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As filed with the Securities and Exchange Commission on March 12, 2010
Registration No. 333-          
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
PRIMO WATER CORPORATION
(Exact name of registrant as specified in its charter)
 
         
Delaware
  5149   30-0278688
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
104 Cambridge Plaza Drive
Winston-Salem, North Carolina 27104
(336) 331-4000
 
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
 
 
 
 
Mark Castaneda
Chief Financial Officer
Primo Water Corporation
104 Cambridge Plaza Drive
Winston-Salem, North Carolina 27104
(336) 331-4000
 
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
 
 
 
 
Please send copies of all communications to:
 
     
D. Scott Coward
  Rachel W. Sheridan
K&L Gates LLP
  Latham & Watkins LLP
4350 Lassiter at North Hills Avenue
  555 Eleventh Street, NW
Suite 300
  Suite 1000
Raleigh, NC 27609
  Washington, DC 20004-1036
(919) 743-7328
  (202) 637-2200
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this registration statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
 
CALCULATION OF REGISTRATION FEE
 
             
Title of Each Class of
    Proposed Maximum Aggregate
    Amount of
Securities to be Registered     Offering Price(1)(2)     Registration Fee(2)
Common Stock
    $60,000,000     $4,278
             
 
(1) Includes shares to be sold upon exercise of the underwriters’ over-allotment option. See “Underwriting.”
 
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act of 1933.
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.
 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell securities, and it is not soliciting an offer to buy these securities, in any state where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED MARCH 12, 2010
 
IPO PRELIMINARY PROSPECTUS
 
Primo Water Logo
 
          Shares
Common Stock
$      per share
 
 
Primo Water Corporation is selling           shares of common stock. We have granted the underwriters a 30-day option to purchase up to an additional           shares from us to cover over-allotments, if any.
 
This is an initial public offering of our common stock. We currently expect the initial public offering price to be between $      and $      per share. We intend to apply for approval to list our common stock on the Nasdaq Global Market under the symbol “     ”.
 
 
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE “RISK FACTORS” BEGINNING ON PAGE 10.
 
 
                 
    Per Share   Total
 
Initial public offering price
  $             $          
Underwriting discount
  $       $    
Proceeds, before expenses, to us
  $       $  
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
 
Thomas Weisel Partners LLC
 
BB&T Capital Markets
 
Signal Hill
 
 
The date of this prospectus is          , 2010.


 

 
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 EX-16.1
 EX-23.1
 
You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with information that is different from that contained in this prospectus. This prospectus is not an offer to sell, nor is it seeking an offer to buy, these securities in any state where the offer or sale is not permitted. The information in this prospectus speaks only as of the date of this prospectus unless the information specifically indicates that another date applies, regardless of the time of delivery of this prospectus or of any sale of our common stock.
 
Primo®, Taste Perfection®, Zero Waste. Perfect Tastetm, www.primowater.com, the Primo logo and other trademarks or service marks of Primo Water Corporation appearing in this prospectus are the property of Primo Water Corporation. Trade names, trademarks and service marks of other companies appearing in this prospectus are the property of the respective owners.
 
Industry and Market Data
 
We obtained the industry and market data used throughout this prospectus through our research, surveys and studies conducted by third-parties and industry and general publications. While we believe the data is reliable, we have not independently verified this industry and market data from third-party sources, and investors should not place undue reliance on this information. Some data are also based on our good faith estimates, which are derived from our review of internal surveys, as well as independent industry publications, government publications, reports by market research firms or other published sources. None of the independent industry publications referred to in this prospectus were prepared on our behalf or at our expense. The foregoing discussion does not, in any manner, disclaim our responsibilities with respect to the disclosures contained in this prospectus.
 
Dealer Prospectus Delivery Obligation
 
Until          , 2010 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.


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PROSPECTUS SUMMARY
 
This summary highlights information about our Company and this offering contained elsewhere herein and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. You should read this entire prospectus carefully, including “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere herein, before making an investment decision. In this prospectus, unless otherwise specified or the context otherwise requires, the terms “Primo,” “we,” “us,” “our,” “our Company,” or “ours” refer to Primo Water Corporation and its consolidated subsidiaries but do not refer to or include information about our former subsidiary, Prima Bottled Water, Inc., which was spun off to our stockholders effective December 31, 2009.
 
Our Business
 
We are a rapidly growing provider of three- and five-gallon purified bottled water and water dispensers sold through major retailers nationwide. We believe the market for purified water is growing due to evolving taste preferences, perceived health benefits and concerns regarding the quality of municipal tap water. Our products provide an environmentally friendly, economical, convenient and healthy solution for consuming purified water. We offer “razor-razorblade” products designed to generate recurring demand for Primo purified bottled water (the razorblade) through the initial sale of our innovative water dispensers (the razor). Once our bottled water is consumed using a water dispenser, empty bottles are exchanged at our recycling center displays where consumers receive a recycling ticket that offers a discount toward the purchase of a full bottle of Primo purified water. Primo consumers purchase an average of 35 bottles of water annually and each bottle can be sanitized and reused up to 40 times before being taken out of use, crushed and recycled, substantially reducing landfill waste compared to consumption of equivalent volumes of single-serve bottled water. Our sales and recycling center displays are prominently located at major retailers nationwide in spaces that are often underutilized. As of December 31, 2009, our water bottle exchange service and water dispensers were offered in each of the contiguous United States and located in approximately 7,000 and 5,500 retail locations respectively, including Lowe’s Home Improvement, Sam’s Club, Costco, Walmart, Target, Kroger, Winn-Dixie, Albertsons and Walgreens.
 
We have created a new nationwide single-vendor water bottle exchange solution for our retail customers, addressing a market demand that was previously unmet. Our water bottle exchange solution is easy for retailers to implement, requires minimal management supervision and store-based labor and provides centralized billing and detailed performance reports. Retailers benefit from year-round, high-margin, highly-predictable revenue, the potential to increase customer traffic and the ability to optimize retail space.
 
We deliver our solution to retailers utilizing our national network of primarily independent bottlers and distributors. These bottlers and distributors make a significant portion of the capital investment required to deliver our solution, including investment in bottling facilities and storage and distribution assets. We focus our capital expenditures on developing new store locations, raising brand awareness, developing new products and managing our national network utilizing our management information system (“MIS”) tools. We are able to manage our national network on a real-time basis through our MIS tools, which provide resource planning and delivery schedule tracking, thus enabling us to optimize our network’s assets and respond to customer needs. In addition, our national network of bottlers and distributors benefits from a year-round product that optimizes utilization of their existing production and distribution assets. We believe our solution and national network provide us a significant competitive advantage in servicing our retail customers.
 
We benefit significantly from management experience gained over the last 15 years in exchange-based businesses, which enables us to implement best practices and develop and maintain key business relationships. Prior to founding Primo, our Chief Executive Officer founded Blue Rhino Corporation, a propane cylinder exchange business, in 1994 and, with several of our other key executive officers, led its initial public offering in 1998 and successful sale in 2004. At the time of the sale, Blue Rhino was the market leader in propane grill cylinder exchange with over 29,000 retail locations in 49 states.


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Industry Overview
 
We believe there are several trends that support consumer demand for our water bottle exchange service and water dispensers, including the following:
 
Emphasis on Health and Wellness
 
As part of a desire to live a healthier lifestyle, we believe consumers are increasingly focused on drinking more water relative to consumption of high caloric beverages, carbonated soft drinks and beverages containing artificial sweeteners.
 
Concerns Regarding Quality of Municipal Tap Water
 
Many consumers purchase purified water not only due to better taste, but also because of concerns regarding municipal tap water quality. Municipal water is typically surface water that is treated centrally and pumped to homes, which can allow additional contaminants to dissolve into the water through municipal or household pipes impacting taste and quality.
 
Growing Preference for Purified Water
 
We believe consumer preference toward purified water relative to tap water continues to grow as purified water has become accepted on a mainstream basis. According to a June 2009 report by independent market analyst Datamonitor, Bottled Water in the United States, consumers spent $18.4 billion in 2008 on bottled water and the bottled water industry is expected to grow at a compound annual growth rate of approximately 7.5%, reaching $26.5 billion by 2013.
 
Increasing Demand for Products with Lower Environmental Impact
 
We believe that consumers are increasingly favoring products with a lower environmental impact with a “reuse, recycle, reduce” mindset becoming a common driver of consumer behavior. Most single-serve polyethylene terephthalate (“PET”) water bottles are produced using fossil fuels and contribute to landfill waste given that only 27% of PET bottles are recycled according to a November 2009 Environmental Protection Agency report. Governmental legislation also reflects these concerns with numerous initiatives enacted to either tax purchases of beverages in plastic bottles or prohibit their use within government facilities or disposal in community landfills.
 
Availability of an Economical Water Bottle Exchange Service and Innovative Water Dispensers
 
Based on estimates derived from industry data, we believe the current household penetration rate of multi-gallon water dispensers is approximately 4%, with the vast majority of these households utilizing traditional home delivery services. We believe the lack of innovation, design enhancement and functionality and the retail pricing structure of our competitors’ dispenser models has prevented greater household adoption. Compounding these issues, there previously was no economical water bottle exchange service with major retailer relationships nationwide to promote dispenser usage beyond the traditional home delivery model. We believe our water bottle exchange service provides this alternative and we are currently the only provider delivering a solution nationally to retailers. We believe there are over 140,000 major retail locations nationwide that we can target to sell our dispensers or offer our water bottle exchange service.


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Our Competitive Strengths
 
We believe that our competitive strengths include the following:
 
Appeal to Consumer Preferences
 
  •  Environmental Awareness. Our water bottle exchange service incorporates reuse of existing bottles, recycles water bottles when their lifecycle is complete and reduces landfill waste and fossil fuel usage compared to alternative methods of bottled water consumption. We believe our water bottle exchange service has a lower environmental impact due to the reuse of existing bottles and the efficiencies associated with our bottling and distribution network.
 
  •  Value. We provide consumers the opportunity for cost savings when consuming our bottled water compared to both single-serve bottled water and typical home and office delivery services. Our water dispensers are sold at attractive retail prices in order to enhance consumer awareness and adoption of our water bottle exchange service, increase household penetration and drive sales of our bottled water.
 
  •  Convenience. Our water bottle exchange service and water dispensers are available at major retail locations nationwide. In addition, our water bottle exchange service provides consumers the convenience of exchanging empty bottles and purchasing full bottles at any participating retailer. We offer three- and five-gallon water bottle options to address different consumer volume preferences. We believe our water bottle exchange service provides a convenient way to consume purified water compared to self-service refill machines and home and office delivery services. Our water bottle sales displays are fully stocked and ready for consumer purchases, eliminating refill time. In addition, our exchange service permits consumers to purchase only the number of water bottles they need without the water bottle purchase minimums or bottle deposits often charged by home and office delivery providers.
 
  •  Taste. We have dedicated significant time and effort to develop our water purification process and formulate the proprietary blend of mineral ingredients included in Primo purified water. We believe that Primo purified water has a silky smooth taste and in an independent taste test that we commissioned, four out of five participants preferred Primo purified water over municipal tap water and three out of four participants preferred Primo purified water over their region’s market-leading bottled water.
 
  •  Health and Wellness. As part of a desire to live a healthier lifestyle, we believe that consumers are increasingly focused on drinking more water relative to consumption of other beverages. As we raise our brand awareness, we believe consumers will recognize that our water bottle exchange service is an effective option for their purified water consumption needs.
 
Key Retail Relationships Served by National Single-Vendor Solution
 
We are the only water bottle exchange provider with a single-vendor solution for retailers nationwide. Our national network of 55 bottlers and 27 distributors utilize our MIS tools and processes to optimize their production and distribution assets while servicing our retail customers. We believe the combination of our major retail relationships, unique single-vendor solution for retail customers, national network of independent bottlers and distributors and our MIS tools is difficult to replicate. We anticipate these factors will facilitate our introduction of new purified water-related products in the future.
 
Ability to Attract and Retain Consumers
 
We offer “razor-razorblade” products designed to generate recurring demand for Primo purified bottled water (the razorblade) through the initial sale of our innovative water dispensers (the razor), which include a coupon for a free three- or five-gallon bottle of Primo purified water. We acquire new consumers and enhance recycling efforts by accepting most dispenser-compatible water bottles in exchange for a recycle ticket discount toward the purchase


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of a full bottle of Primo purified water. Our water bottle exchange service is attractive to retailers as our consumers purchase an average of 35 bottles of Primo purified water per year, which facilitates repeat consumer traffic in our retailers’ stores. In addition, we believe our offering high-quality water dispensers enhances consumer awareness and adoption of our water bottle exchange service, increases household penetration and drives sales of our bottled water.
 
Efficient Business Model
 
Our business model allows us to efficiently offer our solution to our retail partners and centrally manage our national network of bottlers and distributors without a substantial capital investment. Our business processes and MIS tools enable us to manage the bottling and distribution of our water, our product quality, retailer inventory levels and the return of used bottles on a centralized basis, leveraging our invested capital and personnel. Our water bottle exchange service is unique in that we are not required to make a significant portion of the capital investment required to operate our exchange service nationwide. Participation in our water bottle exchange service does not typically require independent bottlers and distributors to make substantial new investments because they often are able to augment their current production capacity and leverage their existing bottling and distribution assets. In addition, the flow of payments between the retailer and our bottlers and independent distributors is a critical component of our overall relationship with our major retail accounts that we control efficiently through electronic data interchange.
 
Benefit from Management’s Proven Track Record
 
We benefit greatly from management experience gained over the last 15 years in exchange businesses to implement and refine best practices and develop and maintain key business relationships. In addition to our Chief Executive Officer, our Chief Financial Officer, Vice President of Operations, Vice President of Products and Vice President of National Accounts all held comparable positions within the Blue Rhino organization during its rapid sales and location growth.
 
Growth Strategy
 
We seek to increase our market share and drive further growth in our business by pursuing the following strategies:
 
Increase Penetration with Existing Retail Relationships and Develop New Retail Relationships
 
We believe we have significant opportunities to increase store penetration with our existing retail relationships and develop new retail relationships based on our competitive strengths. As of December 31, 2009, our water bottle exchange service was offered at approximately 6,000 of our top ten retailers’ nationwide locations. Such retailers present an opportunity of approximately 7,500 additional nationwide locations. We intend to further penetrate our other existing retailers, which collectively provide us the opportunity to be present in an additional 22,400 locations nationwide. Our long-term strategy targets a total of approximately 40,000 retail store locations (which includes new locations with our existing retail customers) within our primary retail categories of home centers, hardware stores, mass merchants, membership warehouses and grocery and drug stores.
 
Drive Consumer Adoption Through Innovative Water Dispenser Models
 
We intend to continue to develop and sell innovative water dispensers at attractive retail prices, which we believe is critical to increasing consumer awareness and driving consumer adoption of our water bottle exchange service. We believe our water dispensers have appealing features, such as stainless steel finishes, adjustable hot and cold temperature controls and hidden bottom-loading bottle features for convenience. Since we first began selling our water dispensers in 2005, we have sold over 460,000 units and have expanded our retail network from four locations as of December 31, 2007, to our current network of approximately 5,500 locations. Our long term


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strategy is to provide multiple purified water-based-beverages from a single Primo water dispenser, with consistent promotion of our water bottle exchange service to supply the purified water.
 
Increase Same Store Sales
 
We offer “razor-razorblade” products that are designed to generate recurring demand for Primo purified bottled water (the razorblade) through the initial sale of water dispensers (the razor). We sell our water dispensers at minimal margin and provide a free three- or five-gallon bottle of water with every water dispenser sold to drive consumer demand for our water bottle exchange service.
 
We believe increasing unit sales of Primo purified bottled water is dependent on generating greater consumer awareness of the environmentally friendly and economical aspects of and the convenience associated with both our purified bottled water and our water bottle exchange service. We expect that our branding, marketing and sales efforts will result in greater usage of our water bottle exchange service. In addition, as consumers exchange dispenser-compatible water bottles, we encourage the use of our water bottle exchange service by providing them a recycling ticket that provides a discount on a full bottle of Primo purified water.
 
Develop and Install Other Hydration Solutions
 
We believe we have significant opportunities to leverage our national bottling and distribution network and our systems and processes to offer other environmentally friendly, economical, convenient and healthy hydration solutions to our retail partners without significant increases in our centralized costs. For example, we intend to offer our retail partners self-service refill vending machines that dispense purified water into bottles and other containers. We believe this offering will cater to a more price-sensitive consumer. In addition, we intend to offer our retail partners automated, self-bagging purified ice dispensers. These purified ice dispensers will provide a simplified method of acquiring ice in customized offering sizes without the extensive manufacturing and storage networks typical of the ice dispensing industry.
 
Pursue Strategic Acquisitions to Augment Geographic and Retail Relationships
 
We believe opportunities exist to expand through selective acquisitions, including smaller water bottle exchange businesses with established retail accounts, on-premises self-service water refill vending machine networks and retail accounts, ice dispenser machine networks and retail accounts and water dispenser companies.
 
Risk Factors
 
Our business is subject to numerous risks, as more fully described in the section entitled “Risk Factors” beginning on page 10. You should carefully consider these risks before deciding to invest in our common stock. These risks include, among others:
 
  •  We have incurred operating losses in the past and may incur operating losses in the future.
 
  •  We depend on a small number of large retailers for most of our consumer sales. Our arrangements with these retailers for our bottled water exchange services and sales of our water dispensers are nonexclusive and may be terminated at will.
 
  •  The success of our business depends on retailer and consumer acceptance of our water bottle exchange service and water dispensers.
 
  •  In our bottled water business, we depend on independent bottlers, distributors and suppliers for our business to operate.


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  •  In our bottled water business, if our distributors do not perform to our retailers’ expectations, if we encounter difficulties in managing our distributor operations or if we or our distributors are not able to manage growth effectively, our retail relationships may be adversely impacted and our business may suffer.
 
  •  We operate in a highly competitive industry, face competition from companies with far greater resources than we have and could encounter significant competition from these companies in our niche market of water bottle exchange services and related products.
 
  •  If our bottled water became contaminated, our business could be seriously harmed.
 
  •  While many members of our senior management have experience as executives of a products and exchange services business, there can be no assurances that this experience and past success will result in our business becoming profitable.
 
Our Corporate Information
 
We were incorporated as a Delaware corporation on October 20, 2004. Our headquarters are located at 104 Cambridge Plaza Drive, Winston-Salem, North Carolina 27104 and our telephone number is (336) 331-4000. Our website is www.primowater.com. Information on, or accessible through, our website is not a part of and is not incorporated into this prospectus and the inclusion of our website address in this prospectus is an inactive textual reference only.


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THE OFFERING
 
Issuer Primo Water Corporation
 
Common stock offered by us           shares (           shares if the underwriters’ over-allotment option is exercised in full)
 
Common stock to be outstanding after this offering           shares (          shares if the underwriters’ over-allotment option is exercised in full)
 
Use of proceeds We estimate that the net proceeds to us from this offering will be approximately $      million (or approximately $      million if the underwriters’ over-allotment option is exercised in full), assuming an initial public offering price of $      per share, the midpoint of the range set forth on the cover page of this prospectus. We intend to use the net proceeds from this offering to repay our 14% subordinated convertible notes due March 31, 2011 and for working capital and general corporate purposes. See “Use of Proceeds.”
 
Dividend policy We currently do not intend to pay any cash dividends on our common stock.
 
Risk factors You should carefully read and consider the information set forth under “Risk Factors,” together with all of the other information set forth in this prospectus, before deciding to invest in shares of our common stock.
 
Proposed Nasdaq Global Market symbol We intend to apply to list our common stock on the Nasdaq Global Market under the symbol “     ”.
 
The number of shares of our common stock that will be outstanding after this offering is based on           shares of common stock outstanding as of          , 2010. Unless otherwise indicated, all information in this prospectus, including the number of shares that will be outstanding after this offering and other share-related information:
 
  •  reflects a     -for-      reverse stock split of our common stock that will occur immediately prior to the closing of this offering;
 
  •  reflects the conversion of our Series A convertible preferred stock and our Series C convertible preferred stock into common stock immediately prior to the closing of this offering;
 
  •  excludes           shares of common stock issuable upon the exercise of warrants to purchase common stock issued in connection with our Series B preferred stock and Series C convertible preferred stock that will expire           days after the closing of this offering;
 
  •  excludes          shares of common stock issuable upon the exercise of warrants to purchase common stock issued to a third party that will expire      days after the closing of this offering;


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  •  excludes           shares of common stock issuable upon the exercise of warrants to purchase common stock issued in connection with our 14% subordinated convertible notes due March 31, 2011 that will expire December 30, 2019;
 
  •  excludes an aggregate of           shares of common stock issuable under our 2004 Stock Plan;
 
  •  excludes an aggregate of           shares of common stock issuable under our 2010 Omnibus Long-Term Incentive Plan, which we have adopted in connection with this offering;
 
  •  excludes an aggregate of           shares of common stock issuable under our 2010 Employee Stock Purchase Plan, which we have adopted in connection with this offering; and
 
  •  assumes no exercise of the underwriters’ over-allotment option to purchase up to      additional shares of our common stock.


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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
 
The following tables summarize our historical consolidated financial data and other information for the periods indicated. We prepared the summary historical consolidated financial data using our audited consolidated financial statements that are included elsewhere in this prospectus. You should read this summary historical consolidated financial data in conjunction with such audited consolidated financial statements and related notes. See “Selected Historical Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The summary historical consolidated financial data are not necessarily indicative of future results.
 
