water filling locations and the corresponding increase in volume produced at most locations over the past ten years. According to Beverage Marketing, in 1996 there were approximately 350 filling locations in the United States versus approximately 425 in 1986, a decrease of 17.6%. The number of filling locations with sales over $75 million doubled to eight from 1995 to 1996. Larger companies are seeking to expand their share within a market, obtain broader distribution and achieve economies of scale with larger volume production. Strategy The Company's objective is to be the leading producer and bottler of natural spring water for customers on a national basis. Aspects of the Company's strategy include the following: Focus on Premium PET Packaging. While the Company uses numerous types of packaging, it is focused on bottling its natural spring water products in premium PET plastic bottles which accounted for approximately 81.7% of its net revenues in fiscal 1997. According to Beverage Marketing, PET is the fastest growing segment of the bottled water market, having grown at a compounded annual rate of approximately 24% from 1987 to 1996, representing $921 million of wholesale sales in 1996. The Company currently offers eight premium PET bottle sizes to its customers, with five of those sizes offered in the Company's proprietary bottle designs. Produce Regionally and Sell to National and Regional Customers. With the acquisition of Castle Rock and the Ginnie Springs source, the Company is implementing its strategy of developing regional production capacity to provide bottled water products to national and regional customers throughout the United States. The ability to provide products to its 28 customers from multiple sites allows the Company to service more effectively national customers such as supermarket chains, drug stores, convenience stores, hotel chains, airlines and restaurant chains, while reducing distribution costs. Invest in State-of-the-Art Production Facilities. The Company has invested in state-of-the-art production facilities which it believes are comparable or superior in sophistication to those used by its competitors. These facilities allow the Company to produce high quality natural spring water products in a cost efficient manner while also providing the flexibility to respond rapidly to the changing shipment and production demands of its customers. Create Innovative Packaging. The Company incorporates innovative packaging into its natural spring water products in order to differentiate its products from those offered by its competitors and to better meet its customers' demands. The Company is a package design leader, having been one of the first to offer premium PET bottles with sport caps; tamper-evident shrink wrap bands; 20 ounce sports bottles; 8 ounce bottles designed for airlines, food service and other distribution channels; and 24.9 ounce bottles designed to compete with the 24 ounce bottle. Provide "One-Stop-Shopping" to Customers. By producing both private label and branded products in a full line of sizes and packages, the Company can offer to its customers "one-stop-shopping" supply arrangements. Customers are able to stock their shelves with a variety of branded water products, while also strengthening their own customer affinity with private label. Private label customers are able to design their own packaging to their specifications. Additionally, because the Company distributes its products throughout the continental United States, the Company's customers need not rely on multiple regional suppliers. Provide Superior Customer Service. The Company is focused on providing the highest level of service to its customers. The Company provides flexibility to its customers in terms of order size, delivery timing and method, and, in the case of private label, label design. The Company believes that by remaining responsive to its customers' needs, it will encourage further sales penetration with existing and new customers. Growth Strategy. AquaPenn's growth strategy is to increase sales to existing customers, broaden its current customer base, add new distribution channels and expand its product line. The Company's active acquisition program includes obtaining the rights to additional spring water sites and acquiring natural spring water companies. In accordance with this strategy, the Company recently acquired the rights to natural spring water from Ginnie Springs, adjacent to which a new production facility is expected to be constructed and completed by the Spring of 1998. In addition, the Company acquired Castle Rock, a bottler and distributor of natural spring water products located in northern California. The acquisition of the right to Ginnie Springs spring water and the acquisition of Castle Rock will allow the Company to serve its customers more efficiently. Product Categories The Company offers both proprietary brands and private label products in each of the categories described below. The Company estimates that approximately 42.5% of fiscal 1997 net revenues were derived from its private label business and approximately 57.5% of net revenues were derived from its proprietary brands. Natural Spring Water. The Company's natural spring water is sodium and chlorine free. The Company estimates that natural spring water products accounted for approximately 88% of its net revenues in fiscal 1997. Distilled Water. The AquaPenn and Great American branded and private label distilled water is primarily used by consumers as a water source for batteries, humidifiers and irons, and for drinking. The Company estimates that distilled water accounted for approximately 4% of its net revenues in fiscal 1997. 29 Fluoridated Spring Water. The Company has developed spring water products containing fluoride. AquaPenn currently packages fluoridated spring water for Beech-Nut Nutrition Corporation under the name Beech-Nut(R) Spring Water and for Gerber Products Company under the name Gerber(R) Baby Water with Fluoride, which is marketed primarily to infants and children. Fluoride-related products accounted for approximately 8% of the Company's net revenues in fiscal 1997. Distribution The Company distributes nearly all of its products from its Milesburg Facility by shipping to the regional warehouses of its customers. Unlike a DSD distribution system in which products are delivered via a company's local delivery trucks to individual outlets, AquaPenn distributes to warehouses that service its customers. This approach to distribution results in reduced distribution costs compared to DSD distribution costs, while providing those companies that distribute via warehouse systems, according to Beverage Marketing, access to nearly 80% of all off-premise retail channels. The Company's Castle Rock subsidiary utilizes primarily a DSD distribution system. The Company intends to continue to distribute natural spring water products under the Castle Rock label through the DSD distribution system and private label and other proprietary brands through the warehouse distribution system. In fiscal 1997, sales to Sam's Club and Walgreen Co. accounted for approximately 12% and 10% of net revenues, respectively; no other customer accounted for more than 10% of the Company's net revenues. In fiscal 1997, sales to Walmart accounted for approximately 10% of Castle Rock's net revenues. As of September 30, 1997, the Company believes its products were sold in all 50 states. Marketing The Company advertises at the wholesale level and participates in approximately 20 trade shows annually. The Company's products are also marketed through food wholesalers, which deliver to single and chain stores such as convenience stores and delicatessens, and through food brokers, which receive commissions based on a percentage of net revenues for products sold. When possible, the Company attempts to cross-market its private label and branded products. The Company has full Electronic Data Interchange ("EDI") capability. EDI is a system which permits customers to place orders and receive invoices electronically. EDI reduces the administrative costs of the Company's customers such as drug store chains and warehouse retailers by eliminating paperwork and reducing processing time. Certain customers and potential customers will only order products from EDI-capable suppliers. The Company currently receives 21.3% of its orders via EDI. The Company believes that its EDI capability permits it to compete better on a national level. Spring Water Sources The geographical distribution of the Company's natural spring water sources is essential to its strategy of producing regionally and selling to national and regional customers. By developing sources in the Northeast, Southeast and West, the Company will be able to distribute more efficiently to the most significant population areas in the United States. The Company believes that these sources provide high quality natural spring water. "Spring water" is defined by the FDA as water derived from an underground formation from which water flows naturally to the surface of the earth. Under FDA guidelines, bottled water must contain fewer than 500 parts per million ("ppm") in total dissolved solids. Varying amounts of solids provide different "tastes" to water. Graysville Spring. The Company's sources include the Graysville Spring with an estimated flow of over 500,000 gallons per day, well in excess of the Company's current and anticipated requirements for the Milesburg Facility. The Company has exclusive use of the leased premises and may draw the full amount of the flow for its bottling needs, except a minimal amount drawn for use by two existing residences. The total dissolved solids of the water from this spring is approximately 120 ppm. The Company leases the spring from the owner of the land on which the spring is located pursuant to a 20 year lease expiring in the year 2017. The Company also has the right of first refusal to buy 30 or lease the land expiring in the year 2026. The land abuts state game lands which reduces the risk of contamination or pollution from external sources. The Graysville Spring is approximately 32 miles from the Milesburg Facility and water is transported from the spring to the facility in the Company's stainless steel tanker trucks. Big Spring. The Company has entered into an agreement with the Borough of Bellefonte, Pennsylvania to purchase natural spring water from the Big Spring. The estimated total flow of the Big Spring is approximately 14 million gallons per day, and the Company has rights to purchase up to one million gallons per day. The total dissolved solids of the water from this spring is approximately 140 ppm. The term of the Company's agreement with the Borough of Bellefonte is 50 years with a five year automatic renewal unless prior notice of termination is given. The Company's rights to draw water from the Big Spring are subject to the satisfaction of the water demands of the Borough of Bellefonte water system. There is no restriction on sale by the Borough of Bellefonte of Big Spring water to other purchasers. The Company is working with the Borough of Bellefonte to obtain the necessary permits and approvals to carry out the agreement and enable the Company to construct an approximately five-mile pipeline to transport water from the Big Spring to the Milesburg Facility. As part of the process, the Borough of Bellefonte must obtain a new water allocation permit to reflect an increase in the draw on Big Spring for both the Borough's own needs and for the sale of spring water to the Company. In addition, subsequent to the signing of the agreement with the Company, the Borough of Bellefonte has been directed by the Pennsylvania Department of Environmental Protection to construct a permanent cover over Big Spring. Although there can be no assurance that the Borough of Bellefonte will obtain all necessary permits or approvals, or obtain them in a timely manner, the Company believes that such permits and approvals are obtainable, and if obtained, the pipeline will be built and bottling of Big Spring water will commence in the Spring of 1999. Ginnie Springs. The Company has entered into an agreement with Seven Springs to purchase natural spring water from Ginnie Springs. Pursuant to the agreement, Seven Springs will sell 40 acres of land adjacent to Ginnie Springs to the Company for the construction of a water bottling facility. The Company also has a ten year option to purchase an additional 40 acres. The estimated total daily flow of Ginnie Springs is 25 million gallons, and pursuant to state regulations Seven Springs is permitted to sell an annual average of up to 1.15 million gallons per day. Pursuant to the agreement with Seven Springs, the Company has agreed to purchase from Seven Springs all water to be processed, purchased or sold at the bottling plant to be constructed by the Company adjacent to Ginnie Springs or at any bottling plant within 100 miles of such bottling plant. However, this purchase requirement will be suspended if the spring water quality at Ginnie Springs does not meet the guidelines for drinking water established by the EPA, the FDA or the International Bottled Water Association ("IBWA"). The total dissolved solids of the water from Ginnie Springs is approximately 140 ppm. The term of the agreement between the Company and Seven Springs is 99 years. The Company has obtained the necessary permits from the water management district and Gilchrist County and is expected to begin construction of the new bottling facility in the near future. The Company intends to pipe natural spring water from Ginnie Springs to the new bottling facility and begin bottling water in the Spring of 1998. Castle Rock. The Company's wholly owned subsidiary, Castle Rock, has an agreement with the City of Dunsmuir, California, pursuant to which Castle Rock purchases natural spring water from the City of Dunsmuir's spring source. The estimated total daily flow from the Castle Rock Spring is approximately one million gallons per day and the total dissolved solids of the water is approximately 95 ppm. The agreement permits Castle Rock to capture water from the source, and then pipe it approximately 1,800 feet to Castle Rock's bottling facility. The term of the agreement is 25 years (until 2015) and Castle Rock has an option to renew for an additional 25 years. The Company may purchase not more than 50 million gallons per year, provided that any daily amount drawn by the Company does not interfere with the domestic use of the City's current and future residential users. The deed in the chain of title that enables the City of Dunsmuir to sell natural spring water to Castle Rock contains limiting language that may restrict the City's ability to sell water to the Company. See "Risk Factors." 31 Production The Company has fully equipped, highly automated state-of-the-art production facilities in Pennsylvania and California and intends to construct a state-of-the-art facility in Florida which is scheduled for completion in the Spring of 1998. The Company continuously upgrades and improves its production facilities to provide high speed, flexible bottling capabilities which permit the Company to be responsive to customers' shipment and production demands, and to supply a premium quality product. Spring Water Treatment and Bottling. Upon delivery to the Company's Milesburg and Castle Rock facilities, the spring water is filtered through 0.2 micron filters and then ozonated during storage in stainless steel storage tanks. Ozone is an unbalanced form of oxygen which, unlike regular oxygen, kills bacteria and micro-organisms 3,000 times faster than chlorine. Unlike chlorine, ozone naturally breaks down to simple oxygen in a few hours and leaves no traces or residues. At the Milesburg Facility, when the spring water leaves the storage tanks it is filtered through a one micron absolute filter and then run through an ultraviolet (UV) light disinfection unit. After exposure to UV light, the water is treated with ozone again. The ozonated water is then piped to the clean room bottling area where the various products are filled and capped. The residual ozone in the bottled products sanitizes the containers as well as the water, making certain the water is pure. The clean room is filled and pressurized with air from two high-volume HEPA (High-Efficiency Particulate Air) air handlers that filter 99.97% of particulates out of the air. Packaging. The Company's 160,000 square foot Milesburg bottling facility is equipped with stainless steel equipment and has several bottling lines. The large space provides the Company with the flexibility to operate existing bottling lines at high speeds. The Company has equipment for multi-packing and is adding multi-pack shrink wrap equipment. The Company's products come in a wide range of bottle sizes including PET bottles in 8 ounce, 12 ounce, .5 liter, 20 ounce, 24.9 ounce, 1 liter, 1.5 liter and 2.0 liter sizes, and .5 gallon, 1 gallon, 2.5 gallon and 5 gallon sizes. The Company believes that it is an industry leader and innovator in packaging. The manufacturing process is highly automated. Bottles are mechanically de-palletized, cleaned, rinsed, filled and capped. The bottles are automatically labeled, tamper banded, assembled and packed in cases. After palletizing and stretch wrapping, the product is either loaded directly onto a truck for immediate shipment or is stored in a warehouse for future shipment. Most products are shipped within 48 to 72 hours after production via outside carriers. Quality Control. The Company maintains exacting internal quality control standards. Each batch of bottled natural spring water is tested for at least nine chemical and physical parameters as well as five microbiological parameters. The Graysville Spring source and critical points in the Milesburg Facility bottling process are evaluated weekly. Water from the Castle Rock Spring is tested daily and the spring source is inspected weekly. In addition, the Company's spring water is tested annually for over 140 contaminants by an independent testing laboratory. The Company uses stainless steel equipment in order to maximize quality control and cleanliness, and maintains an in-house microbiological laboratory at both its Milesburg and Castle Rock facilities. The Company believes that its quality control standards are equal or superior to the standards of most bottled water producers. The Company's products are certified by the National Sanitation Foundation (the "NSF"), an independent agency serving industry, government and consumers in areas relating to public health and the environment. The NSF conducts annual unannounced inspections and extensive product and raw material testing. The Company was awarded the "excellence in manufacturing" award by the IBWA, an award which recognizes the Company's commitment to quality and purity. Competition The bottled water industry is highly competitive. According to Beverage Marketing, there are approximately 350 bottled water filling locations in the United States with sales increasingly concentrated among the larger firms. According to Beverage Marketing, the ten largest bottled water companies accounted for approximately 58.4% of 32 wholesale dollar sales in 1996. Many of the Company's competitors are more experienced, have greater financial and management resources and have more established proprietary trademarks and distribution networks than the Company. On a national basis, the Company competes with bottled water companies such as The Perrier Group of America, Inc. (which includes Arrowhead Mountain Spring Water, Poland Spring, Ozarka Spring Water, Zephyrhills Natural Spring Water, Deer Park, Great Bear and Ice Mountain) and Great Brands of Europe (which includes Evian Natural Spring Water and Dannon Natural Spring Water). The Company also competes with numerous regional bottled water companies located in the United States and Canada. AquaPenn has chosen to compete by focusing on innovative packaging, customer service and pricing. Facilities The Company's Pennsylvania bottling facility, opened in May 1995 and expanded in February 1997, is located in Milesburg, Pennsylvania, on a 30-acre parcel of land owned by the Company. The February 1997 addition expanded the Company's facility by 52,000 square feet for a total size of 160,000 square feet. This addition has been used for the manufacture of both PET and high density polyethylene (1 gallon) bottles. The Company is currently increasing the size of the Milesburg Facility to 345,000 square feet. Two new sections measuring 115,000 square feet and 70,000 square feet will be added to each end of the existing facility. These additions are scheduled to be completed by February 1998. The Company also leases approximately 11,000 square feet of warehouse space located in Boggs Township, Pennsylvania pursuant to a lease expiring on January 15, 1998. The Company's wholly owned subsidiary, Castle Rock, leases a 26,000 square foot office and warehouse in Redding, California pursuant to a lease expiring November 30, 1999. In addition, Castle Rock owns a 20,000 square foot bottling facility in Dunsmuir, California. Castle Rock also separately leases a 2,000 square foot storage space. The Company intends to construct, own and operate a 52,500 square foot expandable state-of-the-art water bottling facility on 40 acres adjacent to Ginnie Springs. The new facility will feature all stainless steel production equipment and computerized systems similar to those in place at the Milesburg Facility. The Company expects the facility to be completed in the Spring of 1998. Management Information Systems The Company utilizes a software package which runs on an IBM platform and integrates all financial, reporting, warehousing, production, and other applications including EDI ordering. The Company believes that its management information systems are adequate to handle the Company's current growth plans. Trademarks The Company has registrations in the U.S. Patent and Trademark Office for many of the trademarks that it uses, including Pure American, Great American and AquaPenn. The Company believes that its common law and registered trademarks have significant value and goodwill and that some of these trademarks are instrumental in its ability to create demand for and market its products. The Company also has common law proprietary rights in several of its bottle designs, and has applied for statutory trademark protection. The Company's proprietary bottle designs are unique bottle designs that help provide brand recognition to the Company's products. Brand recognition is one of several factors which are important to the Company in maintaining its competitive market position. There can be no assurance that the Company's common law or registered trademarks do not or will not violate the proprietary rights of others, that they would be upheld if challenged or that the Company would, in such an event, not be prevented from using the trademarks, any of which could have an adverse effect on the Company. 33 Regulation The Company's operations are subject to numerous federal, state and local laws and regulations relating to its bottling operations, including the identity, quality, packaging and labeling of its bottled water. The Company's bottled water must satisfy FDA standards, which may be periodically revised, for chemical and biological purity. The Company's bottling operations must meet FDA "good manufacturing practices," and the labels affixed to the Company's products are subject to FDA restrictions on health and nutritional claims. In addition, bottled water must originate from an "approved source" in accordance with federal and state standards. State health and environmental agencies also regulate water quality and the manufacturing practices of producers. The Pennsylvania Department of Environmental Protection ("DEP") requires the Company to submit one finished product sample and one source sample of water from the Graysville Spring each week to DEP from a certified microbiological lab for certified bacteriological analysis. In California, the Department of Health Services ("DHS") is the principal agency with regulatory authority over bottled water producers, and DHS regulations generally incorporate FDA requirements. The Company is a member of the IBWA, a trade organization which promulgates regulations regarding the quality of water which its members may market. The Company is currently in compliance with the IBWA regulations; however, there can be no assurance that the spring water sourced by the Company will continue to meet IBWA regulations. The Company has satisfied applicable state and federal requirements and therefore is permitted to sell its bottled water in all 50 states. These laws and regulations are subject to change, however, and there can be no assurance that additional or more stringent requirements will not be imposed on the Company's operations in the future. Although the Company believes that its 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 the Company. Legal Proceedings The Company is not a party to any material legal proceedings. Employees The Company currently employs approximately 225 full-time employees, including Castle Rock employees, none of whom are covered by collective bargaining agreements. During peak production periods, the Company supplements its full-time work force with part-time employees. The Company believes that its relations with its employees are good. 34 MANAGEMENT Executive Officers and Directors The officers and directors of the Company, together with their ages and business backgrounds, are as follows:
Name Age Position with Company ---- --- --------------------- Edward J. Lauth, III................... 43 Chairman, President, Chief Executive Officer and Director Geoffrey F. Feidelberg................. 42 Executive Vice President, Chief Operating Officer and Chief Financial Officer and Director Dennis B. Nisewonger................... 50 Controller and Assistant Secretary Calvin J. Wagner, Jr.(1)............... 39 Secretary and Director Walter Bruce(2)........................ 58 Director Nancy Jean Davis....................... 45 Director Richard F. DeFluri(1).................. 47 Director John H. Gutfreund...................... 68 Director James D. Hammond(1).................... 64 Director Robert E. Poole, Jr.(1)................ 46 Director Norman S. Rich(2)...................... 59 Director Henry S. Shatkin....................... 69 Director Matthew J. Suhey....................... 39 Director
- --------------- (1) A member of the Compensation Committee. (2) Assuming that Weis Markets, Inc. and its subsidiaries sells all of its shares of Common Stock in this Offering, Weis Markets, Inc. shall cause Messrs. Bruce and Rich to resign from the Board effective immediately thereafter. Edward J. Lauth, III is the founder of the Company and has been Chairman, President, Chief Executive Officer and a director of the Company since the Company's founding in 1986. Prior to founding the Company, Mr. Lauth spent several years developing and selling commercial real estate, in addition to founding and selling two businesses in State College, Pennsylvania. Mr. Lauth received a B.S. from Rollins College. Mr. Lauth is also a member of the Regional Board of Directors of Mid-State Bank and Trust Company ("Mid-State Bank"), a subsidiary of Keystone Financial, Inc. Mr. Lauth is responsible for sales, marketing and strategic planning of the Company. 35 Geoffrey F. Feidelberg has been Executive Vice President and Chief Financial Officer since 1989 and Chief Operating Officer and a director of the Company since 1993. Prior thereto, Mr. Feidelberg was a Senior Manager in the Fort Lauderdale office of Price Waterhouse. Mr. Feidelberg received a B.S. in Accounting from the State University of New York at Binghamton and is a Certified Public Accountant. Mr. Feidelberg is also currently the President and a director of SPE Federal Credit Union. Mr. Feidelberg is responsible for the Company's administration, finance, manufacturing and strategic planning. Dennis B. Nisewonger has been Controller of the Company since 1993 and Assistant Secretary since 1995. Prior to joining the Company, Mr. Nisewonger was the fiscal officer for Dauphin County. From 1982 to 1989, Mr. Nisewonger was Controller of Murata Electronics, Inc. Mr. Nisewonger is responsible for the Company's internal accounting and auditing function. Calvin J. Wagner, Jr. has been Secretary and a director of the Company since 1988. Mr. Wagner is a Certified Public Accountant and is currently a partner in the accounting firm of Seligman, Friedman & Co., P.C. From 1991 to 1994, Mr. Wagner was a partner in the accounting firm of Wagner, Mock and Martella. Walter Bruce has been a director of the Company since 1995. Mr. Bruce has been the Vice President-Private Label for Weis Markets, Inc., a publicly owned supermarket chain, since 1976. Nancy Jean Davis has been a director of the Company since 1987. Since 1986, Ms. Davis has been the President and Chairman of McArthur Farms, Inc., a corporation engaged in the distribution of dairy, citrus, beef and feed ingredient commodities. Richard F. DeFluri has been a director of the Company since 1987. Mr. DeFluri has been a Senior Associate of the Pennsylvania Financial Group since 1974. In addition, Mr. DeFluri is a director of The Abbey Company, Aris Corporation, Nittany Health Care, Inc., Joyner Sports Medicine, Inc. and PFG Capital. John H. Gutfreund, former Chairman and Chief Executive Officer of Salomon Brothers, Inc. from 1984 to 1991, has been a director of the Company since 1995. Since 1993, Mr. Gutfreund has been President of Gutfreund & Company, a New York-based financial consulting firm. Mr. Gutfreund is also a director of LCA Vision, Inc. James D. Hammond, Ph.D. has been a director of the Company since 1994. Since 1988, Mr. Hammond has been Dean of the Smeal College of Business Administration at Pennsylvania State University. Mr. Hammond is a director of Atlantic Mutual Insurance Company and a trustee of the Scudder Variable Life Fund, the Scudder Pathway Funds and the Scudder Institutional Fund. Robert E. Poole, Jr. has been a director of the Company since 1994. He has been the Chief Executive Officer and President of S&A Custom Built Homes, Inc., one of the 100 largest homebuilders in the United States, since 1992. Mr. Poole is also on the Advisory Board of PNC Bank of Central Pennsylvania. Norman S. Rich, a director of the Company since 1989, has been President of Weis Markets, Inc. since 1995. He has served on Weis Markets' Board of Directors since 1990. From 1980 to 1995 Mr. Rich was Vice President of Operations for Weis Markets, Inc. Henry S. Shatkin has been a director of the Company since 1995. Mr. Shatkin has been the Chief Executive Officer of Shatkin, Arbor, Karlov, a commodities firm in Chicago, since 1992. Matthew J. Suhey has been a director of the Company since 1993. Mr. Suhey has been an independent commodities trader at the Chicago Board of Trade since 1990. In addition, Mr. Suhey has been an independent food broker on behalf of the Company since 1992. 36 The directors of the Company are elected at the annual meeting of shareholders and each director so elected holds office until his or her successor is elected and shall qualify, or until his or her earlier resignation or removal. The executive officers of the Company are elected by the Board of Directors and serve at the discretion of the Board of Directors. There are no family relationships among any of the directors or executive officers of the Company. Committees of the Board of Directors; Compensation Committee Interlocks The Board of Directors will elect an Audit Committee and has a standing Compensation Committee. Among other functions, the Audit Committee will make recommendations to the Board of Directors regarding the selection of independent auditors, review the results and scope of the audit and other services provided by the Company's independent auditors, review the Company's financial statements and review and evaluate the Company's internal control functions. The Compensation Committee periodically reviews and evaluates the compensation of the Company's officers and establish guidelines for compensation and benefits for the Company's personnel. The Compensation Committee is comprised of Messrs. DeFluri, Poole, Hammond and Wagner. Mr. Wagner has a stock subscription payable to the Company in the amount of $71,878. Compensation of Directors Each director receives 901 shares of Common Stock per year plus reimbursement of reasonable expenses incurred to attend meetings of the Board of Directors. 37 Executive Compensation The following table sets forth a summary of certain information regarding the compensation paid or to be paid by the Company for services rendered to the Company during the fiscal year ended September 30, 1997 with respect to the Company's Chief Executive Officer and all other executive officers whose total annual salary and bonus exceeded $100,000 for such period (the "Named Executives"). Summary Compensation Table
Long-Term Annual Compensation Compensation ------------------- ------------ Securities Underlying All Other Name and Principal Position Year Salary(1) Options(2) Compensation - --------------------------- ---- ------------------- ------------ ------------ Edward J. Lauth, III 1997 $201,250 30,040 $ 41,789(3) Chairman, President and Chief Executive Officer Geoffrey F. Feidelberg, 1997 $161,000 30,040 $ 27,192(4) Executive Vice President, Chief Operating Officer and Chief Financial Officer
- ----------- (1) Includes deferred income of 15% of each officer's base annual salary. (2) Granted pursuant to employment agreements which provide for such grants each fiscal year in which the Company's after-tax profits exceed $1 million. (3) Includes the following amounts: $3,960 (matching 401(k) contribution); $5,753 (life insurance premiums); $1,000 (award for annual service for 10 years); $21,711 (health insurance coverage); $5,850 (value of shares received for Board membership); and $3,515 (long-term disability insurance). (4) Includes the following amounts: $3,209 (matching 401(k) contribution); $4,739 (life insurance premium); $700 (award for annual service for 7 years); $7,537 (health insurance coverage); $5,850 (value of shares received for Board membership); and $5,157 (long-term disability insurance). Option Grants in Last Fiscal Year The following table summarizes certain information with respect to Company stock options granted to the Named Executives during the fiscal year ended September 30, 1997.
Individual Grants --------------------------------------------------------- Percent of Potential Realizable Total Value at Assumed Number of Options Annual Rates of Stock Securities Granted to Exercise Price Appreciation for Underlying Employees or Base Price Option Term(1) Options in Fiscal Per ---------------------- Name Granted Year 1997 Share Expiration Date 5% 10% ---- ---------- ----------- ------------- --------------- ---------- -------- Edward J. Lauth, III 30,040(2) 50% $7.07 9/30/2007 $133,757 $338,787 Geoffrey F. Feidelberg 30,040(3) 50% $7.07 9/30/2007 $133,757 $338,787
38 - ----------------------- (1) This column shows the hypothetical gains on the options granted based on assumed annual compound stock appreciation rates of 5% and 10% over the full ten-year term of the options. The assumed rates of appreciation are mandated by the rules of the Securities and Exchange Commission (the "Commission") and do not represent the Company's estimate or projection of future Common Stock prices. (2) Granted pursuant to an Employment Agreement dated September 16, 1994 between the Company and Mr. Lauth which provides for a grant of an option to purchase 30,040 shares of Common Stock to Mr. Lauth for each fiscal year in which after-tax profits of the Company exceed $1 million. (3) Granted pursuant to an Employment Agreement dated September 16, 1994 between the Company and Mr. Feidelberg which provides for a grant of an option to purchase 30,040 shares of Common Stock to Mr. Feidelberg for each fiscal year in which after-tax profits of the Company exceed $1 million. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values The following table sets forth information concerning the number and value of exercisable and unexercised options to purchase Common Stock held by the Named Executives as of September 30, 1997. No Named Executive exercised any options for Company Stock during fiscal 1997. Aggregated Option Exercises in the Fiscal Year ended September 30, 1997 and Option Values at September 30, 1997
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options at September 30, 1997 Options at September 30,1997(1) ----------------------------- ------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------- ----------- ------------- Edward J. Lauth, III 90,120 -- $ 939,300 $ -- Geoffrey F. Feidelberg 330,440 -- $4,081,100 $ --
- ----------------------- (1) Value determined based on the difference between an assumed fair market value on September 30, 1997 of $15.00 per share (equal to the assumed Offering price per share) and the option exercise price for each above-stated option. Employment Agreements Edward J. Lauth, III. In September 1994, the Company and Mr. Lauth entered into an employment agreement pursuant to which Mr. Lauth receives a salary, adjusted as of September 1996, of $175,000 per year and deferred compensation in the amount of 15.0% of his annual salary. The employment agreement also provides for Mr. Lauth to receive options to purchase 30,040 shares of Common Stock for each fiscal year in which AquaPenn's after-tax profits exceed $1 million. Such after-tax profits were attained for the fiscal years ended September 30, 1996 and 1997. Such options are immediately exercisable, have a term of ten years and an exercise price equal to the fair market value of the Common Stock on the date of grant. The initial term of the employment agreement ended December 31, 1995, but the employment agreement automatically renews for an unlimited number of successive 39 one-year terms unless six months written notice of termination is given by either party. The employment agreement contains a non-compete provision which extends for two years beyond termination of the employment agreement. The Company and Mr. Lauth also entered into a change in control agreement in September 1994, which provides that if, within one year of a "change in control" (as defined in the agreement) of AquaPenn, Mr. Lauth is terminated or resigns because his responsibilities have diminished or been significantly changed or his salary has been reduced by more than 15.0%, Mr. Lauth shall be entitled to receive one year's salary and benefits and all outstanding stock options held by Mr. Lauth shall become immediately exercisable. The change in control agreement terminates if Mr. Lauth ceases to be employed by the Company prior to a change in control. Geoffrey F. Feidelberg. In September 1994, the Company and Mr. Feidelberg entered into an employment agreement, pursuant to which Mr. Feidelberg receives a salary, adjusted as of September 1996, of $140,000 per year and deferred compensation in the amount of 15.0% of his annual salary. The employment agreement also provides for Mr. Feidelberg to receive options to purchase 30,040 shares of Common Stock for each fiscal year in which AquaPenn's after-tax profits exceed $1 million. Such after-tax profits were attained for the fiscal years ended September 30, 1996 and 1997. Such options are immediately exercisable, have a term of ten years and an exercise price equal to the fair market value of the Common Stock on the date of grant. The initial term of the employment agreement ended December 31, 1995, but the employment agreement automatically renews for an unlimited number of successive one-year terms unless six months written notice of termination is given by either party. The employment agreement contains a non-compete provision which extends for two years beyond termination of the employment agreement. The Company and Mr. Feidelberg have also entered into a change in control agreement in September 1994 on substantially the same terms as the change in control agreement entered into with Mr. Lauth. Stock Plans The Company's 1992 Stock Option Plan (the "Option Plan") was adopted by the Company's Board of Directors in November 1992 and approved by its shareholders in March 1993. Options exercisable for a total of 300,400 shares of Common Stock are issuable under the Option Plan. The Option Plan provides for the grant to employees of either "incentive stock options" within the meaning of Sections 421 and 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or nonqualified stock options. Under the Option Plan, only employees (including officers) of the Company are eligible to receive options under the Option Plan. The exercise price of incentive stock options must at least equal the fair market value for the underlying shares on the date of grant or, in the case of options granted to holders of 10.0% or more of the outstanding Common Stock, 110.0% of the fair market value on the date of grant. The exercise price of nonqualified stock options must not be less than the fair market value of the underlying shares on the date of grant. To date, no stock options have been granted under the Option Plan. The Option Plan is administered by a committee of four persons appointed by the Board of Directors of the Company which determines the terms of options granted under the Option Plan, including the exercise price and the number of shares subject to the option. The Option Plan provides the Board of Directors with the discretion to determine when options granted thereunder shall become exercisable. Generally, for options granted to employees, such options may be exercised at any time prior to expiration, so long as the optionee continues to be employed by the Company. No option granted under the Option Plan is transferable by the optionee other than by will or the laws of descent and distribution, and each option is exercisable during the life of the optionee only by the optionee. The Company's Stock Purchase Plan was adopted by the Company's Board of Directors in February 1996 and approved by its shareholders in April 1996. A total of one million shares of Common Stock are issuable under the Stock Purchase Plan. No employee will be granted an option if, immediately after the option is granted, such employee will own 5.0% or more of the total voting power or value of all classes of the Company's stock. In 40 addition, no employee will be granted an option if such employee's rights to purchase shares exceeds $25,000 of the fair market value of such shares for such calendar year. Under the terms of the Stock Purchase Plan, eligible employees may purchase shares of the Company's Common Stock at 85% of the fair market value at the offering date. Payment for the shares must be made within one year of the offering date. An employee may cancel his or her subscription any time prior to payment in full for the shares. No rights under the Stock Purchase Plan are assignable or transferrable by the employee other than by will or the laws of descent and distribution, and only the employee may exercise such rights during his or her lifetime. The employee's rights under the Stock Option Plan terminate immediately in the event the employment of the employee is terminated for any reason other than death, temporary layoff or retirement with the consent of the Company. Upon termination due to death or retirement with consent of the Company the employee or the employee's estate has one year to pay any amounts due for purchase of shares. If the employee is subjected to temporary layoff and is subsequently rehired within six months, the employee may continue to pay for shares subscribed to by such employee. At September 30, 1997, approximately 76,254 shares were subscribed for by eligible employees under the Stock Purchase Plan. The period during which employees must pay for the subscribed shares terminates on January 5, 1998. 41 CERTAIN TRANSACTIONS The Company and Matthew J. Suhey, a director of the Company, have entered into an agreement pursuant to which Mr. Suhey acts as an independent food broker with the Company. Mr. Suhey received compensation of $250,000 in fiscal year 1997 for his services as an independent food broker on behalf of the Company. In addition, accrued commissions to Mr. Suhey as of September 30, 1997, were $20,833. In September 1995, the Board of Directors of the Company resolved to grant to Mr. Suhey options to purchase 30,040 shares of Common Stock of the Company for each year in which AquaPenn's after-tax profits exceed $1 million. Such after-tax profits have been achieved for fiscal years 1996 and 1997. Norman S. Rich, a Director of the Company, is the President of Weis Markets, Inc., the ultimate parent of Aqua Works, Inc., a 40.7% shareholder of the Company. Weis Markets, Inc., which owns and operates supermarkets, purchases natural spring water products from the Company at market prices. Such purchases constituted approximately 1.6% of the Company's total net revenues in fiscal 1997. On August 29, 1997 the Company entered into a Credit Agreement with Mid-State Bank, pursuant to which Mid-State Bank has extended a $10.0 million revolving credit line and a $6.0 million line of credit to the Company. Edward J. Lauth, III, President and a director of the Company, is on the Regional Board of Directors of Mid-State Bank. As of September 30, 1997, Calvin J. Wagner, Jr., a director of the Company, had a stock subscription payable to the Company in the amount of $71,878. 42 PRINCIPAL SHAREHOLDERS AND SELLING SHAREHOLDER The table below sets forth as of December 15, 1997 certain information regarding the beneficial ownership of shares of Common Stock (i) by each director and executive officer of the Company, (ii) by all the directors and officers as a group, (iii) by each person who is known by the Company to be the owner (or beneficial owner) of 5.0% or more of the Company's outstanding shares of Common Stock and (iv) by each of the Company's current shareholders who is offering to sell shares in this Offering.
Beneficial Ownership(1) Beneficial Ownership(1) Prior to the Offering After the Offering --------------------------- Shares to -------------------------- Shares Percent be sold Shares Percent ------ ------- --------- ------ ------- Directors and Officers(2): Norman S. Rich...................... 1,867,587 (3)(14) 40.9% 1,859,000 8,587 * % Edward J. Lauth, III ............... 1,249,592 (4) 26.4 70,000 1,179,592 15.0 Matthew J. Suhey ................... 361,231 (5) 7.4 -- 361,231 4.5 Geoffrey F. Feidelberg.............. 356,876 (6) 7.3 -- 356,876 4.4 Nancy Jean Davis ................... 249,615 (7) 5.2 -- 249,615 3.2 Calvin J. Wagner, Jr. .............. 127,129 (8) 2.8 -- 127,129 1.6 Henry S. Shatkin ................... 85,013 (9) 1.9 -- 85,013 1.1 Robert E. Poole .................... 38,451 (10) * -- 38,451 * Richard F. DeFluri ................. 36,048 (11) * -- 36,048 * James D. Hammond ................... 24,107 (12) * -- 24,107 * John H. Gutfreund .................. 23,431 * -- 23,431 * Walter Bruce ....................... 1,802 (13) * -- 1,802 * All Directors and Officers as a Group (13 persons)............... 4,426,144 77.8% -- 2,497,145 29.1 Other Principal and Selling Shareholders: Aqua Works, Inc. (14)............... 1,859,476 (14) 40.7% 1,859,000 476 * Lowell S. Fixler.................... 32,444 * 32,444 0 0 Sandy & Rockoff Urological Assoc. 0% MPPP UA 07/01/97......... 27,036 (15) * 27,036 0 0 Lester H. Petnick................... 27,036 (16) * 14,420 12,616 * Valassis Enterprises, L.P. ......... 21,629 * 12,016 9,613 * Mark S. and Frances Ann Wagner...... 21,629 * 9,613 12,016 * Carol L. Barash..................... 27,036 (17) * 9,012 18,024 * Scottie Pippen, as Trustee of the Scottie Pippen Revocable Trust.................... 43,258 * 8,111 35,147 * CEDE & Co. FBO John H. Persing, M.D., Inc. Defined Benefit Plan............... 27,036 (18) * 7,811 19,225 * Ronald G. Berman.................... 21,629 * 6,609 15,020 * Kirk H. Gibson...................... 21,629 * 6,008 15,621 * Donald Lord and Myrna Lord.......... 21,629 * 5,408 16,221 * K.R. Schleiden and Joan E. Schleiden.................. 21,629 * 3,629 18,000 *
43 - --------------------- * Less than one percent. (1) A person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date of this Prospectus upon the exercise of options or warrants. Each beneficial owner's percentage ownership is determined by assuming that options or warrants that are held by such person (but not those held by any other person) and that are exercisable within 60 days from the date of this Prospectus have been exercised. Unless otherwise noted, the Company believes that all persons named in the table have sole voting and investment power with respect to all shares of Common Stock beneficially owned by them. For purposes of the table, shares of Common Stock are considered beneficially owned by a person if such person has or shares voting or investment power with respect to such stock. As a result, the same security may be beneficially owned by more than one person and, accordingly, in some cases, the same shares are listed opposite more than one name in the table. (2) Address is c/o One AquaPenn Drive, Milesburg, Pennsylvania, 16853. (3) Mr. Rich is the President of Aqua Works, Inc. and Weis Markets, Inc., the ultimate parent of Aqua Works, Inc., the holder of 1,859,476 shares of Common Stock. Because as President of Aqua Works, Inc. and Weis Markets, Inc. Mr. Rich controls the voting and investment power of such shares, for purposes of computing beneficial ownership Mr. Rich is considered to be the beneficial owner of the 1,859,476 shares of Common Stock held by Aqua Works, Inc. Mr. Rich disclaims beneficial ownership of any shares held by Aqua Works, Inc. (4) Includes 30,653 shares of Common Stock held by the Lauth Family Limited Partnership, 13,067 shares of Common Stock in a Rabbi Trust for the benefit of Mr. Lauth, options and warrants to purchase 165,220 shares of Common Stock and 114,512 shares of Common Stock held by ASW Investors, a Pennsylvania general partnership which has granted Mr. Lauth a proxy to vote all of its shares. (5) Includes options to purchase 330,440 shares of Common Stock and 15,020 shares of Common Stock held through ASW Investors, in which Mr. Suhey has a 13.1% general partner interest. (6) Includes 10,814 shares of Common Stock in a Rabbi Trust for the benefit of Mr. Feidelberg, 180 shares of Common Stock held in trusts for which Mr. Feidelberg is trustee, 6,008 shares of Common Stock held by his spouse and 330,440 shares of Common Stock exercisable pursuant to options. Mr. Feidelberg disclaims beneficial ownership of the 6,008 shares of Common Stock held by his spouse. (7) Includes 39,334 shares of Common Stock and warrants for 21,028 shares of Common Stock held by the Nancy Jean Davis Trust and 189,252 shares of Convertible Preferred Stock held by the Nancy Jean Davis Trust. (8) Includes 12,617 shares of Convertible Preferred Stock and 114,512 shares of Common Stock held through ASW Investors, in which Mr. Wagner has a 0.3% general partner interest and, as managing partner, has the power to sell all of the shares. (9) Includes 10,814 shares of Common Stock held by M-S Capital Fund and 15,020 shares of Common Stock held through ASW Investors, in which Mr. Shatkin has a 13.1% general partner interest. (10) Includes 10,814 shares of Common Stock and 24,032 shares of Convertible Preferred Stock held jointly by Mr. Poole with his spouse. (11) Includes 9,012 shares of Common Stock held by Adicus, L.P. and 27,036 shares of Convertible Preferred Stock held by Adicus, L.P. Mr. DeFluri is a general partner of Adicus, L.P. 44 (12) Includes warrants for 9,012 shares of Common Stock, and 4,731 shares of Common Stock and 6,759 shares of Convertible Preferred Stock held jointly by Mr. Hammond with his spouse. (13) Mr. Bruce is a Vice President of Weis Markets, Inc., the ultimate parent of Aqua Works, Inc., the holder of 1,859,476 shares of Common Stock. Mr. Bruce disclaims beneficial ownership of any shares held by Aqua Works, Inc. (14) Includes warrants for 135,180 shares of Common Stock. The address of Aqua Works, Inc. is 1000 S. Second Street, Sunbury, Pennsylvania, 17801-0471. Weis Markets, Inc. is the ultimate parent of Aqua Works, Inc. (15) Includes 27,036 shares of Convertible Preferred Stock. (16) Includes 27,036 shares of Convertible Preferred Stock. (17) Includes 27,036 shares of Convertible Preferred Stock. (18) Includes 27,036 shares of Convertible Preferred Stock. 45 DESCRIPTION OF CAPITAL STOCK The following description of the Company's capital stock does not purport to be complete and is subject in all respects to applicable Pennsylvania law and to the provisions of the Company's Articles of Incorporation, as amended, and By-laws, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. The authorized capital stock of the Company consists of 100,000,000 shares of Common Stock, no par value, and 2,000,000 shares of Convertible Preferred Stock, par value $1.00 per share. Immediately following the completion of this Offering, the Company estimates that there will be outstanding an aggregate of 7,719,555 shares of Common Stock and no shares of Convertible Preferred Stock. Common Stock Holders of the Common Stock are entitled to one vote per share on all matters to be voted upon by the shareholders. Holders of Common Stock do not have cumulative voting rights, and therefore holders of a majority of the shares voting for the election of directors can elect all of the directors. In such event, the holders of the remaining shares will not be able to elect any directors. Holders of the Common Stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors out of funds legally available therefor, subject to the terms of the agreements governing the Company's long-term debt. The Company does not anticipate paying cash dividends in the foreseeable future. See "Dividend Policy." In the event of the liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and payments to holders of the Convertible Preferred Stock. Holders of the Common Stock have no preemptive, conversion or redemption rights and are not subject to further calls or assessments by the Company. Immediately upon consummation of this Offering, all of the then outstanding shares of Common Stock will be validly issued, fully paid and nonassessable. The Transfer Agent and Registrar for the Common Stock is American Securities Transfer & Trust, Inc. Preferred Stock The Board of Directors has the authority, without any vote or action by the shareholders, to issue Preferred Stock in one or more series and to fix the designations, preferences, rights, qualifications, limitations and restrictions thereof, including the voting rights, dividend rights, dividend rate, conversion rights, terms of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any series. In addition, the issuance of Preferred Stock by the Board of Directors could be utilized, under certain circumstances, as a method of preventing a takeover of the Company at a premium above the then prevailing market price. Convertible Preferred Stock The Convertible Preferred Stock is convertible at the option of the holder at any time into shares of Common Stock at the rate of one share of Convertible Preferred Stock per share of Common Stock. Giving effect to the 0.6008-for-1 Reverse Stock Split that will occur immediately prior to this Offering, each share of Convertible Preferred Stock is convertible into 0.6008 shares of Common Stock. The number of shares of Common Stock into which the Convertible Preferred Stock is converted shall be adjusted to take into account increases or reductions 46 in the number of shares of outstanding Common Stock by reason of a split, share dividend, merger or consolidation. The Convertible Preferred Stock has no redemption features, but does have a preference in liquidation. Pennsylvania Corporate Law Provisions The Company's Articles of Incorporation and By-laws contain certain provisions which may have the effect of deterring or discouraging, among other things, a non-negotiated tender or exchange offer for Company stock, a proxy contest for control of the Company, the assumption of control of the Company by a holder of a large block of the Company's stock and the removal of the Company's management. These provisions empower the Board of Directors, without shareholder approval, to issue Preferred Stock the terms of which, including voting power, are set by the Board. The Pennsylvania Business Corporation law contains certain provisions applicable to the Company which may have similar effects. These provisions, among other things: (1) require that, following any acquisition by any person or group of 20% of a public corporation's voting power, the remaining shareholders have the right to receive payment for their shares, in cash, from such person or group in an amount equal to the "fair value" of the shares, including an increment representing a proportion of any value payable for control of the corporation; (2) prohibit for five years, subject to certain exceptions, a "business combination" (which includes a merger or consolidation of the corporation or a sale, lease or exchange of assets) with a shareholder or group of shareholders beneficially owning 20% or more of a public corporation's voting power; (3) suspend the voting rights of the shares acquired by a person or group acquiring 20% or more of the voting power of the corporation; (4) require that a person or group who acquired, offered to acquire or publicly disclosed the intention of acquiring at least 20% of the voting power of the corporation disgorge "greenmail" profits or profits realized from the disposition of the corporation's securities within 18 months after acquiring at least 20% of the voting power if the security had been acquired by such person or group within 24 months before or 18 months after such person or group acquired 20% of the voting power of the corporation; (5) allow the corporation to adopt shareholders' rights plans with discriminatory provisions (sometimes referred to as "poison pills") whereby options to acquire shares of corporate assets are created and issued which contain terms that limit persons owning or offering to acquire a specified percentage of outstanding shares from exercising, converting, transferring or receiving options and allow the exercise of options to be limited to shareholders or triggered based upon control transactions; (6) shareholders of a corporation would no longer have a statutory right to call special meetings of shareholders or to propose amendments to the articles of incorporation; and (7) in discharging the duties of their respective positions, the board of directors, committees of the board and individual directors may, in considering the best interests of the corporation, consider to the extent they deem appropriate, (i) the effects of any action upon shareholders, employees, suppliers, customers and creditors of the corporation and upon the communities in which offices or other establishments of the corporation are located, (ii) the short-term and long-term interests of the corporation, including benefits that may accrue to the corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the corporation, (iii) the resources, intent and conduct (past, stated and potential) of any person seeking to acquire control of the corporation, (iv) and all other pertinent factors. Further, the board of directors, committees of the board and individual directors are not required, in considering the best interests of the corporation or the effects of any action, to regard any corporate interest or the interests of any particular group affected by such action as a dominant or controlling interest or factor. The consideration of the foregoing factors shall not constitute a violation of the board's applicable standard of care. Amendment of Articles of Incorporation. The Pennsylvania Business Corporation Law provides that the Articles of Incorporation of a Pennsylvania corporation may be amended by the affirmative vote of a majority of the outstanding voting stock of such corporation, except as otherwise provided by such corporation's Articles of Incorporation. 47 General Effect of Anti-Takeover Provisions. The overall effect of these provisions and the existing change in control agreements (see "Management--Employment Agreements") may be to deter a future tender offer or other takeover attempt that some shareholders might view to be in their best interests as the offer might include a premium over the market price of the Common Stock at that time. In addition, these provisions may have the effect of assisting the Company's current management in retaining its position and place it in a better position to resist changes which some shareholders may want to make if dissatisfied with the conduct of the Company's business. 48 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have 7,719,555 shares of Common Stock issued and outstanding (assuming the Underwriters' over-allotment option is not exercised). Of these shares, all 4,071,117 of the shares sold in this Offering (plus any additional shares sold upon the exercise of the Underwriters' over-allotment option) will be freely tradable under the Securities Act, except for shares purchased by "affiliates" of the Company within the meaning of the rules and regulations under the Securities Act. The remaining 3,648,438 outstanding shares (the "Restricted Shares"), which were issued by the Company in reliance upon the "private placement" exemption provided by Section 4(2) of the Securities Act, will be deemed restricted securities within the meaning of Rule 144. Restricted Shares may not be sold unless they are registered under the Securities Act or are sold pursuant to an applicable exemption from registration, including an exemption under Rule 144. In general, Rule 144 permits any person who has beneficially owned shares of Common Stock for at least one year to sell without registration, within any three-month period, a number of such shares not exceeding the greater of one percent of the then outstanding shares of Common Stock or the average weekly trading volume in the Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 also are subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. After they have been paid for and held for more than two years, Restricted Shares held by persons who are not affiliates of the Company may be sold without limitation. Certain current shareholders of the Company who in the aggregate hold 2,950,937 shares of Common Stock have agreed that they will not sell shares of Common Stock prior to the expiration of 180 days from the date of this Prospectus except with the written consent of the Representatives of the Underwriters. See "Underwriting." Commencing , 1997, 2,950,937 shares of Common Stock held by such current shareholders will be eligible for sale in accordance with Rule 144, subject to the volume limitations thereof. Options and warrants (excluding the Weis Markets Warrant) to purchase a total of 949,264 shares of Common Stock have been granted to certain officers, directors and shareholders under pre-existing agreements. A total of 300,400 shares of Common Stock are reserved for issuance under the Option Plan, of which none will have been issued on the date of this Prospectus. A total of 600,800 shares of Common Stock has been reserved for issuance under the Stock Purchase Plan and as of December 11, 1997, 106,547 shares have been purchased by employees. See "Management -- Stock Plans." The Company may file one or more registration statements on Form S-8 immediately following this Offering, registering under the Securities Act shares issued or to be issued pursuant to these options or the Stock Purchase Plan. Certain holders of the options referred to in this paragraph have also agreed that they will not sell any shares of Common Stock acquired by them upon the exercise of their options during the 180 day period following the date of this Prospectus except with the written consent of the Representatives of the Underwriters. Thereafter, shares issued upon exercise of outstanding stock options generally may be sold in the open market. Prior to this Offering, there has been no market for the Common Stock, and no precise prediction can be made of the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of substantial amounts of the Common Stock in the public market could adversely affect prevailing market prices and limit the Company's ability to raise additional capital. See "Risk Factors -- Arbitrary Determination of Offering Price; Possible Volatility of Stock Price" and "Risk Factors -- No Prior Public Market." 49 UNDERWRITING The Underwriters named below, acting through PaineWebber Incorporated, Lazard Freres & Co. LLC and Parker/Hunter Incorporated (the "Representatives"), have severally agreed, subject to the terms and conditions set forth in the Underwriting Agreement by and among the Company, the Selling Shareholders and the Representatives (the "Underwriting Agreement"), to purchase from the Company and the Selling Shareholders, and the Company and the Selling Shareholders have agreed to sell to the Underwriters, the number of shares of Common Stock set forth opposite the names of such Underwriters below:
Number Underwriter of Shares ----------- --------- PaineWebber Incorporated........ Lazard Freres & Co. LLC......... Parker/Hunter Incorporated...... --------- Total.................... =========
The Underwriting Agreement provides that the obligations of the Underwriters to purchase all of the shares of Common Stock are subject to certain conditions. The Underwriters are committed to purchase, and the Company and the Selling Shareholders are obligated to sell, all shares of Common Stock offered by this Prospectus if any of the shares of Common Stock being sold pursuant to the Underwriting Agreement are purchased. The Company has been advised by the Representatives that the Underwriters propose to offer the shares of Common Stock to the public initially at the Offering price set forth on the cover page of this Prospectus and to certain securities dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a discount not in excess of $ per share. After the Offering, the Offering price and the concessions and discounts may be changed by the Representatives. The Company has granted an option to the Underwriters, exercisable during the 30-day period after the date of this Prospectus, to purchase up to 610,668 additional shares of Common Stock at the Offering price less the underwriting discount and commissions set forth on the cover page of this Prospectus. The Underwriters may exercise such option only to cover over-allotments in the sale of the shares that the Underwriters have agreed to purchase. To the extent that the Underwriters exercise such option, each of the Underwriters will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as is approximately the percentage of shares of Common Stock that it is obligated to purchase of the total number of the shares under the Underwriting Agreement as shown in the table set forth above. The Underwriters may exercise the option only for the purposes of covering over-allotments, if any, made in connection with the distribution of the shares of Common Stock to the public. The Company and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act or to contribute payments that the Underwriters may be required to make in respect thereof. The Company, its directors and executive officers and certain shareholders, including the Selling Shareholders, have agreed not to offer, sell, contract to sell or grant any option to purchase or otherwise dispose of any shares of Common Stock owned by them prior to the expiration of 180 days from the date of this Prospectus, except: (i) for shares of Common Stock offered hereby; (ii) with the prior written consent of PaineWebber Incorporated; and (iii) in the case of the Company, for the issuance of shares of Common Stock upon the exercise of options or the grant of options to purchase shares of Common Stock. 50 Prior to this Offering, there has been no public market for the Common Stock of the Company. Accordingly, the Offering price will be determined by negotiations among the Company, the Selling Shareholders and the Representatives of the Underwriters. Among the factors to be considered in determining the Offering price will be the Company's record of operations, its current financial condition, its future prospects, the market for its products, the experience of its management, the economic conditions of the Company's industry in general, the general condition of the equity securities market, the demand for similar securities of companies considered comparable to the Company and other relevant factors. In order to facilitate this Offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may over-allot in connection with this Offering, creating a short position in the Common Stock for their own account. In addition, to cover over-allotments or to stabilize the price of the Common Stock, the Underwriters may bid for, and purchase, shares of the Common Stock in the open market. The Underwriters may also reclaim selling concessions allowed to an underwriter or a dealer for distributing the Common Stock in transactions to cover their short positions, in stabilization transactions or otherwise. Finally, the Underwriters may bid for, and purchase, shares of the Common Stock in market-making transactions and impose penalty bids. These activities may stabilize or maintain the market price of the Common Stock above market levels that may otherwise prevail. The Underwriters are not required to engage in these activities, and may end any of these activities at any time. The Underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. LEGAL MATTERS The legality of the shares offered hereby will be passed upon for the Company by Ballard Spahr Andrews & Ingersoll, Philadelphia, Pennsylvania. Certain legal matters will be passed upon for the Underwriters by Cravath, Swaine & Moore, New York, New York. EXPERTS The audited consolidated financial statements of AquaPenn Spring Water Company, Inc. as of September 30, 1996 and 1997, and for each of the years in the three-year period ended September 30, 1997, included in the Prospectus and in the Registration Statement have been audited by KPMG Peat Marwick LLP, independent certified public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing. The audited financial statements of Dunsmuir Bottling Company as of and for the year ended September 30, 1997, included in the Prospectus have been audited by Matson and Isom Accountancy Corporation, independent certified public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 (together with all amendments thereto, the "Registration Statement") under the Securities Act, with respect to the shares of Common Stock offered hereby. This Prospectus, filed as part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to the Registration 51 Statement and the exhibits and schedules thereto, which may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington D.C. 20549, and at the regional offices of the Commission located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material may be obtained from the Public Reference Section of the Commission located at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 at prescribed rates. The Commission maintains a web site (http://www.sec.gov) that contains material regarding issuers that file electronically with the Commission. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to herein or therein, are not necessarily complete, and in each such instance reference is made to the copy of such contract, agreement or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Company intends to furnish its stockholders with annual reports containing financial statements audited by independent accountants and with quarterly reports containing updated summary financial information for each of the first three quarters of each fiscal year. 52 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Consolidated Financial Statements of AquaPenn Spring Water Company, Inc. and Subsidiaries Independent Auditors' Report............................................................................. F-2 Consolidated Balance Sheets.............................................................................. F-3 Consolidated Statements of Operations.................................................................... F-4 Consolidated Statements of Shareholders' Equity.......................................................... F-5 Consolidated Statements of Cash Flows.................................................................... F-6 Notes to Consolidated Financial Statements............................................................... F-7 Financial Statements of Dunsmuir Bottling Company Independent Auditors' Report............................................................................. F-20 Balance Sheet............................................................................................ F-21 Statement of Operations and Retained Earnings (Deficit).................................................. F-22 Statement of Cash Flows.................................................................................. F-23 Notes to the Financial Statements........................................................................ F-25 AquaPenn Spring Water Company, Inc. Unaudited Pro Forma Combined Financial Data Unaudited Pro Forma Combined Financial Data.............................................................. F-34 Pro Forma Combined Balance Sheet......................................................................... F-35 Pro Forma Combined Statement of Operations............................................................... F-36 Notes to Unaudited Pro Forma Combined Financial Data..................................................... F-37
F-1 Independent Auditors' Report To the Board of Directors and Shareholders of AquaPenn Spring Water Company, Inc.: We have audited the accompanying consolidated balance sheets of AquaPenn Spring Water Company, Inc. and subsidiaries as of September 30, 1996 and 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended September 30, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 AquaPenn Spring Water Company, Inc. and subsidiaries as of September 30, 1996 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP State College, Pennsylvania October 21, 1997, except for note 15 which is as of October 24, 1997 F-2 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, 1996 1997 ----------- ---------- ASSETS Current Assets: Cash and cash equivalents............................................ $ 185,535 $687,035 Accounts receivable, net............................................. 2,794,776 3,604,524 Inventories.......................................................... 1,331,388 1,533,617 Prepaid expenses and other current assets............................ 278,595 425,279 Deferred income taxes................................................ 326,900 243,400 -------------- ---------- Total current assets............................................. 4,917,194 6,493,855 Property, plant, and equipment, net.................................... 14,554,929 20,030,909 Other.................................................................. 44,232 55,421 -------------- ---------- Total assets..................................................... $ 19,516,355 $26,580,185 ============== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of notes payable..................................... $ 90,840 $ 298,966 Accounts payable and accrued liabilities............................. 2,521,670 3,098,571 -------------- ---------- Total current liabilities........................................ 2,612,510 3,397,537 Notes payable.......................................................... 1,717,624 4,518,501 Deferred income taxes.................................................. 536,800 599,800 -------------- ---------- Total liabilities................................................ 4,866,934 8,515,838 -------------- ---------- Stockholders' Equity: Series A, non-voting convertible preferred stock, $1 par value; 2,000,000 shares authorized, 1,713,750 shares issued............................................ 1,713,750 1,713,750 Common stock, no par value, 100,000,000 shares authorized; 4,283,760, and 4,423,712 shares issued, respectively .............................................. -- -- Additional paid-in capital........................................... 11,560,834 12,196,269 Retained earnings ................................................... 1,455,701 4,242,456 Less 11,250 shares of preferred stock in treasury, at cost.................................................. (11,250) (11,250) Less 3,004 shares of common stock in treasury, at cost.................................................. (5,000) (5,000) Less stock subscriptions receivable.................................. (64,614) (71,878) -------------- ---------- Total stockholders' equity....................................... 14,649,421 18,064,347 -------------- ---------- Total liabilities and stockholders' equity....................... $ 19,516,355 $26,580,185 ============== ==========
See accompanying notes to consolidated financial statements. F-3 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30, ------------------------- 1995 1996 1997 ---- ---- ---- Revenues: Product sales.............................................. $ 22,617,746 $ 27,931,308 $ 37,526,028 Other sales................................................ 338,307 309,433 489,287 ------------- ------------ ------------- Net revenues.................................................. 22,956,053 28,240,741 38,015,315 Cost of goods sold............................................ 18,153,355 21,271,313 28,316,938 ------------- ------------ ------------- Gross profit.................................................. 4,802,698 6,969,428 9,698,377 Selling, general and administrative........................... 3,290,609 4,313,480 5,126,583 ------------- ------------ ------------- Income from operations........................................ 1,512,089 2,655,948 4,571,794 Other income (expense): Other income............................................... 7,090 116,484 328,180 Interest expense, net...................................... (745,829) (297,204) (208,467) ------------- ------------ ------------- (738,739) (180,720) 119,713 ------------- ------------ ------------- Income before income tax expense.............................. 773,350 2,475,228 4,691,507 Income tax expense............................................ 135,000 990,000 1,904,752 ------------- ------------ ------------- Net income.................................................... $ 638,350 $ 1,485,228 $ 2,786,755 ============= ============ ============= Net income per common share................................... $ .16 $ .26 $ .47 ============= ============ ============= Weighted average number of common shares outstanding................................................... 3,884,708 5,620,741 5,951,844 ============= ============ =============
See accompanying notes to consolidated financial statements. F-4 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Number of Shares of Series A Common Additional Retained Preferred Stock Paid-In Earnings Treasury Subscription Stock Issued Capital (Deficit) Stock Receivable Total --------- --------- ---------- ---------- --------- ----------- ---------- BALANCE, SEPTEMBER 30, 1994................................ $1,713,750 2,424,886 $2,529,881 $(667,877) $(16,250) $ (52,214) $ 3,507,290 Issuance of Common Stock for services rendered by the Company's Board of Directors...... -- 10,814 54,000 -- -- -- 54,000 Common Stock Options Exercised......................... -- 24,032 40,000 -- -- -- 40,000 Issuance of Common Stock for Private Placement............. -- 1,748,328 8,562,384 -- -- -- 8,562,384 Interest Accrued on Subscription Receivable........... -- -- -- -- -- (5,855) (5,855) Net Income.......................... -- -- -- 638,350 -- -- 638,350 ----------- ----------- ------------ ----------- ---------- ---------- ----------- BALANCE, SEPTEMBER 30, 1995............................ 1,713,750 4,208,060 11,186,265 (29,527) (16,250) (58,069) 12,796,169 Issuance of Common Stock for services rendered by the Company's Board of Directors...... -- 10,814 54,000 -- -- -- 54,000 Issuance of Common Stock in Private Placement.............. -- 64,886 320,569 -- -- -- 320,569 Interest Accrued on Subscription Receivable........... -- -- -- -- -- (6,545) (6,545) Net Income.......................... -- -- -- 1,485,228 -- -- 1,485,228 ----------- ----------- ------------ ----------- ---------- ---------- ----------- BALANCE, SEPTEMBER 30, 1996............................ 1,713,750 4,283,760 11,560,834 1,455,701 (16,250) (64,614) 14,649,421 Issuance of Common Stock for services rendered by the Company's Board of Directors...... -- 10,814 70,200 -- -- -- 70,200 Issuance of Common Stock for Employee Stock Purchase Plan..................... -- 105,256 445,985 -- -- -- 445,985 Issuance of Common Stock for Rabbi Trust................... -- 23,882 119,250 -- -- -- 119,250 Interest Accrued on Subscription Receivable........... -- -- -- -- -- (7,264) (7,264) Net Income.......................... -- -- -- 2,786,755 -- -- 2,786,755 ------------ ----------- ------------- ----------- ----------- ----------- ----------- BALANCE, SEPTEMBER 30, 1997............................ $1,713,750 4,423,712 $12,196,269 $4,242,456 $(16,250) $ (71,878) $18,064,347 ========== ========= =========== ========== ========= ========= ===========
See accompanying notes to consolidated financial statements F-5 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended September 30, 1995 1996 1997 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................. $ 638,350 $ 1,485,228 $ 2,786,755 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 1,352,826 1,831,626 2,385,212 Provision for doubtful accounts......................... 15,000 25,000 -- Provision for deferred income taxes, net................ (194,500) 372,000 146,500 Issuance of common stock for services................... 54,000 54,000 70,200 (Increase) in accounts receivable....................... (413,298) (663,986) (809,748) (Increase) decrease in inventories...................... (959,287) 373,407 (202,229) (Increase) decrease in prepaid expenses and other current assets................................. 107 (141,482) (146,684) (Increase) in other assets.............................. (13,520) (4,615) (11,189) Decrease in certificates of deposit - pledged.............................................. 15,814 -- -- Increase in accounts payable and accrued liabilities.............................. 1,566,843 232,674 576,901 ----------- ---------- ---------- Net cash provided by operating activities.......... 2,062,335 3,563,852 4,795,718 ----------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant, and equipment................. (10,430,942) (2,949,010) (7,861,192) ----------- ---------- ---------- Net cash used in investing activities.............. (10,430,942) (2,949,010) (7,861,192) ----------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable................................ 10,925,000 4,913,536 7,301,460 Repayments of notes payable................................ (10,930,732) (5,935,944) (4,292,457) Proceeds from exercise of stock options.................... 40,000 -- -- Proceeds from issuance of common stock..................... -- -- 565,235 Proceeds from private stock offering, net.................. 8,562,384 320,569 -- Interest accrued on stock subscriptions receivable......... (5,855) (6,545) (7,264) ----------- ---------- ---------- Net cash provided by (used in) financing activities 8,590,797 (708,384) 3,566,974 ----------- ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................................ 222,190 (93,542) 501,500 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ..................................................... 56,887 279,077 185,535 ----------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR...................... $ 279,077 $ 185,535 $ 687,035 ============ ============ =========== Supplemental disclosure of cash flow information: Cash paid during the period for interest, net of $101,923 in capitalized interest in 1995................. $ 762,055 $ 307,720 $ 192,299 Cash paid during the year for income taxes................. 68,342 174,568 1,627,100
See accompanying notes to consolidated financial statements. F-6 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Background of Business AquaPenn Spring Water Company, Inc. (the Company), was formed as a Pennsylvania corporation during November 1986. The Company bottles and distributes non-sparkling natural spring water. The Company's water products are sold to both regional and national customers under retailers' and other customers' private labels and under its proprietary brand labels. Principles of Consolidation The consolidated financial statements include the financial statements of the Company and its wholly-owned subsidiaries. Cash and Cash Equivalents For purposes of reporting cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Inventories Inventories are stated at the lower of cost or market with cost determined using the first-in first-out (FIFO) method. Property, Plant, and Equipment Property, plant, and equipment are recorded at cost. Depreciation and amortization on property, plant, and equipment are provided utilizing the straight-line method over the estimated useful lives of the related assets. Repairs and maintenance are charged to expense and betterments are capitalized; any gain or loss on dispositions is recognized currently. The Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (Statement No. 121) in the beginning of fiscal 1997. There was no impact on the consolidated statements of operations upon the adoption of Statement No. 121. Revenue Recognition Revenue is recognized when products are shipped. F-7 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Continued Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles 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 recorded amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Net Income Per Share Net income per share is based on the weighted average number of shares of common stock outstanding during the periods increased by convertible preferred stock and dilutive common stock equivalents using the treasury stock method. Common shares issued and stock options granted within one year prior to the Offering have been included in the calculation of shares used in computing net income per common share as if they were outstanding for all periods presented. Reclassification Certain prior year amounts have been reclassified to conform with current year presentations. (2) Related Party Transactions The Company has entered into the following transactions with related parties: o The Company sold product to a corporate investor in the Company at normal sales prices in the amount of approximately $625,000, $696,000 and $738,000 in fiscal 1995, 1996, and 1997, respectively. Accounts receivable from this investor at September 30, 1996 and 1997 were approximately $75,000 and $68,000, respectively. o The Company recorded compensation expense to a director of $208,305, $214,981 and $250,000 in fiscal 1995, 1996, and 1997, respectively, for his services as an independent food broker. Accrued commissions to this director at September 30, 1996 and 1997 were $20,833 each year. o The Company had stock subscriptions receivable from a director of $64,614 and $71,878 at September 30, 1996 and 1997, respectively. In addition, the Company recorded $23,625 in fees F-8 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (2) Continued relating to this director's services associated with the Company's private placement transaction (see note 13) during fiscal 1995. o In April 1995, the Company borrowed $8,000,000 from a corporate investor in the Company. The loan was repaid in September 1995 out of the proceeds of the private placement transaction (see note 13). In addition, interest expense of $292,000 was incurred and paid by the Company on this loan. In connection with this loan, 135,180 common stock warrants were issued to this corporate investor exercisable at $4.99 per warrant. These warrants may be exercised in part or in whole at any time. None of these warrants were exercised in fiscal 1996 or 1997. o The Company issued 105,140 common stock warrants to the President exercisable at $4.99 per warrant. These warrants may be exercised in part or in whole at any time. These warrants were issued as consideration for the President's personal guarantee given on a portion of the $8,000,000 borrowing. During fiscal 1996, 30,040 of those warrants were sold to two Directors of the Company by the President. (3) Accounts Receivable Accounts receivable consist of the following:
September 30, ------------------------------- 1996 1997 ---- ---- Accounts receivable - trade................................... $2,868,525 $3,676,555 Other......................................................... 26,251 27,969 ---------- ---------- 2,894,776 3,704,524 Less allowance for doubtful accounts.......................... 100,000 100,000 ---------- ---------- $2,794,776 $3,604,524 ========== ==========
(4) Inventories Inventories consist of the following:
September 30, -------------------------------- 1996 1997 ---- ---- Raw materials................................................. $ 910,988 $1,087,507 Finished goods................................................ 420,400 446,110 ----------- ---------- $ 1,331,388 $1,533,617 =========== ==========
F-9 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) Property, Plant, and Equipment Major classifications of these assets are summarized as follows:
Estimated useful September 30, lives in -------------------------------- years 1996 1997 ----------- ---- ---- Land........................................ - $ 1,140,850 $ 1,190,850 Land improvements........................... 20 129,819 154,121 Buildings................................... 30 5,565,101 7,729,748 Machinery and equipment..................... 3-10 9,532,609 13,941,998 Transportation equipment.................... 3-5 497,943 497,943 Construction in progress.................... - 1,664,776 2,877,630 ----------- ----------- 18,531,098 26,392,290 Less accumulated depreciation and amortization............................ 3,976,169 6,361,381 ---------- ---------- $ 14,554,929 $20,030,909 ============ ===========
Property held for rental is classified as property, plant, and equipment. This property relates to the Company's former manufacturing facility in State College, Pennsylvania which has a net book value of approximately $1,184,000, which is net of approximately $483,000 in accumulated depreciation at September 30, 1997. Interest costs for the construction and purchase of certain long-term assets relating to the Company's new facility in Milesburg, Pennsylvania, were capitalized and are being amortized over the related assets' estimated useful lives. The Company capitalized net interest costs of $101,923 in fiscal 1995 and $0 in fiscal 1996 and 1997. Total depreciation and amortization expense was $1,352,826, $1,831,626 and $2,385,212 in fiscal 1995, 1996, and 1997, respectively. F-10 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) Notes Payable
September 30, ------------------------- 1996 1997 ---- ---- Unsecured note payable to a bank, $10,000,000 revolving credit note - interest at London Interbank Offered Rate (LIBOR) plus 1.7% (7.325% at September 30, 1997), requires interest only through February 1999 with principal and interest due monthly thereafter with maturity in 2004.... -- $ 2,900,000 Mortgage funding payable in monthly installments of principal and interest to the Pennsylvania Industrial Development Authority at 5%, due through May 2011................................................... 1,785,950 1,700,383 Note payable to a bank, $6,000,000 line of credit at LIBOR plus 1.0% (6.6875% at September 30, 1997), payable on demand and requires a negative pledge on the Company's accounts receivable and inventories... -- 200,000 Various installment loan obligations at interest rates between 9% and 10%, due through September 1999, payable to various companies, secured by machinery and equipment............................................. 22,514 15,624 Unsecured note payable to a bank, $6,000,000 line of credit, interest at LIBOR plus 1.2% (6.825% at September 30,1997), and is due February 1998................................................................... -- 1,460 ----------- ----------- 1,808,464 4,817,467 Less portion due within one year....................................... 90,840 298,966 ----------- ----------- $ 1,717,624 $ 4,518,501 =========== ===========
Interest expense was $762,055, $306,970 and $208,467 in 1995, 1996, and 1997, respectively, and is recorded in other income (expense) in the consolidated statements of operations. F-11 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) Continued Based on current payment terms, the required principal reduction of the above debt is as follows: Year ending September 30, Amount ------------- ---------- 1998 $ 298,966 1999 237,000 2000 313,000 2001 335,000 2002 358,000 Thereafter 3,275,501 ---------- $4,817,467 ========== (7) Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities consist of the following: September 30, ------------------------- 1996 1997 ---- ---- Accounts payable................... $ 868,436 $1,021,471 Accrued expenses................... 874,093 860,825 Accrued payroll.................... 96,513 142,224 Income taxes payable............... 595,319 822,322 Other.............................. 87,309 251,729 ---------- ---------- $2,521,670 $3,098,571 ========== ========== (8) Employee Benefit Plan Effective March 1, 1994, the Company adopted a deferred 401(k) Salary Savings Plan for the benefit of its employees and their beneficiaries. Generally, any employee who has completed six months of service and is over 21 years of age is eligible to participate in the Plan. Each eligible employee may elect to contribute up to 15% of his or her compensation for services rendered in any year. The Company matches employee contributions in an amount equal to 100% of the first 1%, 75% of the second 1%, and 50% of the third 1% of each participant's contributions. The Company contributed approximately $10,000, $24,000 and $52,000 in fiscal 1995, 1996, and 1997, respectively. F-12 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (9) Sales to Major Customers During fiscal 1995 and 1996, sales to one customer accounted for approximately 17% and 23%, respectively, of net revenues. During fiscal 1997, sales to two customers accounted for approximately 15% and 11% of net revenues. Accounts receivable from these customers totaled approximately $665,000 and $459,000, respectively, at September 30, 1997. (10) Income Taxes The provision for income taxes attributable to income from operations consists of the following: Years ended September 30, --------------------------------------- 1995 1996 1997 ---- ---- ---- Currently payable: Federal.............. $ 254,500 $ 483,900 $1,452,000 State................ 75,000 134,100 306,252 --------- --------- --------- 329,500 618,000 1,758,252 --------- --------- --------- Deferred (benefit): Federal.............. (153,700) 274,600 108,100 State................ (40,800) 97,400 38,400 ---------- --------- ---------- (194,500) 372,000 146,500 --------- --------- ---------- $ 135,000 $ 990,000 $1,904,752 ========= ========= ========== Total income tax expense was $135,000, $990,000 and $1,904,752 for the years ended September 30, 1995, 1996, and 1997, respectively, and differed from the amounts computed by applying the U.S. federal income tax rate of 35 percent to pretax income as a result of the following: Years ended September 30, --------------------------------------- 1995 1996 1997 ---- ---- ---- Computed "expected" tax expense.............. $ 270,500 $ 866,000 $1,642,000 State income tax, net of federal benefit... 60,000 153,000 227,000 Change in valuation allowance............ (262,500) (27,000) -- Other, net............. 67,000 (2,000) 35,752 --------- -------- ---------- $ 135,000 $990,000 $1,904,752 ========= ======== ========== F-13 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (10) Continued The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 1996 and 1997 are presented below:
September 30, ------------------------- 1996 1997 ---- ---- Deferred tax assets: Accounts receivable, due to allowance for doubtful accounts ........................................ $ 40,600 $ 40,600 Inventories................................................ 78,800 70,100 Deferred compensation...................................... 44,000 62,500 Net operating loss carryforwards........................... 39,000 5,300 Alternative minimum tax credit carryforwards............... 104,500 -- Other, principally due to accruals for financial reporting purposes........................................ 72,100 131,500 ------- ------- Total gross deferred tax assets............................... 379,000 310,000 Less valuation allowance...................................... -- -- -------- -------- Total deferred tax assets..................................... 379,000 310,000 -------- -------- Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation............................... 580,800 662,400 Other...................................................... 8,100 4,000 -------- -------- Total gross deferred tax liabilities.......................... 588,900 666,400 -------- -------- Net deferred tax liability.................................... $209,900 $356,400 ======== ========
Deferred tax assets and liabilities are reported net within deferred income taxes on the consolidated balance sheets at September 30, 1996 and 1997. Under Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (Statement 109), a valuation allowance is recognized if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax asset will not be recognized. Based on the weight of all available evidence, the Company concludes that a valuation allowance is not needed. At September 30, 1997, the Company has Pennsylvania net operating loss carryforwards for state income tax purposes of approximately $89,000 which are available to offset future Pennsylvania taxable income, if any, through the fiscal year ending September 30, 1998 subject to limitation. F-14 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (11) Commitments The Company rents certain land, office equipment, and transportation equipment under noncancellable operating leases. Rent expense for these leases amounted to approximately $127,000, $152,000 and $138,000 for fiscal 1995, 1996, and 1997, respectively. The future minimum annual rent commitments under these leases are approximately as follows: Year ending September 30, Amount ------------- ------ 1998 $110,000 1999 63,000 2000 41,000 2001 15,000 2002 16,000 Thereafter 37,000 -------- $282,000 ======== At September 30, 1997, the Company has entered into a commitment to purchase land and construct a production facility in North Central Florida. The facility, which is expected to be completed in fiscal 1998, is estimated to cost approximately $6,588,000. In addition, the Company has made certain commitments to expand the Milesburg Facility. These commitments are for buildings, building improvements and equipment. As of September 30, 1997, the open commitments relating to this facility are approximately $8,250,000. (12) Shareholders' Equity Common Stock The Company maintains various stock option agreements and plans. Stock options have been granted at prices at or above the fair market value as of the date of the grant. Options vest and expire according to terms established at the grant date. In fiscal year 1997, the Company adopted the disclosure requirements of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (Statement No. 123). As allowed by Statement No. 123, the Company has chosen to continue to account for stock based compensation using Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the grant date over the amount employees must pay to acquire the stock. Accordingly, no compensation cost has been recognized. Had compensation cost for the Company's Plans been determined under Statement No. 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated below: F-15 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (12) Continued
September 30, --------------------------- 1996 1997 ---- ---- Net income as reported............................... $1,485,000 $2,787,000 Pro forma................................. 1,104,000 2,396,000 Net income per share as reported..................... $0.26 $0.47 Pro forma................................. 0.20 0.40
The 1996 and 1997 pro forma amounts include the effect of the common shares issued under the Stock Purchase Plan as if they were accounted for under Statement 123. The per share weighted-average fair values of stock options granted during fiscal years 1996 and 1997 were $4.54 and $4.41, respectively, on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: fiscal year 1996 expected dividend yield 0%, risk-free interest rate of 5.945%, a volatility factor of the expected market price of the Company's common stock of .4166, and a weighted-average expected life of approximately 9 years; fiscal year 1997 expected dividend yield 0%, risk-free interest rate of 5.945%, a volatility factor of the expected market price of the Company's common stock of .4166, and a weighted-average expected life of approximately 10 years. The fair market value of stock options included in the pro forma amounts for fiscal years 1996 and 1997 is not necessarily indicative of future effects on net income and net income per share. A summary of the status of the Company's stock option plans and changes during the years ended on those dates is presented below:
Fiscal years ended: September 30, 1995 September 30, 1996 September 30, 1997 ------------------ ------------------ ------------------ ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ----------------- ----------------- ---------------- Outstanding at beginning of year....................... 570,760 $2.18 570,760 $1.89 696,928 $2.45 Granted........................ 300,400 1.87 126,168 4.99 135,180 7.49 Exercised...................... 24,032 1.66 -- -- -- -- Cancelled...................... 276,368 2.50 -- -- -- -- ------- ---- -------- ---- -------- ---- Outstanding at end of year..... 570,760 1.89 696,928 2.45 832,108 3.26 ======= ==== ======= ==== ======= ==== Options exercisable at year-end..................... 570,760 1.69 696,928 2.45 832,108 3.26 ======= ==== ======= ==== ======= ====
F-16 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (12) Continued The following table summarizes information about the Company's stock option plans as of September 30, 1997:
Options outstanding Options exercisable ----------------------- ------------------------- Weighted Number Average Weighted Number Weighted Range of Outstanding on Remaining Average Exercisable on Average exercise September 30, Contractual Exercise September 30, Exercise prices 1997 Life Price 1997 Price ---------- -------------- ----------- -------- -------------- --------- $ 1.90 270,360 2 years $ 1.90 270,360 $ 1.90 4.99 36,048 4 years 4.99 36,048 4.99 1.66-1.90 300,400 7 years 1.88 300,400 1.88 4.99 90,120 9 years 4.99 90,120 4.99 7.07-8.32 135,180 10 years 7.49 135,180 $7.49 ------- ------- $1.66-8.32 832,108 832,108 ======= =======
Series A Non-Voting Convertible Preferred Stock Series A Non-Voting Convertible Preferred Stock (the Preferred Stock) is convertible at the option of the holder at any time into shares of the Company's common stock at the rate of one share of Preferred Stock for .6008 shares of common stock (See Note 15). The Preferred Stock has no redemption features but does have a preference in liquidation. (13) Private Placement In fiscal 1995, the Company sold 1,748,328 shares of its common stock in exchange for $8,562,384, net of $167,616 of offering costs as part of a private placement transaction. As part of the private placement transaction during fiscal 1996, the Company also sold 64,886 shares of its common stock in exchange for $320,569. The offering under this private placement transaction ceased during fiscal 1996. (14) Stock Purchase Plan Under the terms of the Company's Stock Purchase Plan, eligible employees may purchase shares of the Company's common stock at 85% of the estimated fair market value at the offering date. At September 30, 1997, there were 89,565 shares set aside for eligible employees under this plan of which 76,254 shares had been subscribed for at $5.41 per share and 6,409 shares were purchased by employees during fiscal September 30, 1997. The remaining 6,902 common shares were not subscribed for by the eligible employees. Payment for the subscribed shares must be made by January 1, 1998. Employees may choose to pay for their subscribed shares by using the proceeds from bank loans guaranteed by the Company. The common stock purchased with the proceeds of the loans will serve as collateral for these loans. The loans defer principal and interest payments for 5 years. F-17 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (14) Continued Under the terms of the Company's Stock Purchase Plan, a total of 98,847 shares of common stock which were subscribed for in fiscal 1996 and were issued during fiscal 1997 at $4.16 per share for a total of $411,312. Of this amount, the Company is contingently liable for $385,015 as a result of bank loans guaranteed by the Company. (15) Reverse Stock Split On October 24, 1997, the Company's Board of Directors approved a 0.6008-for-1 reverse stock split of each outstanding share of Common Stock of the Company. All share and per share data, including stock option and stock purchase plan information, have been restated to reflect this split. (16) Subsequent Event - Acquisition of Dunsmuir Bottling Company, Inc. (Unaudited) On October 15, 1997, the Company entered into a merger agreement to purchase all of the stock of Dunsmuir Bottling Company, Inc. ("Dunsmuir", also known as Castle Rock Spring Water). Under terms of this agreement, the Company purchased Dunsmuir for approximately $1,451,000 in cash and approximately $1,550,000 in shares of Common Stock to be valued at a price determined in accordance with the merger agreement and subject to certain other post-closing adjustments, plus the assumption of up to $4,500,000 in Dunsmuir's liabilities. Valuing the Common Stock at the assumed initial public offering price of $15.00 per share, the Common Stock would have an aggregate value of approximately $2,066,000 and the total purchase price for Dunsmuir would be approximately $3,517,000 plus the assumption of Dunsmuir liabilities. The following pro forma, condensed, combined balance sheet assumes the acquisition occurred at September 30, 1997 and the pro forma, condensed, combined statement of operations assumes the acquisition occurred at the beginning of fiscal 1997. This financial information does not purport to be indicative of what would have occurred had the acquisition been made at the beginning of fiscal 1997, or of the results which may occur in the future. Proforma Condensed Combined Balance Sheet (Unaudited) September 30, 1997
Pro Forma Pro AquaPenn Dunsmuir Adjustments Forma -------- -------- ----------- ----- Assets: Current assets..................... $ 6,494,000 $ 1,108,000 $ -- $ 7,602,000 Property, plant and equipment ..... 20,031,000 3,092,000 -- 23,123,000 Other noncurrent assets........... 55,000 6,000 3,787,000 (a) 3,848,000 -- -- -- -- ------------- ------------ ------------ ------------ $ 26,580,000 $ 4,206,000 $ 3,787,000 $ 34,573,000 ============= ============ ============ ============ Liabilities and Stockholders' Equity: Current liabilities................ $ 3,398,000 $ 2,108,000 1,451,000 (a) $ 6,957,000 Long-term liabilities.............. 4,518,000 2,368,000 -- 6,886,000 Other noncurrent liabilities....... 600,000 -- -- 600,000 Stockholders' equity............... 18,064,000 (270,000) 2,336,000 (a) 20,130,000 -- -- -- -- ------------- ------------ ------------ ------------ $ 26,580,000 $ 4,206,000 $ 3,787,000 $ 34,573,000 ============= ============ ============ ============