                         
    Year Ended December 31,  
    2007     2008     2009  
    (in thousands, except per share data)  
 
Consolidated statements of operations data:
                       
Net sales
  $ 13,453     $ 34,647     $ 46,981  
Cost of sales
    11,969       30,776       38,771  
                         
Gross profit
    1,484       3,871       8,210  
Selling, general and administrative expenses
    13,719       17,409       14,127  
                         
Loss from operations
    (12,235 )     (13,538 )     (5,917 )
Interest (expense) and other income, net
    65       (70 )     (2,257 )
                         
Loss from continuing operations before income taxes
    (12,170 )     (13,608 )     (8,174 )
Provision for income taxes
                 
                         
Loss from continuing operations
    (12,170 )     (13,608 )     (8,174 )
Loss from discontinued operations, net of income taxes
    (1,904 )     (5,738 )     (3,650 )
                         
Net loss
    (14,074 )     (19,346 )     (11,824 )
Preferred dividends
    (2,147 )     (2,327 )     (3,042 )
                         
Net loss attributable to common stockholders
  $ (16,221 )   $ (21,673 )   $ (14,866 )
                         
                         
Basic and diluted loss per common share:
                       
Loss from continuing operations attributable to common stockholders
  $       $       $    
Loss from discontinued operations attributable to common stockholders
                       
                         
Net loss attributable to common stockholders
  $       $       $  
                         
Basic and diluted weighted average common shares outstanding:
                       
                         
 
The unaudited pro forma consolidated balance sheet data set forth below gives effect to the conversion of all of our outstanding Series A convertible preferred stock and Series C convertible preferred stock into shares of our common stock. The unaudited pro forma as adjusted consolidated balance sheet data gives effect to our receipt of the net proceeds from the sale of           shares of common stock offered by us at an assumed initial public offering price of $      per share, the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated expenses payable by us and the application of a portion of such net proceeds to repay our 14% subordinated convertible notes due March 31, 2011.
 
                         
    As of December 31, 2009  
                Pro Forma
 
    Actual     Pro Forma     As Adjusted  
    (in thousands)  
          (Unaudited)  
 
Consolidated balance sheet data:
                       
Cash
  $                  
Total assets
    22,368                  
Long-term debt, less current maturities
    14,403                  
 
                         
    Year Ended December 31,  
    2007     2008     2009  
    (in thousands, except location data)  
    (Unaudited)  
 
Other information:
                       
Water bottle exchange locations at year end
    4,700       6,400       7,000  
Water bottle units sold
    1,994       3,215       3,853  
Water dispenser units sold
    12       177       272  


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RISK FACTORS
 
An investment in our common stock involves a high degree of risk. You should read and consider carefully each of the risks and uncertainties described below together with the financial and other information contained in this prospectus before you decide to invest in our common stock. The risks described below are not the only ones we face and additional risks that we are not presently aware of or that we currently believe are immaterial may also impair our business. Our business, financial condition, results of operations, cash flows and prospects may be materially and adversely affected by any of these risks. As a result, the market price of our common stock could decline and you could lose all or part of your investment.
 
Risks Relating to Our Business and Industry
 
We have incurred operating losses in the past and may incur operating losses in the future.
 
We have incurred operating losses in the past and expect to incur operating losses in the future. As of December 31, 2009, our accumulated deficit was approximately $91.0 million. Our losses from continuing operations were $12.2 million for the year ended December 31, 2007, $13.6 million for the year ended December 31, 2008, and $8.2 million for the year ended December 31, 2009. We have not been profitable since our inception, and we may not become profitable in the future. While we anticipate being profitable in 2011, our losses may nonetheless continue as we incur additional costs and expenses related to branding and marketing, expansion of operations, product development and development of relationships with strategic business partners. If our operating expenses exceed our expectations, our financial performance will be adversely affected. If our sales do not grow to offset these increased expenses, we may not become profitable. If we do not achieve sustained profitability, we may be unable to continue operations.
 
In both our bottled water and water dispenser businesses, we depend on a small number of large retailers for most of our consumer sales. Our arrangements with these retailers for our bottled water exchange services and sales of our water dispensers are nonexclusive and may be terminated at will.
 
Certain retailers make up a significant percentage of our retail sales volume, such that if one or more of these retailers were to materially reduce or terminate its business with us, our sales would suffer. For 2009, Lowe’s Home Improvement, Sam’s Club and Walmart represented approximately 33%, 19% and 15% of our consolidated net sales, respectively. While we sell a small percentage of our dispensers directly to consumers through our online store, the vast majority of our sales for both of our water bottle exchange service and of our water dispensers are made through our retail partners.
 
While we have arrangements with certain retailers for our products and services, we cannot provide any assurance of any future sales. None of our significant retail accounts are contractually bound to offer our water dispensers or bottle exchange service. As a result, retailers can discontinue our products or services at any time and offer a competitor’s products or services, or none at all. Continued positive relations with a retailer depend upon various factors, including price, customer service, consumer demand and competition. In addition, certain of our retailers have multiple vendor policies and may seek to offer a competitor’s products or services at new or existing locations. If any significant retailer materially reduces, terminates or is unwilling to expand its relationship with us, or requires price reductions or other adverse modifications in our selling terms, our sales would suffer.
 
The success of our business depends on retailer and consumer acceptance of our water bottle exchange service and water dispensers.
 
We are a consumer products and services company operating in the highly-competitive bottled water market and rely on continued consumer demand or preference for our products and services. To generate sales and profits, we must sell products that appeal to retailers and to consumers. Our future success depends on consumer acceptance, particularly at the household level, of our bottled water products, water bottle exchange service and water dispensers. There is no guarantee that there will be significant market acceptance of our water bottle


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exchange service or that we will be successful in selling our water dispensers on a scale necessary to achieve sustained profitability.
 
The market for bottled water related products and services is evolving rapidly and we may not be able to accurately assess the size of the market or trends that may emerge and affect our business. Consumer preferences can change due to a variety of factors, including social trends, negative publicity and economic changes. If we are unable to convince current and potential retail customers and individual consumers of the advantages of our products and services, our ability to sell our bottled water products and water dispensers will be limited. Consumer acceptance also will affect, and be affected by, our existing retail partners’ and potential new retail partners’ decision to sell our products and services and their perception of the likelihood of consumers purchasing our products and services. Even if retail customers purchase our products or services, there is no guarantee that they will be successful in selling our products or services to consumers on a scale necessary for us to achieve sustained profitability. Any significant changes in consumer preferences for purified bottled water could result in reduced demand for our water bottle exchange service and our water dispensers and erosion of our competitive and financial position.
 
In our bottled water business, we depend on independent bottlers, distributors and suppliers for our business to operate.
 
We are and will continue to be for the foreseeable future, substantially dependent on independent bottlers, distributors and suppliers to bottle and deliver our bottled water products and provide our water bottle exchange service to our retail customers. We do not have our own manufacturing facilities to produce bottled water products. We are and will continue to be for the foreseeable future, entirely dependent on third parties to supply the bottle pre-forms, bottles, water and other materials necessary to operate our bottled water business. We rely on third-party supply companies to manufacture our three- and five-gallon water bottles and deliver them to our bottlers. In turn, we rely on bottlers to properly purify the water, include our mineral enhancements and bottle the finished product without contamination and pursuant to our quality standards and preparation procedures. Finally, we rely upon our distributors to deliver bottled water to our retail partners in a timely manner, accurately enter information regarding the delivery of the bottles into our management information system, manage our recycling center displays and return used bottles to the bottlers to be sanitized or crushed and recycled.
 
We can make no assurance that we will be able to maintain these third-party relationships or establish additional relationships as necessary to support growth and profitability of our business on economically viable terms. As independent companies, these bottlers, distributors and suppliers make their own business decisions. Suppliers may choose not to do business with us for a variety of reasons, including competition, brand identity, product standards and concerns regarding our economic viability. They may have the right to determine whether, and to what extent, they produce and distribute our products, our competitors’ products and their own products. Some of the business for these bottlers, distributors and suppliers comes from producing or selling our competitors’ products. These bottlers, distributors and suppliers may devote more resources to other products or take other actions detrimental to our brands. In addition, their financial condition could also be adversely affected by conditions beyond our control and our business could suffer. In addition, we will face risks associated with any bottler’s or distributor’s failure to adhere to quality control and service guidelines we establish or failure to ensure an adequate and timely supply of product and services at retail locations. Any of these factors could negatively affect our business and financial performance. If we are unable to obtain and maintain a source of supply for bottles, water and other materials, our business will be materially and adversely affected.
 
In our bottled water business, if our distributors do not perform to our retailers’ expectations, if we encounter difficulties in managing our distributor operations or if we or our distributors are not able to manage growth effectively, our retail relationships may be adversely impacted and business may suffer.
 
We rely on our distributors to deliver our three- and five-gallon bottled water and provide our water bottle exchange service to retailers. Accordingly, our success depends on our ability to manage our retail relationships through the performance of our distributor partners. The majority of our current distributors are independent and we exercise only limited influence over the resources they devote to delivery and exchange of our three- and five-


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gallon water bottles. Our success depends on our ability to establish and maintain distributor relationships and on the distributors’ ability to operate viable businesses. We can provide no assurance that we will be able to maintain such relationships or establish additional relationships as necessary to support growth and profitability of our business on economically viable terms. Our retailers impose demanding service requirements on us and we could suffer a loss of consumer or retailer goodwill if our distributors do not adhere to our quality control and service guidelines or fail to ensure an adequate and timely supply of bottled water at retail locations. The poor performance of a single distributor to a national retailer could jeopardize our entire relationship with that retailer and cause our bottled water sales and exchange service to suffer. In addition, the number of retail locations offering our water bottle exchange service and our corresponding sales, have grown significantly over the past several years along with our national distributor network. Accordingly, our distributors must be able to adequately service an increasing number of retail accounts. If we or our distributors fail to manage our growth effectively, our bottled water sales and exchange service may suffer.
 
We operate in a highly competitive industry, face competition from companies with far greater resources than we have and could encounter significant competition from these companies in our niche market of water bottle exchange services and related products.
 
We participate in the highly competitive bottled water segment of the nonalcoholic beverage industry. While the industry is dominated by large and well-known international companies, numerous smaller firms are also seeking to establish market niches. In our business model, we not only offer three- and five-gallon bottled water but also provide consumers the ability to exchange their used containers as part of our exchange service. While we are aware of a few direct competitors that operate water bottle exchange networks at retail, we believe they operate on a much smaller scale than we do and we believe they do not have equivalent MIS tools or bottling and distribution capabilities to effectively support major retailers nationwide. Competitive factors with respect to our business include pricing, taste, advertising, sales promotion programs, product innovation, increased efficiency in production and distribution techniques, the introduction of new packaging and brand and trademark development and protection.
 
Our primary competitors in our bottled water business include Nestlé, The Coca-Cola Company, PepsiCo, Dr Pepper Snapple Group and DS Waters of America. None of these companies currently offer a nationwide water bottle exchange service at retail. However, many of these competitors are leading consumer products companies, have substantially greater financial and other resources than we do, have established a strong brand presence with consumers and have established relationships with retailers, manufacturers, bottlers and distributors necessary to start an exchange business at retail locations nationwide should they decide to do so. In addition to competition between companies within the bottled water industry, the industry itself faces significant competition from other non-alcoholic beverages, including carbonated and non-carbonated soft drinks and waters, juices, sport and energy drinks, coffees, teas and spring and tap water.
 
We also compete directly and indirectly in the water dispenser marketplace. While we have had recent success in our sales of water dispensers to retailers, there are many large consumer products companies with substantially greater financial and other resources than we do, a larger brand presence with consumers and established relationships with retailers that could decide to enter the marketplace. Should any of these consumer products companies so decide to enter the water dispenser marketplace, sales of our water dispensers could be materially and adversely impacted, which, in turn, could materially and adversely affect our sales of bottled water. Finally, our water bottle exchange service faces competition from other methods of purified water consumption such as countertop filtration systems, faucet mounted filtration systems, in-line whole-house filtration systems, water filtration dispensing products such as pitchers and jugs, standard and advanced feature water coolers and refrigerator-dispensed filtered and unfiltered water.


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If we are unable to build and maintain our brand image and corporate reputation, our business may suffer.
 
We are a relatively new company, having been formed in late 2004 and commenced operations in June 2005. Our success depends on our ability to build and maintain the brand image for our existing bottled water products and services and effectively build the brand image for any new products. We cannot assure you, however, that any additional expenditures on advertising and marketing will have the desired impact on our products’ brand image and on consumer preferences. Actual or perceived product quality issues or allegations of product contamination, even if false or unfounded, could tarnish the image of our brand and may cause consumers to choose other products. Allegations of product defects or product contamination, even if untrue, may require us from time to time to recall a product from all of the markets in which the affected product was distributed. Product recalls would negatively affect our profitability and brand image. Also, adverse publicity surrounding water usage and any campaigns by activists attempting to connect our system to environmental issues, water shortages or workplace or human rights violations in certain developing countries in which we or our business partners operate, could negatively affect our overall reputation and our products’ acceptance by consumers.
 
Interruption or disruption of our supply chain, distribution channels or service network could adversely affect our business, financial condition and results of operations.
 
Our ability and that of our business partners, including suppliers, bottlers, distributors and retailers, to manufacture, sell and deliver products and services is critical to our success. Interruption or disruption of our supply chain, distribution channels or service network due to unforeseen events, including war, terrorism and other international conflicts, public health issues, natural disasters such as earthquakes, fires, hurricanes or other adverse weather and climate conditions, strikes and other labor disputes, whether occurring in the United States or abroad, could impair our ability to manufacture, sell or deliver our products and services.
 
If our bottled water became contaminated, our business could be seriously harmed.
 
We have adopted various quality, environmental, health and safety standards. However, our products may still not meet these standards or could otherwise become contaminated. A failure to meet these standards or contamination could occur in our operations or those of our bottlers, distributors or suppliers. Such a failure or contamination could result in expensive production interruptions, recalls and liability claims. Moreover, negative publicity could be generated even from false, unfounded or nominal liability claims or limited recalls. Any of these failures or occurrences could negatively affect our business and financial performance.
 
In our water dispenser business, because all of our dispensers are manufactured by two manufacturers in China, a significant disruption in the operations of these manufacturers or political unrest in China could materially adversely affect us.
 
We have only two manufacturers of water dispensers. Any disruption in production or inability of our manufacturers to produce quantities of water dispensers adequate to meet our needs could significantly impair our ability to operate our water dispenser business on a day-to-day basis. Our manufacturers are located in China, which exposes us to the possibility of product supply disruption and increased costs in the event of changes in the policies of the Chinese government, political unrest or unstable economic conditions in China or developments in the U.S. that are adverse to trade, including enactment of protectionist legislation. In addition, our dispensers are shipped directly from the manufacturer to our retail partners. Although we routinely inspect and monitor our manufacturing partners’ activities and products, we rely heavily upon their quality controls when producing and delivering the dispensers to our retail partners. Any of these matters could materially adversely affect our water dispenser business and, as a result, our profitability.


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If we lose key personnel or are unable to recruit qualified personnel, our ability to implement our business strategies could be delayed or hindered. In addition, we may not be able to attract and retain the highly skilled employees we need to support our planned growth.
 
We are highly dependent upon the services of our senior management because of their experience, industry relationships and knowledge of the business. We are particularly dependent on the services of Billy D. Prim, our Chairman, President and Chief Executive Officer. We do not have a formal succession plan in place for Mr. Prim. While our employment agreements with members of our senior management include customary confidentiality, non-competition and non-solicitation covenants, there can be no assurance that such provisions will be enforceable or adequately protect us. The loss of one or more of our key employees could seriously harm our business and we may not be able to attract and retain individuals with the same or similar level of experience or expertise. We face competition for qualified employees from numerous sources and there can be no assurance that we will be able to attract and retain qualified personnel on acceptable terms. Our ability to recruit and retain such personnel will depend upon a number of factors, such as our results of operations, prospects and the level of competition then prevailing in the market for qualified personnel. Failure to recruit and retain such personnel could materially adversely affect our business, financial condition and results of operations.
 
While many members of our senior management have experience as executives of a products and exchange services business, there can be no assurances that this experience and past success will result in our business becoming profitable.
 
Many members of our senior management have had experience as senior managers of a company engaged in the supply, distribution and exchange of propane gas cylinders. While the business model for that company and the model for our business are similar, the propane gas industry and the bottled water industry are very different. For example, there are no assurances that consumer demand will exist for our bottled water products, water bottle exchange service or water dispensers sufficient to enable us to be profitable. While we believe our business model will be successful, any similarity between our business model and that of our senior management’s predecessor employer should not be viewed as an indication that we will be profitable.
 
The consolidation of retail customers may adversely impact our operating margins and profitability.
 
Our customers, such as mass merchants, supermarkets, warehouse clubs, food distributors and drug and pharmacy stores, have consolidated in recent years and consolidation may continue. As a result of these consolidations, our large retail customers may seek lower pricing or increased promotions from us. If we fail to respond to these trends in our industry, our volume growth could slow or we may need to lower prices or increase trade promotions and consumer marketing for our products and services, both of which would adversely affect our financial results. These retailers may use floor or shelf space currently used for our products and services for their own private label products and services. In addition, retailers are increasingly carrying fewer brands in any one category and our results of operations will suffer if we are not selected by our significant customers to remain a vendor. In the event of consolidation involving our current retailers, we may lose key business if the surviving entities do not continue to purchase products or services from us.
 
Adverse weather conditions could negatively impact our business.
 
Unseasonable or unusual weather may negatively impact demand for our products. The sales of our bottled water products and water dispensers are influenced to some extent by weather conditions in the markets in which we operate. Unusually cool or rainy weather may reduce temporarily the demand for our products and contribute to lower sales, which would have an adverse effect on our results of operations for such periods.
 
We depend on key management information systems and third party service providers.
 
We depend on our management information systems (MIS) to process orders, manage inventory and accounts receivable, maintain distributor and customer information, maintain cost-efficient operations and assist distributors


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in delivering products and services on a timely basis. Any disruption in the operation of our MIS tools, the loss of employees knowledgeable about such systems, the termination of our relationships with third-party MIS partners or our failure to continue to effectively modify such systems as business expands could require us to expend significant additional resources or to invest additional capital to continue to manage our business effectively, and could even affect our compliance with public reporting requirements. Additionally, our MIS tools are vulnerable to interruptions or other failures resulting from, among other things, natural disasters, terrorist attacks, software, equipment or telecommunications failures, processing errors, computer viruses, hackers, other security issues or supplier defaults. Security, backup and disaster recovery measures may not be adequate or implemented properly to avoid such disruptions or failures. Any disruption or failure of these systems or services could cause substantial errors, processing inefficiencies, security breaches, inability to use the systems or process transactions, loss of customers or other business disruptions, all of which could negatively affect our business and financial performance.
 
Water scarcity and poor quality could negatively impact our long-term profitability.
 
Water is a limited resource facing unprecedented challenges from overexploitation, population growth, increasing pollution, poor management and climate change. As demand for water continues to increase and as water becomes scarcer and the quality of available water deteriorates, our business may incur increasing costs or face capacity constraints which could adversely affect our profitability or net sales in the long run.
 
We may pursue acquisitions and investments in new product lines, businesses or technologies that involve numerous risks, which could disrupt our business or adversely affect our financial condition and results of operations.
 
In the future, we may acquire or invest in new product lines, businesses or technologies to expand our current bottled water products and services. Acquisitions present a number of potential risks and challenges that could disrupt our business operations, increase our operating costs or capital expenditure requirements and reduce the value of the acquired product line, business or technology. For example, if we identify an acquisition candidate, we may not be able to successfully negotiate or finance the acquisition on favorable terms or at all. The process of negotiating acquisitions and integrating acquired products, services, technologies, personnel or businesses might result in significant transaction costs, operating difficulties or unexpected expenditures and might require significant management attention that would otherwise be available for ongoing development of our business. If we are successful in consummating an acquisition, we may not be able to integrate the acquired product line, business or technology into our existing business and products and we may not achieve the anticipated benefits of any acquisition. Furthermore, potential acquisitions and investments may divert our management’s attention, require considerable cash outlays and require substantial additional expenses that could harm our existing operations and adversely affect our results of operations and financial condition. To complete future acquisitions, we may issue equity securities, incur debt, assume contingent liabilities or incur amortization expenses and write-downs of acquired assets, any of which could dilute the interests of our stockholders or adversely affect our profitability or cash flow.
 
Changes in taxation requirements could affect our financial results.
 
We are subject to income tax in the numerous jurisdictions in which we generate net sales. In addition, our water dispensers are subject to certain import duties and sales taxes in certain jurisdictions in which we operate. Increases in income tax rates could reduce our after-tax income from affected jurisdictions, while increases in indirect taxes could affect our products’ and services’ affordability and therefore reduce demand for our products and services.
 
Our ability to use net operating loss carryforwards in the United States may be limited.
 
As of December 31, 2009, we had net operating losses of approximately $55.0 million for federal income tax purposes, which expire at various dates through 2029. To the extent available and not otherwise utilized, we intend


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to use any net operating loss carryforwards to reduce the U.S. corporate income tax liability associated with our operations. Section 382 of the Internal Revenue Code of 1986, as amended, generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone certain changes in stock ownership. Our ability to utilize net operating loss carryforwards may be limited, under this section or otherwise, by the issuance of common stock in this offering. To the extent our use of net operating loss carryforwards is significantly limited, our income could be subject to U.S. corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which could result in lower profits.
 
Our financial results may be negatively impacted by the recent global financial events.
 
The recent global financial events have resulted in the consolidation, failure or near failure of a number of institutions in the banking, insurance and investment banking industries and have substantially reduced the ability of companies to obtain financing. These events also led to a substantial reduction in stock market valuations during 2008 and the first few months of 2009, although stock market valuations rebounded significantly in the latter half of 2009. These events could have a number of different effects on our business, including:
 
  •  a reduction in consumer spending, which could result in a reduction in our sales volume;
 
  •  a shift in the purchasing habits of our target consumers;
 
  •  a negative impact on the ability of our retail customers to timely pay their obligations to us, thus reducing our cash flow;
 
  •  a negative impact on the ability of our vendors to timely supply materials; and
 
  •  an increased likelihood that our lender may be unable to honor its commitments under our revolving credit facility.
 