F-18 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Proforma Condensed Combined Statement of Operations (Unaudited) Year Ended September 30, 1997
Pro Forma Pro AquaPenn Dunsmuir Adjustments Forma -------- -------- ----------- ----- Sales .......................... $38,015,000 $7,804,000 -- $45,819,000 Gross profit....................... 9,698,000 2,801,000 (1,071,000)(b) 11,428,000 Other costs and expenses........... 6,911,000 3,312,000 (1,114,000)(b) 9,109,000 ----------- --------- --------- ----------- Net income (loss).................. $ 2,787,000 $ (511,000)(c) $ 43,000 (b) $ 2,319,000 =========== ========= ========= ===========
(a) The aggregate purchase price of $3,517,000 was assumed to be paid through the issuance of shares of the Company's Common Stock of $2,066,000 and the remainder through available credit facilities of $1,451,000. Since the purchase price allocation will not be finalized until after the Offering and the determination of the Offering price, the approximate excess of purchase price over assets acquired of $270,000 is recorded in other noncurrent assets. (b) Reclassification of certain Dunsmuir operating expenses of $1,071,000 to conform with AquaPenn's presentation. Also includes $43,000 in net savings relating to 1) interest savings on the refinancing of Dunsmuir debt with lower interest rate debt, 2) income tax benefit of Dunsmuir as if its results had been consolidated with AquaPenn's tax provision, and 3) amortization of goodwill. F-19 Independent Auditors' Report To the Shareholders of Dunsmuir Bottling Company Redding, California We have audited the accompanying balance sheet of Dunsmuir Bottling Company (an S corporation) as of September 30, 1997, and the related statements of operations and retained earnings (deficit), and cash flows for the year ended September 30, 1997. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dunsmuir Bottling Company as of September 30, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Matson & Isom Accountancy Corporation October 31, 1997 F-20 DUNSMUIR BOTTLING COMPANY BALANCE SHEET
September 30, 1997 ------------------ ASSETS Current Assets: Cash................................................ $ 166,764 Accounts receivable................................. 404,514 Inventories......................................... 426,995 Prepaid expenses ................................... 109,247 ------------- Total current assets............................ 1,107,520 ------------- Property, plant, and equipment - net ................. 3,092,296 Other assets - net.................................... 6,156 ------------- Total assets.................................... $ 4,205,972 ============== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities: Current maturities of long-term debt................ $ 553,504 Current portion of capital lease obligations........ 46,636 Line of credit...................................... 299,658 Accounts payable and accrued expenses............... 1,208,344 ------------ Total current liabilities....................... 2,108,142 ------------ Long-term debt - net of current maturities............ 2,283,345 Capital lease obligations - net of current portion.... 84,799 ------------ Total liabilities............................... 4,476,286 ------------ Stockholders' Equity (Deficit): Capital stock....................................... 100,000 Retained earnings (deficit)......................... (370,314) ------------ Total stockholders' equity (deficit).............. (270,314) ------------ Total liabilities and stockholders' equity (deficit)..................................... $ 4,205,972 =============
The accompanying notes are an integral part of these financial statements. F-21 DUNSMUIR BOTTLING COMPANY STATEMENT OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
Year Ended September 30, 1997 ------------------ Revenue........................................... $ 7,804,080 Cost of goods sold................................ 5,003,570 ------------ Gross profit...................................... 2,800,510 Operating expenses................................ 3,108,569 ------------ Loss from operations.............................. (308,059) Other income (expense): Interest expense................................ (200,793) Other, net...................................... (1,381) ------------ Loss before income tax provision.................. (510,233) Income tax provision.............................. 800 ------------ Net loss.......................................... (511,033) Retained earnings - beginning of year............. 167,319 Dividends paid.................................... (26,600) ------------- Retained earnings (deficit) - end of year......... $ (370,314) ============
The accompanying notes are an integral part of these financial statements. F-22 DUNSMUIR BOTTLING COMPANY STATEMENT OF CASH FLOWS
Year Ended September 30, 1997 ------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss........................................ $ (511,033) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization................. 182,807 Changes in operating assets and liabilities: Accounts receivable......................... (64,178) Inventories................................. 27,842 Prepaid expenses and other assets........... (47,204) Accounts payable and accrued expenses....... 525,503 ------------ Net cash provided by operating activities. 113,737 ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant, and equipment..... (1,483,671) ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from line of credit................ 199,658 Net proceeds from long-term financing........... 1,473,847 Payment on long-term financing.................. (132,608) Dividends paid.................................. (24,186) ------------ Net cash provided by financing activities..... 1,516,711 ------------ NET INCREASE IN CASH.............................. 146,777 CASH AT BEGINNING OF YEAR......................... 19,987 ------------ CASH AT END OF YEAR............................... $ 166,764 =============
The accompanying notes are an integral part of these financial statements. F-23 DUNSMUIR BOTTLING COMPANY STATEMENT OF CASH FLOWS
Year Ended September 30, 1997 ------------------ SUPPLEMENTAL SCHEDULES OF NONCASH INVESTING AND FINANCING TRANSACTIONS: Property, plant, and equipment additions: Cost of property, plant, and equipment................................................. $ (1,660,119) Acquired with debt proceeds............................................................ 176,448 ------------ Cash used for purchase of property, plant, and equipment............................. $ (1,483,671) ============= Proceeds from long-term debt: Total additional debt incurred......................................................... $ 1,650,295 Incurred through acquisition of property, plant and equipment.......................... (176,448) ------------ Cash provided from long-term debt.................................................... $ 1,473,847 ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest (net of amounts capitalized)...................................... $ 158,244 ------------ Cash paid for income taxes............................................................... $ 800 ============
During the year ended September 30, 1997, capital lease obligations totaling $24,247 were incurred for the use of equipment. The accompanying notes are an integral part of these financial statements. F-24 DUNSMUIR BOTTLING COMPANY NOTES TO THE FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Operations Dunsmuir Bottling Company ("Dunsmuir") (a California corporation) bottles and distributes spring water in the western United States. Accounts Receivable Dunsmuir utilizes the allowance method with respect to its accounts receivable. No allowance was deemed necessary at September 30, 1997. It is customary for Dunsmuir to have accounts receivable balances which are individually significant. Inventories Inventories consist of raw materials and finished goods and are stated at the lower of cost, or market, determined on a first-in, first-out basis. Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives (ranging from five to forty years), using the straight-line method. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to income as incurred; significant renewals and betterments are capitalized. Revenue Recognition Revenue is recognized when products are shipped. Income Taxes Dunsmuir and its shareholders have elected to be taxed under the S Corporation provisions of the Internal Revenue Code and the California Revenue and Taxation Code. As a result, the taxable income or loss of Dunsmuir will be reported by the shareholders. Dunsmuir is subject to a minimum franchise tax of the greater of $800 or 1.50% of net income. Cash As of September 30, 1997, Dunsmuir maintained bank balances in one northern California bank in excess of $100,000. Advertising Costs Dunsmuir's accounting policy is to charge advertising costs to expense as incurred. Advertising expense was $56,198 for the year ended September 30, 1997. F-25 DUNSMUIR BOTTLING COMPANY NOTES TO THE FINANCIAL STATEMENTS (1) Continued Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles 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) Inventories
September 30, 1997 ------------------ Inventories consist of the following: Finished goods........................................................ $ 95,614 Raw materials......................................................... 331,381 ---------- $ 426,995 ==========
(3) Property, Plant, and Equipment
September 30, 1997 ------------------ Property, plant, and equipment consisted of the following: Land.................................................................. $ 53,439 Building and improvements............................................. 1,239,717 Machinery and equipment............................................... 1,896,403 Office Equipment...................................................... 45,395 Vehicles.............................................................. 207,274 ---------- 3,442,228 Less accumulated depreciation......................................... (349,932) ---------- Property, Plant, and Equipment - Net.................................. $3,092,296 ==========
During the year ended September 30, 1997, Dunsmuir completed its plant expansion project. Dunsmuir capitalized interest totaling $60,991 as a component of the plant expansion project during the year ended September 30, 1997. Also, during the year ended September 30, 1997, Dunsmuir purchased the remaining one half interest in the real property which contains the Dunsmuir bottling facility from the Ray and Sharon Kassis Family Trust (a related party) for $150,000. Total depreciation expense was $182,177 for the year ended September 30, 1997. (4) Line of Credit Dunsmuir has a revolving line of credit with Tri Counties Bank which matures on January 9, 1998. The line has a maximum limit of $300,000 and is secured by inventories and accounts receivable. Outstanding balances bear interest at the prime lending rate plus 1.75%, payable monthly. At September 30, 1997, the rate was 10.25% and $299,658 was outstanding. The credit agreement contains restrictive covenants regarding the Dunsmuir's working capital, equity, and ability to incur other debt. The measurement date for the financial covenants is December 31, 1997. At September 30, 1997, Dunsmuir did not meet the covenant requirements (see Note (12)). The majority stockholders at September 30, 1997 have personally guaranteed the outstanding balance. F-26 DUNSMUIR BOTTLING COMPANY NOTES TO THE FINANCIAL STATEMENTS (5) Long-Term Debt
September 30, 1997 ------------------ Long-term debt consisted of the following: Note payable to the City of Dunsmuir for California Development Block Grant funds in the amount of $230,000. The note was renegotiated in 1993 and was increased for interest of $29,416. Payable in monthly installments of $3,605 including interest at 8.00% per annum. The note is due March 1, 2001. A portion of past due principal, interest and water charges under the original terms of the note were due and payable under the receipt of proceeds from a legal settlement. In February, 1995, $68,891 was paid in satisfaction of the agreement. The note is secured by a second deed of trust on Dunsmuir's real property and equipment, a second deed of trust on real property of a shareholder, and by personal guarantees of the shareholders........................ $ 88,780 Two notes payable to Superior California Economic Development District in monthly installments of $3,122 including interest at 8.00% per annum. The notes are due February 1, 2004, and are secured by bottling equipment............................................................. 187,587 Mortgage note payable to the Lidster Trust (a related party) in monthly installments of $1,465 including interest at 10.00% per annum. The note is secured by a deed of trust on real property and due June, 2005...... 94,571 Mortgage note payable to Ray & Sharon Kassis Family Trust (a related party) in monthly installments of $1,325 including interest at 10.00% per annum. The note is due July 1, 2007, and secured by a deed of trust on real property....................................................... 149,555 Note payable to GMAC in monthly installments of $589 including interest at 9.15% per annum. The note is secured by a vehicle................... 16,578 Note payable to Tri Counties Bank in monthly installments of $533 including interest at 9.45% per annum. The note is due April, 2000, and is secured by a vehicle................................................ 14,594 Note payable to Tri Counties Bank in monthly installments of $780 including interest at 11.25% per annum. The note is due May, 1999, and is secured by a truck and trailer............................ 14,747 ---------- Balance forward...................................................... $ 566,412 ----------
F-27 DUNSMUIR BOTTLING COMPANY NOTES TO THE FINANCIAL STATEMENTS (5) Continued Balance brought forward.............................................. $ 566,412 Note payable to Tri Counties Bank in monthly installments of $691 including interest at 11.25% per annum. The note is due June, 1999, and is secured by two trailers............................................. 13,109 Note payable to Union Bank in monthly installments of $579 including interest at 9.00% per annum. The note is due June, 2000, and is secured by a vehicle........................................................... 16,873 Note payable to the Lidster Trust (a related party) in monthly installments of $971 including interest at 10.00% per annum. The note is unsecured and due June, 2005........................................ 62,676 Note payable to the Ray and Sharon Kassis Family Trust (a related party) in monthly installments of $1,647 including interest at 10.00% per annum. The note is unsecured and due June, 2005.................... 106,304 Note payable to the Lidster Trust (a related party) with interest at 10.00% per annum. Principal and interest is payable in three equal annual installments of $37,100 on July 1, 1998, 1999 and 2000 and sixty monthly installments of $1,839 beginning July 1, 2000. The note is unsecured and due June 1, 2005.......................................... 130,000 Note payable to the Ray & Sharon Kassis Family Trust (a related party) with interest at 10.00% per annum. Principal and interest is payable in three equal annual installments of $37,100 on July 1, 1998, 1999 and 2000, and sixty monthly installments of $1,839 beginning July 1, 2000. The note is unsecured and due June 1, 2005............................. 130,000 Note payable to Tri Counties Bank in monthly interest only installments at prime plus 2.00%. The rate at September 30, 1997, was 10.50%. The note is secured by a first deed of trust on real property and was due September 19, 1997..................................................... 255,000 Note payable to Tri Counties Bank in monthly installments of $3,690 including interest at prime plus 2.00%. The rate at September 30, 1997, was 10.50%. The note is secured by a second deed of trust on real property and is due August 17, 2017.................................... 365,000 ---------- Balance forward..................................................... $1,645,374 ----------
F-28 DUNSMUIR BOTTLING COMPANY NOTES TO THE FINANCIAL STATEMENTS (5) Continued Balance brought forward.............................................. $1,645,374 Note payable to Tri Counties Bank in monthly installments of $14,286 plus interest at prime plus 1.75%. The rate at September 30, 1997, was 10.25%. The note is secured by equipment and is due June 2, 2004....... 1,156,321 Note payable to Tri Counties Bank in monthly installments of $392 including interest at prime plus 1.50%. The rate at September 30, 1997, was 10.00%. The note is due April, 2001, and secured by a truck......... 14,032 Note payable to Transport International Pool, Inc. in monthly installments of $356 including interest at 10.72% per annum. The note is due November, 1998, and is secured by equipment........................................ 4,960 Note payable to an individual in monthly installments of $1,000 including interest at 7.50% per annum. The note is due in February, 1999, and is unsecured................................................................ 16,162 ---------- 2,836,849 Less current maturities.................................................. (553,504) ---------- Long-Term Debt - Net.................................................... $2,283,345 ==========
The majority of the above notes are secured by personal guarantees of the shareholders at September 30, 1997. Maturities of long-term debt for the next five years are as follows:
Long-Term Debt -------------- 1998.................................... $553,504 1999.................................... $341,920 2000.................................... $338,563 2001.................................... $287,364 2002.................................... $280,420
F-29 DUNSMUIR BOTTLING COMPANY NOTES TO THE FINANCIAL STATEMENTS (6) Capital Leases Obligations Leases that meet the criteria of capital leases have been capitalized. The related assets are included in property, plant, and equipment. Capitalized lease obligations are summarized as follows:
September 30, 1997 Capital lease payable to JLA Credit Corporation in monthly installments of $842 including interest at 11.94% per annum. The lease expires in February, 2001, and is secured by equipment................................................... $ 28,290 Capital lease payable to Nations Credit in monthly installments of $1,118 including interest of 18.00% per annum. The lease is secured by bottling equipment and expires September, 1998................................................ 15,802 Capital lease payable to AEL Leasing in monthly installments of $574 including interest at 9.28% per annum. The lease is secured by equipment and expires in April, 2000.......................................................... 15,776 Capital lease payable to AEL Leasing in monthly installments of $208 including interest at 10.75% per annum. The lease is secured by equipment and expires in September, 2000...................................................... 6,368 Capital lease payable to Bank of the West in monthly installments of $620 including interest at 10.31% per annum. The lease expires in February, 2001, and is secured by equipment................................................... 20,913 Capital lease payable to Bank of the West in monthly installments of $1,286 including interest at 10.31% per annum. The lease expires in January, 2001, and is secured by equipment.................................................... 44,286 ------- 131,435 Less current portion.......................................................................... (46,636) --------- Capital Lease Obligations - Net............................................................... $ 84,799 ========
F-30 DUNSMUIR BOTTLING COMPANY NOTES TO THE FINANCIAL STATEMENTS (6) Continued The following is a schedule of future minimum payments on capital leases: 1998.................................... $ 55,788 1999.................................... 46,839 2000.................................... 39,496 2001.................................... 13,120 -------- Total Minimum Lease Payments............ $ 155,243 Less amount of payments representing interest................................ $ 23,808 --------- Present Value of Net Minimum Lease Payments.......................... $ 131,435 ==========
Following is a summary of property held under capital leases: Bottling equipment...................... $ 200,183 Accumulated amortization................ (30,462) --------- Net................................... $ 169,721 ==========
Amortization of equipment under capital leases is included in depreciation expense for the year ended September 30, 1997. (7) Debt Consolidation On January 4, 1996, Dunsmuir consummated agreements with The Lidster Trust (a related party) and the Ray and Sharon Kassis Family Trust (a related party) to consolidate the debts owed by Dunsmuir to them. Under the agreements, Dunsmuir consolidated various debts and accrued payables due to the lenders through February, 1995, into three new promissory notes including unsecured loans, a mortgage note payable, unpaid equipment and building lease rentals, and accrued interest. The notes contain new terms for repayment beginning on July 1, 1995, (see Note 5). Dunsmuir elected to comply with the modified terms of these notes beginning in 1995. In consideration for extending and modifying the terms of the debts and for subordinating their collateral position to other debtors, the agreements required Dunsmuir to issue shares of its stock and additional promissory notes. The lenders received 92 shares of Dunsmuir's newly authorized Series B common stock. The shares represent approximately 11% of the outstanding stock ownership of Dunsmuir. No fair market value was established for the shares which were issued in January and July, 1997. In January, 1996, pursuant to the agreements, Dunsmuir issued two promissory notes for $130,000 each bearing interest at 10.00% per annum. Each note requires annual installments of $37,100 on July 1, 1998, 1999, and 2000 and monthly installments of $1,839 beginning July 1, 2000 (see Note 5). F-31 DUNSMUIR BOTTLING COMPANY NOTES TO THE FINANCIAL STATEMENTS (8) Income Tax Provision The income tax provision consisted of the following:
CURRENT EXPENSE State franchise tax.............................. $ 800 ---------- Total income tax provision....................... $ 800 ==========
(9) Commitments Dunsmuir leases an office and warehouse facility in Redding, California under an agreement that expires on November 30, 1999. The lease agreement calls for monthly rental payments of $6,394. In 1992, Dunsmuir entered into two agreements to lease bottling equipment from parents of two of the shareholders, related parties. Monthly lease rentals under the agreements total $2,150. The agreements expire in February and March, 1999. Dunsmuir has an option to purchase the equipment at fair market value at the end of the lease terms. Total rental expense under these leases was $25,800 for the twelve months ended September 30, 1997. Dunsmuir also leases office equipment under various operating lease agreements. Monthly lease rentals under those agreements total $3,302. Future minimum rental payments required under the above agreements for the next five years are as follows: 1998.................................... $ 127,527 1999.................................... $ 68,665 2000.................................... $ 33,109 2001.................................... $ 29,674 2002.................................... $ 25,800
(10) Sales to Major Customer During the year ended September 30, 1997, sales to one customer accounted for approximately 10% of net sales. Accounts receivable from this customer totaled $96,138 at September 30, 1997. (11) Common Stock Transactions Dunsmuir is authorized to issue 10,000 shares of Series A common stock and 10,000 shares of Series B common stock. The rights and privileges of the Series B stock are identical to those of Series A except that the Series B shares are non-voting. During the year ended September 30, 1997, Dunsmuir issued 92 shares of Series B common stock. At September 30, 1997, Dunsmuir had 750 shares of Series A common stock outstanding and 92 shares of Series B common stock outstanding. F-32 DUNSMUIR BOTTLING COMPANY NOTES TO THE FINANCIAL STATEMENTS (12) Subsequent Events On October 15, 1997, the shareholders of Dunsmuir entered into a merger agreement to sell all of Dunsmuir stock to Castle Rock Spring Water Company, Inc., a California corporation and wholly owned subsidiary of AquaPenn Spring Water Company, Inc., (AquaPenn) a Pennsylvania corporation. Pursuant to the plan of merger, Dunsmuir was merged with and into Castle Rock Spring Water Company as a tax-free reorganization under the provisions of Section 368 of the Internal Revenue Code. Dunsmuir's shareholders received a combination of cash and common stock of AquaPenn. Upon completion of the merger, Dunsmuir Bottling Company ceased to exist. As part of the merger, the outstanding balance on Dunsmuir's revolving line of credit with Tri Counties Bank was paid in full. F-33 AQUAPENN SPRING WATER COMPANY, INC. UNAUDITED PRO FORMA COMBINED FINANCIAL DATA The following unaudited pro forma combined Statement of Operations for the year ended September 30, 1997 presents unaudited pro forma operating results for the Company as if the Dunsmuir acquisition had occurred as of the beginning of the period presented. The following unaudited pro forma Combined Balance Sheet presents the unaudited pro forma financial condition of the Company as if the Dunsmuir acquisition had occurred as of September 30, 1997. The unaudited pro forma combined financial data are based on available information and on certain assumptions and adjustments described in the accompanying notes which the Company believes are reasonable. The unaudited pro forma combined financial data are provided for informational purposes only and do not purport to present the results of operations of the Company had the transaction assumed therein occurred on or as of the dates indicated, nor are they necessarily indicative of the results of operations which may be achieved in the future. The unaudited pro forma combined financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements of the Company and Dunsmuir Bottling Company, including the notes thereto, included elsewhere in this Prospectus. F-34 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES PRO FORMA COMBINED BALANCE SHEET SEPTEMBER 30, 1997 (Unaudited)
Pro Forma Pro Forma AquaPenn Dunsmuir Adjustments Combined ASSETS Current Assets: Cash and cash equivalents..................................... $ 687,035 $ 166,764 $(1,450,712)(A) $ 853,799 1,450,712 (B) Accounts receivable, net...................................... 3,604,524 404,514 -- 4,009,038 Inventories................................................... 1,533,617 426,995 -- 1,960,612 Prepaid expenses and other current assets..................... 425,279 109,247 -- 534,526 Deferred income taxes......................................... 243,400 -- -- 243,400 ----------- ------------- ----------- ----------- Total current assets....................................... 6,493,855 1,107,520 -- 7,601,375 Property, plant, and equipment, net............................... 20,030,909 3,092,296 23,123,205 Other............................................................. 55,421 6,156 3,516,429 (A) 3,848,320 270,314 (C) ----------- ------------- ----------- ----------- Total assets............................................... $26,580,185 $ 4,205,972 $ 3,786,743 $34,572,900 =========== =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of notes payable.............................. $ 298,966 $ 899,798 $1,450,712 (B) $ 2,649,476 Accounts payable and accrued liabilities...................... 3,098,571 1,208,344 -- 4,306,915 Total current liabilities.................................. 3,397,537 2,108,142 1,450,712 6,956,391 Notes payable..................................................... 4,518,501 2,368,144 -- 6,886,645 Deferred income taxes............................................. 599,800 -- -- 599,800 ------------ ------------ ---------- ----------- Total liabilities.......................................... 8,515,838 4,476,286 1,450,712 14,442,836 Stockholders' Equity: Series A, non-voting convertible preferred stock, $1 par value; 2,000,000 shares authorized, 1,713,750 shares issued.................................... 1,713,750 -- -- 1,713,750 Common stock, no par value, 100,000,000 shares authorized; 4,423,712 shares issued, and 4,609,876 shares issued, pro forma.......................................... -- -- -- -- Capital stock................................................. -- 100,000 (100,000)(C) -- Additional paid-in capital.................................... 12,196,269 -- 2,065,717 (A) 14,261,986 Retained earnings (deficit)................................... 4,242,456 (370,314) 370,314 (C) 4,242,456 Less 11,250 shares of preferred stock in treasury, at cost.......................................... (11,250) -- -- (11,250) Less 3,004 shares of common stock in treasury, at cost.......................................... (5,000) -- -- (5,000) Less stock subscriptions receivable........................... (71,878) -- -- (71,878) ----------- ------------ ---------- ----------- Total stockholders' equity................................. 18,064,347 (270,314) 2,336,031 20,130,064 ----------- ----------- ---------- ----------- Total liabilities and stockholders' equity................. $26,580,185 $ 4,205,972 $3,786,743 $34,572,900 =========== =========== ========== ===========
See accompanying notes to unaudited pro forma combined financial statements F-35 AQUAPENN SPRING WATER COMPANY, INC. PRO FORMA COMBINED STATEMENT OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1997
Pro Forma Pro Forma AquaPenn Dunsmuir Adjustments Combined Revenues: Product sales................................................. $ 37,526,028 $ 7,804,080 -- $ 45,330,108 Other sales................................................... 489,287 -- -- 489,287 ----------- ------------ ---------- ------------ Net revenues...................................................... 38,015,315 7,804,080 -- 45,819,395 ----------- ----------- ----------- ------------ Cost of goods sold................................................ 28,316,938 5,003,570 1,071,258 (D) 34,391,766 ----------- ----------- ---------- ------------ Gross profit...................................................... 9,698,377 2,800,510 (1,071,258) 11,427,629 ----------- ----------- ----------- ------------ Selling, general and administrative................................................ 5,126,583 3,108,569 112,837 (E) 7,276,731 (1,071,258)(D) Income (loss) from operations..................................... 4,571,794 (308,059) (112,837) 4,150,898 Other income (expense)............................................ Other income.................................................. 328,180 (1,381) -- 326,799 Interest expense, net......................................... (208,467) (200,793) 67,811 (F) (444,595) (103,146)(G) ----------- ----------- ----------- ------------ Income (loss) before income tax expense................................................... 4,691,507 (510,233) (148,172) 4,033,102 Income tax benefit (expense)...................................... (1,904,752) (800) 178,862 (H) (1,714,323) 12,367 (I) ----------- ----------- ----------- ------------ Net income (loss)................................................. $ 2,786,755 $ (511,033) $ 43,057 $ 2,318,779 ============ ============ =========== =========== Net income per common share.................................................. $ 0.47 $ 0.38 Weighted average number of shares outstanding......................................... 5,951,844 6,138,007
See accompanying notes to unaudited pro forma combined financial statements. F-36 AQUAPENN SPRING WATER COMPANY, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA (A) The purchase price of $3,516,429 paid through the issuance of AquaPenn's Common Stock and $1,450,712 in cash. The number of shares is subject to adjustment after completion of the Offering, currently estimated at 137,714 shares (valued at $15.00 per share). (B) Additional borrowings incurred to fund the cash portion of the purchase price of Dunsmuir. (C) The amount of the purchase price which exceeds the net book value of Dunsmuir and the elimination of Dunsmuir equity. (D) Reclassification of certain Dunsmuir operating expenses to conform with AquaPenn's presentation. (E) Amortization of the amount of the purchase price which exceeds the net book value. (F) Interest savings from refinancing of Dunsmuir debt with AquaPenn's lower interest rate debt. (G) Interest cost for additional estimated borrowing to fund cash portion of Dunsmuir purchase. (H) Income tax benefit of Dunsmuir as if its results had been consolidated with AquaPenn's income tax provision net of the effect of goodwill amortization. (I) Income tax benefit of pro forma adjustments. F-37 [Photographs to appear on inside back cover with the following captions:] 1. (Lauth With Pure American Bottles) AquaPenn President and founder Edward J. Lauth, III was named Entrepreneur of the Year for Western Pennsylvania in 1996 in a competition sponsored by Ernst & Young LLP and its co-sponsors Entrepreneur of the Year(R) Institute and the Center for Entrepreneur Leadership at the Ewing Marion Kauffman Foundation. 2. (Gerber Baby Water Bottle) AquaPenn was selected by the Gerber Products Company, in June 1996 to produce Gerber(R) Baby Water for the United States market. 3. (Steel Silos Against Sky) Four 60,000-gallon stainless steel silos store spring water at AquaPenn's Milesburg Facility until it is needed for bottling. 4. (Feidelberg With Pure American Vending Machine) Geoffrey F. Feidelberg, Chief Operating Officer and Chief Financial Officer, joined AquaPenn in 1989 following 13 years with the international accounting firm of Price Waterhouse. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- No person has been authorized to give any information or to make any representations in connection with this offering other than those contained in this Prospectus and, if given or made, such information and representations must not be relied upon as having been authorized by the Company or the Underwriters. Neither the delivery of this Prospectus nor any sale made hereunder shall under any circumstances create any implication that there has been no change in the affairs of the Company since the date hereof or that the information contained herein is correct as of any time subsequent to its date. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the registered securities to which it relates. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy such securities in any circumstances in which such offer or solicitation is unlawful. -------------------- TABLE OF CONTENTS Page Prospectus Summary........................................................... 3 Risk Factors................................................................. 7 Use Of Proceeds.............................................................. 13 Dividend Policy.............................................................. 13 Dilution..................................................................... 14 Capitalization............................................................... 16 Selected Consolidated Financial Data......................................... 17 Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................. 19 Business..................................................................... 27 Management................................................................... 35 Certain Transactions......................................................... 42 Principal Shareholders and Selling Shareholders............................................................... 43 Description of Capital Stock................................................. 46 Shares Eligible for Future Sale.............................................. 49 Underwriting................................................................. 50 Legal Matters................................................................ 51 Experts...................................................................... 51 Available Information........................................................ 51 Index to Financial Statements................................................F-1 -------------------------- Until _______________, 1997, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- [LOGO] 4,071,117 Shares AQUAPENN SPRING WATER COMPANY, INC. Common Stock -------------------------- PROSPECTUS -------------------------- PaineWebber Incorporated Lazard Freres & Co. LLC Parker/Hunter Incorporated -------------------------- , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II - INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The following table sets forth the estimated amounts of various expenses payable by the Company and the Selling Shareholders in connection with the registration of the Common Stock offered hereby, other than underwriting discounts and commissions:
Selling Company Shareholders Securities and Exchange Commission fee......................... $11,137 $11,532 NASD filing fee................................................ * * New York Stock Exchange listing fee............................ * * Printing and engraving expenses................................ * * Blue sky fees and expenses..................................... * * Legal fees and expenses........................................ * * Accounting fees and expenses................................... * * Transfer agent and registrar fees.............................. * * Miscellaneous.................................................. * * ------- ------- Total........................................................ $ * $ * ========= ========
- -------------------- * To be provided by amendment. Item 14. Indemnification of Directors and Officers. The Pennsylvania Business Corporation Law of 1988 authorizes the Company to indemnify its directors and officers in terms sufficiently broad to permit indemnification of such persons under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933. The Company's By-Laws provide as follows: "Section 7.01. Indemnification of Directors and Officers. The Corporation shall indemnify any director or officer or employee or agent of the Corporation or any of its subsidiaries who was or is an "authorized representative" of the Corporation (which shall mean, for the purposes of this Article, a director or officer of the Corporation, or a person serving at the request of the Corporation as a director, officer, partner, fiduciary or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) and who was or is a "party" (which shall include for purpose of this Article the giving of testimony or similar involvement) or is threatened to be made a party to any "proceeding" (which shall mean for purposes of this Article any threatened, pending or completed action, suit, appeal or other proceeding of any nature, whether civil, criminal, administrative or investigative, whether formal or informal, and whether brought by or in the right of the Corporation, its shareholders or otherwise) by reason of the fact that such person was or is an authorized representative of the Corporation to the fullest extent permitted by law including, without limitation, indemnification against expenses (which shall include for purposes of this Article, attorneys' fees and disbursements), damages, punitive damages, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by such person in II-1 connection with such proceeding unless the act or failure to act giving rise to the claim is finally determined by a court to have constituted willful misconduct or recklessness. If an authorized representative is not entitled to indemnification with respect to a portion of any liabilities to which such person may be subject, the Corporation shall nonetheless indemnify such person to the maximum extent for the remaining portion of the liabilities." Item 15. Recent Sales of Unregistered Securities. Within the past three years, the Company has issued and sold the securities described below in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, except as may otherwise be noted. In October 1994, the Company granted an option to purchase 270,360 shares at $1.90 per share to Matthew J. Suhey in consideration for the termination of an agreement under which Mr. Suhey served as a sales representative to the Company. In December 1994, the Company issued 901 shares of Common Stock to each of its nine directors for a total of 8,111 shares as compensation for serving on the Board of Directors in 1994. In December 1994, the Company granted an option to purchase 30,040 shares of Common Stock at $1.66 per share to Edward J. Lauth, III, to replace shares previously transferred by Mr. Lauth to an individual for services rendered to the Company. In April 1995, the Company issued a warrant to purchase 105,140 shares of Common Stock at $4.99 per share to Edward J. Lauth, III, in consideration for Mr. Lauth's guarantee of a portion of the Company's borrowings. Mr. Lauth subsequently assigned the rights to purchase 30,040 shares under the warrant to other individuals. To effect the assignment, the Company issued a warrant in the amount of 75,100 to Mr. Lauth and warrants in the amounts of 21,028 and 9,012 to the assignees. In April 1995, the Company issued a warrant to purchase 135,180 shares of Common Stock at an exercise price of $4.99 per share to AquaWorks, Inc. in connection with loans to the Company from AquaWorks, Inc. In June 1995, the Company issued 24,032 shares of Common Stock at $1.66 per share upon the exercise of options received by an individual as compensation for services rendered to the Company. In September 1995, the Company issued 2,704 shares of Common Stock to a former director in consideration for past services as a member of the Board of Directors. In September 1995, the Company issued 1,748,328 shares of Common Stock at $4.99 per share to purchasers in a private placement under Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D of the Securities Act of 1933 for an aggregate price of $8,730,000. In September 1995, the Company issued 901 shares of Common Stock to each of its nine directors for a total of 8,111 shares as compensation for serving on the Board of Directors in 1995. In October 1995, the Company issued 21,629 shares of Common Stock for an aggregate price of $108,000 to the Davis Trust UAD 2/5/77 in a private placement. In December 1995, the Company issued 10,814 shares of Common Stock to M-S Capital Fund for an aggregate price of $54,000 in connection with a private placement. II-2 In January 1996, the Company issued 21,629 shares of Common Stock to an individual for an aggregate price of $108,000 in connection with a private placement. In June 1996, the Company granted an option to purchase 36,048 shares of Common Stock at $4.99 per share to an individual as compensation for services rendered to the Company. In July 1996, the Company issued 901 shares of Common Stock to each of its twelve directors for a total of 10,814 shares as compensation for serving on the Board of Directors in 1996. In July 1996, the Company issued 10,814 shares to individuals for an aggregate price of $54,000 in connection with a private placement. In September 1996, the Company granted options to purchase 30,040 shares of Common Stock at $4.99 per share to Edward J. Lauth, III, Geoffrey F. Feidelberg and Matthew J. Suhey in consideration for services rendered to the Company. In October 1996, the Company issued 13,068 shares of Common Stock to the Lauth Rabbi Trust and 10,815 shares of Common Stock to the Feidelberg Rabbi Trust for an aggregate price of $119,250 in connection with deferred compensation plans. In May 1997, the Company issued 901 shares of Common Stock to each of its twelve directors for a total of 10,814 shares as compensation for serving on the Board of Directors in 1997. From March 1997 until August 1997, the Company issued 98,847 shares of Common Stock at a price of $4.16 per share and 6,409 shares of Common Stock at $5.41 per share to employees purchasing stock under the 1996 Employee Stock Purchase Plan. In September 1997, the Company granted options to purchase 30,040 shares of Common Stock at $7.07 per share to Edward J. Lauth, III, Geoffrey F. Feidelberg and Matthew J. Suhey in consideration for services rendered to the Company. In October 1997, the Company granted 186,163 shares of Common Stock to selling shareholders in connection with a merger of a wholly owned subsidiary of the Company with and into another company (the number of shares subject to adjustment after completion of the Offering, currently estimated at 137,715 shares). In October 1997, the Company issued 1,803 shares of Common Stock and options to purchase 12,016 shares of Common Stock at an exercise price of $8.32 per share in connection with a real estate transaction. In November 1997, the Company issued options to purchase 45,060 shares of Common Stock at an exercise price of $8.32 per share in connection with a real estate transaction. In November 1997, the Company issued 792 shares of Common Stock at a price of $5.41 per share to an employee purchasing stock under the 1996 Employee Stock Purchase Plan. In December 1997, the Company issued 497 shares of Common Stock at a price of $5.41 per share to an employee purchasing stock under the 1996 Employee Stock Purchase Plan. II-3 Item 16. Exhibits and Financial Statement Schedules. (a) Exhibit
Exhibit Number 1 Form of Underwriting Agreement* 3.1 Restated Articles of Incorporation of the Company** 3.2 Amended and Restated By-laws of the Company** 4.1 Form of Certificate evidencing Common Stock of the Company* 4.2 Registration and Holdback Agreement dated as of October 17, 1997 between the Company and Weis Markets, Inc., Dutch Valley Foods, Inc. and Aqua Works, Inc.** 5 Opinion of Ballard Spahr Andrews & Ingersoll regarding the legality of the securities being registered* 10.1 Termination Agreement dated October 3, 1994 between Matthew J. Suhey and the Company** 10.2 1996 Employee Stock Purchase Plan** 10.3 Form of Warrant issued to Edward J. Lauth, III, Nancy Jean Davis and James D. Hammond and Marian I. Hammond** 10.4 Employment Agreement dated September 16, 1994 between Edward J. Lauth, III, and the Company** 10.5 Employment Agreement dated September 16, 1994 between Geoffrey F. Feidelberg and the Company** 10.6 Change in Control Agreement dated September 16, 1994 between Edward J. Lauth, III, and the Company** 10.7 Change in Control Agreement dated September 16, 1994 between Geoffrey F. Feidelberg and the Company** 10.8 Amendment No. 1 to Employment Agreement dated October 27, 1997 between Edward J. Lauth, III and the Company** 10.9 Amendment No. 1 to Employment Agreement dated October 27, 1997 between Geoffrey F. Feidelberg and the Company** 10.10 Agreement of Lease dated July 19, 1996 between Johnson Controls, Inc. and the Company+ 10.11 Assignment of Lease dated February 28, 1997 between Johnson Controls, Inc. and Schmalbach-Lubeca Plastic Containers USA, Inc.**
II-4
10.12 Letter Agreement dated September 10, 1997 between Schmalbach-Lubeca Plastic Containers USA, Inc. and the Company+ 10.13 Agreement dated July 30, 1997 between Seven Springs Water Company and the Company++ 10.14 Water Agreement dated July 10, 1995 between Bellefonte Borough and the Company** 10.15 Amended and Restated Lease Agreement dated October 14, 1997 among Roy Bresler and Ida Bresler and the Company++ 10.16 Water Contract dated August 8, 1990 between City of Dunsmuir and Dunsmuir Bottling Company** 10.16(a) Memorandum of Understanding dated October 6, 1993 between City of Dunsmuir and Dunsmuir Bottling Company. 10.17 Agreement and Plan of Merger dated October 15, 1997 between the Company, Castle Rock Spring Water Company, Inc. and Dunsmuir Bottling Company and certain shareholders of Dunsmuir Bottling Company 10.18 1992 Stock Option Plan** 10.19 Letter Agreement dated December 29, 1995 between the Company and Matthew J. Suhey** 10.20 Letter Agreement dated November 18, 1996 between CoreStates Bank, N.A. and the Company 10.21 6,000,000 Master Demand Note from the Company to CoreStates Bank, N.A. 10.22 Letter dated February 12, 1997 from CoreStates Hamilton Bank to the Company 10.23 Credit Agreement and related Revolving Credit Note and Line of Credit Note dated August 29, 1997 between Mid-State Bank and Trust Company and the Company 21 Subsidiaries of the Company** 23.1 Consent of KPMG Peat Marwick LLP 23.2 Consent of Matson and Isom Accountancy Corporation 23.3 Consent of Ballard Spahr Andrews & Ingersoll (included in Exhibit 5)* 23.4 Consent of Beverage Marketing 23.5 Consent of Information Resources, Inc. 24 Power of Attorney (included in signature page)** 27 Financial Data Schedule**
- -------------------- * To be filed by amendment ** Previously filed + Previously filed, confidential treatment requested ++ Previously filed, confidential treatment requested. This version contains certain material that had been previously redacted. Item 17. Undertakings. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating II-5 to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned Registrant hereby undertakes to provide to the underwriter at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names required by the underwriter to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. II-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Amendment No. 2 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Milesburg, Pennsylvania, on December 15, 1997. AQUAPENN SPRING WATER COMPANY, INC. By: /s/ Geoffrey F. Feidelberg --------------------------------- Name: Geoffrey F. Feidelberg Title: Executive Vice President, Chief Financial Officer and Chief Operating Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated. * Chairman, President, Chief Executive Officer Edward J. Lauth, III and Director (principal executive officer) /s/ Geoffrey F. Feidelberg Executive Vice President, - ------------------------- Chief Financial Officer, Geoffrey F. Feidelberg Chief Operating Officer and Director (principal financial and accounting officer) * Director Walter Bruce * Director Nancy Jean Davis * Director Richard F. DeFluri * Director John H. Gutfreund * Director James D. Hammond * Director Robert E. Poole, Jr. * Director Norman S. Rich * Director Henry S. Shatkin * Director Matthew J. Suhey * Director Calvin J. Wagner, Jr. *By: /s/ Geoffrey F. Feidelberg December 15, 1997 --------------------------- Geoffrey F. Feidelberg pursuant to a power of attorney previously filed EXHIBIT INDEX
Exhibit Number Page 1 Form of Underwriting Agreement* 3.1 Restated Articles of Incorporation of the Company** 3.2 Amended and Restated By-laws of the Company** 4.1 Form of Certificate evidencing Common Stock of the Company* 4.2 Registration and Holdback Agreement dated as of October 17, 1997 by and between the Company and Weis Markets, Inc., Dutch Valley Foods, Inc. and Aqua Works, Inc.** 5 Opinion of Ballard Spahr Andrews & Ingersoll regarding the legality of the securities being registered* 10.1 Termination Agreement dated October 3, 1994 between Matthew J. Suhey and the Company** 10.2 1996 Employee Stock Purchase Plan** 10.3 Form of Warrant issued to Edward J. Lauth, III, Nancy Jean Davis and James D. Hammond and Marian I. Hammond** 10.4 Employment Agreement dated September 16, 1994 between Edward J. Lauth, III, and the Company** 10.5 Employment Agreement dated September 16, 1994 between Geoffrey F. Feidelberg and the Company** 10.6 Change in Control Agreement dated September 16, 1994 between Edward J. Lauth, III, and the Company** 10.7 Change in Control Agreement dated September 16, 1994 between Geoffrey F. Feidelberg and the Company** 10.8 Amendment No. 1 to Employment Agreement dated October 27, 1997 between Edward J. Lauth, III and the Company** 10.9 Amendment No. 1 to Employment Agreement dated October 27, 1997 between Geoffrey F. Feidelberg and the Company** 10.10 Agreement of Lease dated July 19, 1996 between Johnson Controls, Inc. and the Company+ 10.11 Assignment of Lease dated February 28, 1997 between Johnson Controls, Inc. and Schmalbach-Lubeca Plastic Containers USA, Inc.**
Exhibit Number Page 10.12 Letter Agreement dated September 10, 1997 between Schmalbach-Lubeca Plastic Containers USA, Inc. and the Company+ 10.13 Agreement dated July 30, 1997 between Seven Springs Water Company and the Company++ 10.14 Water Agreement dated July 10, 1995 between Bellefonte Borough and the Company** 10.15 Amended and Restated Lease Agreement dated October 14, 1997 among Roy Bresler and Ida Bresler and the Company++ 10.16 Water Contract dated August 8, 1990 between City of Dunsmuir and Dunsmuir Bottling Company** 10.16(a) Memorandum of Understanding dated October 6, 1993 between City of Dunsmuir and Dunsmuir Bottling Company 10.17 Agreement and Plan of Merger dated October 15, 1997 by and among the Company, Castle Rock Spring Water Company, Inc. and Dunsmuir Bottling Company and Certain Shareholders of Dunsmuir Bottling Company 10.18 1992 Stock Option Plan** 10.19 Letter Agreement dated December 29, 1995 between the Company and Matthew J. Suhey** 10.20 Letter Agreement dated November 18, 1996 between CoreStates Bank, N.A. and the Company 10.21 6,000,000 Master Demand Note from the Company to CoreStates Bank, N.A. 10.22 Letter dated February 12, 1997 from CoreStates Hamilton Bank to the Company 10.23 Credit Agreement and relating Revolving Credit Note and Line of Credit Note dated August 29, 1997 between Mid-State Bank and Trust Company and the Company 21 Subsidiaries of the Company** 23.1 Consent of KPMG Peat Marwick LLP 23.2 Consent of Matson and Isom Accountancy Corporation 23.3 Consent of Ballard Spahr Andrews & Ingersoll (included in Exhibit 5)* 23.4 Consent of Beverage Marketing 23.5 Consent of Information Resources, Inc. 24 Power of Attorney (included in signature page)** 27 Financial Data Schedule**
- -------------------- * To be filed by amendment ** Previously filed herewith + Previously filed confidential treatment requested ++ Previously filed, confidential treatment requested. This version contains certain material that had been previously redacted. EX-10.13 2 AGREEMENT THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EXHIBIT 10.13 AGREEMENT THIS AGREEMENT entered into this 30th day of July 1997, by and between AQUAPENN Spring Water Company, hereinafter referred to as "AQUAPENN", and Seven Springs Water Company, hereinafter referred to as "Seven Springs", WITNESSETH: WHEREAS, Seven Springs is the owner and holder of a Suwannee River Water Management District Water Use Permit No. 2-93-00093 (and any subsequent modifications and renewals of the above referenced "Permit"); and WHEREAS, AQUAPENN and Seven Springs are desirous of entering into this Agreement whereby Seven Springs agrees to deliver and sell spring water under the above referenced Permit to AQUAPENN. NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants contained herein, the sum of Ten Dollars, each to the other paid, and other good and valuable considerations, the parties agree as follows: 1. TERM: The term of this Agreement shall be Ninety-Nine (99) years from the effective date. 2. NATURE AND SCOPE OF REAL ESTATE SALE: Seven Springs shall sell to AQUAPENN the front 40 acres which are presently zoned and permitted for a spring water bottling plant, said property depicted in Exhibit "A", attached hereto and made a part hereof by reference. The standards, terms and conditions shall be in accordance with the Florida Bar-Florida Board of Realtors contract, where applicable. The sales price shall be $7,500 per acre for a total purchase price of $300,000.00 and shall be paid in cash, adjusted by prorations. The Seller, in addition, grants to AQUAPENN, its successors or assigns, such ingress, egress and public utility and such other easements as are necessary to carry out the terms and conditions of this Agreement. 3. OPTION TO PURCHASE ADDITIONAL REAL ESTATE: Seven Springs shall deliver to AQUAPENN in recordable form an option to purchase the adjacent Northerly 40 acres for $7,500 per acre, said purchase price to be paid in cash, adjusted by prorations. Said option to be delivered simultaneously with the closing of the initial forty acres and shall run for a period of ten years. This option shall be THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. assignable but shall be required to be for a use of the land which is a part of or associated with the spring water operation contained in the initial 40 acres. 4. AGREEMENT FOR CONSTRUCTION OF SPRING WATER BOTTLING PLANT: Within sixty (60) days of the closing of the purchase of the front 40 acres described in paragraph 2 AQUAPENN will begin construction of a spring water bottling plant having a construction cost of plant, improvements and equipment of not less than $5,000,000 and an operational capacity of bottling no less than 150,000 gallons a day. Said construction will be completed and the plant operational within twelve (12) months of the date of closing. In the event AQUAPENN does not begin such construction within sixty (60) days from the date of closing or fails to pursue said construction with reasonable diligence once begun, Seven Springs will have the option to repurchase said 40 acre site for $150,000 and all liability and obligations by and between the parties will terminate. In addition to the spring water bottling facility, AQUAPENN will, at its sole cost and expense, provide all pumps, pipes, valves, meters, etc. necessary for the spring water extraction and for any other monitoring required by Suwannee River Water Management or other agency and all operational and maintenance costs associated with said equipment. 5. MINIMUM GUARANTEE PAYMENTS: AQUAPENN agrees to purchase from Seven Springs at a cost of [_____________] per gallon, payable on a monthly basis in arrears, all water pumped, extracted, processed or sold by AQUAPENN. Said water shall be extracted from the spring sources currently covered by the Suwannee River Water Management water use permit more specifically described in paragraph 7 and be subject to the minimum and maximum amounts set forth below. In the second year AQUAPENN shall pay a minimum annual payment of [______], in the third year and all subsequent years a minimum annual payment of [______]. There will be no minimum payment in the first year. For this purpose the first year shall begin 12 months from the date of closing or when the plant first becomes operational, whichever first occurs. Beginning the fifth year and continuing each subsequent year, should any monthly payment by AQUAPENN be less than [_____] [______________________] Seven Springs Water Company will have the right to sell spring water to others on a nonexclusive basis for the ensuing sixty (60) day period and in addition will have the right to the use of and access to AQUAPENN's bulk spring water loading facilities on a 24-hour basis. AQUAPENN will construct and maintain its bulk water loading facility in such a manner that personnel from AQUAPENN or Seven Springs will not be required and the bulk spring water customer's driver can reasonably operate the facility by himself. So long as AQUAPENN's bulk loading facility functions in such a manner AQUAPENN will have no staffing responsibilities for users of the bulk loading facility. In no event shall Seven Springs sell 2 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. water in quantities which would prohibit AQUAPENN from meeting its monthly minimum. In exchange for said use, AQUAPENN will be paid the sum of [__________________________] per gallon for spring water not consumed by AQUAPENN and sold to others by Seven Springs. AQUAPENN will not be responsible for the [_____________] fee for spring water acquired by users of the bulk facility for which AQUAPENN receives the [___________________] fee. The parties acknowledge that AQUAPENN will have a domestic water well for purposes of rinsing bottles or other containers, cleaning floors, sprinkler systems and any other domestic use associated with the operation of the facility. AQUAPENN will be under no obligation to pay a fee to Seven Springs for this usage but AQUAPENN specifically agrees that only water purchased from Seven Springs will be used for bottling, distribution or sale. 6. PRICE PER GALLON ADJUSTMENT: The per gallon price will be adjusted by [_________________] of the change in the Consumer Price Index (CPI) or the equivalent every [______] years. The parties acknowledge that in the opinion of some the CPI as it is currently constituted overstates the true overall rate of inflation and it has been proposed that either the current method of calculating the CPI be changed or it be discontinued and replaced with a new index. Should either occur, the adjustments referred to will be made so as to conform as nearly as possible to [_________________] of the change in the CPI as currently constituted. An identical CPI increase shall be applicable to the [___________________] provided in Paragraphs 5 and 11. 7. REPRESENTATION AND WARRANTIES: Seven Springs hereby represents that it is the owner and holder of an unencumbered Suwannee River Water Management District Water Use Permit No. 2-93-00093, which permit allows extraction of 1,152,000.00 gallons per day annual average subject to a maximum daily amount of 1,728,000.00 gallons. Seven Springs shall make all necessary applications for renewals of the permit and shall diligently pursue said renewal applications. Seven Springs shall not jeopardize any existing or renewed permit. One of the measures used in determining the amount of gallons available under a water use permit is the number of acres covered by the application. To this end AQUAPENN agrees that any acreage it owns or controls in the area may be included in any application for a water use permit should the applicable regulations allow it and be subject to the minimum/maximum amount set forth below. 8. RIGHT OF FIRST REFUSAL: AQUAPENN will be granted a reasonable right of first refusal in the event Seven Springs elects to sell its rights under this Agreement, or the spring water rights or spring water permits. 3 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 9. COVENANT NOT TO ADVERSELY AFFECT SPRING WATER QUALITY: Seven Springs shall obtain a written agreement from Barbara Wray Suggs that any future development of her lands shall not adversely affect the quality of spring water to be purchased by AQUAPENN to the extent that it does not meet the quality guidelines established by the EPA or Food and Drug Administration or the International Bottled Water Association. This covenant shall not be interpreted to prohibit the construction of commercial or residential facilities provided same does not impact the spring water quality to the extent that it does not meet the before mentioned quality guidelines. 10. QUALITY OF SPRING WATER SUPPLY: All obligations of AQUAPENN shall be suspended during any period or periods that the spring water quality at the source does not meet guidelines for drinking spring water established by the EPA or Food and Drug Administration or International Bottled Water Association. AQUAPENN will have the right but not the obligation to attempt to cure quality defects and Seven Springs agrees to assist AQUAPENN in its efforts to cure such defects. In the event said period of non-compliance exceeds 15 successive days or 60 cumulative days in a given calendar year then AQUAPENN may elect to bring or acquire bulk spring water off-site to supply the plant so long as such condition exists and for 30 days thereafter or terminate this Agreement and have no further liability hereunder. 11. GOVERNMENTAL IMPOSITIONS: AQUAPENN will pay to the proper governmental authority all taxes, if any, due and owing upon any sums payable to Seven Springs, except income, estate or gift taxes. AQUAPENN will pay to or on behalf of Seven Springs to the proper governmental authority all taxes, if any, imposed upon water extracted and delivered to AQUAPENN or processed by AQUAPENN, such as a severance or consumptive use tax. In the event said taxes exceed the sum of [___________________] per gallon, then and in that event AQUAPENN may terminate this Agreement and shall have no further liability hereunder. 12. CONTINGENCIES: AQUAPENN will have six months from the date of this agreement to obtain approval of the Board of Directors of AQUAPENN for this transaction; to complete all testing and analysis to determine the necessary quality of the spring water; the suitability of the plant site; and to obtain all necessary permits for the construction of the spring water bottling plant and related approvals for removal of the spring water. On or before the six-month period, AQUAPENN shall satisfy or notify Seven Springs in writing that it has waived all contingencies, at which time the closing referenced in Paragraph 2 above shall occur. 13. DESTRUCTION OF SPRING WATER BOTTLING PLANT: In the event the bottling plant is destroyed in whole or in part by a casualty 4 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. to the extent that operation of the bottling plant must be suspended, then, and in that event, AQUAPENN may elect to terminate this Agreement or to repair or restore the plant and shall notify Seven Springs of its election within 30 days of the casualty. In the event AQUAPENN elects to rebuild the plant, the minimum payments will be suspended during the reconstruction period. If AQUAPENN elects to rebuild, it shall begin the rebuilding within 30 days of notifying Seven Springs of its election to do so and diligently pursue said construction. In the event AQUAPENN elects not to rebuild, it will grant a right of first refusal to Seven Springs and will agree not to build another bottling facility nor purchase water from any source within 100 miles of Ginnie Springs within the next seven (7) years. 14. ELECTION TO TERMINATE: Notwithstanding anything contained herein to the contrary, AQUAPENN may elect to terminate this Agreement at any time, for any reason, and shall be liable to Seven Springs for payment of a sum equal to 6 months minimum guarantee from the date of termination. 15. RIGHT OF ENTRY: Seven Springs hereby grants to AQUAPENN and its authorized agents the right to freely enter upon the lands herein described for the purpose of inspection and testing the lands and the spring water. 16. OTHER AGREEMENTS: This Agreement constitutes the entire agreement between the parties, and any changes, amendments or modifications hereof shall be null and void unless same are reduced to writing and signed by the parties hereto. 17. PERSONS BOUND: The covenants herein contained shall bind, and the benefits and advantages shall inure to, the respective heirs, executors, administrators, successors and assigns of the parties hereto. Whenever used, the singular number shall include the plural, the singular, and the use of any gender shall include all genders. Other party may assign their rights in the Agreement. 18. ATTORNEYS' FEES, COSTS: In the event of any litigation arising out of this Agreement, the prevailing party shall be entitled to recover from the non-prevailing party all expenses incurred by the prevailing party in connection with said litigation including a reasonable attorney's fee. 19. SURVIVAL OF COVENANTS: Any of the representations, warranties, covenants, and agreements of the parties, as well as any rights and benefits of the parties pertaining to a period of time following the closing of the transactions contemplated hereby, shall survive the closing and shall not be merged therein. 5 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 20. NOTICES: Any notice required or permitted to be delivered hereunder shall be deemed received when sent by United States mail, postage prepaid, certified mail, return receipt requested, or by express courier, addressed to Seller or Buyer, as the case may be, at the address set forth below: Seven Springs Water Company c/o Ginnie Springs, Inc. with copy to W. Langston Holland, Attorney at Law 7300 N.E. Ginnie Springs Road 125 28th Street N., High Springs, FL 32643 St. Petersburg, FL 33713 AQUAPENN Spring Water Company One AquaPenn Drive P.O. Box 938 Milesburg, PA 16853 With copy to: McQuaide, Blasko, Schwartz 811 University Drive State College, PA 16801 Attn: Thomas Schwartz, Esquire Daniel E. Bright, Esquire (814) 238-4926 21. DESCRIPTIVE HEADINGS: The descriptive headings used herein are for convenience only and are not intended to necessarily refer to the matter in sections which precede or follow them, and have no effect whatsoever in determining the rights or obligations of the parties. 22. STOCK OPTION: Simultaneously with the closing AQUAPENN shall grant to Seven Springs Water Company the option during a ten-year period commencing with the date of closing to purchase 75,000 shares of AQUAPENN's common stock as it currently exists at Five Dollars ($5.00) per share. 23. COVENANTS RUNNING WITH THE LAND: The deed to the property described in paragraphs 2 and 3 shall contain covenants running with the land as set forth in the attached Exhibit B. 24. RIGHT OF FIRST REFUSAL: Anything to the contrary in this agreement notwithstanding, should AQUAPENN terminate this agreement for any reason, Seven Springs will have the right of first refusal to purchase any real estate described in paragraphs 2 and 3 which was purchased by AQUAPENN together with the improvements and fixtures and easements attached to or used in relation to the transporting, processing or bottling of water. The terms of such right of first refusal are set forth in attached Exhibit "C". This right of first refusal will not apply unless and until this agreement is terminated and will expire five (5) years after the date of termination. 6 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 25. SURVIVAL OF OBLIGATIONS: Anything to the contrary in this agreement notwithstanding, should AQUAPENN terminate this agreement for any reason, all obligations incurred by AQUAPENN prior to such termination, including but not limited to water charges (including minimums), and governmental impositions shall survive such termination. 26. ALL WATER MUST BE PURCHASED FROM SEVEN SPRINGS: Anything to the contrary in this agreement notwithstanding, AQUAPENN agrees that any and all water purchased, processed or sold at its water bottling plant to be constructed pursuant to paragraph 4 or anywhere within 100 miles of the site of said water bottling plant shall be purchased from Seven Springs subject only to the exception set forth in paragraph 10 pertaining to acquisition of bulk spring water offsite to supply the plant so long as conditions exist as outlined therein. This provision shall survive the termination of this agreement. 27. INSPECTION MEASUREMENT AND CONFIRMATION: AQUAPENN will provide copies of its records certified as correct by a company officer covering all water sales and shipments no less than twice monthly, allow Seven Springs full access to its pumping facilities and the right to install measurement devices so that Seven Springs can independently measure the volume of water extracted. Seven Springs will also have reasonable access to AQUAPENN's water distribution facilities for the purpose of independently measuring the volume of water sold or distributed. 28. ADJUSTMENTS TO DESCRIPTIONS AND PURCHASE PRICE OF PROPERTIES COVERED IN PARAGRAPHS 2 AND 3: The conveyances covered by paragraphs 2 and 3 will exclude the east sixty (60) feet of the described property and should such exclusion cause the total area of either parcel conveyed to be less than forty (40) acres, AQUAPENN will receive a credit at closing equal to $7500 times the number of acres conveyed which is less than forty (40). For example, should the total area of one parcel conveyed equal 39-1/2 acres, the credit will equal $3750. Seven Springs Water Company AQUAPENN Spring Water Company By: /s/ Barbara Wray Suggs By: /s/ Edward J. Lauth, III ------------------------- ------------------------------ As President As President Attest: /s/ Mark D. Wray Attest: /s/ Dennis B. Nisewonger --------------------- -------------------------- As Secretary As Secretary 7 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EXHIBIT "A" THIS QUIT-CLAIM DEED, executed this 31st day of March, 1995, by MARK D. WRAY, RHONDA WRAY JOHNSON, and RISA WRAY KLEMANS c/o 101 N.E. Ginnie Springs Blvd., High Springs, FL 32643 First Party, to SEVEN SPRINGS WATER COMPANY whose address is 125 28th Street, North, St. Petersburg, FL 33713 and whose Tax I.D. Number is 59-3243964 (Wherever used herein the terms "First Party" and "Second Party" shall include singular and plural, heirs, legal representatives, and assigns of individuals, and the successors and assigns of corporations, wherever the context so admits or requires.) WITNESSETH, That the said First Party, for and in consideration of the sum of Ten and No/100 Dollars ($10.00), in hand paid by the said Second Party, the receipt (illegible text) hereby acknowledged, does hereby remise, release and quit claim to the said Second Party forever, all the right, title, interest, claim and demand which the said first party has in and to the following described lot, piece or parcel of land, situate, lying and being in the County of Gilchrist, State of Florida, to wit: Commence at the SW corner of the NW 1/4 of SW 1/4 of Section 2, TBE, R16E for a point of reference. Thence run along the South line of said NW 1/4 of SW 1/4, M88^43'51"E, 18.00 feet to the point of beginning. Thence run 801^06'24"E, 158.86 feet to the North R/W line of County Road No. C-340, said point being on a curve; thence run along said R/W line on curve being concave Northerly (having a central angle of 11^09'22" and a radius of 5679.58 feet) Northeasterly an arc distance of 1105.88 feet to point of tangency; thence continue along said R/W line N71^22'11"E, 239.93 feet to the East line of said NW 1/4 of SW 1/4; thence run along said East line, N01^00'16"W, 1155.86 feet; thence run SSE^43'54"W, 1310.47 feet; thence run 801^06'24"E, 1296.17 feet to the point of beginning, all lying and being in Gilchrist County, Florida. THIS IS NOT HOMESTEAD PROPERTY Tax Parcel # 02-08-16-0000-0003-0010 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. TO HAVE AND TO HOLD the same together with all and singular the appurtenances thereunto belonging or in anywise appertaining, and all the estate, right, title, interest, lien, equity and claim whatsoever of the said First Party, either in law or equity and claim whatsoever of the said First Party, either in law or equity, to the only proper use, benefit and behalf of the said Second Party forever. IN WITNESS WHEREOF, the said First Party has signed and sealed these presents the day and year first above written. Signed, sealed and delivered in our presence as witnesses: /s/ Lynn R. Holyfield /s/ Mark D. Wray L.S. - ----------------------------- --------------------- Lynn R. Holyfield MARK D. WRAY /s/ Stephen A. Rappenecker /s/ Rhonda W. Johnson L.S. - ----------------------------- --------------------- Stephen A. Rappenecker RHONDA WRAY JOHNSON /s/ Risa Wray Klemans L.S. --------------------- RISA WRAY KLEMANS THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EXHIBIT "B" COVENANT RUNNING WITH THE LAND: Grantee agrees and covenants that the land and any improvements to it shall be used solely for the bottling, processing and distribution of potable water and incidental uses associated with same. THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EXHIBIT "C" RIGHT OF FIRST REFUSAL: Before AQUAPENN may sell or transfer the property described in either paragraphs 2 or 3 of this agreement or the improvements on it, it must first offer it to Seven Springs by giving Seven Springs written notice of the price, terms and conditions upon which AQUAPENN proposes to sell or transfer the property. Seven Springs will have 30 days from receipt of such written notice within in which to notify AQUAPENN that Seven Springs agrees to purchase the property on the same terms and conditions stated in the notice and if it does the sale shall be closed 30 days after of such notification. If Seven Springs does not accept the offer in writing within 30 days after receipt of it AQUAPENN may sell the property to any other purchaser at and only at the same price, terms and conditions stated in the notice to Seven Springs provided that such sale shall be closed within 160 days after the date of the first notice to Seven Springs. If AQUAPENN has not completed the sale or transfer within said 160-day period, the right of AQUAPENN to sell or transfer the property free from the right of first refusal held by Seven Springs will terminate and the provisions of this agreement will apply to any subsequent proposed sale or transfer of the property by AQUAPENN. The term "transfer" includes but is not limited to a lease agreement. EX-10.15 3 AMENDED AND RESTATED LEASE AGREEMENT THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EXHIBIT 10.15 AMENDED AND RESTATED LEASE AGREEMENT THIS AMENDED AND RESTATED LEASE AGREEMENT is made and executed this 14 day of October, 1997 by and between ROY BRESLER and IDA BRESLER, husband and wife, of Franklin Township, Huntingdon County, Pennsylvania (referred to in the singular as "Lessor") -AND- AQUAPENN SPRING WATER COMPANY, INC., a Pennsylvania Business Corporation, with offices at One AquaPenn Drive, Milesburg, Pennsylvania (referred to as "Lessee"). BACKGROUND A. Lessor and Edward J. Lauth, III, entered into a Lease Agreement dated October 28, 1986 (the "Lease Agreement"), whereby Lessor leased to Lauth certain real estate in Franklin Township, Huntingdon County, Pennsylvania, as more fully described on Exhibit "A" attached hereto and made a part hereof by this reference (the "Leased Premises"). B. On May 27, 1988, Lessor and Edward J. Lauth, III entered into a Memorandum of Lease and Right of First Refusal which was recorded in the Office of the THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Recorder of Deeds of Huntingdon County, Pennsylvania on June 20, 1988 at record book 218, page 274. C. On December 22, 1988, Edward J. Lauth, III, assigned his rights under the Lease Agreement to Lessee by a certain Assignment and Assumption Agreement which was recorded in the Office of the Recorder of Deeds of Huntingdon County, Pennsylvania on March 10, 1989 at record book 232, page 497. D. Lessor and Lessee mutually desire to amend and restate the Lease Agreement in the manner set forth herein. NOW THEREFORE, the parties hereto, intending to be legally bound, agree as follows: 1. LEASED PREMISES. Lessor for and in consideration of the rents, covenants and conditions contained in this Lease, does hereby lease to Lessee, and Lessee leases and accepts from Lessor, the real property consisting of approximately seventy four (74) acres, upon which are located three (3) springs, which is more fully described in Exhibit "A" attached hereto and by this reference made a part hereof, together with the right of ingress, egress and regress (the "Leased Premises"). 2. LESSOR'S WARRANTY OF TITLE. Lessor hereby represents and warrants that Lessor is the owner in fee simple absolute of the Leased Premises, subject to 2 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. the covenants, conditions, restrictions and easements of record, if any, which matters of record will not unreasonably interfere with Lessee's use of the Leased Premises. Lessee is aware of water rights previously granted by predecessors in title to Lessor herein as set forth in Huntingdon County Deed Book Vol. 64, Page 685, attached hereto as Exhibit "B". 3. LESSOR'S WARRANTY OF QUIET ENJOYMENT. Lessor covenants and agrees that Lessee, and Lessee exclusively, in paying the rent and other charges herein provided for and observing and keeping the covenants, conditions and terms of this Lease on Lessee's part to be kept or performed, shall lawfully and quietly hold, occupy, use and enjoy the Leased Premises during the term of this Lease without hindrance or molestation by Lessor or any person claiming under Lessor, except as set forth herein relating to rights retained by Lessor. 4. LEASE TERM. The term of this Lease shall end on December 31, 2017, subject to the terms and conditions set forth herein. Provided, however, Lessee may, at any time during the term of this Lease Agreement, upon five (5) year's written notice to Lessor, terminate this Lease Agreement for any reason whatsoever, provided that any rental due for the last year shall be prorated to the date of termination of the Lease. The commencement of the lease term is expressly contingent upon Lessee obtaining from the Pennsylvania Department of Environmental Protection, or any other such regulatory agency, a permit for the bottling of water from the Leased Premises or such other premises as Lessee shall pipe, haul or otherwise transport the water to. If this Lease is terminated by Lessee prior to 3 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. December 31, 2017 by exercising its five (5) year termination rights herein, the Lease shall terminate in its entirety on the date of termination and Lessee shall have no rights under this Lease Agreement and in particular shall not retain any options set forth in paragraph 18 hereinafter, subsequent to the date of termination. 5. RENT. Lessee shall pay Lessor rent for the use and occupancy of the Leased Premises in the amounts set forth on Exhibit "C" attached hereto and made a part hereof by this reference. All rent shall be payable in advance on or before the first day of each year during the term of this Lease Agreement. [ ]. 6. REAL ESTATE TAXES. Lessee shall pay any real estate taxes levied and assessed against the Leased Premises during the term hereof. Such taxes shall be paid either to Lessor or to the appropriate taxing authorities, at the election of Lessee, prior to such time as such taxes shall become delinquent. 7. USE OF LEASED PREMISES. Lessor and Lessee hereby acknowledge it is their intention that the Leased Premises be used by Lessee as a source of potable water which will be collected by Lessee into a tank or tanks to be constructed by Lessee on the Leased Premises which tank or tanks will be in the vicinity of the springs used as a water source by the Lessor. Lessee agrees that unless otherwise permitted by Lessor he will construct not more than one (1) tank for each spring on the Leased Premises. The parties further intend that this Lease specifically includes the right to take, draw and otherwise use 4 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. for sale or other commercial purposes water which flows from any and all springs located on the Leased Premises. Neither party shall do any act that would disrupt, pollute, impair or otherwise harm the spring water, keeping in mind that the water is intended to be a source of potable drinking water for use by Lessors and sale by Lessee. Lessee at its sole discretion, may drill wells at the spring site, in order to manage the flow of water from the springs. 8. CONSTRUCTION AND OPERATION BY LESSEE. Lessee shall at its own expense construct such tank or tanks, spring covers and enclosures, water lines and non-chemical filtration or purification systems as shall be necessary or expedient for the operation of Lessee's contemplated business on the Leased Premises. Prior to commencing any construction (including any alteration or improvements), Lessee shall submit to Lessor for approval the plans for the projected construction project. Lessor shall have ten (10) days from the day the plans are submitted to them to approve or disapprove the projected construction project, provided that the approval for any projected construction project shall not be unreasonably withheld. All construction and operations done by Lessee, its agents or subcontractors shall be performed in a careful and prudent manner. All operations of Lessee shall be conducted in conformance with applicable federal, state or municipal regulations, and Lessee shall be solely responsible for the manner in which said operations are conducted. Lessee shall be responsible for obtaining any and all permits which are required for its use, operation or construction of the Leased Premises. Upon termination of this Lease any improvements built upon the Leased Property shall become the property of the Lessor unless Lessor gives Lessee notice to remove any such improvements, provided that any tank or 5 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. tanks and any purification or filtration equipment used by Lessee shall remain the property of Lessee and shall be removed at the termination of this Lease. In the event Lessee receives notice to remove improvements upon the termination of this Lease, Lessee shall remove those improvements at its sole expense within sixty (60) days of such notice. 9. LESSOR'S WATER SUPPLY. The parties acknowledge that drinking water for Lessor's use is being provided by the springs where Lessee will be conducting its operations. Lessee shall use its best efforts to ensure that the Lessor shall have a sufficient supply of water to Lessor's farmhouse for personal domestic purposes. In the event that Lessor's drinking water is materially disturbed through the fault of the operations of Lessee, upon written notice thereof given by Lessor to Lessee, Lessee shall halt construction or operations on the Leased Premises until such time as Lessor shall be provided a sufficient supply of water as aforesaid. 10. OTHER USE OF WATER AND LEASED PREMISES. In addition to the Lessor's supply of water referred to in Paragraph 9 hereof, Lessee agrees that it shall use its best efforts to ensure that the home formerly owned by Derwood Behrer shall have a sufficient supply of water as required by the agreement recorded in Huntingdon County Deed Book Vol. 64 at page 685. In addition, Lessor shall be entitled to provide a sufficient supply of water for personal domestic purposes to two (2) additional homes, which may be hereinafter constructed for members of Lessor's immediate family. The water right for those two (2) homes, which hereinafter may be constructed, shall be perpetual enabling them to use water from the spring serving the Lessor's home for domestic purposes in perpetuity. 6 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Lessee shall have the right to approve and supervise the installation of the water line from the spring to the two (2) new houses which Lessor is permitted to build during the term of this agreement. Lessor shall be entitled to use the cabin by the large spring so long as its use does not pollute the springs to any extent nor interfere with Lessee's operations. 11. FISHING AND HUNTING RIGHTS. Lessor retains the fishing rights to Spruce Creek on the Leased Premises and further retains the right to hunt on the Leased Premises. Lessee acknowledges that Lessor intends to continue to exercise fishing rights on behalf of members of his family and retains the right to lease his fishing rights to the Tyrone Fishing Club in accordance with previous practice over decades. The parties have hereto agreed that such fishing rights and lease of fishing rights shall continue subject to such reasonable restrictions as may be necessary so that the Lessor, Lessor's heirs and assigns and/or the members of the Tyrone Fishing Club do not interfere with the operations of the Lessee or pollute the water source on the Leased Premises. Any payments for such leases are the property of the Lessor. 12. RIGHT-OF-WAY. The parties acknowledge that a roadway or right-of-way currently exists over the Leased Premises. Lessor for Lessor, Lessor's heirs, and assigns and for Lessor's fishing and hunting licensees and/or lessee, retains an easement over the said roadway for purposes of ingress, egress and regress to exercise all rights consistent with and permitted under this agreement. Lessee shall be responsible for the cost of maintenance and improvement to said roadway, however no maintenance or improvements shall be 7 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. conducted on the said roadway without the prior consent of Lessor, which consent shall not be unreasonably withheld. 13. TREE OPERATIONS. Lessor shall have the right to conduct timbering operations on the Leased Property which shall be limited to the cutting of individual dead trees and individual live saw grade trees. Provided, however, Lessor shall not have the right to perform any clear cutting nor shall Lessor's timbering operations interfere in any way with Lessee's use of the Leased Premises. Lessor shall provide prior notice to Lessee of any proposed timbering on the Leased Premises, which notice shall describe the number and location of any trees to be cut. Lessor shall be permitted to grow Christmas trees on two fields that are currently planted and to harvest such trees at maturity provided that Lessor's Christmas Tree growing activity shall not make use of fertilizers, pesticides or other chemicals and shall not unreasonably interfere with Lessee's use and occupancy of the Leased Premises. 14. ASSIGNMENT OF LEASE. Lessee may, at any time or from time to time during the term hereof, encumber by mortgage or other security instrument, by way of collateral assignment or otherwise, Lessee's interest under this Lease and the leasehold estate hereby created for any purpose, without the consent of Lessor. Lessee shall have the right to assign its estate and interest in this lease to any entity to which the Lessee owns an interest, subject, however, to the understanding that the obligations of Lessee hereunder shall not be released as to Lessee individually unless Lessor herein, Lessor's heirs, administrators, successors or assigns agree to release Lessee from Lessee's obligations hereunder; otherwise, 8 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. this Lease shall not be assignable or the Leased Premises sublet without the express written consent of the Lessor. 15. LIABILITY INSURANCE. Lessee shall acquire and keep in effect during the term hereof a policy or policies of liability insurance in an amount of not less than [ ] which shall name Lessor as insured parties thereon. 16. INDEMNITY OF LESSEE. The Lessee shall indemnify and save harmless the Lessors from any and all loss and of and from any and all causes of action, claims, reckonings or accounts whatsoever relating to the work and business of the Lessee as set forth in this Lease, whether such claims be made by or caused by any governmental agency, Lessee, invitees of Lessee, Lessee's agents, servants or workmen, or any other person acting by or through Lessee. 17. INDEMNITY OF LESSOR. Lessor hereby agrees to indemnify and to hold Lessee harmless against any loss, cost, damage or expense, including reasonable attorney's fees, which Lessee should sustain by virtue of Lessor's violation of any term hereof. 18. RIGHT OF FIRST REFUSAL. Lessor hereby grants to Lessee a right of first refusal to purchase or lease the Leased Premises, (herein called "the property") to be exercised in the following manner. If the Lessor shall receive a bona fide offer from another person or entity to purchase or lease the property, or any portion thereof, the Lessor shall send to the Lessee a copy of the proposed contract, and shall further notify the Lessee of the 9 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. intention of the Lessor to accept the same. The Lessee shall then have the right within thirty (30) days to accept the terms of the said contract in its own name for the gross purchase price or rental and on the terms specified in the same contract, and shall enter into a contract with Lessor setting forth those same terms and conditions. If the Lessee shall not so elect within the same period, the Lessor may then sell or lease the property to the said buyer or lessee, provided that such sale or lease is on the same terms and conditions and for the price set forth in the same contract submitted to the Lessee. This right of first refusal shall continue during the term of this lease agreement and for ten (10) years thereafter. This right of first refusal shall not prohibit any transfer of the property between the current owners, nor shall it prohibit the gift or devise of the property by a current owner to spouse or issue, provided that the terms of this right of first refusal shall be binding upon said spouse or issue. 19. SURVEY: TITLE SEARCH. Lessee shall arrange for and obtain, at its sole cost and expense, a survey and title search of the Leased Premises for the purpose of establishing agreement on the correct boundary between the upper twelve (12) acre field on the Leased Premises and adjacent land owned by R. Wayne Harpster. 20. DEMOLITION OF COTTAGES. Lessee shall, at its sole cost and expense, demolish the two (2) cottages on the Leased Premises known as the "Sills" and "McAllister" cottages following January 1, 1998. Prior to the demolition, Lessor shall be permitted to remove any salvageable items from these cottages. 10 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 21. RESTORATION OF FOOTBRIDGES; PEIFFER COTTAGE. If appropriate regulatory approvals are received (including, without limitation, the Commonwealth of Pennsylvania, Department of Environmental Protection), Lessee shall, at its sole cost and expense, restore the two footbridges that cross the creek to the lower cabin by the big spring. In the event such footbridges are restored by Lessee, Lessee shall, during the lease term, keep the approaches to such footbridges clear of brush and weeds. Lessee shall also evaluate the feasibility and expense of restoring and providing electrical service to the Peiffer cottage. Lessee shall, within a reasonable time, inform Lessor of its findings on this subject. Provided, however, that notwithstanding any restoration of the Peiffer cottage, Lessee shall continue to be permitted to obtain water from the Peiffer spring. 22. REPAIR OF RESIDENTIAL WATER LINE. Lessee shall, within sixty (60) days of the full execution of this Lease, at its sole cost and expense, repair and/or replace the water line to Lessor's residence. 23. ISSUANCE OF STOCK; OPTION. Lessee shall, within thirty (30) days of the execution of this Lease Agreement, [ ] Further, within thirty (30) days of the execution of this Lease Agreement, Lessee shall issue to Lessor an option to purchase up to twenty thousand and No/100 (20,000) shares of its Common Stock at a price of Five and No/100 ($5.00) Dollars per share. Such option shall be exercisable immediately and shall continue for a term of ten (10) years from the date of its issuance. 11 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 24. PARTIAL INVALIDITY. If any term, covenant, condition or provision of this Lease is held by a court of competent jurisdiction to be invalid, void, or unenforceable, the remainder of the provisions shall remain in full force and effect and shall in no way be affected, impaired, or invalidated. 25. AGENCY. Nothing contained in this Lease shall be deemed or construed by the parties or by any third person to create the relationship of principal and agent or of partnership or of joint venture or of any association between Lessor and Lessee, and neither the method of computation of rent nor any other provisions contained in this Lease nor any acts of the parties shall be deemed to create any relationship between Lessor and Lessee, other than the relationship of Lessor and Lessee. 26. NUMBER AND GENDER. In this Lease the neuter gender includes the feminine and masculine, and the singular number includes the plural, and the word "Person" includes corporation, partnership, firm, or association wherever the context so requires. 27. CAPTIONS. Captions of the articles, sections, and paragraphs of this Lease are for convenience and reference only, and the words contained therein shall in no way be held to explain, modify, amplify, or aid in the interpretation, construction, or meaning of the provisions of this Lease. 28. RECORDING. A Memorandum of this Lease and Right of First Refusal contained therein may be recorded at the option and expense of Lessee. Lessor shall execute and acknowledge any such Memorandum upon request of Lessee. 12 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 29. NOTICES. All notices to be sent shall be addressed as follows: If to Lessor: Mr. and Mrs. Roy Bresler HC-01 Box 16 Pennsylvania Furnace, PA 16865 with a copy to: John R. Gates, Esquire Henry, Corcelius, Gates, Gill & Ody, P.C. 200 Penn Street, P.O. Box 383 Huntingdon, PA 16652 if to Lessee: AquaPenn Spring Water Company, Inc. One AquaPenn Drive P.O. Box 938 Milesburg, PA 16853 with a copy to: Daniel E. Bright, Esquire McQuaide Blasko 811 University Drive State College, PA 16801-6699 30. BINDING EFFECT. The agreement shall be binding upon and inure to the benefit of the heirs, personal representatives, successors and assigns of the parties hereto. 31. ENTIRE AGREEMENT. This Lease contains the entire agreement of the parties with respect to the matters covered by or related to this Lease, and no other agreement, statement, or promise made by any party, or to any employee, officer, or agent of any party, which is not contained in this Lease shall be binding or valid. IN WITNESS WHEREOF, the undersigned Lessor and Lessee hereto execute this Agreement as of the day and year first above written. 13 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. WITNESSES: LESSOR: (Illegible signature) /s/ Roy Bresler - ----------------------------- ----------------------------------- Roy Bresler (Illegible signature) /s/ Ida Bresler - ----------------------------- ----------------------------------- Ida Bresler ATTEST: LESSEE: AQUAPENN SPRING WATER COMPANY, INC. /s/ Scott E. Bresler By: /s/ Edward J. Lauth, III - ----------------------------- ----------------------------------- Edward J. Lauth By: President ----------------------------------- 14 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. COMMONWEALTH OF PENNSYLVANIA : : SS. COUNTY OF CENTRE : ------ On this 14 day of October, 1997, before me a notary public, the undersigned officer, personally appeared ROY BRESLER, known to me (or satisfactorily proven) to be the person whose name is subscribed to the within instrument, and acknowledged that he executed the same for the purpose therein contained. IN WITNESS THEREOF, I have hereunto set my hand and notarial seal. My commission expires: /s/ Michael L. Schmoke (SEAL) ----------------------------------- Notary Public COMMONWEALTH OF PENNSYLVANIA : : SS. COUNTY OF CENTRE : ------ On this 14 day of October, 1997, before me a notary public, the undersigned officer, personally appeared IDA BRESLER, known to me (or satisfactorily proven) to be the person whose name is subscribed to the within instrument, and acknowledged that she executed the same for the purpose therein contained. IN WITNESS THEREOF, I have hereunto set my hand and notarial seal. My commission expires: /s/ Michael L. Schmoke (SEAL) ----------------------------------- Notary Public 15 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. COMMONWEALTH OF PENNSYLVANIA : : SS. COUNTY OF CENTRE : ------ On this 14 day of October, 1997, before me a notary public, the undersigned officer, personally appeared EDWARD J. LAUTH III, the PRESIDENT of AQUAPENN SPRING WATER COMPANY, INC., known to me (or satisfactorily proven) to be the person whose name is subscribed to the within instrument, and acknowledged that he executed the same for the purpose therein contained. IN WITNESS THEREOF, I have hereunto set my hand and notarial seal. My commission expires: /s/ Michael L. Schmoke (SEAL) ----------------------------------- Notary Public 16 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EXHIBIT "A" (See Attached) 17 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 685 THIS DEED, Made (illegible text) Between George I. Rodgers (illegible text) the City of Williamsport, County of Lycoming and Commonwealth of Pennsylvania Grantor and Sheldon D. Behrer and Janet A. Behrer, his wife, both of Franklin Township, Huntingdon County, Pennsylvania, as tenants by the entireties, Grantees Witnesseth, that in consideration of - ---------------Twenty-six Hundred ($2600.00)------------Dollars in hand paid, the receipt whereof is hereby acknowledged, the said grantor does hereby grant and convey to the said grantees, survivor of them, their heirs and assigns All that certain parcel or lot of ground with buildings erected thereon situate in the Village of Graysville, Franklin Township, Huntingdon County, Pennsylvania, described as follows: Beginning at a point at a walled spring marked by an iron axle at lands of E. K. Woomer near the left bank of the Spruce Creek, thence by lands of said E. K. Woomer North one (1) degree fifty-six (56) minutes West three hundred-four and ninety-four hundredths (304.94) feet to a point marked by an iron axle in an abandoned road at lands of John F. Johnston, thence by said lands and abandoned road North seventy-nine (79) degrees East two hundred twenty-three (223) feet to a point marked by an iron pin at the edge of a private lane; thence along the boundary of the private lane and crossing Fowler's Run South six (6) degrees thirty-one (31) minutes East three hundred thirty-three and seventy-nine hundredths (333.79) feet to a point in the center line of State Highway Route No. 45 marked by a nail; thence South eleven (11) degrees thirty-four and one-half (34 1/2) minutes East one hundred seventy-nine and eighty-two hundredths (179.82) feet along Lands of Chester W. Behrer to a point marked by a stake near a white pine witness at lands of Edna P. Ellenberger; thence by lands of Ellenberger North sixty (60) degrees twenty-four and one-half (24 1/2) minutes West and crossing State Highway Route No. 45 a distance of three hundred twenty-four and ninety-five hundredths (324.95) feet to a point marked by an iron 18 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. axle in the place of beginning. Containing two and twenty-six hundredths (2.26) acres according to the survey by Heine and Simpson dated April 21, 1965, a copy of which is attached hereto. Being the same parcel of ground title to which vested in the Grantor by deed of George I. Rodgers and Margeurite J. Rodgers dated January 21, 1964 and recorded in Deed Book No. 61 page 664 and by deed of Edmund K. Woomer to George I. Rodgers and Margeurite J. Rodgers, his wife, dated May 29, 1961 and recorded in Deed Book 49, page 27. And the said Rodgers were divorced March 18, 1963 by Decree of the Common Pleas Court of Lycoming County to No. 304-November Term, 1962. Also a certain right to use water from a spring located on lands of E. K. Woomer and to enter upon the grounds of E. K. Woomer for the purposes of maintaining water lines to use the said water for domestic use of the house which water right is created in the deed last above recited, which deed was given to correct the mistake of failing to include the rights to the spring described above made by E. K. Woomer to George Rodgers, et ux, dated September 11, 1956 and recorded in Deed Book 34 page 136 in this that by mistake the parties to the said deed did not include the rights to agreement for the use of water from the said spring. 19 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EXHIBIT "B" (See Attached) 20 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. [LETTERHEAD OF SWEETLAND ENGINEERING & ASSOCIATES, INC.] 900 West College Avenue State College, Pennsylvania 16801 (814) 237-6518 December 4, 1997 JOB NO. 01273 ENGINEER'S DESCRIPTION OF LAND TO BE LEASED FROM ROY M. BRESSLER TO EDWARD LAUTH ALL THAT CERTAIN PARCEL OF LAND situated in Franklin Township, Huntingdon County, PA, being shown as Total Lease Area on plans entitled "Survey of Lands of Roy M. Bressler and a Portion of Lands of Jeffery B. Herr for Edward Lauth Franklin Township Huntingdon County, PA, prepared by Sweetland Engineering & Associates, Inc., drawing numbers D-1019, D-1020 and D-1021, dated June 12, 1987 and is not intended to be recorded at the Huntingdon County Courthouse, bounded and described as follows: BEGINNING at an existing 36" Pine at the common southeastern corner of Land N/F of Donald R. & Lorenali M. Greenland and a northeastern corner of Land N/F of Roy M. & Ida W. Bressler: Thence along said Land N/F of Donald R. & Lorenah M. Greenland N 24" 09" 57" W. 1243.95 feet to an existing 3/4" re-bar at the common northeastern corner of said Land N/F of Donald R. & Lorenah M. Greenland and the northwestern corner of the herein described Lease Area and along Land N/F of Robert W. Harpster Tract No. 2 the following six (6) courses and distances: (1) N 81" 44" 08" E, 357.14 feet to a 3/4" re-bar set; Thence (2) N 61" 20" 17" E, 307.70 feet to an existing 3/4" re-bar; Thence (3) S 89" 56' 59" E. 600.38 feet to an existing 3/4 re-bar; Thence (4) N 80' 13' 09" E, 504.59 feet to an existing 3/4 re-bar; Thence (5), passing through an existing 3/4" re-bar, 88' 54' 39" E, 207.82 feet to a 3/4" re-bar set; Thence (6) N 81' 44" 08" E, 1166.64 feet to a 3/4" re-bar set at the common northwestern corner of land N/F of R. Wayne Harpster and at the northeastern corner of the herein described Lease area and along said Land N/F of Robert W. Harpster Tract No. 2; Thence along said Land N/F of R. Wayne Harpster S 48" 51' 48" E, 446.06 feet to a 3/4" re-bar set along Land N/F of Robert W. Harpster Tract no. 5 Second Parcel; Thence along said Land N/F of Robert W. Harpster Tract No. 5 Second Parcel S 22" 22" 39" E, 238.17 feet to a 3/4" re-bar set al, the southwestern corner of said Land N/F of Robert W. Harpster Tract No. 5 Second Parcel and a northwestern corner of Land N/F of Robert W. Harpster, Tract No. 5 First Parcel; Thence along said land N/F of Robert W. Harpster Tract No. 5 First Parcel the following two (2) courses and distances: (1) S 21' 11" 41" E, 491.46 feet to an existing 3/4" re-bar at the 21 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. southeastern corner of the herein described Lease Area; Thence (2) S 62(degree) 03' 49" W. 574.79 feet to a 3/4" re-bar set along Land N/F of Robert W. Harpster Parcel No. 2 the following fourteen (14) courses and distances: (1) N 26(degree) 54' 41" W. 237.34 feet to an existing stone at a fence corner; Thence (2) S 88(degree) 12' 57" W, 37.16 feet to a 3/4" re-bar set; Thence (3) S 84(degree) 24' 31" W, 273.90 feet to a 3/4" re-bar set; Thence (4) N 73(degree) 50' 29" W, 364.65 feet to a 3/4" re-bar set; Thence (5) N 68(degree) 35' 29" W. 178.20 feet to a 3/4" re-bar set; Thence (6) N 59(degree) 26' 07" W. 143.55 feet to a 3/4" re-bar set; Thence (7) N 69(degree) 09' 20" W. 211.20 feet to a 3/4" re-bar set; Thence (8) N 82(degree) 23' 14" W. 271.46 feet to a 3/4" re-bar set; in stones; Thence (9) N 84(degree) 14' 21" W. 66.42 feet to a 3/4" re-bar set; Thence (10) S 88(degree) 42' 17" W. 313.50 feet to a 3/4" re-bar set; Thence (11) S 0(degree) 47' 43" E. 36.30 feet to a 3/4" re-bar set; Thence (12) S 80(degree) 57' 17" W. 148.85 feet to a 3/4" re-bar set; Thence (13) S 11(degree) 32' 43" E. 204.60 feet to an existing 3" axle; Thence (14) along Parcel No. 3 S 15(degree) 36' 34" E. 74.15 feet to an existing 1" iron pin along Land N/F of R. Wayne Harpster - Parcel No. 1 S 66(degree) 36' 21" W. 322.61 feet to an existing 1" iron pin at the northwestern corner of said Land N/F of R. Wayne Harpster - Parcel No. ( ) and along Land N/F of John F. Johnston the following eight (8) courses and distances: (1) N 14(degree) 35' 11" W. 188.56 feet to an existing 1" iron pin; Thence (2) S 80(degree) 53' 39" W. 215.54 feet to an existing 1" iron pin; Thence (3) S 36(degree) 55' 31" E. 207.70 feet to an existing 1" iron pin; Thence (4) S 5(degree) 29' 04" E, 260.29 feet to an existing 1" iron pin; Thence (5) N 76(degree) 16' 37" E. 33.00 feet to a 3/4" re-bar set; Thence (6) S 18(degree) 09' 06" E. 234.30 feet an existing 1" iron pin; Thence (7) S 53(degree) 31' 03" W. 57.67 feet to an existing 1" iron pin; Thence (8) S 9(degree) 55' 05" E. 81.18 feet to a 3/4" re-bar set at northeastern corner of Land N/F of Roy M. & Ida W. Bressler; Thence crossing through said Land N/F of Roy M. & Ida W. Bressler the following two (2) courses and distances: (1) S 68(degree) 35' 28" W. 299.93 feet to a 3/4" re-bar set; Thence (2) N 13(degree) 19" 37" W. 307.34 feet to the point of beginning. BEING A PORTION OF Deed Book 147, Page 114 - N/F of Roy M. & Ida W. Bressler. UNDER AND SUBJECT, NEVERTHELESS, to all existing easements, conditions, restrictions and covenants of record. 22 THIS EXHIBIT HAS BEEN REDACTED AND IS THE SUBJECT OF A CONFIDENTIAL TREATMENT REQUEST. REDACTED MATERIAL IS BRACKETED AND HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EXHIBIT "C" Spring Site Lease Payment Schedule Lease Calendar Amount Per Year Contract -------- ---------- 1998 [ 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 ] 23 EX-10.16A 4 MEMORANDUM OF UNDERSTANDING EXHIBIT 10.16(a) MEMORANDUM OF UNDERSTANDING This memorandum summarizes the agreement reached between Dunsmuir Bottling Company and the Council negotiating committee and ratified by the full council at the regular Council meeting of September 20, 1993. This memorandum is to be formalized in a legally binding agreement which will be prepared by the City of Dunsmuir Attorney and subject to review by the Dunsmuir Bottling Company legal counsel. 1. The total amount of the loan will be $201,887.88 already disbursed. 2. The repayment term shall remain seven years, but the deferral period shall be extended to thirty-one months. 3. During the deferral the loan shall accrue interest at 8% per year for the first 12 months, thereafter the loan shall accrue interest at 8% per annum compounded monthly. 4. Beginning September 1, 1993 the company will begin making payment of the monthly interest accrued on the loan. The first payment is to be made upon acceptance of this memorandum. 5. Beginning April 1, 1994, the company will begin amortizing the loan over 84 monthly payments (7 years). 6. Beginning January 1, 1993 the charges for water under the Water Contract shall be $.005 per gallon, billed at $3.7418 per one hundred cubic feet of water. 7. The water charges for January 1993 through August 1993 billings shall be deferred until receipt of SP settlement. 8. The City agrees to subordinate its $201,887.88 loan to a $30,000 loan between the Company and Country National Bank. 9. The Company agrees to assign to the City the proceeds from its Settlement in the Sacramento River Spill cases, and execute a legally binding assignment: Said proceeds to be in an amount sufficient to pay all principal and interest that should have been paid from September 1, 1992 under the original terms plus the first years deferred interest and all the deferred water charges. In the event proceeds are not sufficient to pay the full amount set forth above, they shall be applied first to interest owing from Sept 1, 1992, then to deferred water charges, then to principal payments from Sept 1, 1993, then to the first year's deferred interest. Accepted this date: Oct. 6, 1993 ------------ CITY OF DUNSMUIR DUNSMUIR BOTTLING COMPANY By: /s/ Alan N. Harvey By: /s/ Paul A. Kassis - ----------------------------- ----------------------------------- Alan N. Harvey, City Manager Paul A. Kassis, President /s/ Scott E. Lidster, Secretary ----------------------------------- EX-10.17 5 AGREEMENT AND PLAN OF MERGER EXHIBIT 10.17 - ------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Dated as of October 15, 1997 Effective as of 9:00 a.m. EST on October 15, 1997 by and among AquaPenn Spring Water Company, Inc. Castle Rock Spring Water Company, Inc. Dunsmuir Bottling Company doing business as Castle Rock Spring Water Company and Certain Shareholders of Dunsmuir Bottling Company - ------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE ---- ARTICLE I THE MERGER SECTION 1.1 The Merger................................................... 1 SECTION 1.2 Effective Time of the Merger................................. 1 ARTICLE II THE SURVIVING AND PARENT CORPORATIONS SECTION 2.1 Certificate of Incorporation................................. 2 SECTION 2.2 Bylaws....................................................... 2 SECTION 2.3 Directors and Officers....................................... 2 ARTICLE III MERGER CONSIDERATION SECTION 3.1 Consideration................................................ 2 SECTION 3.2 Conversion of Subsidiary Shares.............................. 5 SECTION 3.3 Exchange of Certificates..................................... 5 SECTION 3.4 Closing...................................................... 6 SECTION 3.5 Closing of the Company's Transfer Books...................... 6 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND SUBSIDIARY SECTION 4.1 Organization and Qualification............................... 6 SECTION 4.2 Capitalization .............................................. 7 SECTION 4.3 Authority; Non-Contravention; Approvals...................... 7 SECTION 4.4 Litigation................................................... 8 SECTION 4.5 No Violation of Law.......................................... 8 SECTION 4.6 Financial Statements......................................... 9 SECTION 4.7 Brokers...................................................... 9 SECTION 4.8 Employment Agreements........................................ 9 ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE COMPANY SHAREHOLDERS SECTION 5.1 Organization and Qualification............................... 9 SECTION 5.2 Capitalization .............................................. 10 SECTION 5.3 [Intentionally left blank]................................... 10 SECTION 5.4 Subsidiaries................................................. 10 SECTION 5.5 Authority; Non-Contravention; Approvals...................... 11 SECTION 5.6 Financial Statements......................................... 12 SECTION 5.7 Books of Account............................................. 12 SECTION 5.8 Absence of Certain Changes of Events......................... 12 SECTION 5.9 Absence of Undisclosed Liabilities........................... 12 SECTION 5.10 Taxes........................................................ 13 SECTION 5.11 Title to Assets.............................................. 13 SECTION 5.12 Assets and Properties Complete............................... 14 SECTION 5.13 Access to Spring............................................. 14 SECTION 5.14 Water Quality................................................ 14 SECTION 5.15 Contracts.................................................... 15 SECTION 5.16 Compliance with Agreements................................... 15 SECTION 5.17 No Violation of Law.......................................... 15 SECTION 5.18 Litigation................................................... 16 SECTION 5.19 Employee Benefit Plans; ERISA................................ 16 SECTION 5.20 Labor Matters .............................................. 18 SECTION 5.21 Environmental Matters........................................ 19 SECTION 5.22 Trademarks and Intellectual Property Compliance.............. 20 SECTION 5.23 Insurance.................................................... 20 SECTION 5.24 Year 2000 Compliance......................................... 21 SECTION 5.25 Bank Accounts................................................ 21 SECTION 5.26 Business Relations........................................... 21 SECTION 5.27 Potential Conflicts of Interest.............................. 22 SECTION 5.28 Disclosure................................................... 22 SECTION 5.29 Brokers...................................................... 22 SECTION 5.30 Resignation of Directors and Officers........................ 22 ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE COMPANY SHAREHOLDERS SECTION 6.1 Authority; Non-Contravention; Approvals...................... 23 SECTION 6.2 Approval of Merger........................................... 23 SECTION 6.3 Title to Shares ............................................. 23 SECTION 6.4 Tax-Free Reorganization...................................... 23 SECTION 6.5 Investment; No registration.................................. 24 ARTICLE VII ADDITIONAL AGREEMENTS SECTION 7.1 Expenses and Fees............................................ 24 SECTION 7.2 Confidentiality ............................................. 24 SECTION 7.3 Parent Stock ............................................. 24 SECTION 7.4 Payment of Obligations....................................... 25 SECTION 7.5 No Checks, Wires or Withdrawals.............................. 25 ARTICLE VIII CONDITIONS SECTION 8.1 Condition to Parent's Obligation to Effect the Merger........ 25 SECTION 8.2 Conditions to the Company's Obligation to Effect the Merger.. 25 ARTICLE IX POST-CLOSING OBLIGATIONS SECTION 9.1 Agreement to Cooperate....................................... 26 SECTION 9.2 Public Statements............................................ 26 SECTION 9.3 Transition ............................................. 26 SECTION 9.4 Directors and Officers of Surviving Corporation.............. 26 SECTION 9.5 Lock-up Agreements........................................... 26 SECTION 9.6 Completion of Minutes........................................ 26 SECTION 9.7 Execution of Further Documents............................... 27 ARTICLE X GENERAL PROVISIONS SECTION 10.1 Survival of Representations and Warranties................... 27 SECTION 10.2 Validity. .............................................. 27 SECTION 10.3 Indemnification.............................................. 27 SECTION 10.4 Notices .............................................. 28 SECTION 10.5 Interpretation .............................................. 29 SECTION 10.6 Miscellaneous .............................................. 29 SECTION 10.7 Counterparts .............................................. 29 SECTION 10.8 Parties In Interest.......................................... 29 SECTION 10.9 Exhibits and Schedules....................................... 29 EXHIBITS Exhibit A Shareholders of Castle Rock Exhibit 4.8 Form of Employment Agreement Exhibit 8.1 Form of Opinion of Company's Counsel Exhibit 8.2 Form of Opinion of Parent's Counsel SCHEDULES Schedule 4.2 Capitalization (Parent) Schedule 4.4 Litigation (Parent, Sub) Schedule 5.2 Capitalization (Castle Rock) Schedule 5.4 Subsidiaries (Castle Rock) Schedule 5.5(b) Debt, etc. affected by Merger (Castle Rock) Schedule 5.8 Absence of Certain Changes of Events (Castle Rock) Schedule 5.9 Absence of Undisclosed Liabilities (Castle Rock) Schedule 5.11 Title to Assets (Castle Rock) Schedule 5.12 Assets and Properties Complete (Castle Rock) Schedule 5.14 Water Quality (Castle Rock) Schedule 5.15 Contracts (Castle Rock) Schedule 5.17 No Violation of Law (Castle Rock) Schedule 5.18 Litigation (Castle Rock) Schedule 5.19 Employee Benefits Plans; ERISA (Castle Rock) Schedule 5.20 Labor Matters (Castle Rock) Schedule 5.22 Trademarks and Intellectual Property Compliance (Castle Rock) Schedule 5.23 Insurance (Castle Rock) Schedule 5.24 Year 2000 Compliance (Castle Rock) Schedule 5.25 Bank Accounts (Castle Rock) Schedule 5.27 Conflicts of Interest (Castle Rock) Schedule 7.4 Payment of Obligations (Castle Rock) [The Company agrees to furnish supplementally a copy of any omitted schedule or exhibit to the Commission upon request.] AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER, dated as of October 15, 1997 and effective as of 9:00 a.m. EST on October 15, 1997 (the "Agreement"), is by and among AquaPenn Spring Water Company, Inc., a Pennsylvania corporation ("Parent"), Castle Rock Spring Water Company, Inc., a California corporation and a wholly owned subsidiary of Parent ("Subsidiary"), Dunsmuir Bottling Company, doing business as Castle Rock Spring Water Company, a California corporation (the "Company") and the shareholders of the Company listed in Exhibit A (the "Company Shareholders"). W I T N E S S E T H: WHEREAS, the Boards of Directors of Parent and the Company have determined that the merger of Company with and into Subsidiary (the "Merger") is consistent with and in furtherance of the long-term business strategy of Parent and the Company, and is fair to and in the best interests of Parent and the Company and their respective shareholders; and WHEREAS, Parent, Subsidiary and the Company intend the Merger to qualify as a tax-free reorganization under the provisions of Section 368 of the Internal Revenue Code of 1986, as amended (the "Code"). NOW, THEREFORE, in consideration of the premises and the representations, warranties, covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I THE MERGER SECTION 1.1 The Merger. Upon the terms and subject to the conditions of this Agreement, at the Effective Time (as defined in Section 1.2) in accordance with the California Corporations Code (the "CCC"), Company shall be merged with and into Subsidiary and the separate existence of Company shall thereupon cease. Subsidiary shall be the surviving corporation in the Merger and is hereinafter sometimes referred to as the "Surviving Corporation." SECTION 1.2 Effective Time of the Merger. The Merger shall become effective at such time (the "Effective Time") as shall be stated in Articles of Merger, in a form mutually acceptable to Parent and the Company, to be filed with the Secretary of State of the State of California in accordance with the CCC (the "Merger Filing"). The Merger Filing shall be made simultaneously with or as soon as practicable after the closing of the transactions contemplated by this Agreement in accordance with Section 3.5. 1 ARTICLE II THE SURVIVING AND PARENT CORPORATIONS SECTION 2.1 Certificate of Incorporation. The Articles of Incorporation of Subsidiary at and as of the Effective Time shall be the Articles of Incorporation of the Surviving Corporation following the Effective Time, and the name of the Surviving Corporation shall be Castle Rock Spring Water Company, Inc. SECTION 2.2 Bylaws. The Bylaws of Subsidiary at and as of the Effective Time shall be the Bylaws of the Surviving Corporation following the Effective Time, and the name of the Surviving Corporation shall be Castle Rock Spring Water Company, Inc. SECTION 2.3 Directors and Officers. The directors and officers of the Surviving Corporation following the Merger shall not change at the Effective Time, and such directors and officers shall serve in accordance with the Bylaws of the Surviving Corporation until their respective successors are duly elected or appointed and qualified pursuant to Section 9.4. ARTICLE III MERGER CONSIDERATION SECTION 3.1 Consideration. (a) Cash Consideration and Adjustments. (i) On the Closing Date, each Company Shareholder shall be entitled to receive cash consideration in the amount set forth beside such Shareholder's name on Exhibit A, such cash consideration to be, in the aggregate, an amount equal to $1,450,712 (the "Cash Consideration"). One-half of each Company Shareholder's proportional share of the Cash Consideration shall be paid to each Company Shareholder on the Closing Date and the balance of the Cash Consideration for each Company Shareholder (in the aggregate, the "Escrow Cash") shall be placed in escrow with Ballard Spahr Andrews & Ingersoll, as Escrow Agent ("Escrow Agent") pursuant to that certain Escrow Agreement dated October 15, 1997 (the "Escrow Agreement"), and released as described in (iii), (iv) and (v) below. (ii) Within 120 days of the date hereof, Parent shall satisfy or identify all debts, payables, liabilities and other obligations of the Company, as of the date hereof, identified in accordance with Generally Accepted Accounting Principles (the "Liabilities"); provided that "Liabilities" shall include all allowances and bill-backs to the Company's customers. (iii) Upon completion by Parent of the satisfaction or identification of all Liabilities, and if the Liabilities, both satisfied and identified, exceed in the aggregate $4,650,000, then the cash, if any, to be released to the Company Shareholders shall be calculated as follows: Escrow Cash - [Liabilities - $4,650,000]. 