Other events or conditions may arise directly or indirectly from the global financial events that could negatively impact our business.
 
Risks Relating to Regulatory and Legal Issues
 
Our products and services are heavily regulated at both the state and federal level. If we are unable to continue to comply with applicable regulations and standards in any jurisdiction, we might not be able to sell our products in that jurisdiction or they could be recalled, and our business could be seriously harmed.
 
The production, distribution and sale in the United States of our products are subject to the Federal Food, Drug and Cosmetic Act; the Occupational Safety and Health Act; the Americans with Disabilities Act (the “ADA”); the Lanham Act; various environmental statutes; and various other federal, state and local statutes and regulations applicable to the production, transportation, sale, safety, advertising, promotion, labeling and ingredients of such products. For example, measures have been enacted in various localities and states that require a deposit to be charged for certain non-refillable beverage containers. The precise requirements imposed by these measures vary. Other deposit, recycling or product stewardship proposals have been introduced in various jurisdictions. We anticipate that similar legislation or regulations may be proposed in the future at the local, state and federal levels.
 
The U.S. Food and Drug Administration (the “FDA”) regulates bottled water as a food under the federal Food, Drug and Cosmetic Act. Our bottled water must meet FDA requirements of safety for human consumption, identity, quality and labeling. Further, any claims we make in marketing our products, such as claims related to the beneficial health effects of drinking water, are subject to FDA’s advertising and promotion requirements and restrictions. In addition, the FDA has established current good manufacturing practices, regulations which govern the facilities, methods, practices and controls used for the processing, bottling and distribution of bottled drinking


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water. We and our third-party bottling and distribution partners are subject to these requirements. In addition, all public drinking water must meet Environmental Protection Agency standards established under the Safe Drinking Water Act for mineral and chemical concentration and drinking water quality and treatment. We also must comply with overlapping and, in some cases, inconsistent state regulations in a variety of areas. These state-level regulations, among other things, set standards for approved water sources and the information that must be provided and the basis on which any therapeutic claims for water may be made. We must expend resources to continuously monitor state legislative and regulatory activities in order to identify and ensure compliance with laws and regulations that apply to our bottled water business in each state in which we operate.
 
Additionally, the manufacture, sale and use of resins used to make water bottles are subject to regulation by the FDA. These regulations relate to substances used in food packaging materials, not with specific finished food packaging products. Our beverage containers are deemed to be in compliance with FDA regulations if the components used in the containers: (i) are approved by the FDA as indirect food additives for their intended uses and comply with the applicable FDA indirect food additive regulations; or (ii) are generally recognized as safe for their intended uses and are of suitable purity for those intended uses.
 
The Consumer Product Safety Commission, FDA or other applicable regulatory bodies may require the recall, repair or replacement of our products if those products are found not to be in compliance with applicable standards or regulations. The failure of our third party manufacturers or bottlers to produce merchandise that adheres to our quality control standards could damage our reputation and lead to customer litigation against us. If our manufacturers or distributors are unable or unwilling to recall products failing to meet our quality standards, we may be required to remove merchandise or recall those products at a substantial cost to us. We may be unable to recover costs related to product recalls.
 
We believe that our self-imposed standards meet or exceed those set by federal, state and local regulations. Nevertheless, our failure or the failure of our suppliers, bottlers or distributors to comply with federal or state laws, rules or regulations could subject us to potential governmental enforcement action for violation of such regulations, which could result in warning letters, fines, product recalls or seizures, civil or criminal penalties and/or temporary or permanent injunctions, each of which could materially harm our business, financial condition and results of operations. In addition, our failure, or even our perceived failure, to comply with applicable laws, rules or regulations could cause retailers and others to determine not to do business with us or reduce the amount of business they do with us.
 
In January 2010, the U.S. Food and Drug Administration issued an updated report regarding bisphenol A, or BPA, a chemical used in food and beverage packaging and other products that can possibly have adverse health effects on consumers, particularly on young children. The three- and five- gallon polycarbonate plastic bottles that we use to bottle our water contain BPA. Any significant change in perception by our customers or government regulation of polycarbonate plastic in food and beverage products could adversely affect our operations and financial results.
 
In January 2010, the U.S. Food and Drug Administration issued an updated report regarding its current perspective on the safety of BPA in food packaging materials, asserting the need for additional studies on BPA and issuing its interim public health recommendations. BPA is an industrial chemical used to make hard, clear plastic known as polycarbonate, which is currently used in our three- and five-gallon water bottles. BPA is regulated by the FDA as an indirect food additive. While the FDA notes that studies employing standardized toxicity tests support the safety of human exposure to BPA at the low levels currently experienced by consumers, the FDA’s report additionally acknowledges the results of certain recent studies which suggest some concern regarding potential developmental and behavioral effects of BPA exposure, particularly on infants and young children.
 
The FDA indicated that it plans to continue to evaluate these low dose toxicity studies, as well as other recent peer-reviewed studies related to BPA while, at the same time, soliciting public comment and inter-agency scientific input before updating its formal assessment of the safety of BPA for use in food contact applications. In the interim, the FDA’s public health recommendations include taking reasonable steps to reduce exposure of infants to


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BPA in the food supply and working with industry to support and evaluate manufacturing practices and alternative substances that could reduce exposure in other populations. Further, the FDA indicates that it plans to review its existing authority to shift to a more robust regulatory framework for oversight of BPA.
 
Consistent with the findings of numerous international regulatory bodies, we believe that the scientific evidence suggests that polycarbonate plastic made with BPA is a safe packing material for all consumers. Nonetheless, media reports and the FDA report have prompted concern in our marketplace among existing and potential customers. It is possible that developments surrounding this issue could lead to adverse effects on our business. Such developments could include:
 
  •  Increased publicity that changes public or regulatory perception regarding packaging that uses BPA, so that significant numbers of consumers stop purchasing products that are packaged in polycarbonate plastic.
 
  •  The emergence of new scientific evidence that suggests that the low doses of BPA to which consumers may be exposed when using polycarbonate plastic is unsafe.
 
  •  Interpretations of existing evidence by the FDA or other regulatory agencies that lead to prohibitions on the use of polycarbonate plastic as packaging for consumable products.
 
  •  The inability of sellers of consumable products to find an adequate supply of alternative packaging if polycarbonate plastic containing BPA becomes an undesirable or prohibited packaging material.
 
If any of these events were to occur, our sales and operating results could be materially adversely affected.
 
Our inability to protect our intellectual property, or our involvement in damaging and disruptive intellectual property litigation, could adversely affect our business, results of operations and financial condition or result in the loss of use of products or services.
 
We have filed certain patent applications and trademark registration applications and intend to seek additional patents, to develop additional trademarks and seek federal registrations for such trademarks and to develop other intellectual property. We consider our Primo name and related trademarks and our other intellectual property to be valuable to our business and the establishment of a national branded bottled water exchange program. We rely on a combination of patent, copyright, trademark and trade secret laws and other arrangements to protect our proprietary rights and could incur substantial expense to enforce our rights under such laws. A number of other companies, however, use trademarks similar or identical to the Primo® mark to identify their products, and we may not be able to stop these other companies from using such trademarks. The requirement to change any of our trademarks, service marks or trade names could entail significant expense and result in the loss of any goodwill associated with that trademark, service mark or trade name. While we have filed, and intend to file in the future, patent applications, where appropriate, and to pursue such applications with the patent authorities, we cannot be sure that patents will be issued on such applications or that any issued patents will not be successfully contested by third parties. Also, since issuance of a patent does not prevent other companies from using alternative, non-infringing technology or designs, we cannot be sure that any issued patents, or patents that may be issued to others and licensed to us, will provide significant or any commercial protection, especially as new competitors enter the market.
 
In addition to patent protection, we also rely on trade secrets and other non-patented proprietary information relating to our product development, business processes and operating activities. We seek to protect this information through appropriate efforts to maintain its secrecy, including confidentiality agreements. We cannot be sure that these efforts will be successful or that confidentiality agreements will not be breached. We also cannot be sure that we would have adequate remedies for any breach of such agreements or other misappropriation of our trade secrets, or that our trade secrets and proprietary know-how will not otherwise become known or be independently discovered by others. Where necessary, we may initiate litigation to enforce our patent or other intellectual property rights. Any such litigation may require us to spend a substantial amount of time and money


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and could distract management from its day-to-day operations. Moreover, there is no assurance that we will be successful in any such litigation or that such litigation will not result in successful counterclaims or challenges to the validity of our intellectual property rights. Our failure to successfully develop intellectual property, or to successfully obtain, maintain and enforce patents, trademarks and other intellectual property, could affect our ability to distinguish our products and services from those of our competitors and could cause our sales to suffer.
 
Our business and our ability to provide products and services may be impaired by claims that we infringe the intellectual property rights of others. Vigorous protection and pursuit of intellectual property rights characterize the consumer products industry. These traits can result in significant, protracted and materially expensive litigation. In addition, parties making infringement and other claims may be able to obtain injunctive or other equitable relief that could effectively block our ability to provide our products, services or utilize our business methods and could cause us to pay substantial damages. In the event of a successful claim of infringement, we may need to obtain one or more licenses from third parties, which may not be available at a reasonable cost, or at all. It is possible that our intellectual property rights may not be valid or that we may infringe existing or future proprietary rights of others. Any successful infringement claims could subject us to significant liabilities, require us to seek licenses on unfavorable terms, prevent us from manufacturing or selling products, providing services and utilizing business methods and require us to redesign or, in the case of trademark claims, re-brand our Company, products or services, any of which could have a material adverse effect on our business, results of operations or financial condition.
 
Legislative and executive action in state and local governments enacting local taxes on bottled water to include multi-gallon bottled water could adversely affect our business and financial results.
 
Regulations have been enacted or proposed in some localities where we operate to enact local taxes on bottled water. These actions are purportedly designed to discourage the use of bottled water due in large part to concerns about the environmental effects of producing and discarding large numbers of plastic bottles. While we have not to date directly experienced any adverse effects from these concerns, and we believe that our products are sufficiently different from those affected by recent enactments, there is no assurance that our products will not be subject to future legislative and executive action by state and local governments, which could have a material adverse effect on our business, results of operations or financial condition.
 
Litigation or legal proceedings could expose us to significant liabilities, including product liability claims, and damage our reputation.
 
We are from time to time party to various litigation claims and legal proceedings. We evaluate these claims and proceedings to assess the likelihood of unfavorable outcomes and estimate, if possible, the amount of potential losses. If our products are not properly manufactured or designed, personal injuries or property damage could result, which could subject us to claims for damages. The costs associated with defending product liability and other claims, and the payment of damages, could be substantial. Our reputation could also be adversely affected by such claims, whether or not successful.
 
We may establish a reserve as appropriate based upon assessments and estimates in accordance with our accounting policies. We base our assessments, estimates and disclosures on the information available to us at the time and rely on legal and management judgment. Actual outcomes or losses may differ materially from assessments and estimates. Actual settlements, judgments or resolutions of these claims or proceedings may negatively affect our business and financial performance. A successful claim against us that is not covered by insurance or is in excess of our available insurance limits could require us to make significant payments of damages and could materially adversely affect our results of operations and financial condition.


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Risks Relating to This Offering and Our Common Stock
 
There has not been a public market for our shares and an active market may not develop or be maintained, which could limit your ability to sell shares of our common stock.
 
Prior to this offering, there has been no public market for our common stock. Although we intend to apply to list the common stock on The Nasdaq Global Market, an active public market for our shares may not develop or be sustained after this offering. The initial public offering price for our common stock will be determined through our negotiations with the underwriters and may not be indicative of the market price of our common stock after this offering. If you purchase shares of our common stock, you may not be able to resell those shares at or above the initial public offering price, or at all. We cannot predict the extent to which investor interest in our Company will lead to the development of an active trading market on The Nasdaq Global Market or otherwise or how liquid that market might become. An active public market for our common stock may not develop or be sustained after this offering. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all.
 
The value of our common stock could be volatile.
 
The overall market and the price of our common stock may fluctuate greatly. The trading price of our common stock may be significantly affected by various factors, including:
 
  •  quarterly fluctuations in our operating results;
 
  •  changes in investors’ and analysts’ perception of the business risks and conditions of our business;
 
  •  our ability to meet the earnings estimates and other performance expectations of financial analysts or investors;
 
  •  unfavorable commentary or downgrades of our stock by equity research analysts;
 
  •  termination of lock-up agreements or other restrictions on the ability of our existing stockholders to sell their shares after this offering;
 
  •  fluctuations in the stock prices of our peer companies or in stock markets in general; and
 
  •  general economic or political conditions.
 
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
 
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our Company, the trading price for our stock would be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.


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Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.
 
Sales of a large number of our shares of common stock in the public market after this offering, or the perception that such sales could occur, could adversely affect the market price of our common stock and could impair our ability to sell equity securities in the future at a time and at a price that we deem appropriate. After the closing of this offering, we will have           shares of common stock (           shares if the underwriters exercise their option to purchase additional shares in full) outstanding. The shares of common stock offered in this offering will be freely tradable without restriction under the Securities Act of 1933, as amended (the “Securities Act”), except for any shares of our common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.
 
We, our executive officers, directors and certain stockholders have agreed, subject to certain exceptions, with the underwriters not to offer, sell, contract to sell or otherwise dispose of any common stock or securities convertible into or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus. These shares will represent     % of our outstanding common stock after this offering (or     % if the underwriters exercise their option to purchase additional shares in full). As restrictions on resale end, the market price of our common stock could decline if the holders of the restricted shares sell them or are perceived by the market as intending to sell them. Thomas Weisel Partners LLC may, in its sole discretion, release any of these shares from these restrictions at any time without notice. See “Shares Eligible for Future Sale” and “Underwriting.”
 
All of our shares of common stock outstanding as of the date of this prospectus may be sold in the public market by existing stockholders 180 days after the date of this prospectus, subject to applicable volume and other limitations imposed under federal securities laws. See “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling shares of our common stock after this offering.
 
In the future, we may also issue our securities in connection with investments or acquisitions or in order to raise capital for other purposes. The amount of shares of our common stock issued in connection with these matters could constitute a material portion of our then-outstanding shares of our common stock.
 
Purchasers in this offering will experience immediate and substantial dilution in net tangible book value.
 
The initial public offering price per share is expected to be substantially higher than the net tangible book value per share of our outstanding common stock. Purchasers of shares in this offering will experience immediate dilution in the net tangible book value of their shares. Based on an assumed initial public offering price of $      per share, the mid-point of the range set forth on the cover of this prospectus, dilution per share in this offering will be $      per share (or     % of the price). Further, if we issue additional equity securities to raise additional capital, your ownership interest in our Company may be diluted and the value of your investment may be reduced. See “Dilution.”
 
Concentration of ownership among our existing executive officers, directors and their affiliates may prevent new investors from influencing significant corporate decisions.
 
Upon completion of this offering, our executive officers, directors and their affiliates will beneficially own, in the aggregate, approximately     % of our outstanding shares of common stock. In particular, Billy D. Prim, our Chairman, Chief Executive Officer and President, will beneficially own approximately     % of our outstanding shares of common stock upon completion of this offering. As a result, these stockholders will be able to exercise a significant level of control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions. This control


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could have the effect of delaying or preventing a change of control of our Company or changes in management and will make the approval of certain transactions difficult or impossible without the support of these stockholders.
 
Anti-takeover provisions in our charter documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.
 
Our amended and restated certificate of incorporation and amended and restated bylaws will contain provisions that may make the acquisition of our Company more difficult without the approval of our Board of Directors. These provisions:
 
  •  authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;
 
  •  eliminate the ability of our stockholders to act by written consent;
 
  •  establish advance notice requirements for nominations for elections to our Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings;
 
  •  provide that the Board of Directors is expressly authorized to make, alter or repeal our amended and restated bylaws; and
 
  •  establish a classified board of directors the members of which will serve staggered three-year terms.
 
As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock.
 
These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our Company, including actions that our stockholders may deem advantageous, or negatively affect the trading price of our common stock. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.
 
Since we have no current plans to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.
 
We do not anticipate paying any dividends to our stockholders for the foreseeable future. The agreements governing our indebtedness also restrict our ability to pay dividends. Any determination to pay dividends in the future will be made at the discretion of our Board of Directors and will depend on our results of operations, financial conditions, contractual restrictions, restrictions imposed by applicable law and other factors our Board of Directors deems relevant. Accordingly, you may have to sell some or all of your common stock in order to generate cash flow from your investment. You may not receive a gain on your investment when you sell our common stock and may lose some or all of the amount of your investment. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.
 
We will incur increased costs as a result of being a publicly-traded company.
 
As a company with publicly-traded securities, we will incur significant legal, accounting and other expenses not presently incurred. In addition, the Sarbanes-Oxley Act of 2002, as well as rules promulgated by the U.S. Securities and Exchange Commission, or SEC, and The Nasdaq Stock Market, require us to adopt corporate


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governance practices applicable to U.S. public companies. These rules and regulations may increase our legal and financial compliance costs.
 
If we do not timely satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, the trading price of our common stock could be adversely affected.
 
As a company with publicly-traded securities, we will be subject to Section 404 of the Sarbanes-Oxley Act of 2002. This law requires us to document and test the effectiveness of our internal control over financial reporting in accordance with an established internal control framework and to report on our conclusion as to the effectiveness of our internal control over financial reporting. The cost to comply with this law will affect our net income adversely. Any delays or difficulty in satisfying the requirements of Section 404 could, among other things, cause investors to lose confidence in, or otherwise be unable to rely on, the accuracy of our reported financial information, which could adversely affect the trading price of our common stock. In addition, failure to comply with Section 404 could result in The Nasdaq Stock Market imposing sanctions on us, which could include the delisting of our common stock.
 
Risks Relating to Our Indebtedness
 
Restrictive covenants in our debt instruments restrict or prohibit our ability to engage in or enter into a variety of transactions, which could adversely restrict our financial and operating flexibility and subject us to other risks.
 
Our senior revolving credit facility contains various restrictive covenants that limit our and our subsidiaries’ ability to take certain actions. In particular, these agreements limit our and our subsidiaries’ ability to, among other things:
 
  •  incur additional indebtedness;
 
  •  make restricted payments (including paying dividends on, redeeming or repurchasing capital stock);
 
  •  make certain investments or acquisitions;
 
  •  create liens on our assets to secure debt;
 
  •  engage in certain types of transactions with affiliates;
 
  •  engage in sale-and-leaseback or similar transactions; and
 
  •  transfer or sell assets, merge, liquidate or wind-up.
 
Any or all of these covenants could have a material adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other corporate opportunities and to fund our operations. Any future debt could also contain financial and other covenants more restrictive than those imposed under our current senior revolving credit facility.
 
A breach of a covenant or other provision in any debt instrument governing our current or future indebtedness could result in a default under that instrument and, due to customary cross-default and cross-acceleration provisions, could result in a default under any other debt instrument that we may have. If the lenders under our current or future indebtedness were to so accelerate the payment of the indebtedness, we cannot assure you that our assets or cash flow would be sufficient to repay in full our outstanding indebtedness, in which event we likely would seek reorganization or protection under bankruptcy or other, similar laws.


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Global capital and credit market issues could negatively affect our liquidity, increase our costs of borrowing and disrupt the operations of our suppliers, bottlers, distributors and customers.
 
The global capital and credit markets have experienced increased volatility and disruption over the past two years, making it more difficult for companies to access those markets. There can be no assurance that continued or increased volatility and disruption in the capital and credit markets will not impair our liquidity or increase our costs of borrowing. Our business could also be negatively impacted if our suppliers, bottlers, distributors or retail customers experience disruptions resulting from tighter capital and credit markets or a slowdown in the general economy.
 
We may be unable to generate sufficient cash flow to service our debt obligations. In addition, our inability to generate sufficient cash flows to support operations and other activities without debt financing could prevent future growth and success.
 
Our ability to generate cash, make scheduled payments or refinance our obligations depends on our successful financial and operating performance. Our financial and operating performance, cash flow and capital resources depend upon prevailing economic conditions and various financial, business and other factors, many of which are beyond our control. If our cash flow and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell material assets or operations, obtain additional capital or restructure our debt, any or all of which could have a material adverse effect on our business, financial condition and results of operations. In addition, we cannot assure you that we would be able to take any of these actions on terms acceptable to us, or at all, that these actions would enable us to continue to satisfy our capital requirements or that these actions would be permitted under the terms of our various debt agreements.
 
If we are unable to generate sufficient cash flows to support capital expansion, business acquisition plans and general operating activities, and are unable obtain the necessary funding for these items through debt financing, our business could be negatively affected and we may be unable to expand into existing and new markets. Our ability to generate cash flows is dependent in part upon obtaining necessary financing at favorable interest rates. Interest rate fluctuations and other capital market conditions may prevent us from doing so.


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements that are based on current expectations, estimates, forecasts and projections regarding management’s beliefs and assumptions about the industry in which we operate. Such statements include, in particular, statements about our plans, strategies and prospects under the headings “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” When used in this prospectus, the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would,” and similar expressions identify forward-looking statements.
 
Forward-looking statements are not a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by, which such performance or results will be achieved. Forward-looking statements are based on information available at the time the statements are made and involve known and unknown risks, uncertainties and other factors that may cause actual outcomes and results to differ materially from what is expressed or forecasted in such forward-looking statements. These forward-looking statements include, but are not limited to, statements relating to:
 
  •  our expectations regarding the use of proceeds from this offering;
 
  •  growth in the market for purified water and increased consumer preference toward purified water relative to tap water or other beverages;
 
  •  consumer recognition of our brand and our water bottle exchange service and water dispenser products;
 
  •  the use of our retail relationships, single-vendor solution, national network of independent bottlers and distributors and MIS tools to facilitate our introduction of new purified water-related products in the future;
 
  •  our opportunities to increase store penetration with our existing retail relationships and develop new retail relationships;
 
  •  the continuing development, innovation and sale of our water dispensers;
 
  •  our intention to offer new products and services, including self-service refill vending machines and automated, self-bagging purified ice dispensers;
 
  •  our expectations regarding our business strategy, anticipated profitability, liquidity position, future financial performance, inflation and expense levels;
 
  •  our ability to use any net operating loss carryforwards;
 
  •  our dividend policy;
 
  •  our ability to attract and retain key personnel;
 
  •  our expectations regarding additional costs connected to the growth of our business and costs related to becoming a public company; and
 
  •  our policies regarding our executive compensation program and the level of executive compensation.
 