2 The balance of the Escrow Cash shall be promptly returned to the Parent. If the amount by which the Liabilities exceed $4,650,000 is greater than the Escrow Cash, then the number of Escrow Shares to be returned to Parent shall be calculated as follows ("IPO", "IPO Price" and "Escrow Shares" shall have the meanings set forth in Section 3.1(b) below): If the IPO has been consummated: [(Liabilities - $4,650,000) - Escrow Cash] divided by (75% x IPO Price) If the IPO has not been consummated: [(Liabilities - $4,650,000) - Escrow Cash] divided by 5 If the IPO has been consummated the balance of the Escrow Shares, if any, shall be released to the Company Shareholders after an adjustment, if any, pursuant to Section 3.1(b) below. If the IPO has not been consummated by February 15, 1998, the balance of the Escrow Shares shall be released to the Company Shareholders after an adjustment, if any, pursuant to Section 3.1(b) below. If the amount by which the Liabilities exceed $4,650,000 is equal to or less than the Escrow Cash, the Escrow Shares shall be released to the Company Shareholders upon adjustment, if any, pursuant to and at the time stipulated in Section 3.1(b) below. (iv) Upon completion by Parent of the satisfaction or identification of all Liabilities, and if the Liabilities, both satisfied and identified, are less than $4,650,000, then the Escrow Cash shall be released to the Company Shareholders, the Escrow Shares shall be released to the Company Shareholders upon adjustment, if any, pursuant to and at the time stipulated in Section 3.1(b) below and Parent shall promptly pay to the Company Shareholders an amount in the aggregate equal to the difference between $4,650,000 minus the Liabilities, both satisfied and identified. (v) Upon completion by Parent of the satisfaction or identification of all Liabilities, and if the Liabilities, both satisfied and identified, equal $4,650,000, then the Escrow Cash shall be released to the Company Shareholders and the Escrow Shares shall be released to the Company Shareholders upon adjustment, if any, pursuant to and at the time stipulated in Section 3.1(b) below. (vi) Parent shall regularly update the Company Shareholders regarding the identification of Liabilities and the Company Shareholders shall have the opportunity to contest the validity or amount of any Liability identified by Parent, provided that Parent shall resolve any dispute regarding the validity or amount of any Liability. (b) Share Consideration and Adjustments. (i) On or promptly after the Closing Date, the Company Shareholders shall receive, in the aggregate, the number of shares of common stock of Parent ("Parent Stock") equal to one-half the number of shares obtained by dividing by $5.00 the result of subtracting the aggregate amount of Cash Consideration received by the Company Shareholders in (a) above from $3,000,002 ("Base Shares"). The balance of such shares of Parent Common Stock ("Escrow Shares") shall be placed in escrow with the Escrow Agent pursuant to the Escrow Agreement and adjusted 3 as described in (ii), (iii), (iv) and (v) below. For the purposes of these provisions, "Total Shares" means the sum of Base Shares plus Escrow Shares. (ii) If 75% of the per share price (the "IPO Price") at which the Parent Stock is sold pursuant to an initial public offering of the Parent Stock, not including any over-allotment option, (the "IPO") is $5.00 per share, the number of Escrow Shares shall remain the same pending release pursuant to Section 3.1(a). (iii) If 75% of the IPO Price is greater than $5.00, then the number of Escrow Shares to be released to the Company Shareholders pursuant to Section 3.1(a) shall be calculated as follows: Escrow Shares - [Total Shares - [(Total Shares x 5) divided by (.75 x IPO Price)]]. The balance of the Escrow Shares shall be promptly returned to the Parent. If the IPO Price is such that the number of shares to be returned to the Parent is greater than the number of Escrow Shares, then the Company Shareholders shall sell such excess to the Parent at a price equal to $5.00 per share. To the extent that Base Shares plus Escrow Shares released to Company Shareholders ("Adjusted Shares") is less than Total Shares, Parent shall issue options to Company Shareholders for the difference between Total Shares and Adjusted Shares to be exercisable at the IPO Price for an exercise period of five years from the date of issuance. (iv) If 75% of the IPO Price is less than $5.00, then the Escrow Shares will be released to the Company Shareholders pursuant to Section 3.1(a) and the number of additional shares the Parent Company shall issue to the Company Shareholders and place in escrow to be released pursuant to Section 3.1(a) shall be calculated as follows: [(Total Shares x 5) divided by (.75 x IPO Price)] - Total Shares (v) If the Parent has not made an initial public offering of its common shares by February 15, 1998, then, after completion by Parent of the satisfaction or identification of all Liabilities as set forth under Section 3(a)(iii), the Escrow Shares, as adjusted pursuant to Section 3.1(a)(iii), if appropriate, shall be released to the Company Shareholders. (vi) The Company Shareholders shall be deemed, for federal income tax purposes and otherwise, to be the owners of the Escrow Shares while such shares are held by Escrow Agent. The Company Shareholders shall receive any regular or liquidating dividends paid on the Escrow Shares and shall be entitled to vote the Escrow Shares, while such shares are held by Escrow Agent. (c) Each Company Shareholder shall receive the number of shares of Parent Stock set forth beside such Shareholder's name on Exhibit A. (d) No share of Company Common Stock outstanding immediately prior to the Effective Time shall be deemed to be outstanding or to have any rights other than those set forth in this Section 3.1 after the Effective Time. 4 (e) Shares of Company Common Stock held by shareholders of the Company who have, prior to the taking of the vote of the Company's shareholders on the Merger, filed with the Company written demand for the appraisal of their shares of Company Common Stock in accordance with the applicable provisions of the CCC, shall not be deemed to be converted into the right to receive the Merger Consideration unless, and until such time as, such shareholders shall have withdrawn, failed to perfect, or shall have effectively lost, their right to appraisal of or payment for their shares of Company Common Stock under the CCC, at which time such shares shall be converted into the right to receive the Merger Consideration as provided in this Section 3.1. The Company shall give Parent prompt notice of any demand received by the Company for payment of shares of Company Common Stock from a Dissenting Shareholder, and Parent shall have the right to participate in all negotiations and proceedings with respect to such demand. The Company agrees that it will not, except with the prior written consent of Parent, make any payment with respect to, or settle or offer to settle, any such demand for payment. Each Dissenting Shareholder who becomes entitled, pursuant to the provisions of the CCC, to the payment of the value of his, her or its shares shall receive payment therefor from Parent or Subsidiary (but only after the value thereof shall have been agreed upon or finally determined pursuant to the terms of this Agreement and as provided under the CCC). In the event that any Dissenting Shareholder shall have withdrawn, failed to perfect, or shall have effectively lost, his right to appraisal of and payment for his, her or its shares, Parent shall issue and deliver, upon surrender by such Dissenting Shareholder of his, her or its certificate or certificates representing shares of Company Common Stock, the Merger Consideration to which such Dissenting Shareholder may then be entitled under and pursuant to this Section 3.1. (f) In the event that the Parent Stock is combined into a smaller number of shares, then all shares of Parent Stock owned by the Company Shareholders, including the Escrow Shares, and shares of Parent Stock to which the Company Shareholders are or may be entitled, shall be combined and the Company Shareholders shall be entitled to receive the same number of shares of Parent Stock as if Company Shareholders currently owned and held all of the shares held in escrow or to which Company Shareholders are or may be entitled. SECTION 3.2 Conversion of Subsidiary Shares. At the Effective Time, by virtue of the Merger and without any action on the part of Parent as the sole shareholder of Subsidiary, each issued and outstanding share of common stock, no par value, of Subsidiary ("Subsidiary Common Stock") shall be converted into one share of common stock, no par value, of the Surviving Corporation. SECTION 3.3 Exchange of Certificates. (a) At the Effective Time: (i) each holder of a certificate representing shares of Company Common Stock shall surrender such certificates (the "Company Certificates") for cancellation to the Secretary of Parent, together with a duly executed letter of transmittal and such other documents as the Secretary shall reasonably require; (ii) upon surrender of the Company Certificates, the holder of such Company Certificates shall be entitled to receive, subject to the terms of Section 3.1 and the Escrow Agreement, in exchange therefor (A) a certificate representing that number of whole shares of Parent Common Stock 5 and (B) a check for that portion of the Cash Consideration, into which the shares of Company Common Stock theretofore represented by the Company Certificates so surrendered shall have been converted pursuant to the provisions of Section 3.1, and the Company Certificates so surrendered shall be cancelled. Neither Parent nor Subsidiary shall be liable to a holder of shares of Company Common Stock for any shares of Parent Common Stock or dividends or distributions thereon delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. (b) Notwithstanding any other provision of this Agreement, no certificates or scrip for fractional shares of Parent Common Stock shall be issued in the Merger and no Parent Common Stock dividend, stock split or interest shall relate to any fractional security, and such fractional interests shall not entitle the owner thereof to vote or to any other rights of a security holder. In lieu of any such fractional shares, each holder of Company Common Stock who would otherwise have been entitled to receive a fraction of a share of Parent Common Stock upon surrender of Company Certificates for exchange pursuant to this Article III shall be entitled to receive from the Exchange Agent a cash payment. (c) From and after the Effective Time, all Company Common Stock shall no longer be outstanding and shall automatically be cancelled and retired and shall cease to exist, and each holder of a certificate representing shares of Company Common Stock shall cease to have any rights with respect thereto, except the right to receive in exchange therefor, upon surrender thereof at Closing, the Merger Consideration into which the aggregate number of shares of Company Common Stock represented by such certificate or certificate surrendered shall have been converted pursuant to this Agreement. Notwithstanding any other provision of this Agreement, (i) until holders or transferees of certificates theretofore representing shares of Company Common Stock have surrendered them for exchange as provided herein, no dividends shall be paid with respect to any shares of Parent Common Stock represented by such certificates and no payment for fractional shares shall be made and (ii) without regard to when such certificates representing shares of Company Common Stock are surrendered for exchange as provided herein, no interest shall be paid on any Parent Common Stock dividends or any payment for fractional shares. Upon surrender of a certificate which immediately prior to the Effective Time represented shares of Company Common Stock, there shall be paid to the holder of such certificate the amount of any dividends which became payable after the Effective Time, but which were not paid by reason of the foregoing, with respect to the number of whole shares of Parent Common Stock represented by the certificate or certificates issued upon such surrender. (d) If any certificate for shares of Parent Common Stock is to be issued in a name other than that in which the certificate for shares of Company Common Stock surrendered in exchange therefor is registered, it shall be a condition of such exchange that the certificate so surrendered shall be properly endorsed and otherwise in proper form for transfer and the person requesting such exchange shall have paid to Parent or its transfer agent any applicable transfer or other taxes required by reason of such issuance. (e) In the event any Company Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Company Certificate to be lost, stolen or destroyed, the Surviving Corporation shall issue in exchange for such lost, stolen or destroyed Company Certificate the Parent Common Stock deliverable in respect thereof determined in accordance with this Section 3.4. When authorizing such payment in exchange therefor, the Board of Directors of Parent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen 6 or destroyed Company Certificate to give Parent such indemnity as it may reasonably direct as protection against any claim that may be made against Parent or the Surviving Corporation with respect to the Company Certificate alleged to have been lost, stolen or destroyed. SECTION 3.4 Closing. The closing (the "Closing") of the transactions contemplated by this Agreement shall take place at a location mutually agreeable to Parent and the Company on the date hereof (the date on which the Closing occurs is referred to in this Agreement as the "Closing Date"). SECTION 3.5 Closing of the Company's Transfer Books. At the Effective Time, the stock transfer books of the Company shall be closed and no transfer of shares of Company Common Stock which were outstanding immediately prior to the Effective Time shall thereafter be made. If, after the Effective Time, subject to the terms and conditions of this Agreement, Company Certificates formerly representing Company Common Stock are presented to Parent or the Surviving Corporation, they shall be cancelled and exchanged for Parent Common Stock in accordance with this Article III. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND SUBSIDIARY Parent and Subsidiary each represent and warrant to the Company as of the date hereof as follows: SECTION 4.1 Organization and Qualification. Each of Parent and Subsidiary is a corporation duly organized, validly existing and in good standing or local equivalent thereof under the laws of the state of its incorporation and has the requisite power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being conducted. True, accurate and complete copies of Parent's Articles of Incorporation and Bylaws and Subsidiary's Articles of Incorporation and Bylaws, in each case as in effect on the date hereof, including all amendments thereto, have been or in the case of Subsidiary, will promptly be delivered to the Company. SECTION 4.2 Capitalization. (a) The authorized capital stock of Parent consists of (i) 100,000,000 shares of Parent Common Stock, of which 7,358,239 shares were issued and outstanding as of September 30, 1997, and (ii) 2,000,000 shares of non-voting convertible preferred stock, par value $1.00 per share, of which 1,702,500 shares are issued and outstanding as of September 30, 1997. All of the issued and outstanding shares of Parent Common Stock are validly issued and are fully paid, nonassessable and free of preemptive rights. (b) (i) Except as set forth in Schedule 4.2 attached hereto, as of the date hereof, (A) there were no outstanding subscriptions, options, calls, contracts, commitments, understandings, restrictions, arrangements, rights or warrants, including any right of conversion or exchange under any outstanding security, instrument or other agreement and also including any rights plan or other anti-takeover agreement, obligating Parent or any subsidiary of Parent to issue, deliver or sell, or cause to be issued, 7 delivered or sold or otherwise to become outstanding, additional shares of the capital stock of Parent or obligating Parent or any subsidiary of Parent to grant, extend or enter into any such agreement or commitment. (B) Except as set forth in Schedule 4.2 and except as contemplated hereby, there are no voting trusts other than, proxies or other agreements or understandings to which Parent or any subsidiary of the Parent is a party or is bound with respect to the voting of any shares of capital stock of Parent or any subsidiary and there are no such trusts, proxies, agreements or understandings by, between or among any of Parent's shareholders with respect to Parent Common Stock. There are no outstanding or authorized stock appreciation rights, phantom stock, profit participation or similar rights with respect to Parent. (c) The authorized capital stock of Subsidiary consists of 100 shares of Subsidiary Common Stock, of which 100 shares are issued and outstanding, which shares are owned beneficially and of record by Parent. (d) The shares of Parent Common Stock to be issued to shareholders of the Company in the Merger will be at the Effective Time duly authorized, validly issued, fully paid and nonassessable and free of preemptive rights and will be delivered to each Company Shareholder free and clear of all liens, encumbrances, restrictions and claims of every kind; provided that a portion of such shares will be placed in escrow pursuant to Article III hereof. SECTION 4.3 Authority; Non-Contravention; Approvals. (a) Parent and Subsidiary each have all necessary corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The Parent Common Stock issued pursuant to Article III will, when issued, be duly authorized, validly issued, fully paid and nonassessable, and no shareholder of Parent will have any preemptive right of subscription or purchase in respect thereof. This Agreement has been approved by the Boards of Directors of Parent and Subsidiary, and no other corporate proceedings on the part of Parent or Subsidiary are necessary to authorize the execution and delivery of this Agreement or the consummation by Parent and Subsidiary of the transactions contemplated hereby. This Agreement has been duly executed and delivered by each of Parent and Subsidiary, and, assuming the due authorization, execution and delivery hereof by the Company and the Company Shareholders, constitutes a valid and legally binding agreement of each of Parent and Subsidiary enforceable against each of them in accordance with its terms, except that such enforcement may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) general equitable principles. (b) Except for requirements to notify creditors of the occurrence of the transactions contemplated hereby, the execution and delivery of this Agreement by each of Parent and Subsidiary do not violate, conflict with or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of Parent or any of its subsidiaries under any of the terms, conditions or provisions of (i) the respective charters or by-laws of Parent or any of its subsidiaries, (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental 8 authority applicable to Parent or any of its subsidiaries or any of their respective properties or assets or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which Parent or any of its subsidiaries is now a party or by which Parent or any of its subsidiaries or any of their respective properties or assets may be bound or affected, excluding those violations, conflicts, breaches, defaults, terminations, accelerations or creations of liens, security interests, charges or encumbrances that would not, in the aggregate, have a material adverse effect on the business, operations, properties, assets, condition (financial or other), results of operations or prospects of the Parent and its subsidiaries taken as a whole (a "Parent Material Adverse Effect"). (c) Except for the making of the Merger Filing, no declaration, filing or registration with, or notice to, or authorization, consent or approval of, any governmental or regulatory body or authority is necessary for the execution and delivery of this Agreement by Parent or Subsidiary or the consummation by Parent or Subsidiary of the transactions contemplated hereby. SECTION 4.4 Litigation. Except as disclosed in Schedule 4.4 attached hereto, there are no claims, suits, actions or proceedings pending or, to the knowledge of Parent, threatened against or relating to Parent or any of its subsidiaries, before any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator which could reasonably be expected, either alone or in the aggregate with all such claims, actions or proceedings, to cause a Parent Material Adverse Effect. Except as set forth in Schedule 4.4 attached hereto, neither Parent nor any of its subsidiaries is subject to any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality, authority or arbitrator which prohibits or restricts the consummation of the transactions contemplated hereby or would reasonably be expected, either alone or in the aggregate, to have a Parent Material Adverse Effect. SECTION 4.5 No Violation of Law. Neither Parent nor any of its subsidiaries is in violation of, or has been given notice or been charged with any violation of, any law, statute, order, rule, regulation, ordinance, or judgment (including, without limitation, any applicable environmental law, ordinance or regulation) of any governmental or regulatory body or authority, except for violations which, in the aggregate, could not reasonably be expected to have a Parent Material Adverse Effect. As of the date of this Agreement, to the knowledge of Parent, no investigation or review by any governmental or regulatory body or authority is pending or threatened, nor has any governmental or regulatory body or authority indicated to Parent an intention to conduct the same, other than, in each case, those the outcome of which, as far as reasonably can be foreseen, will not have a Parent Material Adverse Effect. Parent and its subsidiaries have all permits, licenses, franchises, variances, exemptions, orders and other governmental authorizations, consents and approvals necessary to conduct their businesses as presently conducted (collectively, the "Parent Permits"), except for permits, licenses, franchises, variances, exemptions, orders, authorizations, consents and approvals the absence of which, alone or in the aggregate, would not have a Parent Material Adverse Effect. Parent and its subsidiaries are not in violation of the terms of any Parent Permit, except for delays in filing reports or violations which, alone or in the aggregate, would not have a Parent Material Adverse Effect. SECTION 4.6 Financial Statements. Parent has previously delivered to Company copies of its audited financial statements for the years ending September 30, 1994, 1995 and 1996 and interim unaudited financial statements for the period ended June 30, 1997. The audited and unaudited interim 9 financial statements of Parent (collectively, the "Parent Financial Statements") have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as may be indicated therein or in the notes thereto) and fairly present the financial position of Parent and its subsidiaries as of the dates thereof and the results of their operations and changes in financial position for the periods then ended, subject, in the case of the unaudited interim financial statements, to normal year-end and audit adjustments and any other adjustments described therein and to the omission of notes thereto. SECTION 4.7 Brokers. Parent has not engaged, or caused to be incurred, any liability to any finder, broker or sales agent in connection with the origin, negotiation, execution, delivery, or performance of this Agreement and the transactions contemplated hereby, other than Henry R. Hidell of Henry Hidell, Eyster Technological Services, Inc. to whom Parent has paid $100,000. SECTION 4.8 Employment Agreements. Parent and Subsidiary have entered into employment agreements effective as of the Closing with Paul Kassis, Scott Lidster and Clark Wright, substantially in the form of Exhibit 4.8. ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE COMPANY SHAREHOLDERS The Company and each of Paul Kassis, Scott Lidster and Clark Wright (the "Principal Shareholders"), jointly and severally, represent and warrant to Parent and Subsidiary as of the date hereof as follows: SECTION 5.1 Organization and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and has the requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being conducted. The Company is qualified to do business and is in good standing in each jurisdiction in which the properties owned, leased or operated by it or the nature of the business conducted by it makes such qualification necessary, except where the failure to be so qualified and in good standing will not, when taken together with all other such failures, have a material adverse effect on the business, operations, properties, assets, condition (financial or other), results of operations or prospects of the Company and its subsidiaries, taken as a whole (a "Company Material Adverse Effect"). True, accurate and complete copies of the Company's Certificate of Incorporation and By-laws, in each case as in effect on the date hereof, including all amendments thereto, have been delivered to Parent. SECTION 5.2 Capitalization. (a) The authorized capital stock of the Company consists of (i) 10,000 shares of Series A Common Stock, of which 750 shares were issued and outstanding as of the date hereof, and (ii) 10,000 shares of non-voting Series B Common Stock, of which 92 shares were issued and outstanding as of the date hereof. All of such issued and outstanding shares are duly authorized, validly issued and are fully paid, nonassessable and free of preemptive rights and are owned of record and beneficially, free and clear 10 of any liens, by the persons set forth on Schedule 5.2. (No subsidiary of the Company holds any shares of the capital stock of the Company.) (b) There are no outstanding subscriptions, options, calls, contracts, commitments, understandings, restrictions, arrangements, rights or warrants, including any right of conversion or exchange under any outstanding security, instrument or other agreement and also including any rights plan or other anti-takeover agreement, obligating the Company or any subsidiary of the Company to issue, deliver or sell, or cause to be issued, delivered or sold or otherwise to become outstanding, additional shares of the capital stock of the Company or obligating the Company or any subsidiary of the Company to grant, extend or enter into any such agreement or commitment and (ii) except for that certain Buy-Sell Agreement dated July 24, 1990 among the Company and the Principal Shareholders (the "Buy-Sell Agreement"), which will be terminated on the date hereof, and as contemplated hereby, there are no voting trusts, proxies or other agreements or understandings to which the Company or any subsidiary of the Company is a party or is bound with respect to the voting of any shares of capital stock of the Company and there are no such trusts, proxies, agreements or understandings by, between or among any of the Company's shareholders with respect to Company Common Stock. There are no outstanding or authorized stock appreciation rights, phantom stock, profit participation or similar rights with respect to the Company. SECTION 5.3 [Intentionally left blank] SECTION 5.4 Subsidiaries. Schedule 5.4 sets forth the name and state of incorporation of each direct and indirect subsidiary of the Company. Each direct and indirect subsidiary of the Company is duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization and has the requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being conducted. Each subsidiary of the Company is qualified to do business, and is in good standing, in each jurisdiction in which the properties owned, leased or operated by it or the nature of the business conducted by it makes such qualification necessary, except where the failure to be so qualified and in good standing will not, when taken together with all such other failures, have a Company Material Adverse Effect. All of the outstanding shares of capital stock of each subsidiary of the Company are validly issued, fully paid, nonassessable and free of preemptive rights and are owned directly or indirectly by the Company free and clear of any liens, claims, encumbrances, security interests, equities, charges and options of any nature whatsoever except as set forth in Schedule 5.4 attached hereto. There are no subscriptions, options, warrants, rights, calls, contracts, voting trusts, proxies or other commitments, understandings, restrictions or arrangements relating to the issuance, sale, voting, transfer, ownership or other rights with respect to any shares of capital stock of any subsidiary of the Company, including any right of conversion or exchange under any outstanding security, instrument or agreement. SECTION 5.5 Authority; Non-Contravention; Approvals. (a) The Company has full corporate power and authority to enter into this Agreement to consummate the transactions contemplated hereby. This Agreement has been approved by the Board of Directors and the Company Shareholders of the Company, and no other corporate proceedings on the part of the Company are necessary to authorize the execution and delivery of this Agreement or the consummation by the Company of the transactions contemplated hereby. This Agreement has been duly 11 executed and delivered by the Company, and, assuming the due authorization, execution and delivery hereof by Parent and Subsidiary, constitutes a valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, except that such enforcement may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) general equitable principles. (b) The execution and delivery of this Agreement by the Company do not violate, conflict with or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company or any of its subsidiaries under any of the terms, conditions or provisions of (i) the respective charters or by-laws of the Company or any of its subsidiaries, (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to the Company or any of its subsidiaries or any of their respective properties or assets or (iii) except as disclosed in Schedule 5.5(b), any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which the Company or any of its subsidiaries is now a party or by which the Company or any of its subsidiaries or any of their respective properties or assets may be bound or affected, excluding those violations, conflicts, breaches, defaults, terminations, accelerations or creations of liens, security interests, charges or encumbrances that would not, in the aggregate, have a Company Material Adverse Effect. (c) Except for the making of the Merger Filing, no declaration, filing or registration with, or notice to, or authorization, consent or approval of, any governmental or regulatory body or authority is necessary for the execution and delivery of this Agreement by the Company or the consummation by the Company of the transactions contemplated hereby, other than such declarations, filings, registrations, notices, authorizations, consents or approvals which, if not made or obtained, as the case may be, would not, in the aggregate, have a Company Material Adverse Effect. (d) All governmental waivers, consents, orders and approvals legally required for the consummation of the Merger and the transactions contemplated hereby, and all consents from lenders required to consummate the Merger, have been obtained and are in effect at the Effective Time. SECTION 5.6 Financial Statements. The Company has previously delivered to Parent copies of its compiled financial statements for the years ended December 31, 1992, 1993 and 1994, and its reviewed financial statements for the years ended December 31, 1995 and 1996 and interim unaudited financial statements for the period ended July 31, 1997. The reviewed consolidated financial statements and unaudited interim financial statements of the Company (collectively, the "Company Financial Statements") have been prepared in accordance with generally accepted accounting principles applied on a consistent basis (except as may be indicated therein or in the notes thereto) and fairly present the financial position of the Company and its subsidiaries as of the dates thereof and the results of their operations, cash flows and changes in financial position for the periods then ended, subject, in the case of the unaudited interim financial statements, to normal year-end and audit adjustments and any other adjustments described therein and to the omission of notes thereto. 12 SECTION 5.7 Books of Account. The books of account of the Company accurately and fairly reflect, in reasonable detail and in all material respects, the Company's transactions and the disposition of its assets. All notes and accounts receivable of the Company are reflected in accordance with generally accepted accounting principles on its books and records, are valid receivables subject to no material setoffs or counterclaims, are current and collectible and will be collected in accordance with their terms at their recorded amounts subject only to normal adjustments in the ordinary course of business and the reserves for contractual allowances and bad debts set forth on the face of the balance sheet contained in the most recent Company Financial Statements as adjusted for the passage of time through the Closing Date in accordance with past custom and practice of the Company and its subsidiaries. The Company and the Company Subsidiaries have filed all reports and returns required by any material law or regulation to be filed by them, and have paid all taxes, duties and charges due on the basis of such reports and returns. SECTION 5.8 Absence of Certain Changes of Events. Except as set forth in Schedule 5.8, since July 31, 1997, there has not been any change in the business, operations, properties, assets, liabilities, condition (financial or other) or results of operations of the Company and its subsidiaries, taken as a whole, including as a result of any change in capital structure, employee compensation (including severance rights and benefit plans), accounting method or applicable law, other than changes that were both in the ordinary course of business and which in the aggregate would not have a Company Material Adverse Effect. Also except as set forth in Schedule 5.8, since July 31, 1997, there have been no dividends or other distributions to Company Shareholders declared or paid. SECTION 5.9 Absence of Undisclosed Liabilities. Except as disclosed in Schedule 5.9 attached hereto, neither the Company nor any of its subsidiaries had at July 31, 1997, or has incurred since that date, any liabilities or obligations (whether absolute, accrued, contingent or otherwise) of any nature, except: (a) liabilities, obligations or contingencies (i) which are accrued or reserved against in the Company Financial Statements or reflected in the notes thereto or (ii) which were incurred after July 31, 1997 and in the ordinary course of business and consistent with past practices, (b) liabilities, obligations or contingencies which (i) would not, in the aggregate, have a Company Material Adverse Effect or (ii) have been discharged or paid in full prior to the date hereof and (c) performance obligations with respect to contracts which are of a nature not required to be reflected or reserved against in the consolidated financial statements of the Company and its subsidiaries prepared in accordance with generally accepted accounting principles consistently applied and which were incurred in the ordinary course of business. SECTION 5.10 Taxes. (a) The Company and its subsidiaries have (i) duly filed with the appropriate governmental authorities all Tax Returns (as defined in 5.10(c)) required to be filed by them for all periods ending on or prior to the Effective Time, other than those Tax Returns the failure of which to file would not have a Company Material Adverse Effect, and such Tax Returns are true, correct and complete in all material respects and (ii) duly paid in full or made adequate provision in the Company Financial Statements for the payment of all Taxes (as defined in Section 5.10(b)) due for all periods ending at or prior to the Effective Time. The liabilities and reserves for Taxes reflected in the Company balance sheet are adequate to cover all unpaid Taxes for all periods ending at or prior to the Effective Time and there are no material liens for Taxes upon any property or asset of the Company or any subsidiary thereof, except for liens for Taxes not yet due. There are no unresolved issues of law or fact arising out of a notice of deficiency, proposed deficiency or assessment from the IRS or any other 13 governmental taxing authority with respect to Taxes of the Company or any of its subsidiaries which, if decided adversely, singly or in the aggregate, would have a Company Material Adverse Effect. Neither the Company nor any of its subsidiaries is a party to any agreement providing for the allocation or sharing of Taxes with any entity that is not, directly or indirectly, a wholly owned corporate subsidiary of Company. Neither the Company nor any of its corporate subsidiaries has, with regard to any assets or property held, acquired or to be acquired by any of them, filed a consent to the application of Section 341(f) of the Code. (b) For purposes of this Agreement, the term "Taxes" shall mean all taxes, including, without limitation, income, gross receipts, excise, property, sales, withholding, social security, occupation, use, service, service use, license, payroll, franchise, transfer and recording taxes, fees and charges, windfall profits, severance, customs, import, export, employment or similar taxes, charges, fees, levies or other assessments imposed by the United States, or any state, local or foreign government or subdivision or agency thereof, whether computed on a separate, consolidated, unitary, combined or any other basis, and such term shall include any interest, fines, penalties or additional amounts and any interest in respect of any additions, fines or penalties attributable or imposed or with respect to any such taxes, charges, fees, levies or other assessments. (c) For purposes of this Agreement, the term "Tax Return" shall mean any return, report or other document or information required to be supplied to a taxing authority in connection with Taxes. (d) The Company duly elected to be taxed as an S corporation under Subchapter S of the Code and under comparable provisions of the tax laws of the state of California (each an "S Election") effective from the inception of the Company. The S Elections have been in effect continuously since their inception and have not been denied, revoked voluntarily or involuntarily, challenged or contested by any taxing authority. SECTION 5.11 Title to Assets. Schedule 5.11 sets forth a list of all real property leased or owned by the Company and its subsidiaries. The Company and each of its subsidiaries has good and marketable title in fee simple to all its real property and good title to all its leasehold interests and other properties, as reflected in the most recent balance sheet included in the Company Financial Statements, except for properties and assets that have been disposed of in the ordinary course of business since the date of such balance sheet, free and clear of all mortgages, liens, pledges, charges or encumbrances of any nature whatsoever, except (i) the lien of current taxes, payments of which are not yet delinquent, (ii) such imperfections in title and easements and encumbrances, if any, as are not substantial in character, amount or extent and do not materially detract from the value, or interfere with the present use of the property subject thereto or affected thereby, or otherwise materially impair the Company's business operations (in the manner presently carried on by the Company) or (iii) mortgages or security interests incurred in the ordinary course of business and except for such matters which in the aggregate could not reasonably be expected to cause a Company Material Adverse Effect. All leases under which the Company leases real or personal property have been delivered to Parent and are in good standing, valid and effective in accordance with their respective terms, and there is not, under any of such leases, any existing default or event which with notice or lapse of time or both would become a default other than defaults under such leases which in the aggregate will not have a Company Material Adverse Effect. 14 SECTION 5.12 Assets and Properties Complete. The assets and properties of the Company and each of its subsidiaries, whether owned or leased, are and as of the Closing Date shall be adequate and sufficient to conduct the business of the Company as currently conducted. Except as disclosed on Schedule 5.12, the Company has unrestricted rights and access to all present sources of water, including fully transferable leases, title in fee simple to land, rights in all resources on such land or within the leasehold, with no restrictions on quantity, time, use, quality or which would otherwise affect the ongoing business of the Company. SECTION 5.13 Access to Spring. To the best of the Company's knowledge, the Company has the legal right to draw water from the water transmission main of the City of Dunsmuir (the "City"), which draws spring water from the source known as Mossbrae Springs No. 2, B, C and D in Siskiyou County, California (the "Source") pursuant to a Water Contract, dated August 8, 1990, between the City and the Company (the "Water Contract"). The City and the Company filed and successfully completed a validation action in accordance with the Code of Civil Procedures as required by Section 6.b. of the Water Contract. There are no permits, orders, or other authorizing regulations or certificates required by the Company in order to draw water in the quantities permitted under the Water Contract from the Source described above or the City's main, or to use such water in the manner in which the Company is using the water so drawn. To the knowledge of the Company, the City has the legal right to draw water from the Source described above and to enter into the Water Contract with the Company. The Company does not use any other water source for water that it bottles or sells. SECTION 5.14 Water Quality. There are no results of laboratory tests conducted by or for the Company analyzing the water obtained under the Water Contract which would preclude the use of such water as bottled spring water to be sold to the public as spring water; and the Company is not aware of results of any such tests conducted by others which would preclude the use of such water as bottled water to be sold to the public. The Company knows of no condition, including, but not limited to, the actual or threatened presence at, in or near the Source of hazardous substances (as defined in Section 5.21), which could preclude the use of water obtained under the Water Contract as bottled spring water to be sold to the public. Except as set forth in Schedule 5.14, the Company knows of no civil, criminal or administrative actions, suits, demands, claims, hearings, investigations or proceedings pending or threatened, against the Company, any of its subsidiaries, or the City which, if successful, could preclude, in whole or in part, the use of the water obtained under the Water Contract as bottled spring water to be sold to the public. The Company knows of no past or present private or public activity, including, but not limited to, mining, silvicultural, manufacturing, or agricultural operations, that has occurred or is occurring near the Source which had or has the potential to cause conditions, including the actual or threatened presence at, in or near the Source of hazardous substances (as defined in Section 5.21). SECTION 5.15 Contracts. Schedule 5.15 sets forth a complete and accurate list of all contracts to which the Company or any of its subsidiaries is a party or by or to which any of them or any of their respective assets or properties is bound or subject except contracts (and related correspondence and other documents) for the sale or purchase of goods and/or services by the Company and/or any of its subsidiaries, entered into with customers or suppliers in the ordinary course of business. All of the contracts listed in Schedule 5.15 are in full force and effect, and neither the Company nor any of its subsidiaries is in default under, or material breach of, any of them, nor to the knowledge of the Company and the Company Shareholders is any other party to any such contract in default thereunder; nor does any event or condition exist that after notice or lapse of time or both could constitute a default thereunder 15 or material breach thereof on the part of the Company or any of its subsidiaries, or to the knowledge of the Company and the Company Shareholders, any other party thereto. The Company has delivered to Parent or its counsel true, correct, and complete copies of all contracts listed in Schedule 5.15, together with copies of all modifications and supplements thereto. SECTION 5.16 Compliance with Agreements. The Company and each of its subsidiaries are not in breach or violation of or in default in the performance or observance of any term or provision of, and no event has occurred which, with notice or lapse of time or action by a third party, could result in a default under, (a) the respective charters, By-laws or similar organizational instruments of the Company or any of its subsidiaries, or (b) any contract, commitment, agreement, indenture, mortgage, loan agreement, note, lease, bond, license, approval or other instrument to which the Company or any of its subsidiaries is a party or by which any of them is bound or to which any of their property is subject, which breaches, violations and defaults, in the case of clause (b) of this Section 5.16, would have, in the aggregate, a Company Material Adverse Effect. SECTION 5.17 No Violation of Law. Except as disclosed in Schedule 5.17 attached hereto, neither the Company nor any of its subsidiaries is in violation of or has been given notice or been charged with any violation of, any law, statute, order, rule, regulation, ordinance or judgment (including, without limitation, any applicable safety or environmental law, ordinance or regulation) of any governmental or regulatory body or authority, except for violations which, in the aggregate, could not reasonably be expected to have a Company Material Adverse Effect. To the knowledge of the Company, no investigation or review by any governmental or regulatory body or authority is pending or threatened, nor has any governmental or regulatory body or authority indicated to the Company an intention to conduct the same, other than, in each case, those the outcome of which, as far as reasonably can be foreseen, will not have a Company Material Adverse Effect. The Company and its subsidiaries have all permits, licenses, franchises, variances, exemptions, orders and other governmental authorizations, consents and approvals necessary to conduct their businesses as presently conducted (collectively, the "Company Permits"), except for permits, licenses, franchises, variances, exemptions, orders, authorizations, consents and approvals the absence of which, alone or in the aggregate, would not have a Company Material Adverse Effect. Schedule 5.17 sets forth a complete list of all Company Permits. The Company and its subsidiaries are not in violation of the terms of any Company Permit, except for delays in filing reports or violations which, alone or in the aggregate, would not have a Company Material Adverse Effect. To the best of the Company's knowledge, upon consummation of the Merger and the other transactions contemplated by this Agreement, all Company Permits will continue to be valid and in full force and effect. SECTION 5.18 Litigation. Except as referred to in Schedule 5.18 attached hereto, there are no claims, suits, actions or proceedings pending or, to the knowledge of the Company, threatened against or relating to the Company or any of its subsidiaries, before any court, governmental department, commission, agency, instrumentality, authority or arbitrator that seek to restrain the consummation of the Merger or which could reasonably be expected, either alone or in the aggregate with all such claims, actions or proceedings, to cause a Company Material Adverse Effect. Except as referred to in Schedule 5.18 attached hereto, neither the Company nor any of its subsidiaries is subject to any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator which prohibits or restricts the consummation of the transactions contemplated hereby or would have any Company Material Adverse Effect. 16 SECTION 5.19 Employee Benefit Plans; ERISA. (a) Schedule 5.19 sets forth a list of all plans, whether oral or written, in which any employee of the Company ("Employee") participates (individually a "Plan" and collectively the "Plans"). The term Plans shall include (i) any "employee benefit plan" within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), (ii) any profit sharing, pension, deferred compensation, bonus, stock option, stock purchase, severance, retainer, consulting, health, welfare or incentive plan or agreement whether legally binding or not, (iii) any plan or policy providing for "fringe benefits" to the Employees, including but not limited to vacation, paid holidays, personal leave, employee discount, educational benefit or similar programs, and (iv) any employment agreement, or each oral or written contract, commitment and understanding with each current or former director, officer, employee or stockholder or any associate or relative of any thereof, which is not immediately terminable without cost or other liability to the Company. (b) Neither Company nor any member of the Company's group or affiliated service group, as defined in Section 414 of the Internal Revenue Code ("Members of the Group") is, or has at any time been, a party to any multiemployer plan as defined under Section 3(37) of ERISA ("Multiemployer Plan"), or is, or has at any time been, required to contribute to any such Multiemployer Plan. (c) Neither Company nor any Members of the Group has at any time sponsored or maintained, directly or indirectly, an employee pension benefit plan that was subject to the minimum funding requirements of ERISA or is subject to Title IV of ERISA. (d) Each Plan has been administered in all material respects in accordance with its terms. Each Plan which is an "employee benefit plan", as defined in Section 3(3) of ERISA, complies in all material respects by its terms and in operation with the requirements provided by any and all statutes, orders or governmental rules or regulations currently in effect and applicable to the Plan, including but not limited to ERISA and the Internal Revenue Code. (e) The Company has filed or caused to be filed on a timely basis and distributed to employees and/or participants in the Plans on a timely basis, each and every return, report, statement, notice, declaration and other documents required by any federal, state or local government agency (including, without limitation, the Internal Revenue Service, the Department of Labor, the Pension Benefit Guaranty Corporation and the Securities and Exchange Commission), with respect to each Plan sponsored or maintained by the Company. Furthermore, the Company has withheld and remitted to the proper depository all income taxes and wage taxes on benefits derived under the Plans, to the extent such withholding and remittance is required by law. (f) Each Plan intended to qualify under Section 401(a) of the Internal Revenue Code is the subject of a favorable unrevoked determination letter issued by the Internal Revenue Service as to its qualified status, the Internal Revenue Service has not threatened to revoke any favorable determination letter or opinion letter with respect to each Plan, and nothing has occurred since the date of the most recent determination letter to cause the loss of any Plan's qualification. 17 (g) All contributions for all periods ending prior to the Closing Date (including periods from the first day of the current plan year to the Closing Date) have been made prior to the Closing Date by the Company. (h) All insurance premiums have been paid in full, subject only to normal retrospective adjustments in the ordinary course, with regard to the Plans for plan years ending on or before the Closing Date. With respect to periods from the close of the most recent plan year through the Closing Date with respect to the Plans, all insurance premiums due or payable through the Closing Date have been or will be paid in full, and no such premium is overdue or in a grace period for late payment. (i) With respect to each Plan: (1) no prohibited transactions (as defined in Section 406 of ERISA or Section 4975 of the Internal Revenue Code) have occurred; (2) no action or claim (other than routine claims for benefits made in the ordinary course of Plan administration for which Plan administrative review procedures have not been exhausted) is pending, or to Company's knowledge, threatened or imminent against or with respect to the Plan, any employer who is participating (or who has participated) in any Plan or any fiduciary (as defined in Section 21(A) of ERISA) of the Plan; and (3) Neither the Company nor, to Company's knowledge, any fiduciary of any Plan has any knowledge of any facts which could give rise to any action or claim against or with respect to any Plan, any employer who is participating (or who has participated) in any Plan or any fiduciary (as defined in Section 3(21)(A) of ERISA), of any Plan. (j) Neither the Company nor, to the Company's knowledge, any fiduciary with respect to any Plan has any liability or is threatened with any liability (whether joint or several) (i) for the termination of any single employer plan under Sections 4062 or 4064 of ERISA or any multiple employer plan under Section 4063 of ERISA, (ii) for any interest payments required under Section 302(e) of ERISA or Section 412(m) of the Internal Revenue Code, (iii) for any excise tax imposed by Sections 4971, 4972, 4975, 4976, 4977, 4979, 4980, 4980A or 4980B of the Internal Revenue Code, or (iv) to a fine under Section 502 of ERISA. (k) Neither Company nor any of the Members of the Group have incurred any withdrawal liability with respect to any Multiemployer Plan within the meaning of Sections 4201 and 4204 of ERISA, and no liabilities exist with respect to withdrawals from any Multiemployer Plans which could subject Company or any Members of the Group to any controlled group liability under ERISA. (l) None of the Plans that are welfare benefit plans within the meaning of Section 3(1) of ERISA provide for benefits or coverage for any former or retired employee or their beneficiaries, except to the extent required by Section 4980B of the Internal Revenue Code or Sections 601 through 608, inclusive, of ERISA. There is no VEBA maintained with respect to any such welfare plan. (m) Each Plan which is a "group health plan" (as such term is defined in Section 5000(b)(1) of the Code), complies and has complied with the continuation of group health coverage provisions 18 contained in Section 4980B of the Internal Revenue Code and Sections 601 through 608, inclusive, of ERISA. (n) True, correct and complete copies of all documents creating or evidencing any Plan have been provided to Parent, and true, correct and complete copies of all reports, forms and other documents required to be filed with any governmental entity or distributed to Plan participants or employees (including, without limitation, summary plan descriptions, Forms 5500 and summary annual reports for the past three (3) years for all Plans subject to ERISA) have been provided to Parent. A true, correct and accurate summary of any oral agreement or unwritten Plan described in subsection (a) hereof has been provided to Parent. True, correct and complete copies of employee confidentiality or other agreements protecting proprietary processes or information have been provided to Parent. (o) All expenses and liabilities relating to all of the Plans have been, and will on the Closing Date be fully and properly accrued on Company's books and records and disclosed in accordance with generally accepted accounting principles and in Plan financial statements. (p) Any fidelity bond required to be obtained by Company under ERISA with respect to any Plan has been obtained and is in full force and effect. (q) the Company has to the extent applicable with respect to each Plan, made available to Parent copies of the three most recent attorney's responses to an auditor's request for information. (r) There are no pending investigations, proceedings or other matters concerning any Plan before the Internal Revenue Service, Department of Labor, Pension Benefit Guaranty Corporation, or any other governmental agency, other than determination letter applications filed with the Internal Revenue Service. (s) There are no leased employees employed by the Company (as such term is defined in Section 414(n) of the Internal Revenue Code) that must be taken into account with respect to the requirements of the Plan set forth under Section 414(n)(3) of the Internal Revenue Code. (t) The execution of this Agreement by the Company and the consummation of the transactions contemplated hereunder will not, except as set forth in Schedule 5.19, result in any obligation or liability (with respect to accrued benefits or otherwise) to any Plan, or to any Employee or former Employee of the Company or Members of the Group. SECTION 5.20 Labor Matters. Except as set forth in Schedule 5.20, (a) there are no material controversies pending or, to the knowledge of the Company, threatened between the Company or its subsidiaries and any representatives of any of their employees, (b) none of the employees of the Company or its subsidiaries is covered by any collective bargaining agreement, (c) no one has petitioned within the last five years or is now petitioning for union representation of any of the employees of the Company or its subsidiaries, (d) to the knowledge of the Company, there are no material organizational efforts presently being made involving any of the employees of the Company or its subsidiaries and there have been no work stoppages or other material labor difficulties, (e) the Company and its subsidiaries have, to the knowledge of the Company, complied in all material respects with all laws relating to the employment of labor, including, without limitation, any provisions thereof relating to wages, hours, 19 collective bargaining, and the payment of social security and similar taxes and (f) no person has, to the knowledge of the Company, asserted that the Company or any of its subsidiaries is liable in any material amount for any arrears of wages or any taxes or penalties for failure to comply with any of the foregoing. SECTION 5.21 Environmental Matters. (a)(i) the Company and its subsidiaries have conducted their respective businesses in compliance with all applicable Environmental Laws (as defined below), including, without limitation, having all permits, licenses and other approvals and authorizations necessary for the operation of their respective businesses as presently conducted, (ii) none of the properties owned by the Company or any of its subsidiaries contain any Hazardous Substance (as defined below) as a result of any activity of the Company or any of its subsidiaries in amounts exceeding the levels permitted by applicable Environmental Laws, (iii) neither the Company nor any of its subsidiaries has received any notices, demand letters or requests for information from any Federal, state, local or foreign governmental entity or third party indicating that the Company or any of its subsidiaries may be in violation of, or liable under, any Environmental Law in connection with the ownership or operation of their businesses, (iv) there are no civil, criminal or administrative actions, suits, demands, claims, hearings, investigations or proceedings pending or threatened, against the Company or any of its subsidiaries relating to any violation, or alleged violation, of any Environmental Law, (v) no reports have been filed, or are required to be filed, by the Company or any of its subsidiaries concerning the release of any Hazardous Substance or the threatened or actual violation of any Environmental Law, (vi) no Hazardous Substance has been treated, disposed of, released or transported in violation of any applicable Environmental Law from any properties owned by the Company or any of its subsidiaries as a result of any activity of the Company or any of its subsidiaries during the time such properties were owned, leased or operated by the Company or any of its subsidiaries, (vii) there have been no environmental investigations, studies, audits, tests, reviews or other analyses regarding compliance or noncompliance with any applicable Environmental Law conducted by or which are in the possession of the Company or its subsidiaries relating to the activities of the Company or its subsidiaries, (viii) there are no underground storage tanks on, in or under any properties owned by the Company or any of its subsidiaries and no underground storage tanks have been closed or removed from any of such properties during the time such properties were owned, leased or operated by the Company or any of its subsidiaries, (ix) there is no asbestos or asbestos containing material present in any of the properties owned by the Company and its subsidiaries, and no asbestos has been removed from any of such properties during the time such properties were owned, leased or operated by the Company or any of its subsidiaries, (x) none of the properties owned by the Company or any of its subsidiaries contains environmentally sensitive areas, including, without limitation, wetlands as defined in the federal Clean Water Act of 1970, and amendments thereto, which would adversely effect the ability of the Company or any of its subsidiaries to engage in future development of said properties, and (xi) neither the Company, its subsidiaries nor any of their respective properties are subject to any material liabilities or expenditures (fixed or contingent) relating to any suit, settlement, court order, administrative order, regulatory requirement, judgment or claim asserted or arising under any Environmental Law, except for violations of the foregoing clauses (i) through (xi) that, singly or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect. (b) As used herein, "Environmental Law" means any Federal, state, local or foreign law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction, requirement or agreement with any governmental entity relating to (x) the protection, preservation or restoration of the environment (including, without limitation, air, water vapor, surface water, groundwater, drinking water supply, surface land, subsurface land, plant and animal life 20 or any other natural resource) or to human health or safety or (y) the exposure to, or the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of Hazardous Substances, in each case as amended and as in effect on the Closing Date. The term Environmental Law includes, without limitation, (i) the Federal Comprehensive Environmental Response Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act, the Federal Water Pollution Control Act of 1972, the Federal Clean Air Act, the Federal Clean Water Act, the Federal Resource Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Federal Occupational Safety and Health Act of 1970, each as amended and as in effect on the Closing Date, or any state counterpart thereof, and (ii) any common law or equitable doctrine (including, without limitation, injunctive relief and tort doctrines such as negligence, nuisance, trespass and strict liability) that may impose liability or obligations for injuries, damages or penalties due to, or threatened as a result of, the presence of, effects of or exposure to any Hazardous Substance. (c) As used herein, "Hazardous Substance" means any substance presently or hereafter listed, defined, designated or classified as hazardous, toxic, radioactive, or dangerous, or otherwise regulated, under any Environmental Law. Hazardous Substance includes any substance to which exposure is regulated by any government authority or any Environmental Law including, without limitation, any toxic waste, pollutant, contaminant, hazardous substance, toxic substance, hazardous waste, special waste, industrial substance or petroleum or any derivative or by-product thereof, radon, radioactive material, asbestos containing material, urea formaldehyde foam insulation, lead or polychlorinated biphenyls. SECTION 5.22 Trademarks and Intellectual Property Compliance. The Company and its subsidiaries own or have the right to use, without any material payment to any other party, all of their patents, trademarks (registered or unregistered), trade names, service marks, copyrights, technology, know-how and applications as set forth in Schedule 5.22 ("Intellectual Property Rights"), and the consummation of the transactions contemplated hereby will not alter or impair such rights in any material respect. Other than the Intellectual Property Rights, no other intellectual property rights, privileges, licenses, contracts or other agreements are necessary to or used in the conduct of business of the Company or any of its subsidiaries. To the knowledge of the Company, no claims are pending by any person with respect to the ownership, validity, enforceability or use of any such Intellectual Property Rights which claims could reasonably be expected to have a Company Material Adverse Effect. Neither the Company nor any of its subsidiaries, nor to the knowledge of the Company, any of the employees of the Company or any of its subsidiaries, has infringed or made unlawful use of, or is infringing or making unlawful use of, any proprietary or confidential information of any person or entity. SECTION 5.23 Insurance. Schedule 5.23 sets forth all of the insurance policies of the Company. Except to the extent there would be no Company Material Adverse Effect, all of the Company's and its subsidiaries' liability, theft, life, health, fire, title, worker's compensation and other forms of insurance, surety bonds and umbrella policies, insuring the Company and its subsidiaries and their directors, officers, employees, independent contractors, properties, assets and business, are valid and in full force and effect and without any premium past due or pending notice of cancellation, and are, in the reasonable judgment of the Company, adequate for the business of the Company and its subsidiaries as now conducted, and there are no claims, singly or in the aggregate, under such policies in excess of $50,000, which, in any event, are not in excess of the limitations of coverage set forth in 21 such policies. The Company and its subsidiaries have taken all actions reasonably necessary to insure that their independent contractors obtain and maintain adequate insurance coverage. All of the insurance policies referred to in this Section 5.23 are "occurrence" policies and no such policies are "claims made" policies. Neither the Company nor any of its subsidiaries has knowledge of any fact indicating that such policies will not continue to be available to the Company and its subsidiaries upon substantially similar terms subsequent to the Effective Time. The provision and/or reserves in the Company Financial Statements are adequate for any and all self insurance programs maintained by the Company or its subsidiaries. SECTION 5.24 Year 2000 Compliance. Each production system which includes software, hardware, databases or embedded control systems (microprocessor controlled, robotic or other device) (collectively, a "System"), that constitutes any part of, or is used in connection with the use, operation or enjoyment of, any material tangible or intangible asset or real property of the Company and its subsidiaries (i) is designed (or has been modified) to be used prior to and after January 1, 2000, (ii) will operate without error arising from the creation, recognition, acceptance, calculation, display, storage, retrieval, accessing, comparison, sorting, manipulation, processing or other use of dates or date-based, date-dependent or date-related data, including but not limited to century recognition, day-of-the-week recognition, leap years, date values and interfaces of date functionalities, and (iii) will not be adversely affected by the advent of the year 2000, the advent of the twenty-first century or the transition from the twentieth century through the year 2000 and into the twenty-first century (collectively, items (i) through (iii) are referred to herein as "Year 2000 Compliant"). No System that is material to the business, finances or operations of the Company or any subsidiary receives data from or communicates with any component or system external to itself (whether or not such external component or system is the Company's, any subsidiary's or any third party's) that is not itself Year 2000 Compliant. All licenses for the use of any system-related software, hardware, databases or embedded control system permit the Company or its subsidiaries or a third party to make all modifications, bypasses, de-bugging, work-arounds, repairs, replacements, conversions or corrections necessary to permit the System to operate compatibly, in conformance with their respective specifications, and to be Year 2000 Compliant. Except as set forth in Schedule 5.24, neither the Company nor any of its subsidiaries has any reason to believe that it may incur material expenses arising from or relating to the failure of any of its Systems as a result of not being Year 2000 Compliant. SECTION 5.25 Bank Accounts. Schedule 5.25 sets forth all banks or other financial institutions with which the Company has an account or maintains a safe deposit box, showing the type and account number of each such account and safe deposit box and the names of the persons authorized as signatories thereon or to act or deal in connection therewith. SECTION 5.26 Business Relations. Neither the Company nor the Company Shareholders know or have any reason to believe that any customer or supplier of the Company or the subsidiaries of the Company will cease to do business with the Company or the subsidiaries of the Company after the consummation of the transactions contemplated hereby in the same manner and at the same levels as previously conducted with the Company or the subsidiaries of the Company as the case may be. SECTION 5.27 Potential Conflicts of Interest. Except as set forth on Schedule 5.27, (a) No officer, director, or shareholder of the Company or any of its subsidiaries (a) owns, directly or indirectly, any interest (excepting not more than 1% stock holdings for investment purposes in securities of publicly 22 held and traded companies) in, or is an officer, director, employee, or consultant of, any person or entity that is a competitor, lessor, lessee, customer, or supplier of the Company or any of its subsidiaries; (b) owns, directly or indirectly, in whole or in part, any tangible or intangible property that the Company or any of its subsidiaries is using or the use of which is necessary for the business of the Company or any of its subsidiaries; or (c) has any cause of action or other claim whatsoever against, or owes any amount to, the Company or any of its subsidiaries, except for claims in the ordinary course of business, such as for accrued vacation pay, accrued benefits under employee benefit plans, and similar matters and agreements. (b) To the knowledge of the Company, no officer, director, employee, or consultant of the Company or any of its subsidiaries is presently obligated under or bound by any agreement or instrument, or any judgment, decree, or order of any court of administrative agency, that (i) conflicts or may conflict with his or her agreements and obligations to use his or her best efforts to promote the interests of the Company or any of its subsidiaries, (ii) conflicts or may conflict with the business or operations of the Company or any of its subsidiaries as presently conducted or as proposed to be conducted in the short term, or (iii) restricts or may restrict the use or disclosure of any information that may be useful to the Company or any of its subsidiaries. SECTION 5.28 Disclosure. No representation or warranty of the Company or any of the Company Shareholders in this Agreement (including the exhibits and schedules hereto), or any of the other Agreements to be executed and delivered by any of them as contemplated hereby, or any statement made or document presented by the Company or any of the Company Shareholders in connection therewith or herewith, contains or shall contain any untrue statement of a material fact or omits or shall omit to state a material fact required to be stated therein or necessary to make the statements contained therein not false or misleading. There is no fact that the Company has not disclosed to Parent in writing that materially adversely affects the business or condition (financial or otherwise) of the Company or the ability of the Company or any of the Company Shareholders to perform their respective obligations under this Agreement or to consummate any of the transactions contemplated hereby. SECTION 5.29 Brokers. Neither the Company nor the Company Shareholders have engaged, or caused to be incurred, any liability to any finder, broker or sales agent in connection with the origin, negotiation, execution, delivery, or performance of this Agreement and the transactions contemplated hereby. SECTION 5.30 Resignation of Directors and Officers. Parent has received the written resignation, effective as of Closing, of each director and officer of the Company and its subsidiaries. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE COMPANY SHAREHOLDERS Each of the Company Shareholders represents and warrants to Parent and Subsidiary as of the date hereof as follows: 23 SECTION 6.1 Authority; Non-Contravention; Approvals. (a) Such Company Shareholder has full legal right, power and authority to enter into, execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by, and assuming the due authorization, execution and delivery hereof by Parent, and Subsidiary and the Company, constitutes a valid and legally binding agreement of such Company Shareholder, enforceable against such Company Shareholder in accordance with its terms, except that such enforcement may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) general equitable principles. (b) The execution and delivery of this Agreement by each Company Shareholder do not violate, conflict with or result in a breach of any provision of or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of such Company Shareholder under any of the terms, conditions or provisions of (i) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to such Company Shareholder or any of such Company Shareholder's respective properties or assets or (ii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which such Company Shareholder is now a party or by which such Company Shareholder or any of such Company Shareholder's respective properties or assets may be bound. (c) No declaration, filing or registration with, or notice to, or authorization, consent or approval of, any governmental or regulatory body or authority is necessary for the execution and delivery of this Agreement by each Company Shareholder or the consummation by each Company Shareholder of the transactions contemplated hereby. SECTION 6.2 Approval of Merger. The Company Shareholders have adopted and approved the Merger and this Agreement by executing a written consent of the shareholders of the Company. SECTION 6.3 Title to Shares. Each Company Shareholder has good and marketable title to and is the lawful owner, of record and beneficially, of the Company Common Stock set forth next to such Company Shareholder's name in Schedule 5.2. Such Company Common Stock constitutes all of the shares of Company Common Stock owned by such Company Shareholder, either directly or indirectly. The Company Common Stock owned by such Company Shareholder is not or will not be subject to any lien, claim, encumbrance or restriction of any type, kind or nature in favor of any third party or any third party interests. SECTION 6.4 Tax-Free Reorganization. In order to preserve the tax-free treatment of the Merger under Sections 368(a)(1)(A) and 368(a)(2)(D) of the Code, each Company Shareholder agrees that such Company Shareholder has no plan or intention to sell or otherwise dispose of any shares of Parent Common Stock received by such Company Shareholder as Merger Consideration, which sale or disposition would have the effect of reducing the aggregate number of shares of Parent Common Stock received by all Company Shareholders in the Merger to an amount that would be equal in value as of the date of the Merger to less than 51% of the fair market value of all the shares of Company Common Stock outstanding immediately prior to the Merger. 24 SECTION 6.5 Investment; No registration. Each Company Shareholder (i) understands that Parent Common Stock received by such Company Shareholder as Merger Consideration has not been, and will not be, registered under the Securities Act, or under any state securities laws, and is being offered and sold in reliance upon federal and state exemptions for transactions not involving any public offering, (ii) is acquiring such Parent Common Stock solely for such Company Shareholder's own account for investment purposes, and not with a view to the distribution thereof, (iii) is a sophisticated investor with knowledge and experience in business and financial matters, (iv) has received sufficient information concerning Parent and has had the opportunity to obtain additional information as desired in order to evaluate the merits and the risks inherent in holding Parent Common Stock, and (v) is able to bear the economic risk and lack of liquidity inherent in holding Parent Common Stock. ARTICLE VII ADDITIONAL AGREEMENTS SECTION 7.1 Expenses and Fees. Each party hereto agrees to bear its own expenses, including reasonable and customary fees and expenses payable to attorneys and accountants in connection with the transactions contemplated hereby, provided, however, that any fees and expenses payable to Reese, Smalley, Wiseman & Schweitzer, LLP shall be payable solely by the Company Shareholders. SECTION 7.2 Confidentiality. Each of Parent, Subsidiary, the Company and the Company Shareholders will hold in strict confidence all documents and information concerning any party hereto furnished to them and their representatives in connection with the transactions contemplated by this Agreement and will not release or disclose such information to any other person, except as required by law, with the same undertaking from such accountants, attorneys, financial advisors and other representatives of each party. Regardless of whether the transactions contemplated by this Agreement shall be consummated, such confidence shall be maintained and such information shall not be used in competition with any party hereto. Notwithstanding the foregoing, such information shall not be considered confidential if it (i) is or becomes generally available to the public other than as a result of disclosure by any other party hereto, (ii) becomes available to any party from a public source, or (iii) is independently developed by any party hereto through persons who have not had, directly or indirectly, access to non-public information. SECTION 7.3 Parent Stock. Each certificate representing restricted Parent Stock received by Company Shareholders as Merger Consideration will be imprinted with a legend substantially in the following form: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE DISPOSED OF UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND SUCH LAWS COVERING SUCH SECURITIES OF AQUAPENN SPRING WATER COMPANY, INC. OR AN OPINION OF COUNSEL 25 SATISFACTORY TO AQUAPENN SPRING WATER COMPANY, INC. STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT, OFFER, PLEDGE OR OTHER DISTRIBUTION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND SUCH LAWS." SECTION 7.4 Payment of Obligations. On the Closing Date or after the Closing Date and promptly upon verification of the proper pay-off amounts, Parent will pay all obligations of the Company, including obligations to related parties and obligations for which personal guarantees were given by shareholders, disclosed in Schedule 7.4. SECTION 7.5 No Checks, Wires or Withdrawals. The Principal Shareholders agree not to issue any checks, authorize any account or wire transfers or otherwise withdraw any funds from the Company's or the Surviving Corporation's bank account(s) on or after the Closing Date, without the prior written consent of the chief financial officer of Parent. ARTICLE VIII CONDITIONS SECTION 8.1 Condition to Parent's Obligation to Effect the Merger. Unless waived by Parent, its obligation to effect the Merger shall be subject to (a) the receipt of an opinion from Reese, Smalley, Wiseman & Schweitzer, LLP, counsel to the Company, dated as of the Closing Date, substantially in the form set forth in Exhibit 8.1 attached hereto; (b) the receipt of resignations from the Principal Shareholders as officers and directors of the Company; and (c) the termination of the Buy-Sell Agreement. SECTION 8.2 Conditions to the Company's Obligation to Effect the Merger. Unless waived by Company, its obligation to effect the Merger shall be subject to the receipt of an opinion from McQuaide, Blasko, Schwartz, counsel to Parent, dated as of the Closing Date, substantially in the form set forth in Exhibit 8.2 attached hereto. ARTICLE IX POST-CLOSING OBLIGATIONS SECTION 9.1 Agreement to Cooperate. Subject to the terms and conditions herein provided, each of the parties hereto shall use all reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable pursuant to all agreements, contracts, indentures or other instruments to which the parties hereto are a party, or under any applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including using its reasonable efforts (i) to obtain all necessary or appropriate waivers, consents and approvals from lenders, landlords, security holders or other parties whose waiver, consent or approval is required in connection with the Merger, (ii) to effect all necessary registrations, filings and submissions and (iii) to 26 lift any injunction or other legal bar to the Merger, the transactions contemplated hereby and all post-closing actions necessary or required hereunder. By way of clarification and not limitation of the foregoing, the Principal Shareholders agree to use their best efforts to fully cooperate with Parent and the Surviving Corporation in their efforts to identify all Liabilities of the Company and to complete an audit of the Company's Financial Statements as quickly as possible following the Closing. SECTION 9.2 Public Statements. Unless required by law, the parties (i) shall consult with each other prior to issuing any press release or any written public statement with respect to this Agreement or the transactions contemplated hereby, and (ii) shall not issue any such press release or written public statement prior to such consultation. SECTION 9.3 Transition. The Company Shareholders shall not take any action that is designed or intended to have the effect of discouraging any employee, lessor, licensor, customer, supplier or other business associate of the Company or of Parent from maintaining the same business relationships with the Company after the Closing as it maintained with the Company or with Parent prior to the Closing unless such action is taken in accordance with prudent business practices. SECTION 9.4 Directors and Officers of Surviving Corporation. As soon as practicable after closing, Parent shall cause the Shareholder of the Surviving Corporation to elect Paul Kassis and Scott Lidster as additional directors of Surviving Corporation, and Paul Kassis; Scott Lidster; and Clark Wright to be appointed as President; Vice President and Secretary; and Vice President and Treasurer, respectively, of Surviving Corporation each to serve at the pleasure of the shareholder of Surviving Corporation and directors of Parent. Paul Kassis, Scott Lidster and Clark Wright each agree to resign as directors and officers of the Surviving Corporation immediately upon request of Parent. SECTION 9.5 Lock-up Agreements. Each Company Shareholder shall execute a lock-up agreement in relation to the IPO in the same form as lock-up agreements executed by the shareholders of Parent. Each Company Shareholder agrees to cooperate fully with Parent in the IPO, including without limitation assistance with the preparation of financial statements and the audit of the financial statements required in connection with the IPO. SECTION 9.6 Completion of Minutes. Scott Lidster and Paul Kassis agree to draft and execute minutes to any and all board meetings and shareholders meetings for which no minutes currently exist. SECTION 9.7 Execution of Further Documents. Promptly upon request by another party to this Agreement, each party shall execute whatever certificates and documents, and will file, record and publish such certificates and documents which are required to complete all transactions contemplated by this Merger Agreement. 27 ARTICLE X GENERAL PROVISIONS SECTION 10.1 Survival of Representations and Warranties. All of the representations and warranties of Parent, Subsidiary, the Company and the Company Shareholders contained in this Agreement shall survive the Closing and continue in full force and effect for a period of twenty-four (24) months thereafter. SECTION 10.2 Validity. If any provision of this Agreement or the application thereof to any person or circumstance is held invalid or unenforceable, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected thereby and to such end the provisions of this Agreement are agreed to be severable. SECTION 10.3 Indemnification. (a) The Principal Shareholders jointly and severally agree to defend, indemnify and hold Parent and Subsidiary and their respective officers, directors, shareholders, affiliates, employees and agents, and their respective successors and assigns, harmless from and against any and all claims, actions, damages, obligations, losses, liabilities, costs and expenses (including attorneys' fees, costs of collection, other costs of defense and all other fees and costs incurred by Parent and Subsidiary) resulting from: (i) any misrepresentation or omission from or breach of warranty by the Company or the Company Shareholders made in Articles V and VI of this Agreement or in any certificate or document delivered to Parent or Subsidiary by the Company or the Company Shareholders under or in connection with this Agreement; (ii) any breach of any agreement, covenant or commitment of the Company or the Company Shareholders made or contained in this Agreement; (iii) any claim or liability which arises from events or conditions occurring prior to the Closing Date, other than those reflected on the Company Financial Statements or the Schedules to this Agreement; and (iv) tax liabilities incurred by the Company prior to the Closing Date. (b) Parent agrees to defend, indemnify and hold the Company Shareholders and their respective heirs, executors and personal representatives and the Company harmless from and against any and all claims, actions, damages, obligations, losses, liabilities, costs and expenses (including attorneys' fees, costs of collection, other costs of defense and all other fees and costs incurred by the Company or the Company Shareholders resulting from (i) any misrepresentation or omission from or by Parent or Subsidiary made in Article IV of this Agreement or in any certificate or document delivered to the Company or the Company Shareholders by Parent or Subsidiary under or in connection with this Agreement (except for any Private Placement Memorandum), and (ii) any breach of any covenant, agreement or commitment of Parent or Subsidiary made or contained in this Agreement. (c) Any person seeking indemnity under this Section 10.3 (an "Indemnified Person") shall be entitled to make a claim for indemnity under Section 10.3(a) or Section 10.3(b) hereof, as the case may be, only if written notice, specifying in reasonable detail the basis of the claims shall have been provided to the party from which indemnity may be sought (the "Indemnifying Party") (a) within ninety days after the Indemnified Person shall have become aware of facts constituting the basis for such a claim or (b) if earlier, in the case of any action or proceeding by a third party, not more than fifteen days after the commencement of such action or proceeding. In the case of any such action or proceeding by a third party, if the Indemnifying Party so elects or is requested by the Indemnified Person, the Indemnifying 28 Party will assume the defense of such action or proceeding, including the employment of counsel reasonably satisfactory to the Indemnified Person and the payment of the fees and disbursements of such counsel. In the event, however, that such counsel reasonably determines that its representation of both the Indemnifying Party and one or more Indemnified Persons would present such counsel with a conflict of interest or if the Indemnifying Party fails to assume the defense of the action or proceeding in a timely manner after receiving notice, then such Indemnified Person may employ separate counsel to represent or defend it in any such action or proceeding and the Indemnifying Party will pay the fees and disbursement of such counsel; provided, however, that the Indemnifying Party will not be required to pay the fees and disbursements of more than one separate law firm for all Indemnified Persons in any jurisdiction in any single action or proceeding. (d) So long as the Indemnifying Party is conducting the defense of the Indemnified Party in accordance with this Section 10.3(a), the Indemnified Party may retain separate co-counsel at its sole cost and expense and participate in the defense of the claim; (b) the Indemnified Party will not consent to the entry of any judgment or enter into any settlement with respect to any claim without the prior written consent of the Indemnifying Party (not to be withheld unreasonably), and (c) the Indemnifying Party will not consent to the entry of any judgment or enter into any settlement with respect to any claim without the prior written consent of the Indemnified Party (not to be withheld unreasonably). SECTION 10.4 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally, mailed by registered or certified mail (return receipt requested) or sent via facsimile to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) If to Parent or Subsidiary to: AquaPenn Spring Water Company, Inc. P.O. Box 938 1 AquaPenn Drive Milesburg, PA 16853 Attention: Edward J. Lauth Facsimile Number: (814) 353-9108 with a copy to: Ballard Spahr Andrews & Ingersoll 1735 Market Street, 51st Floor Philadelphia, Pennsylvania 19103 Attention: Brian D. Doerner, Esq. Facsimile Number: (215) 864-8999 29 (b) If to the Company, to: Dunsmuir Bottling Company d/b/a Castle Rock Spring Water Company 4900 Mountain Lakes Blvd. Redding, CA 96003 Attention: President Facsimile Number: 916-243-8415 with a copy to: Reese, Smalley, Wiseman & Schweitzer, LLP 1265 Willis Street Redding, CA 96001 Attention: Howard Schweitzer Facsimile Number: (916) 241-5106 SECTION 10.5 Interpretation. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. In this Agreement, unless a contrary intention appears, (i) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision and (ii) reference to any Article or Section means such Article or Section hereof. No provision of this Agreement shall be interpreted or construed against any party hereto solely because such party or its legal representative drafted such provision. SECTION 10.6 Miscellaneous. This Agreement (including the documents and instruments referred to herein) (a) constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof, (b) is not intended to confer upon any other person any rights or remedies hereunder, except for rights of indemnified Parties under Section 10.2 and (c) shall not be assigned by operation of law or otherwise, except that Subsidiary may assign this Agreement to any other wholly owned subsidiary of Parent. THIS AGREEMENT SHALL BE GOVERNED IN ALL RESPECTS, INCLUDING VALIDITY, INTERPRETATION AND EFFECT, BY THE LAWS OF THE COMMONWEALTH OF PENNSYLVANIA APPLICABLE TO CONTRACTS EXECUTED AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE. SECTION 10.7 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. Each of the parties agrees to accept and be bound by facsimile signatures hereto. SECTION 10.8 Parties In Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and except as set forth in the exception to Section 10.3, nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement. 30 SECTION 10.9 Exhibits and Schedules. All Exhibits and Schedules referred to in this Agreement shall be attached hereto and are incorporated by reference herein. 31 IN WITNESS WHEREOF, Parent, Subsidiary and the Company have caused this Agreement to be signed by their respective officers as of the date first written above. ATTEST: AQUAPENN SPRING WATER COMPANY, INC. By: /s/ Geoffrey F. Feidelberg By: /s/ Edward J. Lauth, III ------------------------------ ---------------------------------- Name: Geoffrey F. Feidelberg Name: Edward J. Lauth, III Title: COO Title: President ATTEST: CASTLE ROCK SPRING WATER COMPANY, INC. By: /s/ Geoffrey F. Feidelberg By: /s/ Edward J. Lauth, III ------------------------------ ---------------------------------- Name: Geoffrey F. Feidelberg Name: Edward J. Lauth, III Title: Secretary Title: President ATTEST: DUNSMUIR BOTTLING COMPANY By:/s/ Scott E. Lidster By: /s/ Paul A. Kassis ------------------------------ ---------------------------------- Name: Scott E. Lidster Name: Paul A. Kassis Title: Secretary Title: President /s/ Paul A. Kassis -------------------------------------- Paul Kassis /s/ Scott E. Lidster -------------------------------------- Scott Lidster /s/ Clark Wright -------------------------------------- Clark Wright /s/ Raymond C. Kassis TTEF -------------------------------------- Ray Kassis, Trustee Ray and Sharon Kassis Trust dtd July 15, 1993 32 /s/ Sharon K. Kassis, Trustee -------------------------------------- Sharon Kassis, Trustee Ray and Sharon Kassis Trust dtd July 15, 1993 /s/ Donald K. Lidster Trustee -------------------------------------- Donald K. Lidster, Trustee The Lidster Trust dtd July 1, 1983 and amended June 25, 1987 /s/ Gernith L. M. Lidster - Trustee -------------------------------------- Gernith L. Lidster, Trustee The Lidster Trust dtd July 1, 1983 and amended June 25, 1987 33 EXHIBIT A
Total Stock Shares Cash Value ----- ------ ---- ----- .2969121 Paul Kassis 250 ($ 525,000) 105,000 $ 365,736 $ 890,736 .2969121 Scott Lidster 250 ($ 525,000) 105,000 365,736 890,736 .2969121 Clark Wright 250 ($ 200,000) 40,000 690,736 890,736 .0498812 R & S, 42 ($ 149,645) 29,929 0 149,645 Kassis Trust .0498812 D & G, 42 ($ 149,645) 29,929 0 149,645 Lidster Trust .0095011 Clark Wright 8 28,504 28,504 --- ----------- ------- ---------- ---------- 842 ($1,549,290) 309,858 $1,450,712 $3,000,002
EXHIBIT 4.8 FORM OF EMPLOYMENT AGREEMENT This Agreement, made as of this _____ day of October, 1997, by and between, AQUAPENN SPRING WATER COMPANY, INC. ("AquaPenn"), a Pennsylvania business corporation, CASTLE ROCK SPRING WATER COMPANY, INC. ("Castle Rock"), a California business corporation, (collectively "Employer") and _______________, an individual, hereinafter called "Employee". Intending to be legally bound, and in consideration of the mutual covenants contained herein, the parties hereto agree as follows: 1. Employment. The Employer shall employ Employee for a one (1) year term beginning on October 15, 1997 and ending on October 14, 1998. Unless this Agreement is terminated as provided in the first, second, or third sentence of Section 2 below, it shall automatically renew for an unlimited number of successive additional terms of one (1) year duration. 2. Termination. Employer may at any time during the term of this Agreement terminate Employee immediately for Cause and Employer shall have no further liability or obligation to Employee except for accrued and unpaid salary, fringe benefits and expenses to the date of termination. Employer also may, at any time upon thirty (30) days written notice, terminate Employee without cause, in which case all benefits shall cease upon termination and Employer will continue to pay Employee's base salary for one year from the date of termination to be paid at the same regular intervals as AquaPenn's normal payroll. Finally, this Agreement may only be terminated by the Employee within 90 days of the end of a term, upon 90 days prior written notice to Employer. "Cause" shall be determined by the Board of Directors of AquaPenn or the President of AquaPenn in the exercise of good faith and reasonable judgment, and shall include the occurrence of any or one or more of the following: (i) The willful and continued failure by the Employee to substantially perform his duties of employment, provided that Employer gives Employee at least 30 days prior notice and an opportunity to cure such failure; (ii) The Employee's commission of an act of fraud, embezzlement, theft or other act constituting a felony involving moral turpitude; (iii) The willful engaging by the Employee in gross misconduct or the willful violation of an Employer policy; (iv) The Employee's insobriety or unlawful use of a controlled substance during business hours; 1 (v) The breach by the Employee of any covenants contained in Sections 11 or 12 of this Agreement; (vi) Gross negligence of the Employee; or (vii) Dishonest conduct by the Employee. 3. Employee's Duties. During the term of this Agreement, Employee shall devote all necessary time and his best efforts to the faithful performance of his duties as directed by the Board of Directors of Castle Rock and the Board of Directors and appropriate officers of AquaPenn. It is understood between the parties that said duties shall concentrate in the area of _______________. Employee shall devote his entire professional time to the affairs of the Employer. Notwithstanding anything contained herein, Employee may engage in other business ventures during the term of this Agreement as long as said activities are not in competition with or adverse to the activities of the Employer and as long as such activities do not interfere with Employee's performance of his duties hereunder and such activities do not occur during normal business hours. 4. Salary. Employee's base salary shall be _______________________________ per year, payable with AquaPenn normal payroll. Employee's salary will be reviewed on a yearly basis. 5. Employee Benefits. a. Subject to Section 5.c. below, during the term of this Agreement, and as otherwise provided within the provisions of each of the respective plans, the Employer shall provide to the Employee all benefits to which other employees of the Employer are entitled to receive, in accordance with the terms and conditions applicable to other employees of any policies or plans applicable to such benefits. b. Automobile. Employee shall be entitled to an automobile of reasonable value, of Employee's selection, for business and/or personal use, furnished at the Employer's expense. Such automobile shall be replaced every three (3) years or at the expiration of a lease of appropriate term. c. Right to Change Plans. The Employer shall not be obligated to institute, maintain, or refrain from changing, amending, or discontinuing any benefit plan, program, or perquisite. 6. Arbitration. Except as provided in Paragraph 13, any disputes relating to the interpretation or application of this Agreement shall be promptly resolved by an impartial arbitrator pursuant to the rules of the American Arbitration Association. The parties shall share equally all costs and expenses of arbitration including the arbitrator's fees; and excluding only their own attorney's fees, unless the arbitrator shall order either party to pay any or all of the other's attorneys fees. The arbitration shall take place in Sacramento, California or such other location as the parties shall agree. The award of the arbitrator shall be final and binding, and immediately enforceable by either party in any court of competent jurisdiction. 7. Law Applicable. This Agreement shall be interpreted and enforced in all circumstances according to the laws of the State of California. 2 8. Notices. Notices to the Employer shall be delivered to the following unless changed by written notice of the addressee: AquaPenn Spring Water Company P.O. Box 938 One AquaPenn Drive Milesburg, PA 16853-0938 Notices to Employee shall be delivered to: ----------------------------- ----------------------------- ----------------------------- 9. Entire Agreement. This Agreement fully integrates all understandings and agreements between the parties and shall constitute the entire agreement between them and supersede any prior written employment agreement between the parties or any oral representations of any kind. This Agreement may only be modified in writing by the voluntary signed consent of all parties. 10. Assignment. Employee acknowledges that the services to be rendered by him are unique and personal; accordingly, Employee acknowledges that he may not assign any of his rights or delegate any of his duties or obligations under this Agreement without the prior written consent of the Employer. The rights and obligations of the Employer under this Agreement shall inure to the benefit of and shall be binding upon the Employer's successors and assigns, provided, however, that Employer may not assign its interest to anyone other than an entity affiliated with Employer without the prior written consent of Employee. 11. Confidentiality. During the term of his employment and indefinitely thereafter, Employee shall not use any proprietary or confidential information acquired during the course of his employment for his own benefit, nor shall he disclose it to any other person or organization except as authorized in writing by the Employer. 12. Covenant Not To Compete. a. During the term of Employee's employment and for two (2) years thereafter, Employee shall not become employed by, act as consultant for, contract with, obtain a beneficial ownership interest in or otherwise enter into any form of business relationship with any person, firm, company, partnership, association, organization or other legal entity, for the purpose of offering or providing services or products substantially similar to the Employer's services and products in the territories in which Employer markets and sells its services and products. b. During the term of Employee's employment and for two (2) years thereafter, Employee shall not, directly or indirectly, render services to or contact or attempt to solicit business with regard to the business of bottling and selling water from any customer of Employer on Employee's own behalf or on behalf of any other person, firm, company, partnership, association or other organization. 3 c. During the term of Employee's employment and for two (2) years thereafter, Employee shall not employ, engage the services of or solicit any employee or representative of Employer to terminate his or her employment or representation or to otherwise seek to engage the services of such employee or representative. 13. Injunction. Employee acknowledges that monetary damages would not be an adequate remedy to Employer for Employee's breach of any obligation under Sections 11 and 12 of this Agreement and that such a breach would cause irreparable harm to Employer. If Employee breaches any such obligation, Employer shall be entitled both to regular and permanent injunctive relief from any court or other legally cognizable tribunal of competent jurisdiction, in addition to any other remedies prescribed by law or in equity. If Employer seeks such injunctive relief, Employer shall be obligated to prove only that Employee violated one or more of the terms of Sections 11 and 12 of this Agreement. Employee waives the obligation of Employer to prove any other prerequisite to its entitlement to such injunctive relief. 14. Previous Employment. Employee represents and warrants that he is not, to the best of his knowledge and belief, under any legal restraint or restriction that would prevent or make unlawful the execution of this Agreement or the performance of his obligations under this Agreement and that he has disclosed to the Employer any and all restraints, confidentiality, commitments or employment restrictions that he has with any other previous or current employer or business. 15. Cooperation After Termination. After the termination of this Agreement, Employee agrees to cooperate with any reasonable request of the Employer to participate in the preparation for, response to, prosecution of and/or defense of any pending, actual or threatened litigation involving the Employer based on or involving actions that took place during Employee's employment. The Employer will reimburse Employee for all reasonable expenses Employee incurs as a result of such cooperation. 4 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and year first written above. AQUAPENN SPRING WATER COMPANY, INC. By: ---------------------------------- Edward J. Lauth, III President CASTLE ROCK SPRING WATER COMPANY, INC. By: ---------------------------------- President WITNESS: EMPLOYEE: (SEAL) -------------------------------- 5 Exhibit 8.1 Form of Opinion of Company's Counsel October 15, 1997 AquaPenn Spring Water Company, Inc. P.O. Box 938 One AquaPenn Drive Milesburg, PA 16853-0938 Re: Re: Agreement and Plan of Merger by and among AquaPenn Spring Water Company, Inc. ("Parent"), Castle Rock Spring Water Company, Inc. ("Subsidiary") and Dunsmuir Bottling Company, Inc. (the "Company") Dear Ladies and Gentlemen: This firm is special counsel to Dunsmuir Bottling Company, Inc. You have requested our opinion in connection with that certain Agreement and Plan of Merger dated as of October 15, 1997 by and among AquaPenn Spring Water Company, Inc., Castle Rock Spring Water Company, Inc., Dunsmuir Bottling Company and the shareholders of Dunsmuir Bottling Company (the "Merger Agreement"). With respect to the opinions stated herein, we have examined originals or copies of the following documents, all dated as of October 15, 1997, unless otherwise indicated (the "Documents"): (i) the Merger Agreement and (ii) the Articles of Merger. We have also reviewed such relevant corporate records or documents of the Company, including its Articles of Incorporation, By-Laws and the resolutions adopted by its Board of Directors and Shareholders. In addition, we have also examined such agreements and other documents and such laws, regulations and other information that we consider relevant to the rendering of the opinions set forth herein. In the examination of the Documents in delivering these opinions, we have assumed the genuineness of all signatures, including facsimile signatures, and the authenticity of all items submitted to us as originals, and the conformity with the originals of all items submitted to us as copies. In making our examination of the Documents, we have assumed that each party to one or more of the Documents has the power and authority to execute and deliver, and to perform and observe the provisions of the Documents, and has duly authorized, executed and delivered such Documents, and that such Documents constitute the legal, valid and binding obligations of such party. We have also assumed that Subsidiary is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California. Capitalized terms used herein unless otherwise defined, shall have the meanings given them in the Merger Agreement. Based upon the foregoing, and subject to the specific limitations set forth herein, we are of the opinion that: AquaPenn Spring Water Company, Inc. October 15, 1997 Page 7 (1) The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California and has the requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being conducted. (2) The Company has all requisite corporate power and authority to enter into the Merger Agreement, to perform its obligations under the Merger Agreement and to consummate the transactions contemplated thereby. (3) The Merger Agreement has been approved by the Board of Directors of the Company and the shareholders of the Company, and no other corporate proceedings on the part of the Company are necessary to authorize the execution and delivery of the Merger Agreement or the consummation by the Company of the transactions contemplated thereby. The Merger Agreement and the Articles of Merger have been duly authorized, executed and delivered by the Company, and assuming the due authorization, execution and delivery thereof by Parent and Subsidiary, upon the effectiveness of the Merger, the Merger Agreement will constitute a valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, except that such enforcement may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally, (ii) general equitable principles, and (iii) the invalidity or unenforceability under certain circumstances, under state or federal law or court decisions, of provisions indemnifying a party against liability for its own wrongful or negligent acts or when such indemnification is against public policy. (4) Each Company Shareholder has full power to execute and deliver the Merger Agreement and the Escrow Agreement, and to perform such Stockholder's obligations thereunder. The Merger Agreement and the Escrow Agreement are valid and legally binding obligations of each Company Shareholder enforceable against such Company Shareholder in accordance with their terms. (5) The execution and delivery of the Merger Agreement by the Company do not, and the consummation by the Company of the transactions contemplated by the Merger Agreement will not, violate, conflict with or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of any of the terms, conditions or provisions of (i) the Articles of Incorporation or By-laws of the Company, (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to the Company or any of its properties or assets, or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which the Company is now a party. Excluded from the first sentence of this Paragraph 5, insofar as they apply to the terms, conditions or provisions described in clauses (ii) and (iii) of the first sentence of this Paragraph 5, are such violations, conflicts, breaches, defaults or terminations, that would not, in the aggregate, have a Company Material Adverse Effect. (6) Except for the making of the Merger Filing with the Secretary of State of the State of California in connection with the Merger, no declaration, filing or registration with, or notice to, or AquaPenn Spring Water Company, Inc. October 15, 1997 Page 8 authorization, consent or approval of, any governmental or regulatory body or authority is necessary for the execution and delivery of the Merger Agreement by the Company or the consummation by the Company of the transactions contemplated hereby, other than such declarations, filings, registrations, notices, authorizations, consents or approvals which, if not made or obtained, as the case may be, would not, in the aggregate, have a Company material Adverse Effect. (7) Upon filing of the Articles of Merger with the Secretary of State of the State of California and upon acceptance by the Secretary of State of the State of California, the Merger will be effective in accordance with the California Corporations Code. (8) To our knowledge, there are no claims, suits, actions or proceedings pending or threatened against, relating to or affecting the Company before any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator that seek to restrain the consummation of the Merger or which could reasonably be expected, in the aggregate with regard to all such claims, actions or proceedings to cause a Company Material Adverse Effect. To our knowledge, the Company is not subject to any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator which prohibits or restricts the consummation of the transactions contemplated by the Merger Agreement or would have a Company Material Adverse Effect. This opinion is issued as of the date hereof and is necessarily limited to the laws now in effect and the facts and circumstances known to us on the date hereof. We are not assuming any obligation to review or update this opinion should applicable law or the existing facts or circumstances change. We express no opinion as to matters governed by any laws other than the substantive laws of the State of California. This opinion may not be relied upon by any person other than the party to whom it is addressed, or for any purpose other than as relates to the Merger Agreement and the transactions expressly contemplated thereby. REESE, SMALLEY, WISEMAN & SCHWEITZER cc: Paul Kassis Exhibit 8.2 Form of Opinion of Parent's Counsel October 15, 1997 Dunsmuir Bottling Company d/b/a Castle Rock Spring Water Company 4900 Mountain Lakes Boulevard Redding, CA 96003 In Re: Agreement and Plan of Merger by and among AquaPenn Spring Water Company, Inc. ("Parent"), Castle Rock Spring Water Company, Inc. ("Subsidiary") and Dunsmuir Bottling Company (the "Company") Dear Ladies and Gentlemen: This firm is counsel to AquaPenn Spring Water Company, Inc. You have requested our opinion in connection with that certain Agreement and Plan of Merger dated October 15, 1997 by and among AquaPenn Spring Water Company, Inc., Castle Rock Spring Water Company, Inc., Dunsmuir Bottling Company and the shareholders of Dunsmuir Bottling Company (the "Merger Agreement"). Capitalized terms used herein, unless otherwise defined, shall have the meanings given them in the Merger Agreement. With respect to the opinions stated herein, we have examined originals or copies of the following documents, all dated October 15, 1997, unless otherwise indicated (the "Documents"): (i) the Merger Agreement and (ii) the Articles of Merger. We have also reviewed such relevant corporate records or documents of Parent, including its Articles of Incorporation, By-Laws and the resolutions adopted by the Board of Directors of Parent. In addition, we have also examined such agreements and other documents and such laws, regulations and other information that we consider relevant to the rendering of the opinions set forth herein. In the examination of the Documents in delivering these opinions, we have assumed the genuineness of all signatures and the authenticity of all items submitted to us as originals, and the conformity with the originals of all items submitted to us as copies. In making our examination of the Documents, we have assumed that each party to one or more of the Documents other than Parent has the power and authority to execute and deliver, and to perform and observe the provisions of the Documents, and has duly authorized, executed and delivered such Documents, and that such Documents constitute the legal, valid and binding obligations of such party. Our opinion in paragraph 1 below as to the qualification and good standing of Parent is based solely upon certificates of public officials in the Commonwealth of Pennsylvania. Based upon the foregoing, and subject to the specific limitations set forth herein, we are of the opinion that: Dunsmuir Bottling Company October 15, 1997 Page 2 1. Parent is a corporation duly incorporated, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania and has the requisite corporate power and authority to own, lease and operate its assets and properties and to carry on its business as it is now being conducted. 2. Parent has all requisite corporate power and authority to enter into the Merger Agreement, to perform its obligations under the Merger Agreement and to consummate the transactions contemplated thereby. 3. The Merger Agreement has been approved by the Board of Directors of Parent and no other corporate proceedings on the part of Parent are necessary to authorize the execution and delivery of the Merger Agreement or the consummation by Parent of the transactions contemplated thereby. The Merger Agreement and the Articles of Merger have been duly authorized, executed and delivered by Parent, and, assuming the due authorization, execution and delivery thereof by the Company and Subsidiary, upon the effectiveness of the Merger, the Merger Agreement will constitute a valid and legally binding agreement of Parent, enforceable against Parent in accordance with its terms, except that such enforcement may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally, (ii) general equitable principles, and (iii) the invalidity or unenforceability under certain circumstances, under state or federal law or court decisions, of provisions indemnifying a party against liability for its own wrongful or negligent acts or when such indemnification is against public policy. 4. Except for notice and approval requirements contained in a Credit Agreement between Parent Mid-State Bank and Trust Company, the execution and delivery of the Merger Agreement by Parent does not, and the consummation by Parent of the Transactions contemplated by the Merger Agreement will not, violate, conflict with or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of any of the terms, conditions or provisions of (i) the Certificate of Incorporation or By-laws of Parent, (ii) any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to Parent or any of its properties or assets, or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which Parent is now a party. Excluded from the first sentence of this paragraph 4, insofar as they apply to the terms, conditions or provisions described in clauses (ii) and (iii) of the first sentence of this paragraph 4, are such violations, conflicts, breaches, defaults or terminations, that would not, in the aggregate, have a Parent Material Adverse Effect. Dunsmuir Bottling Company October 15, 1997 Page 3 5. Except for the making of the Merger Filing with the Secretary of State of the State of California in connection with the Merger, no declaration, filing or registration with, or notice to, or authorization, consent or approval of, any governmental or regulatory body or authority is necessary for the execution and delivery of the Merger Agreement by Parent or the consummation by Parent of the transactions contemplated hereby, other than such declarations, filings, registrations, notices, authorizations, consents or approvals which, if not made or obtained, as the case may be, would not, in the aggregate, have a Parent Material Adverse Effect. 6. To our knowledge, there are no claims, suits, actions or proceedings pending or threatened against, relating to or affecting Parent before any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator that seek to restrain the consummation of the Merger or which could reasonably be expected, in the aggregate with regard to all such claims, actions or proceedings to cause a Company Material Adverse Effect. To our knowledge, Parent is not subject to any judgment, decree, injunction, rule or order of any court, governmental department, commission, agency, instrumentality or authority, or any arbitrator which prohibits or restricts the consummation of the transactions contemplated by the Merger Agreement or would have a Parent Material Adverse Effect. This opinion is issued as of the date hereof and is necessarily limited to the laws now in effect and the facts and circumstances known to us on the date hereof. We are not assuming any obligation to review or update this opinion should applicable law or the existing facts or circumstances change. We express no opinion as to matters governed by any laws other than the substantive laws of the Commonwealth of Pennsylvania and the federal laws of the United States of America. Dunsmuir Bottling Company October 15, 1997 Page 4 This opinion may not be relied upon by any person other than the party to whom it is addressed, or for any purpose other than as relates to the Merger Agreement and the transactions expressly contemplated thereby. Very truly yours, McQUAIDE BLASKO By: ------------------------------- Daniel E. Bright DEB:cek cc: Edward J. Lauth, III Geoffrey F. Feidelberg Brian D. Doerner, Esquire Schedule 4.2 Capitalization (Parent) to Agreement and Plan of Merger Outstanding Options to Purchase Shares of Common Stock of AquaPenn Spring Water Company, Inc. Holder of Options Number of Shares - ----------------- ---------------- Edward J. Lauth III 150,000 Geoffrey Feidelberg 550,000 Matthew J. Suhey 550,000 Joseph Paterno 60,000 Seven Springs 75,000 Outstanding Warrants to Purchase Shares of Common Stock of AquaPenn Spring Water Company, Inc. Holder of Warrants Number of Warrants - ------------------ ------------------ Edward J. Lauth III 125,000 Nancy Davis 35,000 James D. Hammond 15,000 Aqua Works, Inc. 225,000 Schedule 4.4 Litigation (Parent and Subsidiary) to Agreement and Plan of Merger None. SCHEDULE 5.2 Capitalization Class A Stock Name Shares ---- ------ Paul A. Kassis 250 Scott E. Lidster 250 Clark J. Wright 250 Class B Stock Name Shares ---- ------ Ray and Sharon Kassis Trust 42 The Lidster Trust 42 Clark J. Wright 8 SCHEDULE 5.4 Subsidiaries None SCHEDULE 5.5(b) Authority: Non-Contravention; Approvals SBA Note Superior California Economic Development District OGD Superior California Economic Development District IRP City of Dunsmuir Note Bank of the West Note Bank of the West Note Nations Credit/Greyrock Note JLA Credit AEL Lease AEL Lease Tri-Counties Note 23860 26660 29060 100360 100860 54060 TIP SCHEDULE 5.8 Absence of Certain Changes of Events 4121 Building Purchase Tri-Counties Building Loan Tri-Counties Equipment Loan SCHEDULE 5.8 (Continued) Dunsmuir Bottling Company 1997 Shareholder Dividends Share Payment Shareholder Holdings Date Amount - ----------- -------- ------ ---------- Clark Wright 250 1/8/97 $ 500.00 Clark Wright 250 2/7/97 500.00 Paul Kassis 250 2/27/97 1,500.00 Scott Lidster 250 2/27/97 1,500.00 Clark Wright 250 3/5/97 500.00 Clark Wright 250 8/29/97 5,062.00 Paul Kassis 250 8/27/97 5,062.00 Scott Lidster 250 8/27/97 5,062.00 ---------- Total Dividends Paid $19,686.00 Accrued Dividends for 1997: Ray Kassis 42 $1,102,000 Donald Lidster 42 1,102.00 Clark Wright 8 210.00 ---------- Total 1997 Dividends $22,100.00 ========== Dividend Recap: Clark Wright 258 $ 6,772,00 Paul Kassis 250 6,562.00 Scott Lidster 250 6,562.00 Ray Kassis 42 1,102.00 Donald Lidster 42 1,102.00 --- ---------- 842 $22,100.00 === ========== SCHEDULE 5.9 Absence of Undisclosed Liabilities Kassis Note $130,000 Lidster Note $130,000 SCHEDULE 5.11 Title To Assets 4121 Dunsmuir Avenue Owned Dunsmuir, CA 96025 4900 Mountain Lakes Blvd. Leased Redding, CA 96003 Contractors Storage Yard Leased 4955 Mountain Lakes Blvd. Redding, CA 96003 SCHEDULE 5.12 Assets and Properties Complete Water Agreement with City of Dunsmuir Water Bottling Plant License - State of California Montana Department of Public Health & Human Services Food Purveyor/Water Bottling License SCHEDULE 5.14 Water Quality Letter for Cobb Mountain (Jaret & Jaret) SCHEDULE 5.15 Contracts Standard Distributor Agreements Modified Distributor Agreements including: Redding Distributing Coors West Donaghy Sales Inc. CNC Containers Bottle Agreement Kassis Note Kassis Note Kassis Mortgage Note Lidster Note Lidster Note Lidster Mortgage Note City of Dunsmuir Water Agreement City of Dunsmuir Loan SCEDD OGD SCEDD IRP Bank of West Bank of West Tri-Counties 100360 29060 26660 100860 54060 GMAC Tri-Counties 23860 Union Bank 69606 JLA Credit William Sweet Note Tri-Counties 166060 Nations Credit/Greyrock TIP SCHEDULE 5.15 (Continued) Contracts AEL Lease AEL Leasing Kassis Equipment Lease Lidster Equipment Lease ATT Capital Lease Colonial Pacific Lease Tenant Lease Caterpillar Financial SBA 5-Gallon Customer Agreement San Francisco Marathon Sponsorship Agreement Creative Entertainment Agreement Japan Export Agreement - Connell Bros. Adobe Sales Brokerage Agreement Smith & Kline (Team Northwest) Brokerage Agreement Window Box Nursery Contract Pivotal Sales Company Ray Morgan Company - Copier Service Agreement Executone - Telephone System Service Agreement John Signor Studio Ring Properties - Building Lease Air-O-Sweep - Parking lot cleaning Aramark Uniform Services, Inc. AT&T Wireless Robert Dewey - Billboard Agreement Dunsmuir Chamber of Commerce - Billboard Agreement SCHEDULE 5.17 No Violation of Law OSHA Compliance Inspection conducted in August 1997. No report issued as of this date. Water Bottling Plant License City of Dunsmuir Business License City of Redding Business License California State Board of Equalization - Sellers Permit Pressure Vessels License - County Of Siskiyou Permit to Operate LP Pressurized Tank - Cal OSHA SCHEDULE 5.18 Litigation Cobb Mountain Letter (Jaret & Jaret) SCHEDULE 5.19 Employee Benefit Plans; ERISA Paid Holidays Paid Vacation Paid Medical Insurance Cafeteria Plan Workers Compensation Insurance Leaves of Absence Medical Leaves Pregnancy Related Disability Leave Pregnancy Disability Leave Family/Medical Leave Family Care/Medical Leave and Pregnancy Disability Military Leave School Activities External Employee Education Employee Discount/Water Buy Program Employee Free Water Program - Nonsalable Product Employee Promotional Item Purchase Program Recycling Program Company vehicles Employee Lunches/refreshments (i.e. working meetings), Beverages (i.e. coffee), & Breakroom supplies SCHEDULE 5.20 Labor Matters Notice of Filing of Discrimination Complaint: Silvestre Franco Notice of Case Closure: Silvestre Franco SCHEDULE 5.22 Trademarks and Intellectual Property Compliance Castle Rock - Registered US Trademark AquaBoost - Application for US Trademark The Best Water on Earth - unregistered SCHEDULE 5.23 Insurance Maryland Insurance - Commercial Package California Indemnity Workers Compensation Lincoln Benefit Life Insurance Blue Shield Health Insurance SCHEDULE 5.24 Year 2000 Compliance None SCHEDULE 5.25 Bank Accounts Lending Institution Account Type Account Number ------------------- ------------ -------------- Tri-Counties Checking 38603461 Tri-Counties Checking 38028765 Tri-Counties Savings 38603066 SCHEDULE 5.27 Potential Conflicts of Interest Kassis Mortgage Note Kassis Note Kassis Note Kassis Equipment Lease Lidster Equipment Lease Lidster Note Lidster Note Lidster Mortgage Note SCHEDULE 7.4 Payment of Obligations