We have included important factors in the cautionary statements included in this prospectus, particularly in the section entitled “Risk Factors,” that we believe could cause actual results or events to differ materially from the forward-looking statements we make. Except as required by applicable law, we assume no obligation to update any forward-looking statements publicly or to update the reasons why actual results could differ materially from those anticipated in any forward looking statements, even if new information becomes available in the future.


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USE OF PROCEEDS
 
We estimate that the net proceeds to us from this offering will be approximately $      million (approximately $      million if the underwriters’ over-allotment option is exercised in full). This estimate is based upon an assumed initial public offering price of $      per share, less estimated underwriting discounts and commissions and offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $      per share would increase (decrease) the net proceeds to us from this offering by approximately $      million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
 
We intend to use the net proceeds from this offering as follows:
 
  •  $      to repay our 14% subordinated convertible notes due March 31, 2011 (“2011 Notes”); and
 
  •  the remaining $      for working capital and general corporate purposes.
 
As of          , 2010, we had $15.0 million principal amount of 2011 Notes outstanding that bear interest at 14% per annum and mature on March 31, 2011. We issued the 2011 Notes on December 30, 2009 and used the proceeds of the 2011 Notes to retire $8.0 million principal amount of subordinated debt and to repay approximately $7.0 million of borrowings under our revolving credit facility.
 
Pending use of the net proceeds of this offering, we intend to invest such net proceeds in short-term, interest-bearing investment grade securities.
 
DIVIDEND POLICY
 
We have never paid or declared cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to finance the development and expansion of our business. We do not expect to pay any dividends on our common stock in the foreseeable future. Any future determination to pay dividends will be at the discretion of our Board of Directors and will depend upon various factors, including our results of operations, financial condition, capital requirements, investment opportunities and other factors that our Board of Directors deems relevant. Our senior credit agreement currently limits our ability to pay cash dividends.


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CAPITALIZATION
 
The following table sets forth our capitalization as of December 31, 2009:
 
  •  on an actual basis (without giving effect to the  -for-   reverse stock split of our common stock);
 
  •  on a pro forma basis to give effect to the  -for-   reverse stock split of our common stock and to the conversion of all outstanding Series A and Series C convertible preferred stock into common stock, as if both the reverse stock split and the conversion had occurred as of December 31, 2009; and
 
  •  on a pro forma as adjusted basis to reflect the reverse stock split and conversion described above, as well as our sale of shares in this offering at an assumed initial public offering price of $      per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and offering expenses payable by us, and the application of a portion of the net proceeds from such sale of common stock to repay our 2011 Notes, as if each had occurred as of December 31, 2009.
 
You should read this table in conjunction with “Use of Proceeds,” “Selected Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto included elsewhere in this prospectus.
 
                         
    As of December 31, 2009  
                Pro Forma
 
    Actual     Pro Forma     as Adjusted  
    (in thousands, except par value data) (Unaudited)  
 
Cash
  $                                    
                         
Current liabilities
    7,326                  
Long-term liabilities
    15,451                  
Preferred stock, $0.001 par value, 100,000 shares authorized
                       
Series A convertible preferred stock, 18,780 shares issued and outstanding, actual, and no shares issued or outstanding, pro forma and pro forma as adjusted
    19                  
Series B preferred stock, 23,280 shares issued and outstanding, actual and pro forma, and no shares issued or outstanding, pro forma as adjusted
    23                  
Series C convertible preferred stock, 12,520 shares issued and outstanding, actual, and no shares issued or outstanding, pro forma and pro forma as adjusted
    13                  
Common stock ($0.001 par value, 200,000 shares authorized and 15,158 shares issued and outstanding, actual;           shares authorized and           shares issued and outstanding, pro forma, and           shares issued and outstanding pro forma as adjusted)
    15                  
Additional paid-in capital
    86,723                  
Common stock warrants
    3,797                  
Accumulated deficit
    (90,999 )                
                         
Total stockholders’ equity (deficit)
    (409 )                
                         
Total capitalization
  $ 22,368                  
                         


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The shares outstanding data in the preceding table as of December 31, 2009:
 
  •  excludes           shares of common stock issuable upon the exercise of warrants to purchase common stock issued in connection with our Series B preferred stock and Series C convertible preferred stock that will expire      days after the closing of this offering;
 
  •  excludes           shares of common stock issuable upon the exercise of warrants to purchase common stock issued to a third party that will expire      days after the closing of this offering;
 
  •  excludes           shares of common stock issuable upon the exercise of warrants to purchase common stock issued in connection with our 2011 Notes that will expire December 30, 2019;
 
  •  excludes an aggregate of           shares of common stock issuable under our 2004 Stock Plan;
 
  •  excludes an aggregate of           shares of common stock available for issuance under our 2010 Omnibus Long-Term Incentive Plan, which we have adopted in connection with this offering;
 
  •  excludes an aggregate of           shares of common stock available for issuance under our 2010 Employee Stock Purchase Plan, which we have adopted in connection with this offering; and
 
  •  assumes no exercise of the underwriters’ over-allotment option to purchase up to           additional shares of our common stock.


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DILUTION
 
If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after the closing of this offering. Pro forma net tangible book value per share represents total tangible assets less total liabilities, divided by the number of shares of common stock outstanding, after giving effect to the     -for-     reverse stock split of our common stock and the conversion of all of our outstanding Series A and Series C convertible preferred stock into an aggregate of           shares of our common stock as if both the reverse stock split and the conversion had occurred as of December 31, 2009. The pro forma net tangible book value of our common stock as of December 31, 2009, was approximately $      million, or approximately $      per share.
 
After giving effect to our sale of shares at an assumed initial public offering price of $      per share, which is the midpoint of the range set forth on the cover page of this prospectus, deducting estimated underwriting discounts and commissions and offering expenses payable by us, and applying the net proceeds from this sale, the pro forma as adjusted net tangible book value of our common stock, as of December 31, 2009, would have been approximately $      million, or $      per share. This amount represents an immediate increase in net tangible book value to our existing stockholders of $      per share and an immediate dilution to new investors of $      per share. The following table illustrates this per share dilution:
 
                 
Initial public offering price per share
          $             
Pro forma net tangible book value per share as of December 31, 2009
  $                     
                 
Increase in pro forma net tangible book value per share attributable to new investors in this offering
  $            
Pro forma as adjusted net tangible book value per share after giving effect to this offering
          $    
                 
Dilution per share to new investors
          $    
                 
 
If the underwriters exercise their over-allotment option in full, there will be an increase in pro forma as adjusted net tangible book value per share to existing stockholders of $      per share and an immediate dilution in pro forma as adjusted net tangible book value per share to new investors of $      per share based upon the assumed initial public offering price of $      per share. A $1.00 increase or decrease in the assumed initial public offering price per share would increase or decrease, respectively, the pro forma as adjusted net tangible book value per share of common stock after this offering by $      per share and increase or decrease, respectively, the pro forma as adjusted dilution per share of common stock to new investors in this offering by $      per share, in each case calculated as described above and assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.
 
The following table summarizes, as of December 31, 2009, on a pro forma as adjusted basis, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by our existing stockholders and by new investors, based upon an assumed initial public offering price of $      per share and before deducting estimated underwriting discounts and commissions and offering expenses payable by us.
 
                                         
    Shares Purchased     Total Consideration     Average Price
 
    Number     Percent     Amount     Percent     Per Share  
 
Existing stockholders
                     %     $                  %     $             
New investors
            %     $         %     $    
                                         
Total
            100%     $         100%     $    
                                         


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The discussion and tables above are based on           shares of common stock outstanding as of December 31, 2009, on a pro forma as adjusted basis and:
 
  •  reflect a     -for-      reverse stock split of our common stock that will occur immediately prior to the closing of this offering;
 
  •  reflect the conversion of our Series A and Series C convertible preferred stock into common stock immediately prior to the closing of this offering;
 
  •  exclude           shares of common stock issuable upon the exercise of warrants to purchase common stock issued in connection with our Series B preferred stock and Series C convertible preferred stock that will expire           days after the closing of this offering;
 
  •  exclude           shares of common stock issuable upon the exercise of warrants to purchase common stock issued to a third party that will expire      days after the closing of this offering;
 
  •  exclude           shares of common stock issuable upon the exercise of warrants to purchase common stock issued in connection with 2011 Notes that expire December 30, 2019;
 
  •  exclude an aggregate of           shares of common stock issuable under our 2004 Stock Plan;
 
  •  exclude an aggregate of           shares of common stock issuable under our 2010 Omnibus Long-Term Incentive Plan, which we have adopted in connection with this offering;
 
  •  exclude an aggregate of           shares of common stock issuable under our 2010 Employee Stock Purchase Plan, which we have adopted in connection with this offering; and
 
  •  assume no exercise of the underwriters’ over-allotment option to purchase up to           additional shares of our common stock.
 
If the underwriters’ over-allotment option is exercised in full, the number of shares held by the existing stockholders after this offering would be reduced to     % of the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors would increase to     % of the total number of shares of our common stock outstanding after this offering.


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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
 
The following tables set forth our selected historical consolidated financial and other data for the periods indicated. We prepared the selected historical consolidated financial data using our consolidated financial statements for each of the years presented. The selected historical consolidated financial data for each year in the three-year period ended December 31, 2009, were derived from our audited historical consolidated financial statements appearing elsewhere in this prospectus, and the selected historical consolidated financial data for each year in the two-year period ended December 31, 2006, were derived from our audited historical consolidated financial statements not appearing in this prospectus. You should read this selected historical consolidated financial data in conjunction with such audited historical consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. The selected historical consolidated financial data are not necessarily indicative of future results.
 
                                         
    Year Ended December 31,  
    2005     2006     2007     2008     2009  
    (in thousands, except per share amounts)  
 
Consolidated statements of operations data:
                                       
Net sales
  $ 158     $ 6,589     $ 13,453     $ 34,647     $ 46,981  
Cost of sales
    220       6,141       11,969       30,776       38,771  
                                         
Gross profit
    (62 )     448       1,484       3,871       8,210  
Selling, general and administrative expenses
    6,684       11,172       13,719       17,409       14,127  
                                         
Loss from operations
    (6,746 )     (10,724 )     (12,235 )     (13,538 )     (5,917 )
Interest (expense) and other income, net
    175       116       65       (70 )     (2,257 )
                                         
Loss from continuing operations before income taxes
    (6,571 )     (10,608 )     (12,170 )     (13,608 )     (8,174 )
Provision for income taxes
                             
                                         
Loss from continuing operations
    (6,571 )     (10,608 )     (12,170 )     (13,608 )     (8,174 )
Loss from discontinued operations, net of income taxes
                (1,904 )     (5,738 )     (3,650 )
                                         
Net loss
    (6,571 )     (10,608 )     (14,074 )     (19,346 )     (11,824 )
Preferred dividends
    (851 )     (1,563 )     (2,147 )     (2,327 )     (3,042 )
                                         
Net loss attributable to common stockholders
  $  (7,422 )   $ (12,171 )   $ (16,221 )   $ (21,673 )   $ (14,866 )
                                         
Basic and diluted loss per common share:
                                       
Loss from continuing operations attributable to common stockholders
  $       $       $       $       $    
Loss from discontinued operations attributable to common stockholders
                                       
                                         
Net loss attributable to common stockholders
  $       $       $       $       $  
                                         
Basic and diluted weighted average common shares outstanding
                                       
                                         
                                         
                                         
    As of December 31,  
    2005     2006     2007     2008     2009  
    (in thousands)  
 
Consolidated balance sheet data:
                                       
Cash
  $ 5,606     $ 7,638     $ 5,776     $ 516     $  
Total assets
    12,107       20,904       21,909       30,570       22,368  
Long-term debt, less current maturities
    43       13             5       14,403  
Other long-term obligations
    4                   481       1,048  
                                         
                                         
    Year Ended December 31,  
    2005     2006     2007     2008     2009  
    (in thousands, except location amounts)  
    (Unaudited)  
 
Other information:
                                       
Water bottle exchange locations at year end
    300       2,300       4,700       6,400       7,000  
Water bottle units sold
    14       745       1,994       3,215       3,853  
Water dispenser units sold
                12       177       272  


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section titled “Selected Historical Consolidated Financial and Other Data” and our financial statements and related notes appearing elsewhere in this prospectus. Our actual results could differ materially from those anticipated in the forward-looking statements included in this discussion as a result of certain factors, including, but not limited to, those discussed in the section of this prospectus titled “Risk Factors.”
 
Overview
 
Primo Water Corporation is a rapidly growing provider of three- and five-gallon purified bottled water and water dispensers sold through major retailers nationwide. Our business is designed to generate recurring demand for Primo purified bottled water through the sale of our innovative water dispensers. Once our bottled water is consumed using a water dispenser, empty bottles are exchanged at our recycling center displays, which provide a recycling ticket that offers a discount toward the purchase of a new bottle of Primo purified water. We have created a nationwide single-vendor water bottle exchange service for our retail customers that requires minimal customer management supervision and store-based labor and provides centralized billing and detailed performance reports. We deliver this service utilizing our national network of primarily independent bottlers and distributors. As of December 31, 2009, our water bottle exchange service and water dispensers were offered in each of the contiguous United States and located in approximately 7,000 and 5,500 retail locations, respectively. For 2007, 2008 and 2009, we generated net sales of $13.5 million, $34.6 million and $47.0 million, respectively.
 
In this Management’s Discussion and Analysis of Financial Condition and Results of Operations, when we refer to “same store sales” for our Exchange segment, we are comparing retail locations at which our water bottle exchange service had been available for at least 12 months at the beginning of the relevant period.
 
Business Segments
 
We manage our business primarily through two reporting segments: Primo Bottled Water Exchange (“Exchange”) and Primo Products (“Products”).
 
Our Exchange segment sells three- and five-gallon purified bottled water through retailers in each of the contiguous United States. We currently offer our exchange service at approximately 7,000 locations through point of purchase display racks and recycling centers that are prominently located at major retailers in space that is often underutilized. We service these retail locations through our national network of primarily independent bottlers and distributors.
 
Our Products segment sells water dispensers that are designed to dispense Primo and other dispenser-compatible bottled water. Our Products sales are primarily generated through major U.S. retailers. Our water dispensers are sold primarily through a direct-import model, where we recognize revenues for the sale of the water dispensers when title is transferred to our retailer customers. We support retail sell-through with limited domestic inventory.
 
We evaluate the financial results of these segments focusing primarily on segment net sales and segment income (loss) from operations before depreciation and amortization (“segment income (loss) from operations”). We utilize segment net sales and segment income (loss) from operations because we believe they provide useful information for effectively allocating our resources between business segments, evaluating the health of our business segments based on metrics that management can actively influence and gauging our investments and our ability to service, incur or pay down debt.
 
Operating segments that do not meet quantitative thresholds for segment reporting are included in Other.


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Cost of sales for Exchange consists of costs for bottling and related packaging materials and distribution costs for our bottled water. Cost of sales for Products consists of contract manufacturing, freight, duties and warehousing costs of our water dispensers.
 
Selling, general and administrative expenses for both segments consist primarily of personnel costs for sales, marketing, operations support and customer service, as well as other supporting costs for operating each segment.
 
Expenses not specifically related to operating segments are shown separately as Corporate. Corporate expenses are comprised mainly of compensation and other related expenses for corporate support, information systems, and human resources and administration. Corporate expenses also include certain professional fees and expenses and compensation of our Board of Directors.
 
Recent Transactions
 
In December 2009, we completed the divesture of our former subsidiary, Prima Bottled Water, Inc. (“Prima”), by distributing the stock in Prima to our existing stockholders on a pro rata basis based upon each such stockholder’s proportionate ownership of our common stock, Series A preferred stock and Series C preferred stock on an as-converted basis. The assets, liabilities and results of operations of Prima are accounted for as discontinued operations. For 2007, 2008 and 2009, we recognized losses from discontinued operations of $1.9 million, $5.7 million and $3.7 million, respectively.
 
Results of Operations
 
The following table sets forth our results of operations for the periods indicated:
 
                         
    Years Ended December 31,  
    2007     2008     2009  
    (in thousands)  
 
Consolidated statements of operations data:
                       
Net sales
  $ 13,453     $ 34,647     $ 46,981  
Cost of sales
    11,969       30,776       38,771  
                         
Gross profit
    1,484       3,871       8,210  
Selling, general and administrative expenses
    13,719       17,409       14,127  
                         
Loss from operations
    (12,235 )     (13,538 )     (5,917 )
Interest (expense) and other income, net
    65       (70 )     (2,257 )
                         
Loss from continuing operations before income taxes
    (12,170 )     (13,608 )     (8,174 )
Provision for income taxes
                 
                         
Loss from continuing operations
    (12,170 )     (13,608 )     (8,174 )
Loss from discontinued operations, net of income taxes
    (1,904 )     (5,738 )     (3,650 )
                         
Net loss
    (14,074 )     (19,346 )     (11,824 )
Preferred dividends
    (2,147 )     (2,327 )     (3,042 )
                         
Net loss attributable to common stockholders
  $ (16,221 )   $ (21,673 )   $ (14,866 )
                         


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The following table sets forth our results of operations expressed as a percentage of net sales for the periods indicated:
 
                         
    Years Ended December 31,  
    2007     2008     2009  
 
Consolidated statements of operations data:
                       
Net sales
    100.0 %     100.0 %     100.0 %
Cost of sales
    89.0       88.8       82.5  
                         
Gross profit
    11.0       11.2       17.5  
Selling, general and administrative expenses
    102.0       50.3       30.1  
                         
Loss from operations
    (91.0 )     (39.1 )     (12.6 )
Interest (expense) and other income, net
    0.5       (0.2 )     (4.8 )
                         
Loss from continuing operations before income taxes
    (90.5 )     (39.3 )     (17.4 )
Provision for income taxes
                 
                         
Loss from continuing operations
    (90.5 )     (39.3 )     (17.4 )
Loss from discontinued operations, net of income taxes
    (14.1 )     (16.5 )     (7.8 )
                         
Net loss
    (104.6 )%     (55.8 )%     (25.2 )%
                         
 
The following table sets forth our segment net sales and segment income (loss) from operations presented on a segment basis and reconciled to our consolidated loss from operations.
 
                         
    Years Ended December 31,  
    2007     2008     2009  
    (in thousands)  
 
Segment Net Sales
                       
Exchange
  $ 10,875     $ 19,237     $ 22,638  
Products
    949       13,758       22,824  
Other
    1,818       1,874       1,611  
Inter-company elimination
    (189 )     (222 )     (92 )
                         
Total net sales
  $ 13,453     $ 34,647     $ 46,981  
                         
                         
Segment Income (Loss) from Operations
                       
Exchange
  $ (2,834 )   $ (1,267 )   $ 3,374  
Products
    (631 )     (1,447 )     (272 )
Other
    (175 )     (116 )     (34 )
Inter-company elimination
          (13 )     9  
Corporate
    (5,229 )     (7,077 )     (4,789 )
Depreciation and amortization
    (3,366 )     (3,618 )     (4,205 )
                         
Loss from operations
  $ (12,235 )   $ (13,538 )   $ (5,917 )
                         
                         
 
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008
 
Net Sales. Net sales for 2009 increased $12.3 million or 35.6% to $47.0 million from $34.6 million in 2008. The increase in sales resulted primarily from a 65.9% increase in Products sales and a 17.7% increase in Exchange sales.
 
Exchange. Exchange net sales increased $3.4 million or 17.7% to $22.6 million in 2009, representing 48.2% of our total net sales in 2009. The increase was due to an increase in water bottle units sold of approximately 0.6 million units or 19.8% to 3.9 million units sold in 2009. The increase in units sold was driven by a same store sales increase of 7.9% as well as an 8.3% increase in selling locations to approximately 7,000 at December 31, 2009. The average price per unit decreased 1.7% in 2009 compared to 2008 as a result of a shift in mix of transactions to 70.9% exchange and 29.1% initial purchase transactions in 2009 compared to 63.2% exchange and 36.8% initial purchase transactions in 2008. We recognize approximately twice as much revenue on initial purchase transactions as we do on exchange transactions. Adding new locations at which our water bottle


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exchange service is offered is important to our strategy of penetrating more homes with our water dispensers as expanded locations and increased water bottle availability enhance the convenience of our service to consumers.
 
Products. Products net sales increased $9.1 million or 65.9% to $22.8 million in 2009, representing 48.6% of our total net sales in 2009. The increase was due to the successful launch of new water dispenser models and the increased number of retailers that offered our products in 2009. Dispenser sales increased 95,000 units or 53% to approximately 272,000 units in 2009. We anticipate continuing to introduce and offer new water dispenser models. Water dispenser home penetration is critical to the success of our strategy of increasing sales of our complementary recurring-revenue bottled water exchange service.
 
Gross Margin. Our overall gross margin as a percentage of net sales increased to 17.5% for 2009 from 11.2% for 2008.
 
Exchange. Gross margin as a percentage of net sales in our Exchange segment increased to 26.6% for 2009 from 15.2% in 2008 due primarily to decreased freight costs as a result of the addition of bottling and distribution capabilities during 2008 for which we received a full-year benefit in 2009. With these additions we believe we have sufficient bottling and distribution capabilities to service our continued growth. We anticipate slight improvements in gross margin for our Exchange segment for 2010 as we further benefit from improvements in our supply chain and realize efficiencies from our business model in which many of our variable costs are fixed.
 