======================================================================================== Estimated Estimated Creditor Accounting Debt Payoff Amount Notes Payable As of Sept. 30, 1997 As of Sept. 30, 1997 - ---------------------------------------------------------------------------------------- R & S Kassis - N/P $ 107,190.09 $ 107,190.09 - ---------------------------------------------------------------------------------------- R & S Kassis - N/P $ 161,200.00 $ 161,200.00 - ---------------------------------------------------------------------------------------- R & S Kassis - Mortgage N/P $ 150,801.56 $ 150,801.56 - ---------------------------------------------------------------------------------------- D & G Lidster - N/P $ 63,197.90 $ 63,197.90 - ---------------------------------------------------------------------------------------- D & G Lidster - N/P $ 161,200.00 $ 161,200.00 - ---------------------------------------------------------------------------------------- D & G Lidster - Mortgage N/P $ 95,359.56 $ 95,359.56 - ---------------------------------------------------------------------------------------- City of Dunsmuir $ 89,372.00 $ 89,372.00 - ---------------------------------------------------------------------------------------- S.C.E.D.D. # OGD 006 $ 94,417.76 $ 94,272.64 - ---------------------------------------------------------------------------------------- S.C.E.D.D. #IRP 001 $ 94,417.78 $ 94,272.64 - ---------------------------------------------------------------------------------------- Tri Counties Bank #100360 $1,167,186.80 $1,167,186.80 - ---------------------------------------------------------------------------------------- Tri Counties Bank #29060 $ 13,211.11 $ 13,211.11 - ---------------------------------------------------------------------------------------- Tri Counties Bank #100860 $ 301,705.19 $ 301,705.19 - ---------------------------------------------------------------------------------------- Tri Counties Bank #183160 $ 365,425.83 $ 365,425.83 - ---------------------------------------------------------------------------------------- Tri Counties Bank #54060 $ 238,070.43 $ 238,070.43 - ---------------------------------------------------------------------------------------- Tri Counties Bank #26660 $ 14,254.82 $ 14,254.82 - ---------------------------------------------------------------------------------------- Tri Counties Bank #23860 $ 14,656.31 $ 14,656.31 - ---------------------------------------------------------------------------------------- Tri Counties Bank #166060 $ 14,120.39 $ 14,120.39 - ---------------------------------------------------------------------------------------- William Sweet - N/P $ 16,080.45 $ 16,080.45 - ---------------------------------------------------------------------------------------- Tri Counties Visa #45710617033 -- -- - ---------------------------------------------------------------------------------------- Capitalized Lease Obligations - ---------------------------------------------------------------------------------------- Bank of the West $ 43,387.86 $ 50,167.55 - ---------------------------------------------------------------------------------------- Bank of the West $ 20,461.61 $ 24,167.91 - ---------------------------------------------------------------------------------------- Nations Credit\Greyrock $ 14,768.95 $ 22,315.80 - ---------------------------------------------------------------------------------------- JLA Credit $ 27,664.77 $ 34,586.15 - ---------------------------------------------------------------------------------------- AEL Leasing $ 15,966.23 $ 15,966.23 - ---------------------------------------------------------------------------------------- AEL Leasing - 5 gallon $ 6,385.09 $ 7,498.08 - ---------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------- Total notes payable & capitalized $3,290,502.49 $3,316,279.44 leases scheduled for payoff ========================================================================================
EX-10.20 6 LINE OF CREDIT APPROVAL EXHIBIT 10.20 CoreStates Hamilton Bank 30 North Third Street PO Box 1071 Harrisburg PA 17108 717 234 2784 CORESTATES HAMILTON BANK, NOW Thomas J. Fowlston INCORPORATED AS CORESTATES BANK, N.A. Vice President November 18, 1996 Geoffrey F. Feidelberg Chief Operating Officer AquaPenn Spring Water Company, Inc. P.O. Box 938 One AquaPenn Drive Milesburg, PA 16853-0938 Dear Geoff: I am pleased to advise you that CoreStates Bank, N.A. (the "Bank") has approved a $6,000,000 line of credit (the "Line of Credit") to AquaPenn Spring Water Company, Inc. (the "Borrower"). The Line of Credit will be used to finance working capital needs. Subject to the terms and conditions of this letter and the documentation hereafter executed and delivered by the Borrower to the Bank in connection herewith, the Bank will make advances from time to time to the Borrower under the Line of Credit in amounts not to exceed $6,000,000 at any one time outstanding. Borrowings under the Line of Credit will be payable when and in amounts demanded by the Bank. Borrower shall at the time of each advance select one of the following interest rate options, subject to availability: (a) A rate per annum which is at all times equal to the Bank's Prime Rate, such rate to change each time the Prime Rate changes, effective on and as of the date of the change(s). (b) A fixed rate as offered by the Bank in its sole discretion to the Borrower from time to time for a period of time up to 90 days. At the expiration of any period, the Borrower shall select from available options. (c) A rate per annum equal to 1.25% in excess of the LIBOR rate, offered for a period of 30, 60 or 90 days, which will be quoted to the Borrower at the time of the advance for that advance. At the expiration of any period, the Borrower shall select from available options. Absent an effective election, the interest rate shall be option (a) above. Calculations and payments of interest will be based on the applicable interest rate option. Geoffrey F. Feidelberg Chief Operating Officer AquaPenn Spring Water Company, Inc. Page 2 November 18, 1996 Any prepayment(s) of principal prior to the expiration of the relevant fixed-rate interest period shall require immediate payment to the Bank of a prepayment fee equal to the amount, if any, by which the aggregate present value of scheduled principal and interest payments eliminated by the prepayment exceeds the principal amount being prepaid, with said present value to be calculated by application of a discount rate determined by Bank in its reasonable judgment to be the yield-to-maturity at the time of prepayment on U.S. Treasury securities having a maturity which most closely approximates the maturity date of the principal amount being prepaid. On a fiscal year basis, Borrower shall furnish the Bank with audited financial statements within one hundred twenty (120) days of fiscal-year end, along with a new annual budget. Also, on a monthly basis, Borrower shall furnish the Bank with internally-prepared financial statements within thirty (30) days of period end. Borrower must achieve and remain in compliance with the terms, conditions and covenants of all loan documents with its other lender(s). Borrower shall not create, incur or permit any lien(s) or encumbrance(s) to exist in or upon any of its accounts receivable and inventory, without the Bank's prior approval. Borrower has not breached and is not in violation of any environmental protection law, rule or regulation. Borrower will immediately give notice in writing to Bank of any condition or event which constitutes or could constitute a breach or violation of any environmental protection law, rule or regulation. Borrower agrees to hold Bank and its employees harmless from any loss, liability or expense arising from any such breach or violation. The availability of the Line of Credit is contingent upon the Borrower and the Bank entering into mutually acceptable loan documentation setting forth the terms and conditions stated herein and such other terms and conditions, covenants, warranties and representations as may be required by the Bank and be mutually acceptable to the Borrower and the Bank. Notwithstanding, the terms and conditions stated herein shall survive execution and delivery of such loan documentation. Please signify your concurrence by signing, dating and returning the enclosed copy of this letter by no later than December 2, 1996. Geoffrey F. Feidelberg Chief Operating Officer AquaPenn Spring Water Company, Inc. Page 3 November 18, 1996 We look forward to working with you and your fine company. Very truly yours, /s/ Thomas J. Fowlston - ---------------------- Thomas J. Fowlston Vice President /dir Accepted and agreed this 19th day of November, 1996. ATTEST: AQUAPENN SPRING WATER COMPANY, INC. (Signature illegible) By: /s/ Geoffrey F. Feidelberg - ----------------------------- ------------------------------- Title: COO/CFO ----------------------------- EX-10.21 7 MASTER DEMAND NOTE EXHIBIT 10.21
For Bank Use Only - ---------------- --------------------- ------------------------- ------------------------------ | | | | | | | | - ---------------- --------------------- ------------------------- ------------------------------ LIS NO. LOAN NO. BORROWER APPROVAL SIGNATURE
CoreStates MASTER DEMAND NOTE $6,000,000 , 1997 - ---------- ------------- -- FOR VALUE RECEIVED, each of the undersigned, jointly and severally if more than one (hereinafter collectively referred to as "Borrower"), promises to pay to the order of CoreStates Bank, N.A.*, a national banking association (the "Bank"), at any of its banking offices in Pennsylvania, the principal amount of Six Million and 00/100------------------------------------------------------- DOLLARS in lawful money of the United States, or, if less, the outstanding principal balance on all loans and advances made by Bank evidenced by this Note ("Loans"), plus interest. Said principal and interest shall be payable ON DEMAND Interest shall accrue at a rate(s) per annum as set forth in the attached Master Demand Note Addendum. INTEREST - Interest shall be calculated on the basis of a 360-day year and shall be charged for the actual number of days elapsed. Accrued interest shall be payable monthly. Accrued interest shall also be payable on demand and when the entire principal balance of this Note is paid to Bank. The term "Prime Rate" is defined as the rate of interest for loans established by Bank from time to time as its prime rate. Interest shall accrue on each disbursement hereunder from the date such disbursement is made by Bank, provided, however, that to the extent this Note represents a replacement, substitution, renewal or refinancing of existing indebtedness, interest shall accrue from the date hereof. Interest shall accrue on the unpaid balance hereof at the rate provided for in this Note until the entire unpaid balance has been paid in full, notwithstanding the entry of any judgment against Borrower. BANK'S LOAN RECORDS - The actual amount due and owing from time to time under this Note shall be evidenced by Bank's books and records of receipts and disbursements hereunder. Bank shall set up and establish an account on the books of Bank in which will be recorded Loans evidenced hereby, payments on such Loans and other appropriate debits and credits as provided herein, including any Loans which represent reborrowings of amounts previously repaid. Bank shall also record, in accordance with customary accounting practice, all other interest, charges, expenses and other items properly chargeable to Borrower hereunder, and other appropriate debits and credits. Such books and records of Bank shall be presumed to be complete and accurate and shall be deemed correct, except to the extent shown by Borrower to be manifestly erroneous. NOTE NOT A COMMITMENT TO LEND - Borrower acknowledges and agrees that no provision hereof, and no course of dealing by Bank in connection herewith, shall be deemed to create or shall imply the existence of any commitment or obligation on the part of Bank to make Loans. Except as otherwise provided in a currently effective written agreement by Bank to make Loans, each Loan shall be made solely at Bank's discretion. COLLATERAL - As security for all indebtedness to Bank now or hereafter incurred by Borrower, under this Note or otherwise, Borrower grants Bank a lien upon and security interest in any securities, instruments or other personal property of Borrower now or hereafter in Bank's possession and in any deposit balances now or hereafter held by Bank for Borrower's account and in all proceeds of any such personal property or deposit balances. Such liens and security interests shall be independent of Bank's right of setoff. This Note and the indebtedness evidenced hereby shall be additionally secured by any lien or security interest evidenced by a writing (whether now existing or hereafter executed) which contains a provision to the effect that such lien or security interest is intended to secure (a) this Note or indebtedness evidenced hereby or (b) any category of liabilities, obligations or the indebtedness of Borrower to Bank which includes this Note or the indebtedness evidenced hereby, and all property subject to any such lien or security interest shall be collateral for this Note. DEMAND NOTE - This Note is and shall be construed as a "demand instrument" under the Uniform Commercial Code. Bank may demand payment of the indebtedness outstanding under this Note or any portion thereof at any time. BANK'S REMEDIES - In the event that any payment hereunder is not made when due or demanded, Bank may, immediately or any time thereafter, exercise any or all of its rights hereunder or under any agreement or otherwise under applicable law against Borrower, against any person liable, either absolutely or contingently, for payment of any indebtedness evidenced hereby, and in any collateral, and such rights may be exercised in any order and shall not be prejudiced by any delay in Bank's exercise thereof. At any time after such non-payment, Bank may, at its option and upon five days written notice to Borrower, begin accruing interest on this Note at a rate not to exceed five percent (5%) per annum in excess of the rate of interest provided for above on the unpaid principal balance hereof; provided, however, that no such interest shall accrue hereunder in excess of the maximum rate permitted by law. All such additional interest shall be payable upon demand. NOTICE TO BORROWER - Any notice required to be given by Bank under the provisions of this Note shall be effective as to each Borrower when addressed to Borrower and deposited in the mail, postage prepaid, for delivery by first class mail at Borrower's mailing address as it appears on Bank's records. DISBURSEMENTS AND PAYMENTS - The proceeds of any Loan may be credited by Bank to the deposit account of Borrower or disbursed in any other manner requested by Borrower and approved by Bank. All payments due under this Note are to be made in immediately available funds. If Bank accepts payment in any other form, such payment shall not be deemed to have been made until the funds comprising such payment have actually been received by or made available to Bank. If Borrower is not an individual, Borrower authorizes Bank (but Bank shall have no obligation) to charge any deposit account in Borrower's name at Bank for any and all payments of principal, interest, or any other amounts due under this Note. PAYMENT OF COSTS - In addition to the principal and interest and other sums payable hereunder, Borrower agrees to pay Bank on demand, all costs and expenses (including reasonable attorneys' fees and disbursements) which may be incurred by Bank in the collection of this Note or the enforcement of Bank's rights and remedies hereunder. REPRESENTATIONS BY BORROWER - In order to induce Bank to make Loans, Borrower represents and warrants as follows: if Borrower is a corporation or a general or limited partnership, Borrower represents and warrants that it is validly existing and in good standing in the jurisdiction of whose laws it was organized. If Borrower is a corporation, Borrower represents and warrants that the execution, delivery and performance under this Note are within Borrower's corporate powers, have been duly authorized by all necessary action by Borrower's Board of Directors, and are not in contravention of the terms of Borrower's charter, by-laws, or any resolution of its Board of Directors. If Borrower is a general or limited partnership, Borrower represents and warrants that the execution, delivery and performance of this Note have been duly authorized and are not in conflict with any provision of Borrower's partnership agreement or - ---------- * CoreStates Bank, N.A. also conducts business as Philadelphia National Bank, as CoreStates First Pennsylvania Bank and as CoreStates Hamilton Bank. certificate of limited partnership. Borrower further represents and warrants that this Note has been validly executed and is enforceable in accordance with its terms, that the execution, delivery and performance by Borrower of this Note are not in contravention of law and do not conflict with any indenture, agreement or undertaking to which Borrower is a party or is otherwise bound, and that no consent or approval of any governmental authority or any third party is required in connection with the execution, delivery and performance of this Note. If this Note is secured by "margin stock" as defined in Regulation U of the Board of Governors of the Federal Reserve System, Borrower warrants that no Loan or portion thereof shall be used to purchase or carry margin stock, and that each Loan shall be used for the purpose or purposes indicated on the most recent Form FR U-1 executed by Borrower in connection with Loans made by Bank. WAIVERS, ETC. - Borrower and each additional obligor on this Note waive presentment, dishonor, notice of dishonor, protest and notice of protest. Neither the failure nor any delay on the part of Bank to exercise any right, remedy, power or privilege hereunder shall operate as a waiver or modification thereof. No consent, waiver or modification of the terms of this Note shall be effective unless set forth in a writing signed by Bank. All rights and remedies of Bank are cumulative and concurrent and no single or partial exercise of any power or privilege shall preclude any other or further exercise of any right, power or privilege. MISCELLANEOUS - This Note is the unconditional obligation of Borrower, and Borrower agrees that Bank shall not be required to exercise any of its rights or remedies against any collateral in which it holds a lien or security interest, or against which it has right of setoff, or against any particular obligor. All representations, warranties and agreements herein are made jointly and severally by each Borrower. If any provision of this Note shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof. To the extent that this Note represents a replacement, substitution, renewal or refinancing of a pre-existing note or other evidence of indebtedness, the indebtedness represented by such pre-existing note or other instrument shall not be deemed to have been extinguished hereby. This Note has been delivered in and shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without regard to the law of conflicts. In the event any due date specified or otherwise provided for in this Note shall fall on a day which Bank is not open for business, such due date shall be postponed until the next banking day, and interest and any fees or similar charges shall continue to accrue during such period of postponement. This Note shall be binding upon each Borrower and each additional Obligor and upon their personal representatives, heirs, successors and assigns, and shall benefit Bank and its successors and assigns. CONSENT TO JURISDICTION AND VENUE -- IN ANY LEGAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER ARISING OUT OF OR RELATED TO THIS NOTE OR THE RELATIONSHIP EVIDENCED HEREBY, EACH UNDERSIGNED PARTY HEREBY IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN ANY COUNTY IN THE COMMONWEALTH OF PENNSYLVANIA WHERE BANK MAINTAINS AN OFFICE AND AGREES NOT TO RAISE ANY OBJECTION TO SUCH JURISDICTION OR TO THE LAYING OR MAINTAINING OF THE VENUE OF ANY SUCH PROCEEDING IN SUCH COUNTY. EACH UNDERSIGNED PARTY AGREES THAT SERVICE OF PROCESS IN ANY SUCH PROCEEDING MAY BE DULY EFFECTED UPON IT BY MAILING A COPY THEREOF, BY REGISTERED MAIL, POSTAGE PREPAID, TO EACH UNDERSIGNED PARTY. WAIVER OF JURY TRIAL -- EACH UNDERSIGNED PARTY HEREBY WAIVES, AND BANK BY ITS ACCEPTANCE HEREOF THEREBY WAIVES, TRIAL BY JURY IN ANY LEGAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF OR RELATED TO THIS NOTE OR THE RELATIONSHIP EVIDENCED HEREBY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR BANK TO ENTER INTO, ACCEPT OR RELY UPON THIS NOTE. IN WITNESS WHEREOF, Borrower, intending this to be a sealed instrument and intending to be legally bound hereby, has executed and delivered this Note as of the day and year first above written. - ------------------------------------------------------------------------------- Name of Corporation or Partnership AQUAPENN SPRING WATER COMPANY, INC. By: /s/ Geoffrey F. Feidelberg By: - --------------------------------------- ----------------------------------- (Signature of Authorized Signer) (Signature of Authorized Signer) Geoffrey F. Feidelberg - --------------------------------------- ----------------------------------- (Print or Type Name and (Print or Type Name and Title of Signer Above) Title of Signer Above) INDIVIDUALS SIGN BELOW - --------------------------------------- ---------------------------- [Seal] (Signature of Witness) (Signature of Individual Borrower) - --------------------------------------- ---------------------------------- (Print or Type Name of (Print or Type Name of Above Witness) Borrower Signing Above) - --------------------------------------- ---------------------------- [Seal] (Signature of Witness) (Signature of Individual Borrower) - --------------------------------------- ---------------------------------- (Print or Type Name of (Print or Type Name of Above Witness) Borrower Signing Above) MASTER DEMAND NOTE ADDENDUM Requests for Loans. Borrower may request Loans from Bank by a telephone or letter request given by a duly authorized officer or other duly authorized person. Bank will make such Loans to Borrower as Bank may elect to make by crediting to Borrower's designated account with Bank such sum or sums of money as may be mutually agreed upon at such time. Bank will forward to Borrower at Borrower's address written advices or statements of Loans made to Borrower in accordance with Bank's usual procedures, which advices or statements will also advise Borrower of the rate or rates of interest payable on the Loans, and such other terms as may have been agreed to. Definitions. For purposes of this Note, the following terms shall have the following meanings (terms defined in the singular to have the same meaning when used in the plural and vice versa) unless the context otherwise requires: "Business Day" means any day other than a Saturday, Sunday or any day which is a legal holiday under the laws of the Commonwealth of Pennsylvania or on which commercial banks in Philadelphia, Pennsylvania are authorized or required by law or other governmental action to close and, if the applicable day relates to a LIBOR Loan, LIBOR Period or notice with respect to a LIBOR Loan, a day on which dealings in dollar deposits are also carried on in the London Interbank Market and banks are open for the transaction of banking business in London. "Fixed Rate Loan" means any Loan when and to the extent that the interest rate therefor is a fixed rate as offered by the Ban in its sole discretion. "LIBOR Loan" means any Loan when and to the extent that the interest rate therefor is determined by reference to the LIBOR Rate. "LIBOR Period" shall mean, with respect to any LIBOR Loan, the period commencing on the date such Loan begins to bear interest at a rate tied to the LIBOR Rate in accordance with this Note and ending thirty (30) days, sixty (60) days or ninety (90) days thereafter, as selected by Borrower. "LIBOR Rate" shall mean, for any LIBOR Period for a LIBOR Loan, the rate per annum (rounded upward, if necessary, to the next higher 1/16%) determined by Bank to be equal to the quotient of (a) the average of the quotations (rounded upward to the next higher 1/16%), offered to Bank (or an average of the quotations offered to one or more other reference banks selected by Bank) two (2) Business Days prior to the first day of such LIBOR Period in the interbank eurodollar market in London at 11:00 A.M. local time, for a period equal to the number of days in such LIBOR Period for delivery on the first day of such LIBOR Period and in an amount comparable to the principal amount of the LIBOR Loan, divided by (b) a number equal to 1.00 minus the average of the daily rates (expressed as a decimal fraction) of reserve requirements applicable during such LIBOR Period (including without limitation, basic, supplemental, marginal and emergency reserves) under any regulations of the Board of Governors of the Federal Reserve System or other domestic governmental authority having jurisdiction with respect thereto, as now and from time to time hereafter in effect, dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board). "Prime Loan" means any Loan when and to the extent that the interest rate therefor is determined by reference to the Prime Rate. "Prime Rate" means the rate of interest announced or designated from time to time by CoreStates Bank, N.A., Philadelphia, Pennsylvania, as its prime rate. Any change in the Prime Rate shall be effective as of the opening of business on the day on which such change in the Prime Rate becomes effective. Interest. Interest shall accrue on the outstanding and unpaid principal amount of the Loans at a rate per annum, at the Borrower's election, as set forth below, as follows: (1) At a rate per annum which is at all times equal to the Prime Rate. (2) At a rate as offered by the Bank in its sole discretion to the Borrower from time to time which shall be fixed for a period of time up to 90 days. (3) At a rate which is at all times equal to one and twenty-five one-hundredths percent (1.25%) in excess of the LIBOR Rate. Interest on each Loan shall be calculated on the basis of a year of 360 days and shall be charged for the actual number of days elapsed. Interest on the Loans shall be paid in immediately available funds at any office of Bank as follows: (1) If the Prime Rate or a fixed rate is selected, on the first day of each month. (2) If the LIBOR Rate is selected, on the last day of the Interest Period with respect thereto and, in the case of an Interest Period greater than three months, at three-month intervals after the first day of such Interest Period. Interest Rate Elections. (a) Borrower, subject to any prior continuing interest rate election(s) made pursuant hereto, may notify Bank (which notification may be effected 2 pursuant to any notice of borrowing) that it is electing to have interest accrue based on the Prime Rate on a specific portion (up to an including 100%) of the aggregate unpaid amount of all Loans. (b) Subject to the notice provisions set forth below, at any time and from time to time, Borrower may notify Bank (which notification may be effected pursuant to any notice of borrowing) that it is electing to have interest accrue for a period of up to 180 days ending on or before the Expiration Date of the Line of Credit at a fixed rate as offered by the Bank in its sole discretion on a specific portion of the unpaid amount of the Loans (including Loans to be made by the Bank to the Borrower on the date of election) equal to the lesser of the aggregate unpaid amount of the Loans or the amount specified by Borrower. (c) Subject to the notice provisions set forth below, at any time and from time to time, Borrower may notify Bank (which notification may be effected pursuant to any notice of borrowing) that it is electing to have interest accrue for a thirty (30) day, sixty (60) day or ninety (90) day period ending on or before the Expiration Date of the Line of Credit at a rate tied to the LIBOR Rate on a specific portion of the unpaid amount of the Loans (including Loans to be made by the Bank to the Borrower on the date of election) equal to the lesser of the aggregate unpaid amount of the Loans or the amount specified by Borrower. (d) Borrower shall notify Bank not later than 11:00 a.m. two (2) Business Days before the date on which the Borrower desires any Loan, or portion thereof, to bear interest at a rate tied to the LIBOR Rate or at a fixed rate. Notwithstanding anything contained herein to the contrary, any Loan, or portion thereof, which bears interest at a rate tied to the LIBOR Rate or a fixed rate shall be in minimum denominations of One Hundred Thousand Dollars ($100,000) or more. (e) Following any advances under the Loans and an interest rate election made by Borrower with respect thereto under Sections (a), (b) and (c), but subject to all other conditions of this Note, Borrower may, in accordance with the provisions of Sections (a), (b) and (c), from time to time elect to convert or continue the type of interest rate borne by such advances. In the event that Borrower fails to provide Bank with any notice of conversion or continuance, as described above, such Loans shall commence or continue, as appropriate, bearing interest at the Prime Rate. (f) If the last day of the thirty (30) day, sixty (60) day or ninety (90) day period, as the case may be, elected by Borrower pursuant to Section (b) does not fall on a Business Day, (1) the period shall be automatically extended until the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such period shall end on the next preceding Business Day, 3 (2) interest shall, to the extent applicable, continue to accrue at a rate tied to the then applicable LIBOR Rate, and (3) the next thirty (30) day, sixty (60) day or ninety (90) day period, as the case may be, elected by Borrower, if any, shall commence on the day following the Business Day described in clause (1) above. (g) Any LIBOR Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month in which such LIBOR Period ends) shall end on the last Business Day of a calendar month and the next LIBOR Period shall commence on such Business Day. (h) If Borrower at any time fails to make a necessary interest rate election pursuant to Section (a) or (b) and (c) with regard to any or all of the aggregate unpaid amount of the Loans, Borrower shall be deemed to have elected to have interest accrue at the Prime Rate. Illegality. Notwithstanding any other provision herein, if the Bank determines that any applicable law, rule, or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank, or comparable agency charged with the interpretation or administration thereof, or compliance by the Bank with any request or directive (whether or not having the force of law) of any such authority, central bank, or comparable agency shall make it unlawful or impossible for the Bank to maintain or fund its LIBOR Loans, then upon notice to the Borrower by the Bank the outstanding principal amount of the LIBOR Loans together with interest accrued thereon, and any other amounts payable to the Bank under this Note shall be repaid (a) immediately upon demand of the Bank if such change or compliance with such request, in the judgment of the Bank, requires immediate repayment; or (b) at the expiration of the last Interest Period to expire before the effective date of any such change or request. LIBOR Rate Unascertainable. Notwithstanding anything to the contrary herein, if the Bank determines (which determination shall be conclusive) that (1) quotations of interest rates for the relevant deposits referred to in the definition of LIBOR Rate are not being provided in the relevant amounts or for the relative maturities for purposes of determining the rate of interest on a LIBOR Loan as provided herein and (2) the relevant rates of interest referred to in the definition of LIBOR Rate upon the basis of which the rate of interest for any such type of loan is to be determined do not accurately cover the cost to the Bank of making or maintaining such type of Loans, then the Bank shall forthwith give notice thereof to the Borrower, whereupon (a) the obligation of the Bank to make LIBOR Loans shall be suspended until the Bank notifies the Borrower of the circumstances giving rise to such suspension no longer exist; and (b) the Borrower shall repay in full the then outstanding principal amount of each LIBOR Loan together with accrued interest thereon, on the last day of the then current Interest Period applicable to such Loan. 4 Increased Cost. The Borrower shall pay to the Bank from time to time such amounts as the Bank may determine to be necessary to compensate the Bank for any costs incurred by the Bank which the Bank determines are attributable to its making or maintaining any LIBOR Loans hereunder or its obligation to make any such Loans hereunder, or any reduction in any amount receivable by the Bank in respect of any such Loans or such obligation (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any change after the date of this Note in U.S. federal, state, municipal or foreign laws or regulations (including Regulation D), or the adoption or making after such date of any interpretations, directives, or requirements applying to a class of banks including the Bank of or under any U.S. federal, state, municipal or foreign laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof ("Regulatory Change"), which: (1) changes the basis of taxation of any amounts payable to the Bank under this Note in respect of any of such Loans (other than taxes imposed on the overall net income of the Bank for any of such Loans by the jurisdiction where the Bank is located); or (2) imposes or modifies any reserve, special deposit, compulsory loan, or similar requirements relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, the Bank (including any of such Loans or any deposits referred to in the definition of LIBOR Rate); or (3) imposes any other condition affecting this Note (or any of such extension of credit or liabilities). The Bank will notify the Borrower of any event occurring after the date hereof which will entitle the Bank to compensation pursuant hereto as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. Determinations by the Bank for purposes hereof of the effect of any Regulatory Change on its costs of making or maintaining Loans or on amounts receivable by it in respect of Loans, and of the additional amounts required to compensate the Bank in respect of any Additional Costs, shall be conclusive, provided that such determinations are made on a reasonable basis. Capital Adequacy. In the event the Bank determines that (1) compliance with any judicial, administrative, or other governmental interpretation of any law or regulation or (2) compliance by the Bank or any corporation controlling the Bank with any guideline or request from any central bank or other governmental authority (whether or not having the force of law) has the effect of requiring an increase in the amount of capital required or expected to be maintained by the Bank or any corporation controlling the Bank, and the Bank determines that such increase is based upon its obligations hereunder, and other similar obligations, the Borrower shall pay to the Bank such additional amount as shall be certified by the Bank to be the amount allocable to the Bank's obligations to the Borrower hereunder. The Bank will notify the Borrower of any event occurring after the date hereof that will entitle the Bank to compensation pursuant hereto as promptly as practicable after it obtains knowledge thereof and determines to request such compensation. Determinations by the Bank for purposes hereof of the effect of any increase in the amount of capital required to be maintained by the Bank and of the amount allocable to the Bank's obligations to the Borrower hereunder shall be conclusive, provided that such determinations are made on a reasonable basis. 5 Funding Loss Indemnification. The Borrower shall pay to the Bank, upon the request of the Bank, such amount or amounts as shall be sufficient (in the reasonable opinion of the Bank) to compensate it for any loss, cost or expense incurred as a result of: (1) Any payment(s) of a LIBOR Loan on a date other than the last day of the Interest Period for such Loan including, but not limited to, acceleration of the Loans by the Bank pursuant hereto; or (2) Any prepayment(s) of principal of a Fixed Rate Loan including, but not limited to, acceleration of the Loans by the Bank pursuant hereto; or (3) Any failure by the Borrower to borrow or convert, as the case may be, a LIBOR Loan on the date for borrowing or conversion, as the case may be, specified in the relevant notice hereunder. If the Bank sustains or incurs any such loss or expense it shall from time to time notify the Borrower of the amount determined in good faith by the Bank (which determination shall be conclusive, provided that such determinations are made on a reasonable basis, absent manifest error and may include such assumptions, allocations of costs and expenses and averaging or attribution methods as is reasonable) to be necessary to indemnify the Bank for such loss or expense. AQUAPENN SPRING WATER COMPANY, INC. By: /s/ Geoffrey F. Feidelberg -------------------------------- Title: COO Date: January 21, 1997 6 EX-10.22 8 LETTER REGARDING INTEREST RATE EXHIBIT 10.22 CoreStates Hamilton Bank 30 North Third Street PO Box 1071 Harrisburg PA 17108 717 234 2784 CORESTATES HAMILTON BANK, NOW Thomas J. Fowlston INCORPORATED AS CORESTATES BANK, N.A. Vice President February 12, 1997 Mr. Geoffrey Feidelberg Chief Financial Officer AquaPenn Spring Water Company, Inc. P.O. Box 938 Milesburg, PA 16853-0938 Dear Geoff: This letter should serve as your official notification that we have amended our commitment to your company in order to reduce the rate. As you are aware, you are being billed at the rate of LIBOR plus 1% instead of the LIBOR plus 1.25% indicated in our commitment letter. This rate was agreed upon as part of our loan negotiations for your $6 million line. The remaining terms and conditions of the line remain in place as indicated in our commitment letter. If you have any questions concerning this matter, please feel free to contact me. We do appreciate your business and look forward to continuing to meet your needs. Sincerely, /s/ Thomas J. Fowlston - ------------------------------------- Thomas J. Fowlston Vice President TJF/bb EX-10.23 9 CREDIT AGREEMENT EXHIBIT 10.23 CREDIT AGREEMENT between MID-STATE BANK AND TRUST COMPANY, as the Lender and THE AQUAPENN SPRING WATER COMPANY, INC. as the Borrower Dated: August 29, 1997 CREDIT AGREEMENT THIS CREDIT AGREEMENT (the Credit Agreement and all amendments, modifications and supplements hereto and any exhibits or schedules to any of the foregoing, this "Agreement"), dated as of August __, 1997, between MID-STATE BANK AND TRUST COMPANY, a Pennsylvania banking corporation having its principal office at 1130 Twelfth Street, Altoona, Pennsylvania 16601 (the "Lender"), and AQUAPENN SPRING WATER COMPANY, INC., a Pennsylvania corporation having its principal office at P.O. Box 938, One AquaPenn Drive, Milesburg, Pennsylvania 16853 (the "Borrower"). W I T N E S S E T H: WHEREAS, the Lender has loaned sums to the Borrower pursuant to that certain Amended and Restated Credit Agreement (the "Amended Credit Agreement"), dated as of April 5, 1995, as amended by that certain First Amendment to Amended and Restated Credit Agreement, dated as of December 4, 1995, and as further amended by that certain Second Amendment to Credit Agreement; and WHEREAS, the Borrower has requested that the Lender (i) loan it additional sums, (ii) amend the manner in which interest on sums borrowed is calculated and (iii) release its security interests in the Borrower's assets and the Lender, upon the Borrower agreeing to certain terms and conditions, is willing to do so; and WHEREAS, because of the extent to which the Amended Credit Agreement, as amended, would have to be further modified, the Lender and the Borrower have agreed to execute this Agreement to supersede in all respects the Amended Credit Agreement, as amended. NOW, THEREFORE, in consideration of the foregoing and the mutual promises contained herein and other valuable consideration, and with the intent to be legally bound hereby, the parties hereto agree as follows: ARTICLE I DEFINITIONS The capitalized terms defined below shall have the following respective meanings when used herein: Affiliate shall mean with respect to any Person (i) each Person that, directly or indirectly, owns or controls, whether beneficially, or as a trustee, guardian or other fiduciary, 5% or more of the Stock having ordinary voting power in the election of directors, (ii) each Person that controls, is controlled by or is under common control with such Person or any Affiliate of such Person, or (iii) each of such Person's officers, directors, joint venturers and partners. For the purpose of this definition, "control" of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise. Business Day shall mean any day on which the Lender is open for business and on which commercial banks in London, England are open for dealings in U.S. dollar deposits in the London Interbank Market; provided, however, that during any period of time during which the entire Principal Balance is bearing interest at the Floating Rate in accordance with the provisions of this Agreement hereinafter set forth, the term "Business Day" shall mean any day on which the Lender is open for business. Capital Expenditures shall mean all payments, including, without limitation, payments for capital lease obligations, for any fixed assets or improvements, or replacements, substitutions or additions thereto, that have a useful life of more than one year and which are required to be capitalized under GAAP. Capital Leases shall mean, with respect to any Person, any lease of any property (whether real, personal or mixed) by such Person as lessee that, in accordance with GAAP, either would be required to be classified and accounted for as a capital lease on a balance sheet of such Person or otherwise be disclosed as such in a note to such balance sheet, other than, in the case of the Borrower, any such lease under which the Borrower is the lessor. CERCLA shall mean the Federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended. Charges shall mean all Federal, state, county, city, municipal, local, governmental taxes at the time due and payable, levies, assessments or charge upon or relating to (i) the Collateral, (ii) the Obligations, (iii) the Borrower's employee payroll, income or gross receipts, (iv) the Borrower's ownership or use of any of its assets, or (v) any other aspect of the Borrower's business. Commitment Termination Date shall mean February 28, 1999. Default shall mean any event which, with the passage of time or notice or both, would, unless cured or waived, become an Event of Default. EBITDA shall mean net income before extraordinary items plus income tax expense, interest expense, depreciation expense and amortization expense. Environmental Laws shall mean all Federal, state and local laws, including statutes, regulations, ordinances, codes, rules and other governmental restrictions and requirements, 2 relating to the discharge of air pollutants, water pollutants or process waste water or otherwise relating to the environment or hazardous substances. Financial Statement shall mean the Borrower's quarterly financial statement, dated as of [date], as supplied to the Lender. Fiscal Year shall mean the twelve month period (or shorter period with respect to the first Fiscal Year within the term hereof) that ends on September 30. Subsequent changes of the fiscal year of the Borrower shall not change the term "Fiscal Year" unless the Lender shall consent in writing to such changes. Fixed Charges shall mean the sum of interest expense, scheduled principal payments, payments under capital leases and income tax expense (excluding any deferred portions, dividends and unfunded capital expenditures). Floating Rate shall mean the rate per annum announced from time to time by the Lender as its then prime rate. GAAP shall mean generally accepted accounting principles as in effect from time to time. Governmental Person shall mean the government of the United States or the government of any state or locality therein, any political subdivision or any governmental, quasi-governmental, judicial, public or statutory instrumentality, authority, body or entity, or other regulatory bureau, authority, body or entity of the United States or any state or locality therein. Guaranteed Indebtedness shall mean, as to any Person, any obligation of such Person guaranteeing any indebtedness, lease, dividend or other obligation of any other Person in any manner. Indebtedness shall mean all liabilities, obligations and indebtedness of any and every kind and nature, including, without limitation, all liabilities and all obligations to trade creditors, whether now or hereafter owing, arising, due or payable, from the Borrower to any Person and howsoever evidenced, created, incurred, acquired or owing, whether primary, secondary, direct, contingent, fixed or otherwise. Interest Period shall mean the period of time during which a particular LIBOR Rate will be applicable to all or any particular portion of the Principal Balance in accordance with the provisions of this Agreement, it being agreed that (a) each Interest Period shall commence and shall terminate on a Re-Set Date, (b) each Interest Period shall be of a duration of either 3 one month, two months, or six months, (c) no Interest Period shall extend beyond the Maturity Date, and (d) the portion of the Principal Balance with respect to which a particular Interest Period is applicable will bear interest at the LIBOR Rate pertaining to such Interest Period from and including the first day of such Interest Period to, but not including, the last day of such Interest Period. Lien shall mean any mortgage or deed of trust pledge, hypothecation, assignment, deposit arrangement, lien, security interest, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any lease intended as security or any title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the Pennsylvania Uniform Commercial Code). LIBOR Rate applicable to a particular Interest Period shall mean, as to the Line of Credit Loans, a rate per annum equal to the Base LIBOR Rate applicable to such Interest Period plus 1.20 percent and, as to the Revolving Credit Loans, a rate per annum equal to the Base LIBOR Rate applicable to such Interest Period plus 1.70 percent. The "Base LIBOR Rate" applicable to a particular Interest Period shall mean a rate per annum equal to the rate of interest at which U.S. dollar deposits in an amount approximately equal to the portion of the Principal Balance which will bear interest at a particular LIBOR Rate during such Interest Period, and with maturities comparable to the last day of such Interest Period, are offered in immediately available funds in the London Interbank Market to the Lender by leading banks in the Eurodollar market at 11:00 a.m., London time, two (2) Business Days prior to the commencement of such Interest Period. Each determination of the LIBOR Rate and the Base LIBOR Rate applicable to a particular Interest Period shall be made by the Lender and shall be conclusive and binding upon the Borrower absent manifest error. Interest at the applicable LIBOR Rate or Rates from time to time shall be calculated for the actual number of days elapsed on the basis of a 360-day year. Line of Credit Accommodation shall mean the undertaking by the Lender to establish a Six Million ($6,000,000) Dollar line of credit facility for the Borrower as set forth in Paragraph 2.2(a) hereof. Line of Credit Loans shall mean the aggregate Line of Credit Advances outstanding at any time. Loan Documents shall mean this Agreement, the Revolving Credit Note and the Line of Credit Note. Loans shall mean the amounts outstanding under the Revolving Credit Note and the Line of Credit Note. 4 Material Adverse Effect shall mean material adverse effect on (i) the business, assets, operations or financial or other condition of the Borrower taken as a whole, and (ii) the Borrower's ability to pay the Obligations in accordance with the terms thereof. Maturity Date shall mean either, as the context may require, (i) the date the Line of Credit Advances must be repaid under this Agreement, or (ii) the date on which the Term Loan must be repaid under this Agreement. Net Worth shall mean, at any date of determination thereof, (i) the amount of all assets of the Borrower as may be properly classified as such, less (ii) the amount of all liabilities of the Borrower, all as determined in accordance with GAAP. Notes shall mean the Revolving Credit Note and the Line of Credit Note. Obligations shall mean all loans, advances, debts, liabilities and obligations for monetary amounts (whether or not such amounts are liquidated or determinable) owing by the Borrower to the Lender and all covenants and duties regarding such amounts, of any kind or nature, present or future, whether or not evidenced by any note, agreement or other instrument, arising under any of the Loan Documents. Other Agreements shall mean all Loan Documents and all agreements, instruments and documents, whether heretofore, now, or hereafter executed by or on behalf of the Borrower and delivered to the Lender with respect to this Agreement. Permitted Encumbrances shall mean the following encumbrances: (i) Liens for taxes or assessments or other governmental charges or levies, either not yet due and payable or to the extent that nonpayment thereof is permitted by the terms of this Agreement; (ii) pledges or deposits securing obligations under workers' compensation, unemployment insurance, social security or public liability laws or similar legislation; (iii) pledges or deposits securing bids, tenders, contracts (other than contracts for the payment of money) or leases to which the Borrower is a party as lessee made in the ordinary course of business; (iv) deposits securing public or statutory obligations of the Borrower; (v) workers', mechanics', suppliers', carriers', warehousemen's, landlords' or other similar liens arising in the ordinary course of business; (vi) deposits securing or in lieu of surety, appeal or customs bonds in proceedings to which the Borrower is a party; (vii) any attachment or judgment Lien, unless the judgment it secures shall not, within 30 days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall not have been discharged within 5 days after the expiration of any such stay; (viii) liens on fixtures granted to lessors pursuant to Leases; (ix) the Liens listed on Schedule 1 hereto; and (x) purchase money liens. 5 Person shall mean any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, institution, public benefit corporation, entity or government. Principal Balance shall mean the principal balance outstanding at any time under the Notes. Revolving Credit Loan shall mean the aggregate amount of Revolving Credit Advances outstanding at any time. Revolving Credit Loan Commitment shall mean the undertaking by the Lender to establish a Ten Million ($10,000,000) Dollar revolving credit facility for the Borrower as set forth in Paragraph 2.1(a) hereof. Re-Set Date shall mean consecutive numerically corresponding dates during the term of this Agreement, the first of which Re-Set Dates shall be August __, 1997. Each subsequent Re-Set Date during the term of this Agreement shall be the date in each subsequent calendar month during the term of this Agreement which numerically corresponds to the first Re-Set Date during the term of this Agreement; provided, however, that if the numerically corresponding date in any such subsequent calendar month during the term of this Agreement shall not be a Business Day, the Re-Set Date for such calendar month shall be the next succeeding Business Day, unless the next such succeeding Business Day would fall in the next calendar month, in which event the Re-Set Date for such calendar month shall be the next preceding Business Day. For the purposes of this Agreement, the period of time between any two consecutive Re-Set Dates during the term of this Agreement shall be deemed to be a period of one month. Roll Over Date applicable to a particular Interest Period shall mean the last day of such Interest Period. Tangible Net Worth shall mean the stockholders' equity in the Borrower determined in accordance with generally accepted accounting principles consistently applied, except that there shall be deducted therefrom all intangible assets as reflected on the latest balance sheet of the Borrower, such as organization costs, unamortized debt discount and expenses, good will, patents, trademarks, copyrights, franchises, research and development expenses and any amount reflected as treasury stock. Term Loan shall mean the term loan into which the Revolving Credit Loan is automatically converted as of the Commitment Termination Date. 6 ARTICLE II AMOUNT AND TERMS OF CREDIT Section 2.1 Revolving Credit Advances; Conversion of Revolving Credit Loan to Term Loan. (a) The Lender hereby establishes, subject to the terms and conditions hereof and relying upon the representations and warranties herein set forth, a Revolving Credit Loan Commitment in favor of the Borrower in the maximum aggregate principal amount of Ten Million ($10,000,000) Dollars. Upon and subject to the terms and conditions hereof, the Lender agrees to make available, from time to time on and after the date hereof and until the Commitment Termination Date, for the Borrower's use and upon the request of the Borrower therefor, advances of $100,000 or multiples thereof (each, a "Revolving Credit Advance") in an aggregate amount outstanding which shall not exceed $10,000,000. Subject to the provisions of this Section and until payment of all amounts outstanding in respect of the Revolving Credit Loan has been demanded, whether by declaration, acceleration or otherwise, the Borrower may from time to time borrow, repay and reborrow under this Section 2.1(a). (b) The Revolving Credit Loan shall be evidenced by a promissory note (the "Revolving Credit Note") to be executed and delivered by the Borrower immediately following its execution of this Agreement in form satisfactory to the Lender. The Revolving Credit Note shall be payable to the order of the Lender and shall represent the obligation of the Borrower to repay the amount of the Revolving Credit Commitment or, if less, the aggregate unpaid principal amount of all Revolving Credit Advances made by the Lender to the Borrower with interest thereon as prescribed in Section 2.3 hereof. The date and amount of the Revolving Credit Advance by the Lender and the payment of principal with respect thereto shall be recorded on the books and records of the Lender, which books and records shall constitute prima facie evidence of the accuracy of the information therein recorded. The entire unpaid balance of the Revolving Credit Loan shall be due and payable on the Commitment Termination Date. (c) In the event that the outstanding balance of the Revolving Credit Loan shall, at any time, exceed the Revolving Credit Commitment, the Borrower shall, within 2 Business Days after notice of such determination by the Lender, repay the Revolving Credit Loan in the amount of such excess. Any mandatory prepayment pursuant to this Paragraph 2.2(c) shall be accompanied by the payment of accrued and unpaid interest on the amount being prepaid through the date of such prepayment. No prepayment fee shall be payable in respect of any mandatory prepayment under this Paragraph 2.1(c) or under Section 2.4. (d) As of the Termination Date, the Revolving Credit Loan shall automatically convert to the Term Loan. [Paragraph continued on following page.] 7 Commencing on March 28, 1999 and on the last day of each month thereafter through and including January 31, 2004, the principal balance of the Term Loan shall be payable in equal payments computed on an amortization period of 120 months, with the entire unpaid principal balance of the Term Loan due and payable on February 28, 2004. Interest on the Term Loan shall be payable in the manner prescribed in Section 2.3 hereof. (e) The Borrower's obligations under Paragraph 2.1(d) above shall be evidenced by a term note (the "Term Note") to be executed and delivered by the Borrower within two (2) Business Days of the Commitment Termination Date. The Term Note shall be in form satisfactory to the Lender and shall represent the obligation of the Borrower to repay the Term Loan with interest thereon as prescribed in Section 2.3 hereof. Section 2.2 Line of Credit Advances. (a) The Lender hereby establishes, subject to the terms and conditions hereof and relying upon the representations and warranties herein set forth, and upon and subject to the terms and conditions hereof, the Lender agrees to make from time to time on and after the date hereof and until February 28, 1998, upon the request of the Borrower therefor, Line of Credit Loans (each, a "Line of Credit Advance") as it in its sole and absolute discretion elects to make in an aggregate amount outstanding, which shall not exceed $6,000,000. The Lender forthwith shall inform the Borrower whether or not it elects to make such Line of Credit Advance. (b) The Line of Credit shall be evidenced by a promissory note (the "Line of Credit Note") to be executed and delivered by the Borrower immediately following its execution of this Agreement in form satisfactory to the Lender. The Line of Credit Note shall be payable to the order of the Lender and shall represent the obligation of the Borrower to repay the amount of the Line of Credit or, if less, the aggregate unpaid principal amount of all Line of Credit Advances made by the Lender to the Borrower with interest thereon as prescribed in Section 2.3 hereof. The date and amount of each Line of Credit Advance by the Lender and the payment of principal with respect thereto shall be recorded on the books and records of the Lender, which books and records shall constitute prima facie evidence of the accuracy of the information therein recorded. (c) In the event that the outstanding balance of the Line of Credit shall, at any time, exceed $6,000,000, the Borrower shall, within 2 Business Days after notice of such determination by the Lender, repay the Line of Credit in the amount of such excess. Any mandatory prepayment pursuant to this Section 2.2(c) shall be accompanied by the payment of accrued and unpaid interest on the amount being prepaid through the date of such prepayment. No prepayment fee shall be payable in respect of any mandatory prepayment under this Section 2.1(c). 