Products. Gross margin as a percentage of net sales in our Products segment improved to 5.6% for 2009 from 0.5% in 2008 due primarily to improved pricing from retailers. Our strategy is to sell our water dispensers at minimal operating profit in order to increase home penetration, which we believe will lead to increased recurring-revenue, higher margin Exchange sales.
 
Selling, General and Administrative Expenses. Selling, general and administrative expenses for 2009 decreased $3.3 million or 18.9% to $14.1 million from $17.4 million and, as a percentage of net sales, decreased to 30.1% for 2009 from 50.3% for 2008. The decrease is due to lower employee-related costs as a result of a reduction in headcount of 17 employees as well as reduced levels of consulting fees and related travel and benefit costs resulting in about $2.6 million of the overall reduction in selling, general and administrative expenses. The additional personnel resources were related to our efforts in 2008 to expand our supply chain with more bottling and distribution capacity and information system infrastructure as well as our efforts to establish new business segments. During 2009 we were able to reduce these personnel resources when our supply chain reached what we believe to be an appropriate size. We were able to significantly grow our business and expand our gross margins in 2009 despite the reduction in selling, general and administrative expenses. While we do not expect to incur significant additional costs connected to the growth of our business in 2010, we do expect to incur about $1.0 million in additional costs as a public company related to compliance, reporting and insurance.
 
Interest (Expense) and Other Income, Net. Net interest expense for 2009 increased to $2.3 million from $70,000 in 2008 as a result of increased use of debt to fund business operations. We expect the proceeds from this offering to repay debt and lower future interest cost relative to that experienced during 2009.
 
Preferred Stock Dividends. Dividends on our Series B preferred stock increased $0.7 million to $3.0 million in 2009 from $2.3 million in 2008. In January 2009, we offered holders of our Series B preferred stock the option to suspend their current cash dividend payment of 10% in exchange for a dividend accrual of 15% for 2009. Cash dividends paid on our Series B preferred stock during 2009 and 2008 were $1.3 million and $2.3 million, respectively. At December 31, 2009 and 2008 the accrued and unpaid dividends on our Series B preferred stock were $2.4 million and $0.6 million, respectively, which is included in accrued expenses and other current liabilities in the consolidated balance sheet.
 
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
 
Net Sales. Net sales for 2008 increased $21.2 million or 157.5% to $34.6 million from $13.5 million in 2007. The increase in net sales resulted primarily from a 1,349.7% increase in Products sales and a 76.9% increase in Exchange sales.


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Exchange. Exchange net sales increased $8.3 million to $19.2 million in 2008, representing 55.5% of our total net sales in 2008. The increase was due to an increase in water bottle units sold of 1.2 million or 61.2% to 3.2 million units sold in 2008. The increase in units was driven by a same store sales increase of 22.0% as well as a 36.1% increase in selling locations to approximately 6,400 selling locations at December 31, 2008. The average price per unit increased 9.7% in 2008 primarily as a result of a price increase implemented in mid-2008.
 
Products. Products net sales increased $12.8 million to $13.8 million, representing 39.7% of our total net sales in 2008. The increase is due to the successful launch of our Products business segment in late 2007. Product sales increased by approximately 165,000 units to approximately 177,000 units sold in 2008.
 
Gross Margin. Our overall gross margin as a percentage of net sales increased to 11.2% for 2008 from 11.0% for 2007.
 
Exchange. Gross margin as a percentage of net sales in our Exchange segment increased to 15.2% for 2008 from 6.1% in 2007 due primarily to decreased freight costs as a result of the addition of 28 bottlers and ten distributors in 2008.
 
Products. Gross margin as a percentage of net sales in our Products segment improved to 0.5% for 2008 from (23.2)% in 2007 due primarily to limited sales volume in 2007.
 
Selling, General and Administrative Expenses. Selling, general and administrative expenses, excluding impairment charges, for 2008 increased $3.7 million or 26.2% to $17.4 million from $13.7 million and, as a percentage of net sales, decreased to 50.0% for 2008 from 102.0% for 2007. The increase is primarily due to higher employee-related costs as a result of headcount additions, consulting fees and related travel and benefit costs resulting in about $3.1 million of the overall expense increase. The additional personnel resources were related to our efforts to expand our supply chain with more bottling and distribution capacity, enhance information system infrastructure and establish new business segments. Selling, general and administrative expenses as a percentage of net sales decreased significantly as we grew net sales at a faster rate than our expense growth.
 
Interest Expense and Other Income, Net. Net interest and other income for 2008 decreased to an expense of $70,000 from income of $65,000 in 2007 as a result of the use of debt to fund business operations, which were primarily funded with equity in 2007.
 
Preferred Stock Dividends. Dividends on our Series B preferred stock increased $0.2 million to $2.3 million in 2008 from $2.1 million in 2007. At both December 31, 2008 and 2007, the accrued and unpaid dividends on our Series B preferred stock were $0.6 million, which is included in accrued expenses and other current liabilities in the consolidated balance sheet.
 
Liquidity and Capital Resources
 
Since inception, we have financed our operations primarily through the sale of preferred stock, the issuance of long term debt and borrowings under credit facilities. At December 31, 2009, our principal sources of liquidity were accounts receivable, net of allowance for doubtful accounts, of $1.9 million compared to cash of $0.5 million and accounts receivable, net of allowance for doubtful accounts, of $3.2 million at December 31, 2008. As of December 31, 2009, we had a working capital deficit of $2.5 million compared to a working capital deficit of $2.6 million as of December 31, 2008.
 
During 2009, the primary source of capital was proceeds from the issuance of long term debt and, as of December 31, 2009, we had an outstanding debt balance of $14.8 million, net of a $0.6 million discount. During 2008 and 2007, our primary source of capital was the proceeds of preferred stock issuances of $19.6 million and $14.1 million, respectively. Additionally, during 2008 we made borrowings under our credit facilities, which had a balance of $7.0 million at December 31, 2008.


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Net Cash Flows from Operating Activities
 
Net cash used in operating activities was $2.0 million for 2009, $11.8 million for 2008 and $6.8 million for 2007. For 2009, net cash used in operations was primarily the result of $8.2 million of loss from continuing operations, partially offset by non-cash depreciation and amortization of $4.2 million, non-cash interest expense of $0.7 million related to our long term debt issuances and reduction in working capital components of $0.8 million.
 
For 2008, net cash used in operations was primarily the result of $13.6 million of loss from continuing operations, partially offset by depreciation and amortization of $3.6 million. Additional working capital for accounts receivable and inventory due to revenue growth resulted in a use of cash of $1.9 million and $1.3 million, respectively and was partially offset by an increase in accounts payable of $1.1 million.
 
For 2007, net cash used in operations was primarily the result of $12.2 million of loss from continuing operations, partially offset by depreciation and amortization of $3.4 million and the increase of accounts payable and accrued expenses of $1.0 million and $1.3 million, respectively.
 
Net Cash Flows from Investing Activities
 
Cash flows from investing activities included capital expenditures for property and equipment and bottles of $2.4 million in 2009, $9.4 million in 2008 and $5.0 million for 2007, which were our primary investing activities for all periods. Our capital expenditures in the past have been primarily for the installation of our recycle centers and display racks at new locations that offer our water bottle exchange service as well as related transportation racks and bottles. We also invest in technology infrastructure to manage our network of independent bottlers and distributors.
 
Net Cash Flows from Financing Activities
 
Cash provided by financing activities was $6.3 million for 2009, $24.4 million for 2008 and $12.5 million for 2007. For 2009, financing activities were primarily the issuance of long term debt of $20.4 million that was partially offset by payments of $6.6 million on our senior revolving credit facility, payments of $5.4 million related to other long-term debt, Series B preferred stock dividend payments of $1.3 million and payment of debt issuance costs of $0.6 million. The cash component of our Series B preferred stock dividends was partially reduced in 2009 and accrued as opposed to paid currently. Additionally, the cash dividends paid will be further reduced for 2010 to approximately $0.2 million.
 
For 2008, financing activities were primarily the issuance of preferred stock of $19.6 million and borrowings of $7.0 million on our revolving credit facility that were partially offset by payments of $2.3 million of Series B preferred stock dividends.
 
For 2007, financing activities were primarily the issuance of preferred stock of $14.1 million that was partially offset by $1.6 million of Series B Preferred Stock dividend payments.
 
Credit Facility
 
We originally entered into a revolving credit facility with Wachovia Bank National Association in June 2005 and in June 2008 we amended the facility to extend the term to June 30, 2010. The current facility commitment is $10.0 million and is subject to a customary borrowing base calculation for advances. Interest on the outstanding borrowings under the revolving credit facility is payable quarterly at our option at (i) the LIBOR Market Index Rate (LMIR) plus the applicable margin or (ii) the greater of (A) the Federal Funds Rate plus 0.50% or (B) the bank’s prime rate plus the applicable margin. At December 31, 2009 and 2008, the interest rate on the outstanding balance under the facility was at the bank’s prime rate plus 2.50% and 0.75%, respectively (5.75% at December 31, 2009 and 4.00% at December 31, 2008). Beginning in January 2010 and effective with the December 2009 amendment, the applicable margin for both the prime rate and the federal funds rate options was decreased to 1.00%. The availability under the Revolver was $5.9 million and $1.5 million at December 31, 2009 and 2008, respectively.


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We are required to pay a fee per annum equal to 3.50% of the outstanding amount of letters of credit issued under the revolving credit facility. In addition, there is a fee of 0.50% on the unused portion of the revolver lending commitment. At December 31, 2009 and 2008, there were outstanding letters of credit totaling approximately $0.4 million and $0.3 million, respectively.
 
The revolving credit facility contains various conditions for extensions of credit and restrictive covenants including minimum quarterly EBITDA and gross revenue requirements. Substantially all of our assets are pledged as collateral to borrowings under the revolving credit facility.
 
14% Subordinated Convertible Notes due March 31, 2011
 
In December 2009, we issued our 14% subordinated convertible notes due March 31, 2011 (“2011 Notes”) to 28 investors, including existing stockholders, affiliates of existing stockholders and senior management. The 2011 Notes have a total face value of $15.0 million and are subordinated to our bank revolving credit facility. The 2011 Notes pay quarterly interest at a rate of 14% per annum. We intend to use proceeds of this offering to repay the 2011 Notes.
 
Warrants to purchase 1,111,109 shares of our common stock were issued in connection with the 2011 Notes. The initial fair value of the warrants is $0.6 million and resulted in an original issue discount on the 2011 Notes which will be amortized as interest expense over the term of the 2011 Notes. The fair value of the warrants is included in other long-term liabilities in the consolidated balance sheet and will be adjusted periodically until such time as the exercise price becomes fixed at which time the then fair value will be reclassified as a component of stockholders’ equity (deficit).
 
Adequacy of Capital Resources
 
Our future capital requirements may vary materially from those now anticipated and will depend on many factors, including the rate of growth in new locations and related display and rack costs, cost to develop new water dispensers, sales and marketing resources needed to further penetrate our markets, the expansion of our operations in the United States, the response of competitors to our solutions and products and any acquisitions of other businesses. Historically, we have experienced increases in our capital expenditures consistent with the growth in our operations and personnel, and we anticipate that our expenditures will continue to increase as we grow our business.
 
We believe our cash, the proceeds from this offering, funds available under our revolving credit facility and future cash flows from our operations will be sufficient to meet our currently anticipated working capital and capital expenditure requirements for at least the next twelve months.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.
 
Contractual and Commercial Commitment Summary
 
Our contractual obligations and commercial commitments as of December 31, 2009 are summarized below:
 
                                         
    Payments Due by Period  
          Less Than
                More Than
 
Contractual Obligations
  Total     1 Year     1-3 Years     3-5 Years     5 Years  
    (in thousands)  
 
Long-term debt obligations
  $ 15,000     $     $ 15,000     $     $  
Capital lease obligations
    7       4       3              
Operating lease obligations
    2,008       691       841       394       82  
Revolving credit facility
    423       423                    
                                         
Total
  $ 17,438     $    1,118     $ 15,844     $    394     $     82  
                                         


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Inflation
 
During the last three years, inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.
 
Quantitative and Qualitative Disclosures About Market Risk
 
For fixed rate debt, interest rate changes affect the fair value of financial instruments but do not impact earnings or cash flows. Conversely, for floating rate debt, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant. The recorded carrying amounts of cash and cash equivalents approximate fair value due to their short maturities.
 
We are exposed to market risk related to changes in interest rates on borrowings under our revolving credit facility. Our credit facility bears interest based on LIBOR and the prime rate, plus an applicable margin. To quantify our exposure to interest rate risk, a 100 basis point increase in interest rates would have increased interest expense for the years ended December 31, 2007, 2008, and 2009 by approximately $8,000, $29,000 and $132,000, respectively. Actual changes in interest rates may differ materially from the hypothetical assumptions used in computing this exposure.
 
Seasonality
 
We have experienced and expect to continue to experience seasonal fluctuations in our sales and operating income. Our sales and operating income have been highest in the spring and summer, and lowest in the fall and winter. Our Exchange segment, which generally enjoys higher margins than our Products segment, experiences higher sales and operating income in the spring and summer. Our Products segment had historically experienced higher sales and operating income in spring and summer, however, we believe the seasonality of this segment will be more dependent on retailer inventory management and purchasing cycles and not correlated to weather. Sustained periods of poor weather, particularly in the spring and summer, can negatively impact our sales in our higher margin Exchange segment. Accordingly, our results of operations in any quarter will not necessarily be indicative of the results that we may achieve for a fiscal year or any future quarter.
 
Critical Accounting Policies and Estimates
 
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements and related notes, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of our financial statements in conformity with GAAP requires us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions used to determine certain amounts that affect the financial statements are reasonable, based on information available at the time they are made. To the extent there are material differences between these estimates, judgments and assumptions and actual results, our consolidated financial statements may be affected. Some of the more significant estimates include allowances for doubtful accounts, valuation of inventories, depreciation, valuation of deferred taxes and allowance for sales returns.
 
Revenue Recognition. We recognize revenue when title to the product has transferred to the buyer, collectability of a fixed and determinable sales price is reasonably assured and we have no further obligations to assist in the resale of the products. Exchange revenue is recognized for the sale of three- and five-gallon purified bottled water upon either the delivery of inventory to the retail stores or the purchase by the consumer. Our water dispensers are procured primarily through a direct-import model, where we recognize revenue when title is transferred to our retail customers. Cash consideration provided for discounts and sales incentives, as well as provisions for returns and other adjustments are recorded as a reduction to sales.
 
Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from our retail customers’ inability to pay us. The allowance for doubtful accounts is based on a review of specifically identified accounts in addition to an overall aging analysis. Judgments are made with respect to the collectability of


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accounts receivable based on historical experience and current economic trends. Actual losses could differ from those estimates.
 
Long-Lived Assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset at the date it is tested for recoverability, whether in use or under development. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. We recorded an impairment charge in 2008 of $98,000, related to display racks no longer in use and to be disposed.
 
Income Taxes. We account for income taxes using the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent that utilization is not presently more likely than not.
 
Effective January 1, 2007, we adopted the provisions of Accounting Standards Codification (“ASC”) 740-10, Income Taxes. Previously, we had accounted for tax contingencies in accordance with ASC 450-10, Contingencies. As required by ASC 740-10, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, we applied ASC 740-10 to all tax positions for which the statute of limitations remained open. The implementation of ASC 740-10 did not have a material impact on our consolidated financial statements.
 
Stock-Based Compensation. We account for our stock-based employee and director compensation plans in accordance with ASC 718, Compensation-Stock Compensation. ASC 718 requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). In 2007, 2008 and 2009 compensation expense related to stock options was approximately $157,000, $215,000 and $298,000 and is included in selling, general and administrative expenses from continuing operations, respectively, and approximately $25,000, $61,000 and $80,000 is included in discontinued operations, respectively.
 
The fair value of each option is estimated on the date of grant using the Black-Scholes method with the following assumptions used for grants:
 
                         
    Year Ended December 31,  
    2007     2008     2009  
 
Risk-free interest rate
    4.6 %     3.2 %     2.0 %
Expected life of options in years
    6.3       5.9       5.5  
Estimated volatility
    45.0 %     39.0 %     39.0 %
Dividend yield
                 
 
The risk-free interest rate is based on the implied yield available on U.S. Treasury zero-coupon issues with a remaining term approximately equal to the expected life of our stock options. The estimated pre-vesting forfeiture rate is based on our historical experience. The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. As a non-public entity, historic volatility is not available for our shares. As a result, we estimated volatility based on a peer group of companies, which we believe collectively provide a reasonable basis for estimating volatility. We intend to continue to consistently use the same group of publicly traded peer companies to determine volatility in the future until sufficient information regarding volatility


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of our share price becomes available or the selected companies are no longer suitable for this purpose. We do not expect to declare dividends on our common stock in the foreseeable future.
 
Significant Factors Used in Determining Fair Value of Our Common Stock. The fair value of the shares of common stock that underlie the stock options we have granted has historically been determined by our board of directors based upon information available to it at the time of grant. Because, prior to this offering, there has been no public market for our common stock, our board of directors has determined the fair value of our common stock by utilizing, among other things, recent or contemporaneous valuation information from negotiated equity transactions with third parties or third party valuations. The valuation information included reviews of our business and general economic, market and other conditions that could be reasonably evaluated at that time, including our financial results, business agreements, intellectual property and capital structure. These valuation approaches are based on a number of assumptions, including our future sales and industry, general economic, market and other conditions that could reasonably be evaluated at the time of the valuation.
 
Recent Accounting Pronouncements
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance which established the Accounting Standards Codification (“ASC” or “Codification”) as the source of authoritative GAAP recognized by the FASB to be applied to nongovernmental entities, and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards upon its effective date and, subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. The guidance is not intended to change or alter existing GAAP. The guidance became effective in our fourth quarter of 2009. The guidance did not have an impact on our consolidated financial position, results of operations or cash flows.
 
In May 2009, the FASB issued authoritative guidance on the accounting for and disclosure of events that occur after the balance sheet date. This guidance was effective for interim and annual financial periods ending after June 15, 2009. This guidance was amended in February 2010. It requires an entity that is a SEC filer to evaluate subsequent events through the date that the financial statements are issued. The adoption did not impact our consolidated financial position, results of operations or cash flows.
 
In January 2010, the FASB issued guidance, which clarifies that the stock portion of a distribution to stockholders that allows them to receive cash or stock with a potential limitation on the total amount of cash that all stockholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. This update is effective for our first quarter of 2010. The adoption is not expected to have a material impact on our consolidated financial position results of operations or cash flows.
 
In January 2010, the FASB issued guidance that clarifies ASC 810 implementation issues relating to a decrease in ownership of a subsidiary that is a business or non-profit activity. This amendment affects entities that have previously adopted ASC 810-10. This update is effective for our first quarter of 2010. The adoption is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.


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BUSINESS
 
Overview
 
We are a rapidly growing provider of three- and five-gallon purified bottled water and water dispensers sold through major retailers nationwide. We believe the market for purified water is growing due to evolving taste preferences, perceived health benefits and concerns regarding the quality of municipal tap water. Our products provide an environmentally friendly, economical, convenient and healthy solution for consuming purified water. We offer “razor-razorblade” products designed to generate recurring demand for Primo purified bottled water (the razorblade) through the initial sale of our innovative water dispensers (the razor). Once our bottled water is consumed using a water dispenser, empty bottles are exchanged at our recycling center displays where consumers receive a recycling ticket that offers a discount toward the purchase of a full bottle of Primo purified water. Primo consumers purchase an average of 35 bottles of water annually and each bottle can be sanitized and reused up to 40 times before being taken out of use, crushed and recycled, substantially reducing landfill waste compared to consumption of an equivalent volume of single-serve bottled water. Our sales and recycling center displays are prominently located at major retailers nationwide in spaces that are often underutilized. As of December 31, 2009, our water bottle exchange service and water dispensers were offered in each of the contiguous United States and located in approximately 7,000 and 5,500 retail locations respectively, including Lowe’s Home Improvement, Sam’s Club, Costco, Walmart, Target, Kroger, Winn-Dixie, Albertsons and Walgreens.
 
(GRAPHIC)
 
We have created a new nationwide single-vendor water bottle exchange solution for our retail customers, addressing a market demand that was previously unmet. Our water bottle exchange solution is easy for retailers to implement, requires minimal management supervision and store-based labor and provides centralized billing and detailed performance reports. Retailers benefit from year-round, high-margin, highly-predictable revenue, the potential to increase customer traffic and the ability to optimize retail space.
 
We deliver our solution to retailers utilizing our national network of primarily independent bottlers and distributors. These bottlers and distributors make a significant portion of the capital investment required to deliver our solution, including investment in bottling facilities and storage and distribution assets. We focus our capital expenditures on developing new store locations, raising brand awareness, developing new products and managing our national network utilizing our MIS tools. We are able to manage our national network on a real-time basis


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through our MIS tools, which provide resource planning and delivery schedule tracking, thus enabling us to optimize our network’s assets and respond to customer needs. In addition, our national network of bottlers and distributors benefits from a year-round product that optimizes utilization of their existing production and distribution assets. In addition, our national network benefits from our MIS tools that assist resource planning and delivery schedule optimization. We believe our solution and national network provide us a significant competitive advantage in servicing our retail customers.
 
We benefit significantly from management experience gained over the last 15 years in exchange-based businesses, which enables us to implement best practices and develop and maintain key business relationships. Prior to founding Primo, our Chief Executive Officer founded Blue Rhino Corporation, a propane cylinder exchange business, in 1994 and, with several of our other key executive officers, led its initial public offering in 1998 and successful sale in 2004. At the time of the sale, Blue Rhino was the market leader in propane grill cylinder exchange with over 29,000 retail locations in 49 states.
 
Industry Background
 
We believe there are several trends that support consumer demand for our water bottle exchange service and water dispensers, including the following:
 
Emphasis on Health and Wellness
 
The majority of the human body is comprised of water and nearly all critical body functions rely on proper hydration. As part of a desire to live a healthier lifestyle, we believe consumers are increasingly focused on drinking more water relative to consumption of high caloric beverages, carbonated soft drinks and beverages containing artificial sweeteners.
 
Concerns Regarding Quality of Municipal Tap Water
 
Many consumers purchase purified water not only due to better taste, but also because of concerns regarding municipal tap water quality. Municipal water is typically surface water that is treated centrally and pumped to homes, which can allow additional contaminants to dissolve into the water through municipal or household pipes impacting taste and quality. There have been many recent publications highlighting pollution and quality issues with municipal water in the United States. Additionally, due to budgetary deficits, municipalities are increasingly privatizing their water treatment and distribution systems, and there have been many compliance and quality issues documented in connection with privatized municipal water systems.
 
Growing Preference for Purified Water
 
We believe consumer preference toward purified water relative to tap water continues to grow. With increasing availability in recent years, purified water has become accepted on a mainstream basis and preferred by many over municipal tap water. While it is difficult to quantify purified water consumption in all of its forms, we believe the growth of bottled water consumption reflects this trend. According to a June 2009 report by independent market analyst Datamonitor, Bottled Water in the United States, consumers spent $18.4 billion in 2008 on bottled water and the industry is expected to grow at a compound annual growth rate of approximately 7.5%, reaching $26.5 billion by 2013.
 
Increasing Demand for Products with Lower Environmental Impact
 
We believe that consumers are increasingly favoring products with a lower environmental impact with a “reuse, recycle, reduce” mindset becoming a common driver of consumer behavior. Areas of concern include products’ packaging materials, carbon footprint and crude oil usage in production and distribution and the impact on landfills when disposed. Most single-serve PET water bottles are produced using fossil fuels and contribute to landfill waste given that only 27% of PET bottles are recycled according to a November 2009 Environmental


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Protection Agency report. Additionally, according to the December 2008 report, Bottled Water-U.S., by Mintel International Group Limited, the incidence of people who do not drink single-serve PET bottled water because of environmental concerns nearly doubled from 18.0% in 2007 to 35.0% in 2008. Governmental legislation also reflects these concerns with the passage of “bottle bills” in many jurisdictions that tax the purchase of plastic water bottles, require deposits with the purchase of certain plastic bottles, prohibit the use of government funds to purchase plastic water bottles and ban certain plastic bottles from landfills.
 
(GRAPHIC)
 
 
Source: National Association for PET Container Resources 2005 and 2008 Reports on Postconsumer PET Container Recycling Activity.
 
Availability of an Economical Water Bottle Exchange Service and Innovative Water Dispensers
 
According to 2007 United States census data, there are approximately 112 million households. Based on estimates derived from industry data, we believe the current household penetration rate of multi-gallon water dispensers is approximately 4%, with the vast majority of these households utilizing traditional home delivery services. Until recently, there has been little innovation, design enhancement and functionality improvement in water dispensers to meet modern household needs and competing water dispensers have traditionally retailed at prices we believe are unlikely to support greater household adoption. Compounding these issues, there previously was no viable provider of an economical water bottle exchange service with major retailer relationships nationwide to promote dispenser usage beyond the traditional home delivery model. We believe our water bottle exchange service provides this alternative and we are currently the only provider delivering a solution nationally to retailers. We believe there are over 140,000 major retail locations nationwide that we could target to sell our dispensers or offer our water bottle exchange service.
 
Our Competitive Strengths
 
We believe that our competitive strengths include the following:
 
Appeal to Consumer Preferences
 
  •  Environmental Awareness. Our water bottle exchange service incorporates reuse of existing bottles, recycles water bottles when their lifecycle is complete and reduces landfill waste and fossil fuel usage compared to alternative methods of bottled water consumption. Our three- and five-gallon water bottles are exchanged, sanitized and reused up to 40 times before being taken out of service, crushed and recycled. Given its typical exchange lifecycle, one Primo five-gallon water bottle provides consumers with water in an amount equivalent to approximately 1,200 16 ounce single-serve PET bottles. When used as an alternative for consuming purified water, based on current recycling rates, one Primo five-gallon water bottle can prevent


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  approximately 875 16 ounce single-serve PET bottles from contributing to landfill waste. In addition, we believe our water bottle exchange service uses less fossil fuel in the distribution process and has a lower carbon footprint than alternative methods of bottled water consumption. Our geographically dispersed national network of independent bottlers and distributors are closer to major retailers than our centralized single-serve bottled water competitors. In addition, our exchange service is utilized by consumers as part of their ordinary shopping patterns, compared to separate, non-optimized deliveries typically associated with traditional home delivery providers, generally by less fuel efficient vehicles.
 
  •  Value. We provide consumers the opportunity for cost savings when consuming our bottled water compared to both single-serve bottled water and typical home and office delivery services. We believe our five-gallon bottles of purified water typically cost a consumer between $4.69 and $7.99, after giving effect to the discount provided by our recycling ticket. We believe this compares favorably to the cost of single-serve PET bottles, case pack water and most home and office delivery services. The cost savings provided by our recycle ticket also provides consumers an incentive to remain a user of our water bottle exchange service. Finally, our water dispensers are sold at attractive retail prices in order to enhance consumer awareness and adoption of our water bottle exchange service, increase household penetration and drive sales of our bottled water.
 
  •  Convenience. Our water bottle exchange service and water dispensers are available at major retail locations nationwide. In addition, our water bottle exchange service provides consumers the convenience of exchanging empty bottles and purchasing full bottles at any participating retailer. We offer three- and five-gallon water bottle options to address different consumer volume preferences. We believe our water bottle exchange service provides a convenient way to consume purified water compared to self-service refill machines and home and office delivery services. Our water bottle sales displays are fully stocked and ready for consumer purchases, eliminating refill time. In addition, our exchange service permits consumers to purchase only the number of water bottles they need without the water bottle purchase minimums or bottle deposits often charged by home and office delivery providers.
 
  •  Taste. We have dedicated significant time and effort in developing our water purification process and formulating the proprietary blend of mineral ingredients included in Primo purified water that we believe has a silky smooth taste. In an independent taste test that we commissioned and was conducted in six regions throughout the United States in 2007, four out of five participants on average preferred Primo purified water over municipal tap water and three out of four participants on average preferred Primo purified water over their region’s market-leading bottled water.
 
  •  Health and Wellness. As part of a desire to live a healthier lifestyle, we believe that consumers are increasingly focused on drinking more water relative to consumption of other beverages. As we raise our brand awareness, we believe consumers will recognize that our water bottle exchange service is an effective option for their purified water consumption needs.
 
Key Retail Relationships Served by National Single-Vendor Solution
 
We are the only water bottle exchange provider with a single-vendor solution for retailers nationwide. Our solution is easy to implement and supervise for national and regionally concentrated major retailers. We manage a national network of primarily independent bottlers and distributors to service our retail customers. This network of 55 bottlers and 27 distributors utilize our MIS tools and processes to optimize their production and distribution assets while servicing our retail customers. We believe the combination of our major retail relationships, unique single-vendor solution for retail customers, national network of independent bottlers and distributors and our MIS tools is difficult to replicate. We anticipate these factors will facilitate our introduction of new purified water-related products in the future.


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Ability to Attract and Retain Consumers
 
We offer “razor-razorblade” products designed to generate recurring demand for Primo purified bottled water (the razorblade) through the initial sale of our innovative water dispensers (the razor), which include a coupon for a free three- or five-gallon Primo bottle of water. We acquire new consumers and enhance recycling efforts by accepting most dispenser-compatible water bottles in exchange for a recycle ticket discount toward the purchase of a full bottle of Primo purified water. Our water bottle exchange service is attractive to retailers as our consumers purchase an average of 35 bottles of Primo purified water per year, which facilitates repeat consumer traffic in our retailers’ stores. In addition, we believe we are the leading provider of water dispensers to retailers, a status we believe we achieved within less than two years of entering the market. We believe this rapid success is due to the innovative features, design elements and attractive retail prices of our water dispensers. We further believe our offering high-quality water dispensers enhances consumer awareness and adoption of our water bottle exchange service, increases household penetration and drives sales of our bottled water.
 
Efficient Business Model
 
Our business model allows us to efficiently offer our solution to our retail partners and centrally manage our national network of bottlers and distributors without a substantial capital investment. Our business processes and MIS tools enable us to manage the bottling and distribution of our water, our product quality, retailer inventory levels and the return of used bottles on a centralized basis, leveraging our invested capital and personnel. We own the bottles, transportation racks, mineral injectors and sales and recycling displays to ensure product quality and proper positioning of the Primo brand. We focus our capital expenditures on developing new store locations, raising brand awareness, developing new products and optimizing our MIS tools. Our water bottle exchange service is unique in that we are not required to make a significant portion of the capital investment required to operate our exchange service nationwide. Participation in our water bottle exchange service does not typically require independent bottlers and distributors to make substantial new investments because they often are able to augment their current production capacity and leverage their existing bottling and distribution assets. In addition, the flow of payments between the retailer and our bottlers and independent distributors is a critical component of our overall relationship with our major retail accounts that we control efficiently through electronic data interchange.
 
Benefit from Management’s Proven Track Record
 
We benefit greatly from management experience gained over the last 15 years in exchange businesses, which enables us to implement and refine best practices and develop and maintain key business relationships. Our Chief Executive Officer, Billy D. Prim, founded Blue Rhino Corporation, a propane cylinder exchange business, in 1994 and led its IPO in 1998 and its successful sale in 2004. At the time of the sale, Blue Rhino was the market leader of propane grill cylinder exchange with over 29,000 retail locations in 49 states. In addition to our Chief Executive Officer, our Chief Financial Officer, Vice President of Operations, Vice President of Products and Vice President of National Accounts all held comparable positions within the Blue Rhino organization during its rapid sales and location growth.
 
Growth Strategy
 
We seek to increase our market share and drive further growth in our business by pursuing the following strategies:
 
Increase Penetration with Existing Retail Relationships and Develop New Retail Relationships
 
We believe we have significant opportunities to increase store penetration with our existing retail relationships and develop new retail relationships based on our competitive strengths. As of December 31, 2009, our water bottle exchange service was offered at 6,000 of our top ten retailers’ nationwide locations. Such retailers present us an opportunity of approximately 7,500 additional nationwide locations. We intend to further penetrate our other existing retailers, which collectively provide us the opportunity to be present in an additional 22,400 locations nationwide. Our long-term strategy includes targeting up to approximately 40,000 total retail store locations


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(which includes new locations with our existing retail customers) within our primary retail categories of home centers, hardware stores, mass merchants, membership warehouses and grocery and drug stores.
 
Within two years of our inception, we expanded our retail presence from 13 states to our current locations within each of the contiguous United States. In addition, from 2005 through 2009, we increased our water bottle exchange locations from approximately 300 to 7,000, representing a compound annual growth rate of approximately 120%.
 
Drive Consumer Adoption Through Innovative Water Dispenser Models
 
We intend to continue to develop and sell innovative water dispensers at attractive retail prices, which we believe is critical to increasing consumer awareness and driving consumer adoption of our water bottle exchange service. We believe our water dispensers have appealing features, such as stainless steel finishes, adjustable hot and cold temperature controls and hidden bottle bottom-loading features for convenience. As a result of our strategy of developing innovative water dispensers, we believe we became the leading seller of water dispensers to retailers within less than two years of our entry into the market. Since we began selling our water dispensers in 2005, we have sold over 460,000 units, and have expanded our retail network from four locations as of December 31, 2007, to our current network of approximately 5,500 locations. We plan to continue introducing new dispenser models at attractive retail price points to meet the evolving needs of consumers, enhance consumer awareness and adoption of our water bottle exchange service, and increase household penetration. Our long term strategy is to provide multiple purified water-based beverages from a single Primo water dispenser, with consistent promotion of our water bottle exchange service to supply the purified water.
 
Increase Same Store Sales
 
We offer “razor-razorblade” products designed to generate recurring demand for Primo purified bottled water (the razorblade) through the initial sale of water dispensers (the razor). We sell our water dispensers at minimal margin and provide a free three- or five-gallon bottle of water with every water dispenser sold to drive consumer demand for our water bottle exchange service.
 
We believe increasing unit sales of Primo purified bottled water is dependent on generating greater consumer awareness of the environmentally friendly and economical aspects of and the convenience associated with both our purified bottled water and our water bottle exchange service. We expect that our branding, marketing and sales efforts will result in greater usage of our water bottle exchange service. We are also increasing our public relations initiatives associated with new market launches, developing additional cooperative advertising programs with retail distribution partners and increasing our field marketing activities. In addition, as consumers exchange dispenser-compatible water bottles, we encourage the use of our water bottle exchange service by providing them a recycling ticket that provides a discount on a full bottle of Primo purified water.
 
Develop and Install Other Hydration Solutions
 
We believe we have significant opportunities to leverage our national bottling and distribution network and our systems and processes to offer other environmentally friendly, economical, convenient and healthy hydration solutions to our retail partners without significant increases in our centralized costs. For example, we intend to offer our retail partners self-service refill vending machines that dispense purified water into bottles and other containers. We believe this offering will cater to a more price-sensitive consumer. In addition, we intend to offer to our retail partners automated, self-bagging purified ice dispensers. These purified ice dispensers will provide a simplified method of acquiring ice in customized offering sizes without the extensive manufacturing and storage networks typical of the ice dispensing industry.


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Pursue Strategic Acquisitions to Augment Geographic and Retail Relationships
 
We believe opportunities exist to expand through selective acquisitions, including smaller water bottle exchange businesses with established retail accounts, on-premises self-service water refill vending machine networks and retail accounts, ice dispenser machine networks and retail accounts and water dispenser companies.
 
Product Overview
 
Water
 
We have dedicated significant time and effort in developing our water purification process and formulating the proprietary blend of mineral ingredients included in our purified water. Our proprietary blend of mineral ingredients was developed with the assistance of consultants and several months of lab work and taste tests and has what we believe to be a silky smooth taste. In an independent taste test that we commissioned and was conducted in six regions throughout the United States in 2007, four out of five participants on average preferred Primo purified bottled water over tap water and three out of four participants on average preferred Primo over their region’s market-leading bottled water brand. We believe it is important that each bottle of Primo purified water has consistent taste and each production lot is tested to ensure it meets our standards. In addition, to ensure that our safety standards are met and FDA and industry standards are met or exceeded, each production lot of our purified water undergoes chemical and microbiological testing and all facilities bottling Primo purified water undergo regular hygiene audits.
 
Water Bottles
 
(GRAPHIC OF WATER BOTTLES)
 
We currently source three- and five-gallon water bottles from multiple vendors for use in our exchange service. Each of our Primo water bottles includes a handle designed for easy transportation and lifting when installing the bottle onto or into one of our water dispensers. Our bottles also include a specially designed cap that prevents spills when carrying or installing.


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Water Dispensers
 
We currently source and market three lines of water dispensers comprised of 15 models:
 
(GRAPHIC OF WATER DISPENSERS)
 
Our dispensers are designed to dispense Primo and other dispenser-compatible bottled water. Our dispensers have manufacturer suggested retail prices that range from $199.99 for our top-of-the-line bottom-loading model with a stainless steel finish to $14.99 for a simple pump that can be installed on a bottle and operated by hand.
 
Currently, more than 95% of our dispenser sales are attributable to our bottom- and top-loading products. Consistent with our environmental focus, our electric dispensers are Energy Star® rated, and, we believe, utilize less energy than competing water dispensers without this industry rating. In addition, some of our dispenser models feature power switches to individually control the hot and cold tanks of the dispenser, saving additional energy when not in use and providing a child-safety feature. We believe both our bottom- and top-loading models dispense water twice as fast as competing products and have the fastest recovery time for heating and cooling water. In addition, certain models of our bottom- and top-loading dispensers come equipped with adjustable hot and cold temperature controls conveniently located on the top of the dispenser.
 
We believe our bottom loading dispensers are attractive to consumers and will drive the greatest increase in household penetration as a result of their innovative styling and features. Water bottles are loaded and concealed inside our bottom-loading dispensers by a hinged door for ease of use and a clean aesthetic appearance.
 
Currently, all of our water dispensers are manufactured by independent suppliers in China. Our dispensers are shipped directly to our retailer partners and we do not use distributors in connection with our water dispensers. We also provide private label water dispensers to Target that are branded as Black & Decker products pursuant to a license agreement with The Black & Decker Corporation.
 
Primo Water Marketing
 
Our marketing efforts focus primarily on developing and maintaining a brand identity synonymous with an environmentally friendly, economical, convenient and healthy solution for purified water consumption. We direct our marketing efforts as close as possible to the point of sale to strengthen our brand and promote consumer


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awareness of our water bottle exchange service. We believe our water bottle exchange service develops consumer loyalty through the use of our recycling tickets. Our marketing efforts include the following initiatives:
 
Primo Water Packaging
 
Our three- and five-gallon water bottles, sales and recycling center displays, water dispensers and certain distributor delivery vehicles prominently display our Primo logo and distinctive four-bubble design.
 
Primo Water Displays
 
Our sales and recycling center displays are typically located near the front of a store, providing point-of-sale advertising and branding. We believe our displays enhance consumer awareness of the Primo brand and reinforce the association of our water with an environmentally friendly, economical, convenient and healthy solution for purified water consumption. Our displays include Primo graphics, slogans and instructions on the exchange process that simply attach to the displays. We have the ability to quickly replace, customize or introduce new marketing materials on our displays throughout our retail network. In addition, we work with retailers to customize in-store solutions to best promote our brand.
 
Promotions
 
Our promotional activities target new customers by:
 
  •  Accepting third-party dispenser-compatible water bottles in the exchange process (which we believe is unique in the industry);
 
  •  Providing attractive pricing on our water dispensers;
 
  •  Offering a free bottle of water with the purchase of a water dispenser;
 
  •  Advertising in retailers’ weekly circulars; and
 
  •  Providing samples of our purified water and water dispensers on-site at our retailers’ locations and educating consumers on the benefits of our purified bottled water and dispensers.
 
We promote our brand through social media, our website (www.primowater.com) and other public relations efforts. We also maintain a blog (www.breakfree411.com) that is styled as a third-party website and provides updates on the water industry. In addition, we seek to raise awareness of our brand and products through blogs and related periodicals that target women as well as household and kitchen matters. We believe that women often significantly influence household and kitchen appliance decisions and concentrating our efforts in this manner is designed to improve the effectiveness of our advertising campaigns and improve household penetration.
 
Our promotional activities have evolved from our “Taste Perfection” campaign to our “Zero Waste. Perfect Taste,” campaign emphasizing our environmental efforts while simultaneously focusing on the taste of our purified water. We plan to increase our promotional activity as we expand our business.
 
The Primo Water Bottle Exchange Supply Chain
 
Water Purification and Bottling
 
Our bottling process begins with either spring water or water from a public source that is processed through a pre-filtration stage to remove large particles. The water is then passed through polishing filters to catch smaller particles followed by a carbon filtration process that removes odors, tastes, sanitization by-products and pharmaceutical chemicals. A microfiltration process then removes microbes before the water is passed through a softener to


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increase the purification efficiency. The water next passes through the last phase of reverse osmosis or distillation, completing the purification process. After the purification process is complete, our proprietary blend of mineral ingredients is injected into the water followed by the final ozonation process to sanitize the water. A bottle is filled with Primo purified water only after the inspection and sanitization steps outlined below are completed. Each of our production lots is placed on a 48-hour hold to allow for testing and to ensure successful compliance with chemical and microbiological standards. We have the ability to trace each bottle of Primo water to its bottling and distributor sources, and we regularly perform recall tests to ensure our ability to react to a contamination event should it occur. In comparison, municipal water is generally treated at a centralized processing facility and then distributed throughout the pipeline network. As the water flows to the point of use, contaminants and other foreign objects may be dissolved into the water, and household piping and faucets may collect sediment that over time reduces the quality of municipally supplied water.
 
(GRAPHIC)
 
Our distributors are responsible for collecting empty Primo bottles and other dispenser-compatible bottles that are deposited into our recycling center displays. At the completion of the delivery cycle, a distributor inspects the exchanged bottles for reusability and coordinates the recycling efforts with our operations personnel to ensure that reuse of each water bottle we receive in the exchange process is being optimized. Our water bottles can be sanitized and reused up to 40 times before being taken out of use, crushed and recycled, substantially reducing landfill waste compared to consumption of similar amounts of single-serve PET bottled water. Bottles that pass a distributor’s initial inspection are subject to three washing cycles to remove particles. Bottles are then passed through two sanitization stages before a final rinse with hyper-ozonated water to kill or inactivate any microbes that remain at that point in the sanitation process. The water bottles are then ready to be filled with our purified water.
 
(GRAPHIC)
 
Distribution Network
 
We rely on a national network of independent distributors and, to a lesser degree, a company-operated distribution system. Our water bottle exchange process begins when a distributor is directed through our proprietary MIS tool, Routeview, to stock or replenish a Primo bottled water retail location. Routeview enables our distributors to review delivery quantities and tentative scheduling requirements in their territory. Our systems provide anticipated demand based on historical sales and, to the extent available, retailer point of sale (“POS”) data. Each distributor is provided information to enable the distributor to load a truck with the appropriate inventory to stock or restock the water bottle sales displays on its route, including a tailored amount of excess bottles as safety stock. Upon arrival at each retail location, the driver first visits the recycling center display to collect empty Primo and other dispenser-compatible bottles. The driver enters data related to empty bottles on a handheld device to collect exchange efficiency information and potential customer conversion data and then loads empty bottles onto the truck. The driver next checks the in-store sales display to compare the number of remaining bottles of water with the anticipated demand report generated by our MIS tools. After entering current stock levels,


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the driver is instructed by our MIS tools through the handheld device and based on proprietary algorithms, to replenish the sales display with an appropriate quantity of bottles.
 