8 Section 2.3 Interest on the Revolving Credit Loan and the Line of Credit. (a) From and including the date hereof, but not including, the first Re-Set Date during the term of this Agreement, the entire Principal Balance shall bear interest at the Floating Rate. From and including the first Re-Set Date during the term of this Agreement to, but not including, the last Re-Set Date during the term of this Agreement, the entire Principal Balance shall, unless and to the extent that the Borrower shall select one or more of the available LIBOR Rates, bear interest at the Floating Rate. The available LIBOR Rates shall consist of a two-month LIBOR Rate, a three-month LIBOR Rate and a six-month LIBOR Rate determined in accordance with the provisions of this Agreement, it being agreed that (i) the Borrower shall have the right to select the LIBOR Rate or Rates from time to time applicable to the Principal Balance and (ii) each LIBOR Rate from time to time so selected by the Borrower shall take effect and shall end on a Re-Set Date. The Borrower shall not have the right to select more than three (3) LIBOR Rates to take effect on any given Re-Set Date. If the Borrower shall not select a LIBOR Rate by written notice given to the Lender at least three (3) Business Days prior to a particular Re-Set Date, the interest rate applicable to the Principal Balance for such Re-Set Date shall be the Floating Rate. The LIBOR Rate or Rates selected by the Borrower or otherwise designated for a particular Re-Set Date in accordance with the foregoing provisions of this Paragraph shall be in effect from and including the first day of the Interest Period to which such LIBOR Rate pertains to, but not including, the Roll Over Date applicable to such Interest Period and shall (subject to the following provisions of this Paragraph) be applicable to the portion of the Principal Balance with respect to which a LIBOR Rate or Rates are due to be re-set on such Re-Set Date, as well as to any portion of the Principal Balance bearing interest at a Floating Rate and any advance of the Loans scheduled to be made on such Re-Set Date. Notwithstanding the foregoing provisions of this Paragraph, any advance or advances of the Loans which are drawn down and which in the aggregate are less than $100,000.00, or which are drawn down other than on a Re-Set Dale, will bear interest at the Floating Rate from and including the date upon which the same are drawn down to, but not including, the earlier to occur of (i) the first Re-Set Date on which a LIBOR Rate applicable to the outstanding Principal Balance due to be Re-Set is selected, or (ii) the first Re-Set Date on which the aggregate portion of the Principal Balance bearing interest at the Floating Rate is equal to or is in excess of $100,000.00, whereupon the interest rate applicable to such advance or advances or such portion of the Principal Balance bearing interest at the Floating Rate may be converted to a LIBOR Rate in accordance with the provisions of this Paragraph. If the Maturity Date is not a Re-Set Date, the entire Principal Balance shall at the election of the Lender either bear interest at the Floating Rate or at a one-month LIBOR Rate determined in accordance with the provisions of this Agreement from and including the last Re-Set Date prior to the Maturity Date to, but not including, the Maturity Date, it being agreed that any such one-month LIBOR Rate shall be determined on the basis of an assumed Interest Period of one month. 9 (b) Each advance of the Loans subsequent to the initial advances of the Loans shall be made on a Re-Set Date during the term of this Agreement. Notwithstanding anything to the contrary set forth in this Agreement, the Lender shall not be obligated to authorize an advance of the Loans unless the Borrower has delivered to the Lender a request for such advance at least five (5) days prior to the date upon which such advance is requested accompanied by all back up materials which are required to enable the Lender to determine whether the conditions precedent for the making of such advance as set forth in the Agreement have been satisfied. (c) The Lender shall, as soon as practicable after 9:00 a.m., prevailing time, two (2) Business Days prior to the commencement of a particular Interest Period, determine the LIBOR Rate which will be in effect during such Interest Period and inform the Borrower of the LIBOR Rate so determined (which determination shall be conclusive and binding upon the Borrower absent manifest error). In the event, and on each occasion, that on the day two (2) Business Days prior to the commencement of a particular Interest Period, the Lender shall have determined in good faith (which determination shall be conclusive and binding upon the Borrower absent manifest error) that U.S. dollar deposits in an amount approximately equal to the portion of the Principal Balance which is to bear interest at a particular LIBOR Rate during such particular Interest Period in accordance with the provisions of this Agreement are not generally available at such time in the London Interbank Market, or reasonable means do not exist for ascertaining a LIBOR Rate for such particular Interest Period, the Lender shall so notify the Borrower and the interest rate applicable to the portion of the Principal Balance with respect to which such LIBOR Rate was to pertain shall automatically be converted to the Floating Rate as of the next occurring Re-Set Date, it being agreed that the Floating Rate shall remain in effect thereafter with respect to such portion of the Principal Balance unless and until the Lender shall have determined in good faith (which determination shall be conclusive and binding upon the Borrower absent manifest error) that the aforesaid circumstances no longer exist, whereupon the interest rate applicable to such portion of the Principal Balance may upon request of the Borrower be converted back to a LIBOR Rate determined in the manner hereinabove set forth in this Agreement effective as of the first Re-Set Date which occurs ten (10) Business Days or more after such good faith determination by the Lender. If any change in any law or regulation or in the interpretation thereof by any governmental authority charged with the administration or interpretation thereof shall make it unlawful for the Lender to make or maintain LIBOR Rates with respect to the Principal Balance of any portion thereof or to fund the Principal Balance or any portion thereof at LIBOR Rates in the London Interbank Market or to give effect to its obligations as contemplated by this Agreement, then, upon notice by the Lender to the Borrower, the interest rate applicable to the entire Principal Balance shall be automatically converted to the Floating Rate, it being agreed that any notice given by the Lender to the Borrower, pursuant to this sentence shall, if lawful, be effective insofar as it pertains to any particular portion of the Principal Balance bearing interest at a particular LIBOR Rate on the last day of then existing Interest Period 10 pertaining to such particular portion of the Principal Balance, or if not lawful, shall be effective immediately upon being given by the Lender to the Borrower, and that the Floating Rate shall remain in effect thereafter with respect to such particular portion of the Principal Balance unless and until the Lender shall have determined in good faith (which determination shall be conclusive and binding upon the Borrower absent manifest error) that the aforesaid circumstances no longer exist, whereupon the interest rate applicable to such portion of the Principal Balance may upon request of the Borrower be converted to a LIBOR Rate determined in the manner hereinabove set forth in this Agreement effective as of the first Re-Set Date which occurs ten (10) Business Days or more after such good faith determination by the Lender. If the interest rate applicable to any particular portion of the Principal Balance is converted from a LIBOR Rate to the Floating Rate on a date other than a Roll Over Date in accordance with the provision of the preceding sentence, the Borrower shall pay to the Lender on demand an amount equal to the prepayment premium, if any, which would have been due pursuant to the provision of this Agreement hereinafter set forth if the portion of the Principal Balance bearing interest at such LIBOR Rate was prepaid in full on the date of such conversion. (d) Subject to the following provisions of this Paragraph, the Borrower shall have the right to prepay the Principal Balance in whole, or in part, upon no less than five (5) Business Days' prior written notice to the Lender specifying the intended date of prepayment, which date of prepayment shall not be more than forty-five (45) days after the date of such notice, and the amount to be prepaid and subject to payment of all interest and other sums then due and payable pursuant to the provisions of this Agreement. No prepayment premium shall be payable if the portion of the Principal Balance being prepaid is bearing interest on the date of prepayment at the Floating Rate in accordance with the provisions of this Agreement, or if such prepayment occurs on the Roll Over Date pertaining to the portion of the Principal Balance being prepaid. If any particular portion of the Principal Balance being prepaid is bearing interest at a particular LIBOR Rate and such prepayment does not occur on the Roll Over Date pertaining to the portion of the Principal Balance being prepaid, the Borrower shall pay to the Lender contemporaneously with such prepayment a prepayment premium equal to the portion of the Principal Balance being prepaid, multiplied by a per annum interest rate equal to the difference between the Base LIBOR Rate applicable to the portion of the Principal Balance being prepaid and the 360-day equivalent interest yield, as adjusted to reflect interest payments on a monthly basis (hereinafter called the "Reinvestment Rate"), on any current U.S. Government Treasury Obligations selected by the Lender, in its sole and absolute discretion, in an aggregate amount comparable to the portion of the Principal Balance being prepaid, and with maturities comparable to the Roll Over Date applicable to the portion of the Principal Balance being prepaid, calculated over a period of time from and including the date of prepayment to, but not including, the Roll Over Date applicable to the portion of the Principal balance being prepaid as discounted in good faith to present value in a manner satisfactory to the Lender. If the Base LIBOR Rate applicable to the portion of the 11 Principal Balance being prepaid is equal to or less than the Reinvestment Rate, no prepayment premium shall be due. No prepayment premium payable under this Paragraph shall in any event or under any circumstances be deemed or construed to be a penalty. If a portion of the Principal Balance is bearing interest at a LIBOR Rate or Rates and a portion of the Principal Balance is bearing interest at the Floating Rate in accordance with the provisions of this Agreement on the date of a partial prepayment of the Principal Balance in accordance with the provisions of this Paragraph, such partial prepayment shall be applied to the respective portions of the Principal Balance bearing interest at such LIBOR Rate or Rates and the Floating Rate in such order and manner so as to minimize the prepayment premium due with respect thereto as calculated pursuant to the provisions of this Paragraph. Any payment of the Principal Balance after the Lender shall have declared the Obligations immediately due and payable in accordance with the provisions of this Agreement shall be deemed to be a voluntary prepayment for all purposes of this Paragraph and a prepayment premium calculated pursuant to the provisions of this Paragraph shall be payable with respect thereto based upon the Base LIBOR Rate or Rates applicable to the Principal Balance immediately prior to such declaration. The Lender shall deliver to the Borrower a statement setting forth the amount and basis of determination of the prepayment premium, if any, due in connection with a prepayment of the Principal Balance in accordance with the provisions of this Paragraph, it being agreed that (a) the calculation of such prepayment premium shall be made in good faith and may be based on any current U.S. Government Treasury Obligations selected by the Lender, in its sole and absolute discretion, (b) the Lender shall not be obligated or required to have actually reinvested the prepaid portion of the Principal Balance in any such U.S. Government Treasury Obligations as a condition precedent to the Borrower being obligated to pay a prepayment premium calculated in accordance with the provisions of this Paragraph, and (c) the Borrower shall not have the right to question the correctness of any such statement or the method of calculation set forth therein in the absence of manifest error. The Borrower shall, upon receipt of such statement and contemporaneously with any such prepayment of the Principal Balance, remit to the Lender the prepayment premium, if any, due in connection therewith, as calculated pursuant to the provisions of this Paragraph. The Lender shall not be obligated to accept any prepayment of the Principal Balance unless it is accompanied by the prepayment premium, if any, due in connection therewith as calculated pursuant to the provisions of this Paragraph. Any partial prepayment of the Principal Balance in accordance with the provisions of this Paragraph shall be in a minimum amount of at least $250,000.00. No partial payment of the Principal Balance shall be permitted in accordance with the provisions of this Paragraph if such a partial prepayment would reduce the principal balance below $500,000.00. The provisions of this Paragraph shall be applicable to any prepayment of the Principal Balance in whole or in part. (e) All sums which may or shall become due and payable by the Borrower in accordance with the foregoing provisions shall be, and shall under all circumstances be deemed to, constitute additional interest on, and shall constitute part of, the Obligations. 12 Section 2.4 Set-Off. To secure the prompt payment to the Lender of the Obligations, the Borrower hereby gives to the Lender a lien and security interest upon and in any property, credits, securities or monies which may at any time be delivered to, or be in the possession of, or owned by the Lender in any capacity whatever including the balance of any deposit account maintained by the Borrower with the Lender. The Borrower hereby authorizes the Lender in case of an Event of Default, at the Lender's option and at any time and from time to time, to apply, at the discretion of the Lender, to the payment of the Obligations any and all such property, credits, securities or monies now or hereafter in the possession or control of the Lender belonging or owed to the Borrower irrespective of whether or not the Lender shall have made any demand under this Agreement or any Note and although all or a portion of the Obligations may be unmatured. The rights of the Lender under this Section 2.4 are in addition to other rights and remedies (including, without limitation, other rights of set-of), which the Lender may have. ARTICLE III CONDITIONS PRECEDENT This Agreement shall become effective upon the satisfaction of the following conditions precedent set forth in Sections 3.1, 3.2, 3.3, and 3.4: Section 3.1 Execution and Delivery of Agreement. This Agreement or counterparts thereof shall have been duly executed by, and delivered to, the Borrower and the Lender. Section 3.2 Documents and Other Agreements. The Lender shall have received all of the following, each in form and substance satisfactory to the Lender: A. the Revolving Credit Note payable to the Lender as required by Section 2.1(b); B. the Line of Credit Note payable to the Lender as required by Section 2.2(b); and C. a Certificate of the Secretary of the Borrower that sets forth the true and correct copies of the Articles of Incorporation and Bylaws of the Borrower and all amendments thereto (if different than those provided to the Lender pursuant to the Amended Credit Agreement), true and correct copies of the resolutions of the Board of Directors of the Borrower authorizing or ratifying the execution, delivery and performance of the Loan Documents and the Other Agreements and the names of the officer or officers of the Borrower authorized to sign the Loan Documents and the Other Agreements (if different than individuals identified to the Lender at the time of the Borrower's execution of this Agreement), together with a sample of the true signature of each such officer. 13 Section 3.3 Absence of Material Adverse Change. No material and adverse change in the business, operations or condition, financial or otherwise, of the Borrower shall have occurred or be continuing. Section 3.4 Conditions to Each Loan Advance. It shall be a further condition to the funding of the initial advance of each of the Loans and each subsequent advance thereafter that the following statements shall be true on the date of each such funding or advance: (a) all of the representations and warranties of the Borrower contained in any of the Loan Documents shall be correct in all material respects as to the Borrower and as of the date of each such advance as though made on and as of such date, except (i) to the extent that any such representation or warranty expressly relates to an earlier date, and (ii) for changes therein permitted or contemplated by this Agreement. (b) no event shall have occurred and be continuing, or would result from the funding of such advance, which constitutes or would constitute a Default or an Event of Default. ARTICLE IV REPRESENTATIONS AND WARRANTIES To induce the Lender to enter into this Agreement, the Borrower makes the following representations and warranties to the Lender: Section 4.1 Corporate Existence; Compliance with Law. The Borrower (i) is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation; (ii) is duly qualified as a foreign corporation and in good standing under the laws of each jurisdiction where its ownership or lease of property or the conduct of its business requires such qualification (except for jurisdictions in which such failure to so qualify or to be in good standing could not reasonably be expected to have a Material Adverse Effect); (iii) has the requisite corporate power and authority and the legal right to own and operate its properties, to lease the property it operates under lease and to conduct its business as now, heretofore, and proposed to be conducted; and (iv) is in compliance with its articles of incorporation and by-laws. Section 4.2 Corporate Power Authorization; Enforceable Obligations. The execution, delivery and performance by the Borrower of the Loan Documents and the Other Agreements: (i) are within the Borrower's corporate power; (ii) have been and will be duly authorized by all necessary or proper corporate action; (iii) are not in contravention of any provision of the Borrower's articles of incorporation or bylaws; (iv) will not violate any law, regulation or any order or decree of any court or governmental instrumentality; (v) will not 14 conflict with or result in the breach or termination of, constitute a default under, or accelerate any performance required by, an indenture, mortgage, deed of trust, lease, agreement or other instrument to which the Borrower is a party or by which the Borrower or any of its property is bound (except for such conflict, breach, termination, default or acceleration as could not reasonably be expected to have a Material Adverse Effect); and (vi) do not require the consent or approval of any Governmental Person or any other Person. Each of the Loan Documents to be delivered for the benefit of or on behalf of the Borrower constitute a legal, valid and binding obligation of the Borrower, enforceable against it in accordance with its terms. Section 4.3 Financial Statements. To the best knowledge of the Borrower and except as disclosed on Schedule 4.3, the Borrower does not have any known liabilities or obligations (whether absolute, accrued, contingent or otherwise), the existence of which would have a Material Adverse Effect on the business, results of operations or financial condition of the Borrower, except (i) liabilities, obligations, or contingencies which are accrued or reserved against in the Financial Statement and (ii) normally recurring liabilities incurred after the date of the Financial Statement in the ordinary course of business and consistent with past practice. Section 4.4 Other Ventures. Except as disclosed on Schedule 4.4, the Borrower is not engaged in any joint venture or partnership with any other Person. Section 4.5 Taxes. All Federal, state and local tax returns, reports and statements required to be filed by the Borrower (other than immaterial state and local filings) have been filed with the appropriate governmental agencies and all Charges and other impositions shown thereon to be due and payable have been paid. The Borrower has paid when due and payable all requisite Charges, except such Charges being contested pursuant to Section 6.2(b) hereof. Section 4.6 No Litigation. Except as set forth on Schedule 4.6 hereto, no action, suit or arbitration is now pending or, to the actual knowledge of the Borrower, threatened against the Borrower at law, in equity or otherwise which, if determined adversely, could reasonably be expected to have a Material Adverse Effect. Section 4.7 Employment and Labor Agreements. Except as set forth on Schedule 4.7, there are no employment agreements covering management of the Borrower, and there are no collective bargaining agreements or other labor agreements covering any employees of the Borrower. A true and complete copy of each such agreement will be furnished to the Lender upon its request. Section 4.8 Full Disclosure. No information contained in this Agreement, the other Loan Documents, the Financial Statement or any written statement furnished by or on behalf of the Borrower pursuant to the terms of this Agreement contains any untrue statement of a 15 material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading at the time and in light of the circumstances under which made. Section 4.9 Environmental Matters. To the best knowledge of the Borrower and except as disclosed on Schedule 4.9, the Borrower is in compliance with all Environmental Laws to the extent that any non-compliance with such laws would not have a Material Adverse Effect on the Borrower's business. ARTICLE V FINANCIAL STATEMENTS AND INFORMATION Section 5.1 Reports and Notices. The Borrower covenants and agrees that from the date hereof and until the Obligations are paid in full, it shall deliver to the Lender: (a) Within forty-five (45) days after the end of each fiscal quarter, copies of its unaudited balance sheets as of the end of such quarter and the related statements of income for that portion of the Fiscal Year ending as of the end of such quarter, prepared in accordance with GAAP (subject to normal year end adjustments) setting forth in comparative form in each case the projected figures for such period and accompanied by the certification of the chief executive officers or chief financial officers of the Borrower that all such financial statements present fairly in accordance with GAAP (subject to normal year end adjustments) the financial position and results of operations of the Borrower as at the end of such quarter and for the period then ended and that there was no Default or Event of Default in existence as of such time or, if there was any Default or Event of Default in existence as of such time, setting forth a description of such Default or Event of Default and specifying the action, if any, taken by the Borrower to remedy the same. (b) Within 120 days after the close of each Fiscal Year, a copy of its annual audited financial statements consisting of balance sheets and statements of income and retained earnings and statements of cash flows, setting forth in comparative form in each case the figures for the previous fiscal year, which financial statements shall be prepared in accordance with GAAP, certified (only with respect to the financial statements) without qualification as to its scope of audit or the financial condition of the Borrower as a going concern by a firm of independent certified public accountants selected by the Borrower and acceptable to the Lender and accompanied by (i) a statement in reasonable detail showing the calculations used in determining the financial covenants under Sections 6.3 hereof, and (ii) a certification of the chief executive officers or chief financial officers of the Borrower that all such financial statements present fairly in accordance with GAAP the financial position and results of operations and the statements of cash flows of the Borrower as at the end of such year and for 16 the period then ended, and that there was no Default or Event of Default in existence as of such time or, if there was any Default or Event of Default in existence as of such time, setting forth a description of such Default or Event of Default and specifying the action, if any, taken by the Borrower to remedy the same. (c) As soon as practicable, but in any event within 2 Business Days after any officer of the Borrower becomes aware of the existence of any Default or Event of Default, or any development or other information which could reasonably be expected to have a Material Adverse Effect, telephonic or telecopier notice specifying the nature of such Default or Event of Default or development or information, including the anticipated effect thereof, which notice shall be promptly confirmed in writing within 5 days. (d) If requested by the Lender, copies of all Federal, state and local tax returns and reports in respect of income, franchise or other taxes on or measured by income (excluding sales, use or like taxes) filed by the Borrower. (e) Such other information respecting the Borrower's business, financial condition or prospects as the Lender may, from time to time, reasonably request. ARTICLE VI AFFIRMATIVE COVENANTS The Borrower covenants and agrees that until the Obligations are paid in full: Section 6.1 Maintenance of Existence and Conduct of Business. The Borrower shall (i) do, or cause to be done, all things necessary to preserve and keep in full force and effect its corporate existence, rights and franchises; (ii) continue to conduct its business substantially as now conducted or as otherwise permitted hereunder; and (iii) at all times maintain, preserve and protect its property in use or useful in the conduct of its business and keep the same in good operating condition (taking into consideration ordinary wear and tear) and from time to time make, or cause to be made, all needful and proper repairs, renewals and replacements, betterments and improvements thereto consistent with industry practices, so that the business carried on in connection therewith may be properly conducted at all times. Section 6.2 Payment of Obligations. (a) Subject to Paragraph (b) of this Section 6.2, the Borrower shall (i) pay and discharge, or cause to be paid and discharged, all its Indebtedness as and when due and payable, and (ii) pay and discharge, or cause to be paid and discharged, promptly all (A) Charges imposed upon it, its income and profits or any of its property, and (B) lawful claims 17 for labor, materials, supplies and services or otherwise before any thereof shall become in default. (b) The Borrower may in good faith contest, by proper legal actions or proceedings, the validity or amount of any Charges, Liens or claims arising under Section 6.2(a)(ii); provided that the Borrower gives the Lender advance written notice of its intention to contest the validity or amount of any such Charge, Lien or claim and that at the time of commencement of any such action or proceeding and during the pendency thereof (i) no Default or Event of Default shall have occurred; (ii) adequate reserves with respect thereto are maintained on the books of the Borrower in accordance with GAAP; (iii) such contest operates to suspend collection of the contested Charges or claims and is maintained and prosecuted continuously with diligence; (iv) no Lien shall exist for such Charges or claims during an action or proceeding; (v) the Borrower shall promptly pay or discharge such contested Charges and all additional charges, interest, penalties and expenses, if any, and shall deliver to the Lender evidence acceptable to the Lender of such compliance, payment or discharge if such contest is terminated or discontinued adversely to the Borrower; and (vi) the Lender has not advised the Borrower in writing that the Lender reasonably believes that nonpayment or nondischarge thereof would have a Material Adverse Effect. Section 6.3 Financial Covenants. (a) EBITDA/Fix Charges shall be equal to at least 1.15 to 1.0, determined as of the end of each Fiscal Year. (b) The ratio of total liabilities to Tangible Net Worth shall not be greater than 2.0 to 1.0 as of the end of each Fiscal Year. Section 6.4 Books and Records. The Borrower shall keep adequate records and books of account with respect to its business activities in which proper entries, reflecting all of its financial transactions, are made in accordance with GAAP. Section 6.5 Litigation. The Borrower shall notify the Lender in writing promptly of any suit or administrative proceeding that could reasonably be expected to involve an amount in excess of $100,000 in any one instance or in excess of $500,000 in the aggregate or could reasonably be expected to have a Material Adverse Effect. Section 6.6 Insurance. The Borrower shall, at its sole cost and expense, maintain "all risk" physical damage insurance on all personal property, by insuring against all hazards and risks ordinarily insured against owners or users of such properties in similar businesses. 18 The Borrower shall, at its sole cost and expense, maintain comprehensive general liability insurance on an "occurrence basis" (unless such insurance cannot be reasonably obtained at commercially reasonable rates in which case such insurance shall be on a "claims made" basis) against claims for personal injury, bodily injury and property damage with a minimum limit of $1,000,000 per occurrence and $3,000,000 in the aggregate. Such coverage shall include, but not be limited to, all risks customarily insured against by owners engaged in similar businesses. The Borrower shall, at its sole cost and expense, maintain workers' compensation insurance to the extent required by law. All policies of insurance required to be maintained under this Agreement shall be in form and with insurers recognized as adequate by the Lender, and all such policies shall be in such amounts as may from time to time be satisfactory to the Lender. The Lender reserves the right at any time, upon review of the Borrower's risk profile, to require additional forms and limits of insurance to, in the Lender's reasonable discretion, adequately protect the Collateral. Schedule 6.6 hereto lists all insurance maintained by the Borrower. Section 6.7 Compliance with Law and Agreements. The Borrower shall comply with all federal, state and local laws and regulations applicable to it. The Borrower shall perform within any required time period (after giving effect to applicable grace periods) all of its obligations and enforce all of its rights under each agreement to which it is a party. The Borrower shall not modify in any manner adverse to it any provision of any agreement to which it is a party which termination or modification could reasonably be expected to have a Material Adverse Effect. Section 6.8 Supplemental Disclosure. From time to time as may be necessary (in the event that such information is not otherwise delivered by the Borrower to the Lender pursuant to this Agreement) so long as there are Obligations outstanding hereunder, the Borrower will, as promptly as is reasonable under the circumstances after any officer of the Borrower has knowledge with respect thereto, and at least semi-annually, supplement or amend and deliver to the Lender each Schedule or representation herein with respect to any matter hereafter arising which, if existing or occurring at the date of this Agreement, would have been required to be set forth or described in such Schedule or as an exception to such representation or which is necessary to correct any information in such Schedule or representation which has been rendered inaccurate thereby. 19 ARTICLE VII NEGATIVE COVENANTS The Borrower covenants and agrees that until the Obligations are paid in full: Section 7.1 Mergers, etc. As long as the Borrower is in compliance with Section 6.3 hereof, the Borrower may merge or consolidate with or into, acquire all or substantially all of the assets or capital stock of, or otherwise combine with, any other entity; provided, however; that following such action, the Borrower or its successor is also in compliance with Section 6.3 hereof and provided, further, that the Borrower shall give notice to the Lender of its intentions to act as permitted in this Section at least ten (10) business days prior to the closing date of any such transaction. Section 7.2 Transactions with Affiliates. The Borrower shall not enter into or be a party to any transaction with any Affiliate of the Borrower except as otherwise provided herein or in the ordinary course of and pursuant to the reasonable requirements of the Borrower's business and upon fair and reasonable terms that are no less favorable to the Borrower than what the Borrower would obtain in a comparable arm's-length transaction with a person or entity that is not an Affiliate. Section 7.3 Guaranteed Indebtedness. The Borrower shall not incur any Guaranteed Indebtedness except (i) by endorsement of instruments of items of payment for deposit to the general account of the Borrower, and (ii) for Guaranteed Indebtedness incurred for the benefit of the Borrower if the primary obligation is permitted by this Agreement. Section 7.4 Loans and Investments. The Borrower will not at any time make or suffer to remain outstanding any loan or advances to any person or entity, or become or remain liable to such person or entity, except: (a) loans and investments existing on the date hereof and listed in Schedule 7.4 (including any extensions or renewals thereof); (b) trade credit extended, and loans and advances extended to suppliers, under usual and customary terms in the ordinary course of business; (c) demand deposits, time deposits or certificates of deposit in United States commercial banks and maturing not in excess of one year from the date of acquisition; and (d) obligations backed by the full faith and credit of the United States of America maturing not in excess of one year from the date of acquisition, commercial paper maturing, not in excess of one year from the date of acquisition and rated P-1 by Moody's Investor 20 Services, Inc. or A-1 by Standard and Poor's Corporation on the date of acquisition, and preferred stock or indebtedness which is (i) traded in a national securities exchange and (ii) rated A or better by Moody's Investors Service, Inc. or Standard Poor's Corporation on the date of acquisition. Section 7.5 Saleleaseback Transaction. Except for (i) sales or transfers by the Borrower in the ordinary course of business, and (ii) sales or transfers, the net proceeds of which are (A) applied to the repayment of the Notes and (B) reinvested in a comparable line of business to be owned and operated by the Borrower, the Borrower shall not abandon, sell, lease or otherwise dispose of any part of its respective assets or directly or indirectly enter into an agreement or arrangement whereby the Borrower shall sell or transfer any part of its assets and thereafter rent or lease such property. ARTICLE VIII EVENTS OF DEFAULT; RIGHTS AND REMEDIES Section 8.1 Events of Default. The occurrence of any one or more of the following events shall constitute an "Event of Default" hereunder: (a) The Borrower shall fail to make any payment of principal of, or interest on, or any other amount owing in respect of any of the Obligations when due and payable or declared due and payable, and such failure shall have remained unremedied for a period of ten (10) days after the Borrower has received notice of such failure from the Lender. (b) The Borrower shall fail or neglect (i) to deliver the Term Note as required by Paragraph 2.1(e), or (ii) to perform, keep or observe any of the provisions of Section 7.3 (the "Financial Covenants") or Article VIII of this Agreement. (c) The Borrower shall fail or neglect to perform, keep or observe any other provision of this Agreement or of any of the other Loan Documents and the same shall remain unremedied for a period ending on the first to occur of 20 days after the Borrower shall receive written notice of any such failure from the Lender or 30 days after the Borrower shall become aware thereof; provided, however, that if such failure cannot be remedied during such 20 or 30 day period despite all reasonable efforts of the Borrower, then such 20 or 30 day period, as the case may be, shall be extended by an additional 30 days or such longer period of time (but not more than 60 days without the consent of the Lender, which shall not be unreasonably withheld) as is necessary to cure such failure as long as the Borrower is proceeding diligently to cure such failure and the delay could not reasonably be expected to have a Material Adverse Effect. 21 (d) A default shall occur under any other agreement, document or instrument to which the Borrower is a party or by which the Borrower or the Borrower's property is bound and such default is not cured within any applicable grace period or waived in writing, or being contested pursuant to the provisions of Section 6.2 and such default either (i) involves the failure to make any payment when due of an amount in excess of $100,000 (whether of principal, interest or otherwise and whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) in respect of any Indebtedness, or (ii) causes (or permits any holder of such Indebtedness or a trustee to cause) such Indebtedness or a portion thereof in an aggregate amount exceeding $100,000 to become due prior to its stated maturity or prior to its regularly scheduled dates of payment. (e) Any representation or warranty herein or in any Loan Document or in any written statement pursuant thereto or hereto shall be untrue or incorrect in any material respect as to the Borrower as of the date when made or deemed made. (f) Any of the assets of the Borrower shall be attached, seized, levied upon or subjected to a writ or distress warrant or come within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors of the Borrower and shall remain unstayed or undismissed for 45 consecutive days; or any person or entity shall apply for the appointment of a receiver, trustee or custodian for any of the assets of the Borrower and such application shall remain unstayed or undismissed for 45 consecutive days. (g) A case or proceeding shall have been commenced against the Borrower in a court having competent jurisdiction seeking relief (i) under title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable Federal, state or foreign bankruptcy or other similar law, (ii) appointing a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) of the Borrower or of any substantial part of their respective properties, or (iii) ordering the winding-up of liquidation of the affairs of the Borrower, and such case or proceeding shall remain undismissed or unstayed for 45 consecutive days or such court shall enter an order granting the relief sought in such proceeding. (h) The Borrower shall (i) file a petition seeking relief under title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable Federal, state or foreign bankruptcy or other similar law, (ii) consent to the institution of proceedings thereunder or to the filing of any such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee or sequestrator (or similar official) of the Borrower or of any substantial part of their respective properties, (iii) fail generally to pay its debts as such debts become due, or (iv) take any corporate action in furtherance of any such action. 22 (i) Final judgment or judgments for the payment of money in excess of $250,000 in the aggregate shall be rendered against the Borrower and the same shall not (i) be fully covered by insurance in accordance with Section 6.6 hereof, or (ii) within thirty days after the entry thereof, have been discharged or execution thereof stayed pending appeal or shall not have been discharged within five days after the expiration of any such stay. Section 8.2 Remedies. If any Event of Default shall have occurred and be continuing, the Lender may without notice (i) terminate the Revolving Credit Loan Commitment with respect to further Revolving Credit Advances, whereupon no Revolving Credit Advances may be made hereunder, and/or (ii) declare all Obligations to be forthwith due and payable, whereupon all Obligations shall become and be due and payable, without presentment, demand, protest of further notice of any kind; provided, however, that upon the occurrence of an Event of Default specified in Section 8.1(h) or (i) hereof, the Obligations shall become due and payable without declaration, notice or demand by the Lender. ARTICLE IX MISCELLANEOUS Section 9.1 Complete Agreement; Modification of Agreement; Sale of Interest. The Loan Documents constitute the complete agreement between the parties with respect to the subject matter hereof and may not be modified, altered or amended except by an agreement in writing signed by the Borrower and the Lender. The Borrower hereby consents to the Lender's sale of participations, assignment, transfer or other disposition, at any time or times, of any of the Loan Documents or of any portion thereof or interest therein. In the event the Lender assigns or otherwise transfers all or any part of the Revolving Credit Note and/or the Line of Credit Note, the Lender shall so notify the Borrower, and the Borrower shall, upon the request of the Lender, issue a new Revolving Credit Note or a new Line of Credit Note in exchange for the old Revolving Credit Note or the old Line of Credit Note, as the case may be. Section 9.2 Fees and Expenses. The Borrower shall pay all reasonable out-of-pocket expenses of the Lender in connection with the negotiation, preparation and execution of the Loan Documents (including the reasonable fees and expenses of all of its counsel retained in connection with the Loan Documents and the transactions contemplated thereby). If, at any time, regardless of the existence of any Event of Default, the Lender shall employ counsel for advice or other representation in connection with or shall incur reasonable legal or other costs and expenses in connection with: (i) any amendment, modification, termination, waiver, or consent with respect to, any of the Loan Documents. 23 (ii) any litigation, contest, dispute, suit, proceeding or action (whether instituted by the Lender, the Borrower, or any other person or entity) in any way relating to any of the Loan Documents or any other agreements to be executed or delivered in connection herewith in which the Lender is the prevailing party; or (iii) any enforcement of any rights of the Lender against the Borrower or any other person or entity that may be obligated to the Lender by virtue of any of the Loan Documents; then, the reasonable attorneys' fees arising from such services, and all reasonable expenses incurred by such counsel in any way or respect arising in connection with or relating to any of the events or actions described in this Section 9.2 shall be payable, on demand, by the Borrower to the Lender and shall be additional Obligations secured under this Agreement and the other Loan Documents. Section 9.3 No Waiver by the Lender. The Lender's failure, at any time or times, to require strict performance by the Borrower of any provisions of this Agreement and any of the other Loan Documents shall not waiver, affect or diminish any right to the Lender thereafter to demand strict compliance and performance therewith. Any suspension or waiver by the Lender of an Event of Default by the Borrower under the Loan Documents shall not suspend, waive or affect any other Event of Default by the Borrower under this Agreement and any of the other Loan Documents whether the same is prior or subsequent thereto and whether of the same or of a different type. None of the undertakings, agreements, warranties, covenants and representations of the Borrower contained in this Agreement or any of the other Loan Documents and no Event of Default by the Borrower under this Agreement and no defaults by the Borrower under any of the other Loan Documents shall be deemed to have been suspended or waived by the Lender unless such suspension or waiver is by an instrument in writing signed by an officer of the Lender and directed to the Borrower specifying such suspension or waiver. Section 9.4 Remedies. The Lender's rights and remedies under this Agreement shall be cumulative and nonexclusive of any other rights and remedies which the Lender may have under any other agreement, by operation of law or otherwise. Section 9.5 Severability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 24 Section 9.6 Parties. This Agreement and the other Loan Documents shall be binding upon, and inure to the benefit of, the respective successors of the Borrower and the Lender and the assigns, transferees and endorsees of the Lender. Section 9.7 Conflict of Terms. Except as otherwise provided in this Agreement or any of the other Loan Documents by specific reference to the applicable provisions of this Agreement, if any provision contained in this Agreement is in conflict with, or inconsistent with, any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control. Section 9.8 Governing Law. Except as otherwise expressly provided in any of the Loan Documents, in all respects, including all matters of construction, validity and performance, this Agreement and the obligations arising hereunder shall be governed by, and construed and enforced in accordance with, the laws of the Commonwealth of Pennsylvania applicable to contracts made and performed in such state, without regard to the principles thereof regarding conflict of laws, and any applicable laws of the United States of America. Section 9.9 Notices. (a) All communications required to be sent to the Lender shall be sent to the following address by hand delivery, courier, telecopier or by the United States Mail first class postage prepaid: Mr. Philip H. Johnson Senior Vice President Mid-State Bank and Trust Company P.O. Box 4 1330 South Atherton Street State College, PA 16804-0004 Telephone: (814) 234-5168 Telecopier: (814) 234-5780 Such communication shall be effective 5 days after mailing or when received, whichever is earlier. (b) All communications required to be sent to the Borrower shall be sent to the following address, by hand delivery, courier, telecopier or by the United States Mail first class postage prepaid: Geoffrey F. Feidelberg Chief Operating Officer 25 AquaPenn Spring Water Company, Inc. P.O. Box 938 One AquaPenn Drive Milesburg, Pennsylvania 16853 Telephone: (814) 355-5556 Telecopier: (814) 353-9180 Such communication shall be effective 5 days after mailing or when received, whichever is earlier. Section 9.10 Section Titles. The Section titles and Table of Contents contained in this Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. Section 9.11 Counterparts. This Agreement may be executed in any number of separate counterparts, each of which shall, collectively and separately, constitute one agreement. IN WITNESS WHEREOF, this Agreement has been duly executed as of the date first written above. MID-STATE BANK AND TRUST COMPANY By: /s/ Philip H. Johnson -------------------------------- Philip H. Johnson Senior Vice President ATTEST: AQUAPENN SPRING WATER COMPANY, INC. By: /s/ Dennis B. Nisewonger By: /s/ Geoffrey F. Feidelberg ------------------------- ------------------------------ Name: Dennis B. Nisewonger Name: Geoffrey F. Feidelberg ----------------------- ------------------------------ Title: Assistant Secretary Title: COO/CFO ---------------------- ----------------------------- 26 Schedules Schedule 4.3 Financial Statements Schedule 4.6 Litigation Schedule 4.7 Employment and Labor Agreement Schedule 4.9 Environmental Matters Schedule 6.6 Insurance Schedule 7.2 Liens Schedule 7.4 Loans and Investments 27 REVOLVING CREDIT NOTE $10,000,000 Altoona, Pennsylvania August 29, 1997 FOR VALUE RECEIVED, the undersigned, The AquaPenn Spring Water Company, Inc. (the "Maker"), a Pennsylvania corporation having its principal office at P.O. Box 938, One AquaPenn Drive, Milesburg, Pennsylvania 16853, promises to pay to the order of Mid-State Bank and Trust Company (the Lender") in immediately available funds at the principal office of the Lender at Mid-State Bank and Trust Company, 1130 Twelfth Avenue, Box 2007, Altoona, Pennsylvania 16601, or at such other location as the holder hereof may designate from time to time, the lesser of (i) the principal sum of Ten Million ($10,000,000) Dollars, or (ii) the aggregate unpaid principal amount of all loans made by the Lender to the Maker pursuant to Section 2.1 of the credit agreement (the "Credit Agreement") dated of even date herewith between the Lender and the Maker on February 28, 1999, together with interest from the date hereof on the unpaid balance of the principal hereof calculated as provided in Section 2.3 of the Credit Agreement. If any payment of principal or interest on this Note shall become due on a Saturday, Sunday or any other day on which the Lender is not open for business, such payment shall be made on the next succeeding business day, and such extension of time shall in such case be included in computing interest in connection with such payment. The Lender hereby acknowledges that all payments due under this Note shall, to the extent funds are available, be automatically deducted on the payment due date (or if that date is not a date on which the Lender is open for business, on the Lender's next business day) from an account designated in writing by the Maker for that purpose. This Note is one of the Notes referred to in and issued pursuant to the Credit Agreement. This Credit Agreement contains provisions, among other things, for the acceleration of the stated maturity of this Note upon the happening of certain stated events recited therein and also for prepayments on account of the principal hereof prior to maturity as provided therein. The Maker hereby waives presentment, demand, protest or notice of any kind in connection with this Note. This Note shall bind the Maker and its successors and assigns, and the benefits hereof shall inure to the benefit of the Lender and its successors and assigns. All references herein to the "Maker" and the "Lender" shall be deemed to apply to the Maker and the Lender, respectively, and their respective successors and assigns. THE FOLLOWING PARAGRAPHS SET FORTH WARRANTS OF AUTHORITY FOR AN ATTORNEY TO CONFESS JUDGMENT AGAINST THE MAKER. IN GRANTING THIS WARRANT OF ATTORNEY TO CONFESS JUDGMENT AGAINST THE MAKER, THE MAKER HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY, AND, ON THE ADVICE OF THE SEPARATE COUNSEL OF THE MAKER, UNCONDITIONALLY WAIVES ANY AND ALL RIGHTS THE MAKER HAS OR MAY HAVE TO PRIOR NOTICE AND AN OPPORTUNITY TO HEARING UNDER THE RESPECTIVE CONSTITUTIONS AND LAWS OF THE UNITED STATES, THE COMMONWEALTH OF PENNSYLVANIA AND THE STATE OF FLORIDA, EXCEPT AS EXPRESSLY SET FORTH HEREIN AND IN THE RULES OF THE PENNSYLVANIA RULES OF CIVIL PROCEDURE PERTAINING TO CONFESSED JUDGMENTS, AS FROM TIME TO TIME IN EFFECT. IF FOR ANY REASON AFTER ANY SUCH ACTION HAS BEEN COMMENCED THE SAME SHALL BE DISCONTINUED OR IF ANY JUDGMENT ENTERED PURSUANT TO THE WARRANT IS OPENED OR STRICKEN, THE LENDER SHALL HAVE THE RIGHT FOR THE SAME DEFAULT OR ANY SUBSEQUENT DEFAULT TO BRING ONE OR MORE FURTHER AMICABLE ACTIONS AS ABOVE PROVIDED TO COLLECT ALL SUMS DUE. IF THE MAKER WISHES TO CHALLENGE ANY JUDGMENT CONFESSED PURSUANT TO THIS SECTION, IT SHALL DO SO ONLY BY FILING A PETITION TO OPEN THE JUDGMENT PURSUANT TO PENNSYLVANIA RULES OF CIVIL PROCEDURE RULE 2959, AS IN EFFECT FROM TIME TO TIME ("RULE 2959") AND SHALL NOT OTHERWISE INTERFERE (BY FILING ANY CIVIL ACTION BILL IN EQUITY, OR OTHERWISE) WITH THE OPERATION OF THIS JUDGMENT GRANTED PURSUANT TO THIS SECTION. MAKER EXPRESSLY ACKNOWLEDGES THAT THE PROCEDURE AVAILABLE TO IT THROUGH RULE 2959 WILL PROVIDE IT WITH A FULL AND FAIR OPPORTUNITY TO BE HEARD AS TO ANY REASON WHY JUDGMENT SHOULD NOT BE ENTERED AGAINST IT. UPON AN EVENT OF DEFAULT (AS THAT TERM IS DEFINED IN THE CREDIT AGREEMENT), THE MAKER DOES HEREBY EMPOWER THE PROTHONOTARY OR ANY ATTORNEY OF ANY COURT OF RECORD WITHIN THE COMMONWEALTH OF PENNSYLVANIA TO APPEAR FOR THE MAKER AND, WITH OR WITHOUT ONE OR MORE COMPLAINTS FILED, CONFESS JUDGMENT OR JUDGMENTS AGAINST THE MAKER IN ANY COURT OF RECORD WITHIN THE COMMONWEALTH OF PENNSYLVANIA, IN FAVOR OF THE LENDER, ITS SUCCESSORS AND ASSIGNS, FOR THE UNPAID PRINCIPAL BALANCE OF THIS NOTE AND ALL INTEREST ACCRUED HEREON, TOGETHER WITH COSTS OF SUIT AND AN ATTORNEY'S COMMISSION OF 10% FOR COLLECTION OF SUCH SUMS, AND THE MAKER HEREBY FOREVER WAIVES AND RELEASES ANY AND ALL ERRORS IN SAID PROCEEDINGS AND WAIVES STAY OF EXECUTION AND STAY, CONTINUANCE OR ADJOURNMENT OF SALE ON EXECUTION. THE AUTHORITY AND POWER TO APPEAR FOR AND ENTER JUDGMENT AGAINST THE MAKER SHALL NOT BE EXHAUSTED BY ONE OR MORE EXERCISES THEREOF AND MAY BE EXERCISED FROM TIME TO TIME AND AS OFTEN AS THE LENDER OR ITS SUCCESSORS AND ASSIGNS SHALL DEEM NECESSARY OR DESIRABLE. THE MAKER ACKNOWLEDGES THAT IT UNDERSTANDS THE MEANING AND EFFECT OF THE CONFESSION CONTAINED IN THE FOREGOING PARAGRAPHS, SPECIFICALLY, THE MAKER UNDERSTANDS, AMONG OTHER THINGS, THAT (1) IT IS RELINQUISHING THE RIGHT TO HAVE THE BURDEN OF PROOF OF DEFAULT REST ON THE LENDER PRIOR TO THE ENTRY OF JUDGMENT, (2) THE ENTRY OF JUDGMENT MAY RESULT IN A LIEN ON ITS PROPERTY, (3) IT WILL BEAR THE BURDEN AND EXPENSE OF ATTACKING THE JUDGMENT AND CHALLENGING EXECUTION ON THE LIEN AND SALE OF THE PROPERTY COVERED THEREBY, AND (4) ENOUGH OF ITS PROPERTY MAY BE TAKEN TO PAY THE PRINCIPAL AMOUNT, INTEREST, COSTS AND ATTORNEY'S FEES. WITNESS the due execution hereof on the date first above written with intention that this Note shall constitute a sealed instrument. ATTEST: AQUAPENN SPRING WATER COMPANY, INC. By: /s/ Dennis B. Nisewonger By: /s/ Geoffrey F. Feidelberg --------------------------------- ------------------------------ Name: Dennis B. Nisewonger Name: Geoffrey F. Feidelberg ------------------------------- --------------------------- Title: Assistant Secretary Title: COO/CFO ------------------------------ -------------------------- LINE OF CREDIT NOTE $6,000,000 Altoona, Pennsylvania August 29, 1997 FOR VALUE RECEIVED, the undersigned, The AquaPenn Spring Water Company, Inc. (the "Maker"), a Pennsylvania corporation having its principal office at P.O. Box 938, One AquaPenn Drive, Milesburg, Pennsylvania 16853, promises to pay to the order of Mid-State Bank and Trust Company (the "Lender") on demand in immediately available funds at the principal office of the Lender at Mid-State Bank and Trust Company, 1130 Twelfth Avenue, Box 2007, Altoona, Pennsylvania 16601, or at such other location as the holder hereof may designate from time to time, the lesser of (i) the principal sum of Six Million ($6,000,000) Dollars, or (ii) the aggregate unpaid principal amount of all line of credit loans made by the Lender to the Maker pursuant to Section 2.2 of the Credit Agreement (the "Credit Agreement") dated of even date herewith between the Lender and the Maker, together with interest calculated as provided in Section 2.3 of the Credit Agreement from the date hereof on the unpaid balance of the principal hereof. If any payment of principal or interest on this Note shall become due on a Saturday, Sunday or any other day on which the Lender is not open for business, such payment shall be made on the next succeeding business day, and such extension of time shall in such case be included in computing interest in connection with such payment. The Lender hereby acknowledges that all payments due under this Note shall, to the extent funds are available, be automatically deducted on the payment due date (or if that date is not a date on which the Lender is open for business, on the Lender's next business day) from an account designated in writing by the Maker for that purpose. This Note is the Note referred to in and issued pursuant to the Credit Agreement. This Note by its very nature is due and payable commencing on the date of its execution and delivery and without regard as to whether the Lender has made any request for payment or presentment. This Note shall bind the Maker and its successors and assigns, and the benefits hereof shall inure to the benefit of the Lender and its successors and assigns. All references herein to the "Maker" and the "Lender" shall be deemed to apply to the Maker and the Lender, respectively, and their respective successors and assigns. THE FOLLOWING PARAGRAPHS SET FORTH WARRANTS OF AUTHORITY FOR AN ATTORNEY TO CONFESS JUDGMENT AGAINST THE MAKER. IN GRANTING THIS WARRANT OF ATTORNEY TO CONFESS JUDGMENT AGAINST THE MAKER, THE MAKER HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY, AND, ON THE ADVICE OF THE SEPARATE COUNSEL OF THE MAKER, UNCONDITIONALLY WAIVES ANY AND ALL RIGHTS THE MAKER HAS OR MAY HAVE TO PRIOR NOTICE AND AN OPPORTUNITY TO HEARING UNDER THE RESPECTIVE CONSTITUTIONS AND LAWS OF THE UNITED STATES, THE COMMONWEALTH OF PENNSYLVANIA AND THE STATE OF FLORIDA, EXCEPT AS EXPRESSLY SET FORTH HEREIN AND IN THE RULES OF THE PENNSYLVANIA RULES OF CIVIL PROCEDURE PERTAINING TO CONFESSED JUDGMENTS, AS FROM TIME TO TIME IN EFFECT. IF FOR ANY REASON AFTER ANY SUCH ACTIONS HAS BEEN COMMENCED THE SAME SHALL BE DISCONTINUED OR IF ANY JUDGMENT ENTERED PURSUANT TO THE WARRANT IS OPENED OR STRICKEN, THE LENDER SHALL HAVE THE RIGHT FOR THE SAME DEFAULT OR ANY SUBSEQUENT DEFAULT TO BRING ONE OR MORE FURTHER AMICABLE ACTIONS AS ABOVE PROVIDED TO COLLECT ALL SUMS DUE. IF THE MAKER WISHES TO CHALLENGE ANY JUDGMENT CONFESSED PURSUANT TO THIS SECTION, IT SHALL DO SO ONLY BY FILING A PETITION TO OPEN THE JUDGMENT PURSUANT TO PENNSYLVANIA RULES OF CIVIL PROCEDURE RULE 2959, AS IN EFFECT FROM TIME TO TIME ("RULE 2959") AND SHALL NOT OTHERWISE INTERFERE (BY FILING ANY CIVIL ACTION BILL IN EQUITY, OR OTHERWISE) WITH THE OPERATION OF THIS JUDGMENT GRANTED PURSUANT TO THIS SECTION. MAKER EXPRESSLY ACKNOWLEDGES THAT THE PROCEDURE AVAILABLE TO IT THROUGH RULE 2959 WILL PROVIDE IT WITH A FULL AND FAIR OPPORTUNITY TO BE HEARD AS TO ANY REASON WHY JUDGMENT SHOULD NOT BE ENTERED AGAINST IT. UPON AN EVENT OF DEFAULT (AS THAT TERM IS DEFINED IN THE CREDIT AGREEMENT), THE MAKER DOES HEREBY EMPOWER THE PROTHONOTARY OR ANY ATTORNEY OF ANY COURT OF RECORD WITHIN THE COMMONWEALTH OF PENNSYLVANIA TO APPEAR FOR THE MAKER AND, WITH OR WITHOUT ONE OR MORE COMPLAINTS FILED, CONFESS JUDGMENT OR JUDGMENTS AGAINST THE MAKER IN ANY COURT OF RECORD WITHIN THE COMMONWEALTH OF PENNSYLVANIA, IN FAVOR OF THE LENDER, ITS SUCCESSORS AND ASSIGNS, FOR THE UNPAID PRINCIPAL BALANCE OF THIS NOTE AND ALL INTEREST ACCRUED HEREON, TOGETHER WITH COSTS OF SUIT AND AN ATTORNEY'S COMMISSION OF 10% FOR COLLECTION OF SUCH SUMS, AND THE MAKER HEREBY FOREVER WAIVES AND RELEASES ANY AND ALL ERRORS IN SAID PROCEEDINGS AND WAIVES STAY OF EXECUTION AND STAY, CONTINUANCE OR ADJOURNMENT OF SALE ON EXECUTION. THE AUTHORITY AND POWER TO APPEAR FOR AND ENTER JUDGMENT AGAINST THE MAKER SHALL NOT BE EXHAUSTED BY ONE OR MORE EXERCISES THEREOF AND MAY BE EXERCISED FROM TIME TO TIME AND AS OFTEN AS THE LENDER OR ITS SUCCESSORS AND ASSIGNS SHALL DEEM NECESSARY OR DESIRABLE. THE MAKER ACKNOWLEDGES THAT IT UNDERSTANDS THE MEANING AND EFFECT OF THE CONFESSION CONTAINED IN THE FOREGOING PARAGRAPHS, SPECIFICALLY, THE MAKER UNDERSTANDS, AMONG OTHER THINGS, THAT (1) IT IS RELINQUISHING THE RIGHT TO HAVE THE BURDEN OF PROOF OF DEFAULT REST ON THE LENDER PRIOR TO THE ENTRY OF JUDGMENT, (2) THE ENTRY OF JUDGMENT MAY RESULT IN A LIEN ON ITS PROPERTY, (3) IT WILL BEAR THE BURDEN AND EXPENSE OF ATTACKING THE JUDGMENT AND CHALLENGING EXECUTION ON THE LIEN AND SALE OF THE PROPERTY COVERED THEREBY, AND (4) ENOUGH OF ITS PROPERTY MAY BE TAKEN TO PAY THE PRINCIPAL AMOUNT, INTEREST, COSTS AND ATTORNEY'S FEES. WITNESS the due execution hereof on the date first above written with intention that this Note shall constitute a sealed instrument. ATTEST: AQUAPENN SPRING WATER COMPANY, INC. By: /s/ Dennis B Nisewonger By: /s/ Geoffrey F. Feidelberg ----------------------------- ------------------------------ Name: Dennis B. Nisewonger Name: Geoffrey F. Feidelberg --------------------------- ---------------------------- Title: Assistant Secretary Title: COO/CFO -------------------------- --------------------------- EX-23.1 10 ACCOUNTANTS' CONSENT Exhibit 23.1 Accountants' Consent To the Board of Directors AquaPenn Spring Water Company, Inc.: We consent to the use of our report dated October 21, 1997, except for note 15 which is as of October 24, 1997, included in this Registration Statement on Form S-1 of AquaPenn Spring Water Company, Inc. and to the reference to our firm under the headings "Experts" and "Selected Consolidated Financial Data." /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP State College, Pennsylvania December 12, 1997 EX-23.2 11 ACCOUNTANTS' CONSENT Exhibit 23.2 Accountants' Consent To the Board of Directors AquaPenn Spring Water Company, Inc.: We consent to the use of our report dated October 31, 1997, included in this Amendment Number 2 to Registration Statement of Form S-1 of AquaPenn Spring Water Company, Inc. and to the reference to our firm under the heading "Experts". /s/ Matson and Isom Accountancy Corporation Redding, California December 11, 1997 EX-23.4 12 CONSENT OF BEVERAGE MARKETING EXHIBIT 23.4 December 1, 1997 Mr. Geoffrey F. Feidelberg AquaPenn Spring Water Company, Inc. P.O. Box 938 Milesburg, PA 16853 Dear Geoff: Beverage Marketing Corporation hereby consents to the use of our name and the reference to our publication Bottled Water in the United States 1997 in your Form S-1 registration statement as filed with the Securities and Exchange Commission. Sincerely, /s/ Stanley J. Kostman - ----------------------------------------- Stanley J. Kostman President, Beverage Marketing Corporation EX-23.5 13 CONSENT OF INFORMATION RESOURCES, INC. EXHIBIT 23.5 Date: December 1, 1997 To: Annabel Monaghan From: Sarah Laor -- IRI Phone: (973) 244-5250 No. Pages: 1 - ---------------------------------- Dear Annabel: This is to confirm that PaineWebber, Inc. and AquaPenn have been granted permission to refer to Information Resources, Inc. material in the AquaPenn prospectus. Sincerely, /s/ Sara Laor - ---------------------------------- Sara Laor Director, Client Service -----END PRIVACY-ENHANCED MESSAGE-----