At the completion of the delivery cycle and after inspection of the bottles, our distributors typically are responsible for coordinating the sanitization and bottling process with our bottlers. In addition, distributors must run end-of-day reports on their handheld devices which transmit crucial data points into our databases and validate daily activity. Our handheld devices also capture electronic signatures, significantly reducing paper exchange. This greatly improves our verification procedures and enhances our environmental efforts.
 
 
We have the ability to test and refine procedures through our Company-operated distribution system before implementing them with our independent distributors nationwide. In addition, we regularly solicit feedback from our independent distributors to improve processes.
 
Flow of Payments and Capital Requirements
 
We control the flow of payments between our retail customers and our bottlers and distributors through electronic data interchange. Our distributors are responsible for handling distribution and servicing our sales and recycling center displays. Through our handheld devices, distributors report their deliveries which are received by our systems and verified by data integrity checks. Depending on the retailer, our distributors either present the store manager with an invoice for the bottles delivered or our systems electronically bill the retailer. We compensate our distributors with a fixed payment per delivered water bottle on the fifteenth day of the month following the delivery activity. Our fixed payment is a gross amount from which the distributor must typically pay the bottler. In order to maximize their returns and profitability, our distributors increasingly are becoming vertically integrated, using their capital to build bottling facilities. Due to the high degree of automation during our billing and


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inventory management procedures, we are able to leverage our centralized personnel and believe we will be able to significantly expand our business with minimal increases in variable cost.
 
We focus our capital expenditures on developing new store locations, raising brand awareness, developing new products and optimizing our MIS tools. We are also responsible for the centralized operations and personnel, sales and recycling displays, bottles, transportation racks, mineral packets and mineral injectors and handheld devices. We rely on our national network of independent bottlers and distributors to make a significant portion of capital investment required to operate our exchange service nationwide, including a majority of the capital expenditures related to the bottling, sanitization and refill process and the distribution assets such as delivery trucks and warehouse storage. Participation in our water bottle exchange service does not typically require the independent bottlers and distributors to make substantial new investments because they often are able to augment their current production capacity and leverage their existing bottling and distribution assets. In addition, many of our major retail customers have invested their capital to expand store locations and generate customer traffic.
 
Flow of Payments and Capital Requirements
 
(GRAPHIC)
 
Retailer Relationships
 
We target major retailers with either a national footprint or a significant regional concentration. Our relationships are diversified among the following retail categories and major accounts:
 
     
Retail Category
 
Major Accounts
 
Home Centers / Hardware Stores
  Lowe’s Home Improvement, Ace Hardware, True Value
Mass Merchants
  Walmart, Target, Kmart
Grocery Stores
  Kroger, Winn-Dixie, Albertsons, Food Lion
Membership Warehouses
  Sam’s Club, Costco
Drug Stores
  Walgreens, CVS
 
Retailer Opportunity
 
We offer retailers a single-vendor solution. Our water bottle exchange service provides retailers with a year-round consumer product and an opportunity to increase sales and profits with minimal labor and financial investment. Through our primarily independent network of bottlers and distributors, we are able to service major retailers nationwide. Retailers benefit from our water bottle exchange service that offers high margin and generates productivity from often underutilized interior and exterior retail space. In addition, our water bottle exchange service has the potential to increase retailers’ sales of ancillary products through increased traffic from repeat water bottle exchange consumers, who purchase an average of 35 water bottles annually.


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Account Set-Up
 
We actively pursue headquarters-based retail relationships to better serve our retail partners and minimize layers of approval and decision-making with regard to the roll-out of our water bottle exchange service to multiple locations. Upon confirmation of new retail locations, we coordinate with the retailer and distributor to schedule openings in a timely manner. We actively assist retailers in developing site plans for the setup of our sales and recycling center displays. While retailer setup preferences may vary, retailers often like to locate the recycling center display prominently on the exterior of their store to ease the transaction process, showcase their recycling and environmental efforts and conserve inside floor space while at the same time promoting the Primo brand.
 
Account Service
 
Our water bottle exchange service is a turn-key program for retailers in which we and our distributors actively service each retail account. After the retail location is established, our distributors complete on-site training and have an economic interest in supporting and growing the business relationship to increase product throughput. Distributors deliver three- and five-gallon Primo bottled water directly to retail locations and maintain the sales and recycling center displays.
 
Sales Support
 
While distributors service our retail accounts, the customer relationship is “owned” and maintained by our experienced retail sales organization, which allows us to develop strong brand affinity and maintain key headquarters-based relationships to secure and maintain our national retail network. Our retail relationships are divided into regions and managed by our sales personnel. In addition, we leverage our national network of primarily independent distributors that typically employ their own sales representatives. This combined team is responsible for selling and supporting our water bottle exchange service to targeted retailers.
 
Systems Support
 
We supply each major retail customer with a customized sales and business update on a monthly basis. The monthly update consists of a graphical dashboard highlighting sales trends and location-based information as well as qualitative commentary to assist store and headquarters personnel in their business decisions. We believe our reports help retail personnel monitor the success of our water bottle exchange service and highlight our analytical and customer support capabilities as a retail partner. In many cases, our retail customers do not have internal reporting capabilities to develop comparable analyses.
 
Customer Service
 
We maintain a single 1-800 number for all distributors, retailers and customers to contact us directly with questions regarding our bottled water, water bottle exchange process and customer service inquires. In addition, we maintain a separate 1-800 number for our water dispensers. We believe maintaining our own customer service numbers allows us to effectively monitor all aspects of our business and receive feedback on issues first-hand that we can direct to our distributors or dispenser suppliers.
 
Significant Customers
 
For the year ended December 31, 2009, Lowe’s Home Improvement, Sam’s Club and Walmart represented approximately 33%, 19% and 15% of our total sales, respectively.


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National Bottler and Distributor Network
 
In an effort to build a market-leading single-vendor national water bottle exchange service, we have sought to attract experienced and well-capitalized bottlers and distributors to support our network. As of December 31, 2009, we had 55 bottlers and 27 independent distributors.
 
Bottler and Distributor Opportunity
 
We provide bottlers and distributors with an attractive business opportunity, complementing many of their existing operations. We continually pursue new relationships and additional locations with existing retail partners to increase the production at each bottler’s manufacturing facility and the retail customer density within each distributor’s territory.
 
Bottler and Distributor Standards
 
We work very closely with our national network of primarily independent bottlers and distributors to ensure their production and storage standards meet or exceed the requirements of the United States Food and Drug Administration and other industry regulations. As we seek to promote our brand, we believe it is critical to provide bottled water that has consistent taste and is produced in a manner that exceeds current industry requirements. We regularly monitor, test and arrange for third-party hygiene audits of each bottling facility.
 
In addition, we regularly monitor our distributors’ performance to ensure a high level of account service. Distributors are generally required to develop an infrastructure sufficient to:
 
  •  Complete customer installations within 30 days of the notification of a newly established account;
 
  •  Monitor and maintain inventory levels with assigned retail accounts; and
 
  •  Resolve water bottle stock-outs within 36 hours.
 
Bottler and Distributor Selection Process
 
We have selectively identified and pursued high quality independent bottlers and distributors that can support our major retailers nationwide. We screen all bottler and distributor candidates by reviewing credit reports, safety records and manufacturing compliance reports, and conducting management reference checks. As a result of this thorough selection process, we have established what we believe to be a highly dependable national network of independent bottlers and distributors. We currently maintain three distributor or bottler relationships that have relatively high customer concentrations in the geographic areas they serve. None of these distributors or bottlers, however, had responsibility for more than 8.0% of the bottling or more than 12.6% of the distribution with respect to our water bottle exchange volume for the year ended December 31, 2009. We believe we have a positive relationship with each of these parties and our senior executives have maintained a business relationship with each such party since they were managing operations at Blue Rhino Corporation.
 
Bottler and Distributor Services
 
We currently employ raw material procurement and supply chain personnel who perform periodic inventory audits and month-end review procedures. In addition we have operations personnel who manage our independent bottler and distributor relationships, including training and monitoring personnel and activities. We also employ customer service personnel who handle bottler, distributor, retailer and end-user phone calls.


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Company Owned Distribution Operations
 
We have distribution responsibilities for certain regions that are relatively near our primary facilities. We distribute our bottled water to major retailers in portions of North Carolina, South Carolina, Florida and Virginia. We believe distributing our bottled water in these areas is an important way for us to better understand the bottled water exchange process and provides us the necessary feedback to enhance our independent bottler and distributor relationships. In addition, distributing our bottled water in these areas should assist us in validating the economic arrangements we offer our bottlers and distributors and developing industry knowledge that we can deploy throughout our system. For the year ended December 31, 2009, our Company-owned distribution operations accounted for approximately 23.5% of our water bottle exchange volume.
 
Bottler and Distributor Agreements
 
We have entered into bottler and distributor agreements with each of our 55 bottlers and 27 independent distributors on substantially similar terms. While individual agreements contain variances and exceptions, the material terms of such agreements are described generally below. No individual bottler or distributor is material to our overall financial condition or results of operations.
 
Bottler Agreement
 
In our bottler agreement, we appoint a bottler as a non-exclusive supplier of our purified drinking water. The bottler is restricted from competing with us during the term of the agreement and for a specified period after the term in a specified geography.
 
The bottler is required to bottle and deliver product in conformance with our specifications, including our proprietary mineral formula. The bottler must ensure that our bottled water products comply with applicable laws, rules and regulations (including those of the FDA), industry standards (including those of the International Bottled Water Association) and our quality requirements. The agreement also imposes requirements on the bottler with respect to the maintenance of its facilities and equipment that are intended to ensure the quality of our products.
 
We provide the necessary bottles, caps, labels, transportation racks, mineral injectors and formula minerals at no charge to the bottler to support the bottling and supply of our bottled water products. The bottler is required to maintain inventory levels necessary to satisfy our production requirements. Product may not be released for shipment until the bottler meets all applicable quality requirements.
 
Pricing is set forth in the agreement, and we have the right to modify pricing on thirty days notice to the bottler. The agreements generally have a three-year term, and if not otherwise terminated, automatically renew for successive one-year periods after the initial term. Either party may terminate the agreement in the event of an uncured material breach by the other party.
 
Distributor Agreement
 
In our distributor agreement, we grant a distributor the right to serve as our exclusive delivery and service agent and representative with respect to our bottled water exchange service for a specified term in a specified geographic territory. The distributor is restricted from competing with us during the term of the agreement and for a specified period after the term in the specified geography. We have the right, at any time, to purchase a distributor’s rights under the agreement, along with related distribution equipment, for an amount based on the distributor’s revenues under the agreement for the prior twelve-month period and the fair market value of the equipment being purchased.
 
The distributor must perform its services under the agreement in conformance with our distributor manual and all applicable laws and regulations, including those of the FDA.


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We compensate a distributor for its services while maintaining a direct relationship with and collecting payments from our retailer customers within the distributor’s service territory. Pricing is set forth in the agreement, and we have the right to modify pricing and payment terms on thirty days notice to the distributor.
 
The agreements generally have a ten-year term, and if not otherwise terminated, automatically renew for successive one-year terms after the initial ten-year term. Either party may terminate the agreement for, among other reasons, an uncured material breach by the other party.
 
Management Information Systems
 
We have made a substantial investment in MIS tools which enhance our ability to process orders, manage inventory and accounts receivable, maintain distributor and customer information, maintain cost-efficient operations and assist distributors in delivering products and services on a timely basis. Our technology utilizes highly integrated, scalable software applications that cost-effectively support our growing retail network. Our MIS tools also allow us to analyze historical trends and data to further enhance the execution, service and identification of new markets and marketing opportunities. The primary components of our systems include the following:
 
Sales and Marketing Support Systems
 
We operate a single customer relationship management database that integrates all financial and transaction-based data with respect to each retail account. Our MIS tools provide our account managers and customer service representatives access to crucial data to effectively manage each bottler, distributor and retail relationship.
 
Bottler and Distributor Level Technology
 
Our distribution process is highly automated and scalable. Our technology allows bottlers and distributors timely access to information for customer support needs and provides access to real-time data to enhance decisions. In addition, each distributor is electronically linked to our systems with our proprietary Routeview software. Routeview enables distributors to review delivery quantities and tentative scheduling requirements across our entire national network. In addition, our MIS tools allow drivers to update delivery, inventory and invoicing information through handheld devices. This technology provides retailers with accurate and timely inventory and invoices and assists each distributor in managing its responsibilities.
 
Financial Integration
 
We utilize Microsoft’s Dynamics GP software as our core platform which interfaces with all of our systems. Each handheld device is based on Microsoft’s operating system and ensures integration within our reporting and financial databases. All delivery transactions are validated and data is imported into our database tables and mapped to corresponding accounting ledgers.
 
Manufacturing and Sourcing
 
Our manufacturing strategy is to utilize third-party manufacturers to produce empty water bottles, sales displays and recycle centers and water dispensers at a reasonable cost. We believe that using contract manufacturers has several advantages over our manufacturing these items directly, including (i) decreased capital investment in manufacturing plants and equipment and working capital, (ii) the ability to leverage contract manufacturers’ purchasing relationships for lower materials costs, (iii) minimal fixed costs of maintaining unused manufacturing capacity and (iv) the ability to utilize our suppliers’ broad technical and process expertise.
 
Currently, the majority of our water dispensers are assembled by a single manufacturer in China, which utilizes several sub-suppliers to provide components and subassemblies. We have the sole North American rights to develop products with this manufacturer and each dispenser unit is produced to our design specifications. Each unit is inspected and tested for quality by the manufacturer’s personnel prior to shipment and any units returned


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by consumers or retailers are sent directly to the manufacturer for a credit, replacement or refund issued by the manufacturer. Our units generally are shipped directly from Hong Kong to the retailer. For the year ended December 31, 2009, this manufacturer produced water dispenser units that accounted for more than 95% of our water dispenser billings.
 
Our water bottles and caps are produced by multiple vendors throughout the United States. We select suppliers based on price, quality and geographic proximity to our bottlers. We only purchase water bottles with handles as a convenience feature for consumers.
 
Our sales displays and recycle centers are made to our design. We frequently request bids from multiple manufacturers to achieve optimal pricing.
 
Product Design and Development
 
A primary focus of our product research and development efforts is developing innovative water dispensers as part of our strategy to enhance consumer awareness and adoption of our water bottle exchange service, increase household penetration and drive sales of our bottled water. We continually work to improve water dispenser features, seek to lower manufacturing costs so that our innovative products are more affordable and introduce new models. Innovative improvements developed in cooperation with our manufacturing partners include bottom-loading dispensers, adjustable hot and cold temperature controls and faster water dispensing capabilities. Our water dispenser models are designed to appeal to consumers of diverse demographic audiences. We are currently working with our manufacturing partners to develop new product lines that include self-bagging automated purified ice dispensers and purified water refill dispensers to be located on-site at our retail customers. We expect to introduce these new product lines in 2010. We are also in the early development stage of creating a water dispenser product that provides consumers the ability to dispense multiple purified water-based beverages, including traditional hot drink products and flavored and carbonated beverages.
 
Competition
 
We participate in the highly competitive bottled water segment of the nonalcoholic beverage industry. While the industry is dominated by large and well-known international companies, numerous smaller firms are also seeking to establish market niches. We have a unique business model in the bottled water market in the United States in that we not only offer three- and five-gallon bottled water on a nationwide basis but also provide consumers the ability to exchange their used containers as part of our water bottle exchange service. We believe that we are one of the first companies to provide a national water bottle exchange service at retail. While we are aware of a few direct competitors that operate similar networks, we believe they operate on a much smaller scale than we do and do not have equivalent MIS tools or bottler and distributor capabilities to effectively support major retailers nationwide. Competitive factors with respect to our business include pricing, taste, advertising, sales promotion programs, product innovation, efficient production and distribution techniques, introduction of new packaging, and brand and trademark development and protection.
 
Our primary competitors in our bottled water business include Nestlé, The Coca-Cola Company, PepsiCo, Dr Pepper Snapple Group and DS Waters of America. None of these companies currently offer a nationwide water bottle exchange service at retail. However, many of these competitors are leading consumer products companies, have substantially greater financial and other resources than we do, have established a strong brand presence with consumers and have established relationships with retailers, manufacturers, bottlers and distributors necessary to start an exchange business at retail locations nationwide should they decide to do so. In addition to competition between firms within the bottled water industry, the industry itself faces significant competition from other non-alcoholic beverages, including carbonated and non-carbonated soft drinks and waters, juices, sport and energy drinks, coffees, teas and spring and tap water.
 
We also compete directly and indirectly in the water dispenser marketplace. This marketplace is diverse and faces competition from other methods of purified water consumption such as countertop filtration systems, faucet


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mounted filtration systems, in-line whole-house filtration systems, water filtration dispensing products such as pitchers and jugs, standard and advanced feature water coolers and refrigerator-dispensed filtered and unfiltered water.
 
Intellectual Property and Trademarks
 
We believe that our intellectual property provides a competitive advantage and we have invested substantial time, effort and capital in establishing and protecting our intellectual property rights. We have filed certain patent applications and trademark registration applications and intend to seek additional patents, to develop additional trademarks and seek federal registrations for such trademarks and to develop other intellectual property. We consider our Primo name and related trademarks and our other intellectual property to be valuable to our business and the establishment of a national branded bottled water exchange service. We rely on a combination of patent, copyright, trademark and trade secret laws and other arrangements to protect our proprietary rights. We own ten United States federal trademark registrations, including registrations for our Primo® and Taste Perfection® trademarks, our Primo® logo and our distinctive four bubble design. We also own a pending application to register our Zero Waste. Perfect Tastetm trademark in the United States for use in association with drinking water dispensers, bottled drinking water and a variety of other non-alcoholic beverages. In addition, the design of our recycling center displays is protected by four United States design patents and two Canadian industrial design registrations. We own three pending utility patent applications in the United States for our bottled water distribution method and bottle return apparatus (or our recycling center displays).
 
In addition to patent protection, we also rely on trade secrets and other non-patented proprietary information relating to our product development, business processes and operating activities. We regard portions of our proprietary MIS tools, various algorithms used in our business and the composition of our mineral formula to be valuable trade secrets of the Company. We seek to protect this information through appropriate efforts to maintain its secrecy, including confidentiality agreements.
 
Governmental Regulation
 
The conduct of our businesses and the production, distribution, advertising, promotion, labeling, safety, transportation, sale and use of our products are subject to various laws and regulations administered by federal, state and local governmental agencies in the United States. It is our policy to abide by the laws and regulations that apply to us, and we require our bottling, manufacturing, and distributing partners to comply with all laws and regulations applicable to them.
 
We are required to comply with:
 
  •  federal laws, such as the Federal Food, Drug and Cosmetic Act, the Occupational Safety and Health Act and the Americans with Disabilities Act;
 
  •  customs and foreign trade laws and regulations;
 
  •  state consumer protection laws;
 
  •  federal, state and local environmental, health and safety laws;
 
  •  laws governing equal employment opportunity and workplace activities; and
 
  •  various other federal, state and local statutes and regulations.
 
We maintain environmental, health and safety policies and a quality, environmental, health and safety program designed to ensure compliance with applicable laws and regulations.


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The United States Food and Drug Administration (the “FDA”) regulates bottled water as a food under the federal Food, Drug and Cosmetic Act. Our bottled water must meet FDA requirements of safety for human consumption, identity, quality and labeling. Further, the sale and marketing of our products is subject to FDA’s advertising and promotion requirements and restrictions. In addition, FDA has established current “good manufacturing practice” regulations, which govern the facilities, methods, practices and controls used for the processing, bottling and distribution of bottled drinking water. We and our third-party supply, bottling and distribution partners are subject to these requirements. We also must comply with overlapping and sometimes inconsistent state regulations in various jurisdictions. As a result, we must expend resources to continuously monitor state legislative and regulatory activities for purposes of identifying and ensuring compliance with the laws and regulations that apply to our bottled water business in each state in which we operate. While we must meet the government-mandated standards, we believe that our self-imposed standards meet or exceed those set by federal, state and local regulations.
 
Additionally, the manufacture, sale and use of resins used to make water bottles is subject to regulation by the FDA. Those regulations are concerned with substances used in food packaging materials, not with specific finished food packaging products. We believe our beverage containers are in compliance with FDA regulations. Additionally, the use of polycarbonates in food containers used by children under three years of age is subject to certain state and local restrictions.
 
Measures have been enacted in various localities and states that require a deposit or tax to be charged for certain non-refillable beverage containers. The precise requirements imposed by these measures vary. Other deposit, recycling or product stewardship proposals have been introduced in various jurisdictions. We anticipate that similar legislation or regulations may be proposed in the future at the local, state and federal levels.
 
Legal Proceedings
 
From time to time, we are a party to various lawsuits, claims and other legal proceedings arising from our normal business activities. We have not had, and we do not believe that we have currently, any proceedings that, individually or in the aggregate, would be expected to have a material adverse effect on our business, results of operations or financial condition.
 
Facilities
 
Our corporate headquarters, including our principal administrative, marketing, sales, technical support and research and development facilities, are located in Winston-Salem, North Carolina where we lease approximately 14,200 square feet under an agreement that expires on May 31, 2011.
 
In addition we lease warehouse space in Winston-Salem, North Carolina, Lakeland, Florida and Petersburg, Virginia to support our Company-owned operations in these regions. These facilities have lease expirations that vary from May 2010 to November 2010.
 
We believe that our current facilities are suitable and adequate to meet our current needs, and that suitable additional or substitute space will be available as needed to accommodate expansion of our operations.
 
Employees
 
As of December 31, 2009, we had 75 employees. We believe that our continued success will depend on our ability to continue to attract and retain skilled personnel. We have never had a work stoppage and none of our employees are represented by a labor union. We believe our relationship with our employees is good.


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MANAGEMENT
 
Set forth below are our executive officers and directors, together with their positions and ages as of March 1, 2010.
 
             
Name
 
Age
 
Position
 
Billy D. Prim
    54     Chairman, Chief Executive Officer, President and Director
Mark Castaneda
    45     Chief Financial Officer
Michael S. Gunter
    41     Senior Vice President, Operations
Duane G. Goodwin
    51     Senior Vice President, Business Development
Richard A. Brenner
    46     Director
David W. Dupree
    55     Director
Malcolm McQuilkin
    63     Director
David L. Warnock
    51     Director
 
Set forth below is a brief description of the business experience of our directors and executive officers.
 
Billy D. Prim — Chairman, Chief Executive Officer, President and Director. Mr. Prim has been our Chairman, Chief Executive Officer and President since he founded the Company in 2004. Mr. Prim has also served on our Board of Directors since 2004. Prior to founding the Company, Mr. Prim founded Blue Rhino Corporation (a provider of propane cylinder exchange and complementary propane and non-propane products) in March 1994 and served as its Chief Executive Officer and Chairman of the Board. He led Blue Rhino’s initial public offering in May 1998 and remained its Chief Executive Officer until April 2004, when Blue Rhino was acquired by Ferrellgas Partners, L.P., at which time he was elected to the Ferrellgas board of directors on which he served until November 2008. Mr. Prim also previously served on the board of directors of Southern Community Bank and Trust from 1996 until 2005. Mr. Prim brings extensive business, managerial and leadership experience to our Board of Directors. Mr. Prim’s service as an executive and a Director of Primo provide our Board of Directors with a vital understanding and appreciation of our business. In addition, Mr. Prim’s leadership abilities, his experience at Blue Rhino and his extensive knowledge of the bottled water industry position him well for service on our Board of Directors.
 
Mark Castaneda — Chief Financial Officer. Mr. Castaneda has served as our Chief Financial Officer since March 2008. Prior to joining our Company, he served as Chief Financial Officer for Tecta America, Inc. (a private national roofing contractor) from October 2007 until March 2008, as Chief Financial Officer for Interact Public Safety (a private software company) from September 2006 until October 2007 and as Chief Financial Officer for Pike Electric Corporation (a publicly-traded energy solutions provider) from October 2004 until August 2006, where he helped lead its initial public offering in July 2005. Mr. Castaneda served Blue Rhino Corporation as its Chief Financial Officer from November 1997 until October 2004 and as a Director from September 1998 until April 2004. Mr. Castaneda helped lead Blue Rhino’s initial public offering with Mr. Prim in May 1998. Mr. Castaneda began his career with Deloitte & Touche in 1988 and is a certified public accountant.
 
Michael S. Gunter — Senior Vice President, Operations. Mr. Gunter has served as our Senior Vice President of Operations since March 2010 and previously served as our Vice President of Operations from our founding in October 2004 through February 2010. Prior to joining our Company, he served as the Senior Director of Strategy and Financial Analysis as well as the Director of Information Technology for Blue Rhino Corporation from 2000 until October 2004. Mr. Gunter served as an Artillery Officer in the United States Marine Corps from 1990 to 1996.
 
Duane G. Goodwin — Senior Vice President, Business Development. Mr. Goodwin has served as our Senior Vice President of Business Development since February 2010. Prior to joining our Company, he served as Chief Supply Chain Officer for BlueLinx Corporation (a distributor of building products) from December 2005 until April 2009, as Senior Operations Consultant for Cerberus Capital Management (a private investment firm) from June 2005 until December 2005 and in various management roles for The Home Depot (a home


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improvement retailer) from 1994 until January 2005. Before joining The Home Depot Mr. Goodwin was with Walmart Stores, Inc. (a mass merchant retailer), where he served in a variety of roles from 1985 through 1994.
 
Richard A. Brenner — Director. Mr. Brenner has served on our Board of Directors since 2005. He has been the Chief Executive Officer of Amarr Garage Doors (a manufacturer and distributor of garage doors) since July 2002 and was its President from July 1993 until June 2002. Mr. Brenner also serves on several boards of private and nonprofit entities, including ABC of North Carolina, Idealliance and Wake Forest University Health Sciences, and was a member of the board of directors of Blue Rhino Corporation from 1998 to 2004. Mr. Brenner’s significant executive and board service experience qualify him for service on our Board of Directors.
 
David W. Dupree — Director. Mr. Dupree has served on our Board of Directors since April 2008. As a founder of The Halifax Group (a private equity group) in 1999, he serves as the Chief Executive Officer and Managing Director of Halifax. Prior to co-founding Halifax, Mr. Dupree was a Managing Director and Partner with The Carlyle Group, where he was primarily responsible for investments in healthcare and related sectors. Mr. Dupree is also a Director Emeritus of Whole Foods Markets, Inc. where he served as a director from 1997 until 2008 and served on the Audit Committee and was Chairman of the Nominating and Governance Committee. Mr. Dupree also serves on several boards of private and non-profit organizations, including the Wake Forest University Board of Trustees. Mr. Dupree’s business, financial, executive and managerial experience as well as service on the boards of various entities position him well to serve as a member of our Board of Directors.
 
Malcolm McQuilkin — Director. Mr. McQuilkin has served on our Board of Directors since 2005. Since 1990, he has been Chief Executive Officer of Blue Rhino Global Sourcing, LLC (an import and design company and a wholly owned subsidiary of Ferrellgas Propane Partners). As the current Chief Executive Officer of Blue Rhino Global Sourcing, Mr. McQuilkin provides our Board of Directors with significant leadership and executive experience. Mr. McQuilkin’s leadership abilities, his international business expertise (particularly with respect to outsourcing) and his extensive knowledge of complex financial and operational issues facing large companies qualify him to serve as a member of our Board of Directors.
 
David L. Warnock — Director. Mr. Warnock has served on our Board of Directors since 2005. He is a founder and managing member of Camden Partners Holdings, LLC (a private investment management firm established in 1995 and formerly known as Cahill Warnock & Company, LLC). Mr. Warnock serves on the board of National American University, Inc., New Horizons Worldwide, Inc., Nobel Learning Communities, Inc., Questar Assessment, Inc., Towne Park Ltd., Ranir LLC, and CIBT School of Business and Technology Corp., and was a member of the board of directors of Blue Rhino Corporation from 2000 to 2004. Mr. Warnock brings to our Board of Directors a unique and valuable perspective from his years of experience in private investment management. Mr. Warnock’s business acumen and his financial, managerial, leadership and board service experience qualify him to serve on our Board of Directors.
 
Our executive officers are elected by, and serve at the discretion of, our Board of Directors.
 
Board of Directors
 
Immediately following the closing of this offering, our Board of Directors will consist of five members. Our amended and restated bylaws that will be in effect immediately following the closing of this offering permit our Board of Directors to establish the authorized number of directors, and five directors are currently authorized. These amended and restated bylaws also provide that any vacancies or newly-created directorships may be filled only by the remaining members of our Board of Directors.


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As of the closing of this offering, our amended and restated certificate of incorporation and amended and restated bylaws will provide for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms, as follows:
 
  •  the Class I directors will be Billy D. Prim and David W. Dupree, and their terms will expire at the annual meeting of stockholders to be held in 2011;
 
  •  the Class II directors will be David L. Warnock and Malcolm McQuilkin, and their terms will expire at the annual meeting of stockholders to be held in 2012; and
 
  •  the Class III director will be Richard A. Brenner, and his term will expire at the annual meeting of stockholders to be held in 2013.
 
Upon expiration of the term of a class of directors, directors for that class will be elected for a three-year term at the annual meeting of stockholders in the year in which that term expires. Each director’s term continues until the election and qualification of that director’s successor, or that director’s earlier death, resignation or removal. Any increase or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of our Board of Directors may have the effect of delaying or preventing changes in control of our Company.
 
Director Independence
 
Upon the closing of this offering, we anticipate that our common stock will be listed on the Nasdaq Global Market. Under the applicable Nasdaq listing standards, independent directors must comprise a majority of a listed company’s Board of Directors within a specified period following the closing of its initial public offering. In addition, Nasdaq’s rules require that, subject to specific exceptions, each member of a listed company’s audit committee and those members of the board of directors determining executive compensation and director nominations be independent. Audit committee members also must satisfy the independence criteria set forth in rule 10A-3 under the Securities Exchange Act of 1934. Under the Nasdaq rules, a director will only qualify as an “independent director” if, in the opinion of the company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
 
In order to be considered independent for purposes of rule 10A-3 under the Securities Exchange Act of 1934, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors or any other board committee: (1) accept, directly or indirectly, any consulting, advisory or other compensatory fee from the listed company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.
 
In           2010, our Board of Directors undertook a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and provided by each director concerning his background, employment and affiliations, including family relationships, our Board of Directors has determined that none of Messrs.                    , representing      of our five current directors, has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under Nasdaq rules. Our Board of Directors also determined that Messrs.                    , who comprise our audit committee, Messrs., who comprise our compensation committee, and Messrs.                    , who comprise our nominating and governance committee, satisfy the independence standards for those committees established by applicable SEC rules and the rules of Nasdaq. In making these determinations, our Board of Directors considered the relationships that each non-employee director has with our Company and all other facts and circumstances our Board of Directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director. There is no family relationship between any director, executive officer or person nominated to become a director or executive officer.


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Board Committees
 
Our Board of Directors has established an audit committee, a compensation committee and a nominating and governance committee. Our Board of Directors may establish other committees from time to time to facilitate our corporate governance.
 
Audit Committee. Our audit committee is comprised of Messrs. Brenner, Dupree and Warnock, with Mr. Dupree acting as chair. The principal responsibilities and functions of our audit committee are to assist the Board of Directors in fulfilling its oversight of (i) the integrity of our financial statements, (ii) the effectiveness of our internal controls over financial reporting, (iii) our compliance with legal and regulatory requirements, (iv) the qualifications and independence of our registered public accounting firm, and (v) the performance of our registered public accounting firm. In carrying out its oversight responsibilities and functions, our audit committee, among other things, oversees and interacts with our independent auditors regarding the auditors’ engagement and/or dismissal, duties, compensation, qualifications and performance; reviews and discusses with our independent auditors the scope of audits and our accounting principles, policies and practices; reviews and discusses our audited annual financial statements with our independent auditors and management; and reviews and approves or ratifies (if appropriate) related party transactions. Our audit committee also is directly responsible for the appointment, compensation, retention and oversight of our independent auditors.
 
Our Board of Directors has determined that           is an audit committee financial expert, as defined under the applicable rules of the SEC, and that all members of the audit committee are “independent” within the meaning of the applicable Nasdaq listing standards and the independence standards of rule 10A-3 of the Securities Exchange Act of 1934. Each of the members of the audit committee meets the requirements for financial literacy under the applicable rules and regulations of the SEC and The Nasdaq Stock Market.
 
Compensation Committee. Our compensation committee is comprised of Messrs. Dupree, McQuilkin and Warnock, with Mr. Warnock acting as the chair. The principal functions of our compensation committee include (i) reviewing our compensation practices and policies, (ii) reviewing and approving the compensation for our senior executives, (iii) evaluating the performance of our senior executives, and (iv) assisting in the Company’s compliance with the regulations of the SEC regarding executive compensation disclosure. Our Board of Directors has determined that all members of the compensation committee are “independent” within the meaning of the applicable Nasdaq listing standards.
 
Nominating and Governance Committee. Our nominating and governance committee is comprised of Messrs. Brenner, Dupree, McQuilkin and Warnock, with Mr. Brenner acting as the chair. The principal functions of our nominating and corporate governance committee are, among other things, to (i) establish membership criteria for our Board of Directors, (ii) establish and communicate to stockholders a method of recommending potential director nominees for the committee’s consideration, (iii) identify individuals qualified to become directors consistent with such criteria and select the director nominees, (iv) plan for continuity on our Board of Directors, (v) recommend action to our Board of Directors upon any vacancies on our Board of Directors, (vi) facilitate the annual evaluation of the performance of our Board of Directors and its committees, (vii) periodically review management succession plans, and (viii) consider and recommend to our Board of Directors other actions relating to our Board of Directors, its members and its committees. Our Board of Directors has determined that all members of the nominating and governance committee are “independent” within the meaning of the applicable Nasdaq listing standards.
 
Code of Conduct
 
Our Board of Directors has adopted a Code of Business Conduct and Ethics that will become effective upon the closing of this offering. This code will apply to all of our employees, officers, and directors, including our principal executive, financial and accounting officers and all persons performing similar functions. A copy of our Code of Business Conduct and Ethics will be available upon the closing of this offering on our corporate website


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(www.primowater.com). We expect that any amendments to the code, or any waivers of its requirements, will be disclosed on our website.
 
Director Compensation
 
We have not historically had any policy regarding compensation payable to our directors. Instead, we have from time to time in the past made awards of stock options to our non-employee directors. We made no such awards in 2008 or 2009 and we have not otherwise compensated our directors for services. In February 2010, we awarded each of our non-employee directors 60,000 shares of restricted common stock that vest in equal annual installments over a three-year period.
 
After giving effect to these awards, our non-employee directors hold the following equity awards received as director compensation:
 
                 
Name
  Stock Options (#)(1)     Restricted Stock (#)(2)  
 
Richard A. Brenner
    24,000       60,000  
David W. Dupree
          60,000  
Malcolm McQuilkin
    12,000       60,000  
David L. Warnock
    24,000       60,000  
 
 
(1) These stock options were granted prior to 2008, are vested in their entirety and have an exercise price of $1.25 per share. As of December 31, 2009, the only outstanding equity awards were the stock options listed above.
 
(2) These shares of restricted stock were granted on February 18, 2010 and vest in equal annual installments over a three-year period.
 
In connection with this offering, our Board of Directors approved and adopted our Non-Employee Director Compensation Policy. Under the Non-Employee Director Compensation Policy, each non-employee director will receive an annual retainer of $25,000, to be paid one-half in restricted common stock and one-half in options to purchase common stock, granted on the first business day following each annual meeting of our stockholders. Additionally, non-employee directors will receive the following cash awards: (i) a $5,000 retainer for directors who also serve as committee chairs and a $2,500 retainer for other directors; (ii) $2,500 for each regularly scheduled Board of Directors meeting attended in person ($1,000 if attended telephonically); (iii) $1,000 for each ad hoc telephonic special Board of Directors meeting attended; (iv) $1,000 for each regularly scheduled committee meeting attended; and (v) $500 for each ad hoc telephonic committee meeting attended. Grants made under the Non-Employee Director Compensation Policy will be made pursuant to the 2010 Omnibus Long-Term Incentive Plan and will vest in full on the day immediately following the first anniversary of the grant date.
 
Compensation Committee Interlocks and Insider Participation
 
Upon the closing of this offering, our compensation committee will consist of Messrs. Dupree, McQuilkin and Warnock. During 2009, Messrs. Prim, Brenner, McQuilkin and Warnock served on our compensation committee. Mr. Filipowski, a former member of our Board of Directors, also served on our compensation committee through the end of January 2009.
 
Interlocks
 
With the exception of Mr. Prim who served on our compensation committee through the end of 2009, none of the members of our current compensation committee or our compensation committee during 2009 is or has at any time during the past year been an officer or employee of ours. None of our executive officers has served as a member of the board of directors, or as a member of the compensation or similar committee, of any entity that has one or more executive officers who served on our Board of Directors or compensation committee during 2009.


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Sale of Subordinated Convertible Notes and Warrants
 
Messrs. Prim, Dupree, McQuilkin and Warnock (either individually or through an affiliated entity) purchased an aggregate of $3.04 million of our 2011 Notes and an aggregate of 225,185 warrants to purchase shares of our common stock in a private placement on December 30, 2009. We issued a total of $15.0 million of 2011 Notes and a total of 1,111,109 warrants in that private placement. The exercise price of these warrants is either (a) $1.25 per share or (b) following a public offering in which we realize at least $30.0 million in net proceeds, 80% of the per share price of the shares issued in the offering. The following table sets forth certain information regarding such persons’ purchase of the 2011 Notes and the related warrants.
 
                     
        Principal
       
        Amount of Notes
       
        Purchased
    Warrants
 
Name
  Affiliated Investor   ($)     (#)  
 
Billy D. Prim
      540,000       40,000  
David W. Dupree
      100,000       7,407  
Malcolm McQuilkin
  Malcolm McQuilkin Living Trust     1,000,000       74,074  
David L. Warnock
  Camden Partners Strategic Fund III, LP     1,344,140       99,566  
David L. Warnock
  Camden Partners Strategic Fund III-A, LP     55,860       4,138  
 
Sale of Series C Convertible Preferred Stock and Warrants
 
Messrs. Prim, Dupree, McQuilkin and Warnock (either individually or through an affiliated entity) purchased an aggregate of 5,826,947 shares of Series C convertible preferred stock and warrants to purchase an aggregate of 582,695 shares of common stock at an exercise price of $1.98 per share in private placement transactions between December 14, 2007 and May 20, 2008. We issued a total of 12,520,001 shares of Series C convertible preferred stock and warrants to purchase 1,252,001 shares of common stock in connection with these private placement transactions. The following table sets forth certain information regarding such persons’ ownership of those shares and warrants.
 
                             
        Shares
    Warrants
    Amount Paid for
 
        Purchased
    Purchased
    Shares and Warrants
 
Name
  Affiliated Investor   (#)     (#)     ($)  
 
Billy D. Prim
      512,363       51,237       1,229,671  
David W. Dupree
  Primo Investors, L.P.     4,281,250       428,125       10,275,000  
Malcolm McQuilkin
  Malcolm McQuilkin Living Trust     200,000       20,000       480,000  
David L. Warnock
  Camden Partners Strategic Fund III, LP     800,084       80,008       1,920,202  
David L. Warnock
  Camden Partners Strategic Fund III-A, LP     33,250       3,325       79,800  
 
Sale of Series B Preferred Stock and Warrants
 
Messrs. Prim, McQuilkin, Warnock and Filipowski (either individually or through or with an affiliated entity or person) purchased an aggregate of 8,999,691 shares of Series B preferred stock and warrants to purchase an aggregate of 2,402,916 shares of common stock at an exercise price of $1.25 per share in private placement transactions between April 28, 2006 and June 30, 2007. We issued a total of 23,280,221 shares of Series B preferred stock and warrants to purchase a total of 6,215,813 shares of common stock in these private placement transactions. The following table sets forth certain information regarding such persons’ ownership of those shares.
 
                             
        Shares
    Warrants
    Amount Paid for
 
        Purchased
    Purchased
    Shares and Warrants
 
Name
  Affiliated Investor   (#)     (#)     ($)  
 
Billy D. Prim
      5,164,846       1,379,013       5,164,846  
Billy D. Prim
  Deborah Prim     70,000       18,690       70,000  
Malcolm McQuilkin
  Malcolm McQuilkin Living Trust     600,000       160,200       600,000  
David L. Warnock
  Camden Partners Strategic Fund III, LP     2,880,300       769,040       2,880,300  
David L. Warnock
  Camden Partners Strategic Fund III-A, LP     119,700       31,959       119,700  
Andrew J. Filipowski
      164,845       44,014       164,845  


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EXECUTIVE COMPENSATION
 
Compensation Discussion and Analysis
 
The following discussion and analysis of compensation arrangements of our (1) principal executive officer (Billy D. Prim), (2) principal financial officer (Mark Castaneda) and (3) three most highly compensated executive officers other than our principal executive officer and principal financial officer who were serving as executive officers on December 31, 2009 (Michael S. Gunter, Richard E. Belmont and Brent C. Boydston, and collectively with Messrs. Prim and Castaneda, our NEOs) should be read together with the compensation tables and related disclosures set forth below. This discussion contains forward-looking statements that are based on our current considerations, expectations and determinations regarding future compensation programs. The actual amount and form of compensation and the compensation programs that we adopt may differ materially from current or planned programs as summarized in this discussion.
 
Introduction
 
Our compensation discussion and analysis discusses the total compensation for our NEOs, and it describes our overall compensation philosophy, objectives and practices. Our compensation philosophy and objectives generally apply to all of our employees and all of our employees are eligible to participate in the main components our compensation program consisting of:
 
  •  base salary;
 
  •  annual cash bonus; and
 
  •  equity compensation.
 
The relative value of each of these components for individual employees varies based on job role and responsibility, as well as our financial performance.
 
Compensation Philosophy and Objectives
 
Our compensation approach is necessarily tied to our stage of development. Our compensation philosophy is to offer our executive officers, including our NEOs, compensation and benefits that are competitive and meet our goals of attracting, retaining and motivating highly skilled management, which is necessary to achieve our financial and strategic objectives and create long-term value for our stockholders. Accordingly, our executive officer compensation program is designed to link annual and long-term cash and stock incentives to the achievement of Company and individual performance goals and to align the interests of executive officers with the creation of stockholder value.
 
We believe compensation should be determined within a framework that is intended to reward individual contribution and the achievement of Company objectives. Within this overall philosophy, our objectives are to:
 
  •  attract, retain and motivate our executives by providing a total compensation program that takes into consideration competitive market requirements and strategic business needs;
 
  •  align the financial interests of executive officers with those of our stockholders, both in the short and long term;
 
  •  provide incentives for achieving and exceeding annual and long-term performance goals; and
 
  •  appropriately reward executive officers for creating long-term stockholder value.


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Each of Messrs. Prim, Castaneda and Gunter is entering into an employment agreement with the Company in connection with this offering. We are also entering into an employment agreement in connection with this offering with Duane G. Goodwin who joined our Company as Senior Vice President, Business Development in February 2010. The material terms of those employment agreements are described below.
 
Role of Directors and Executive Officers in Setting Compensation
 
Prior to this offering, we were a privately-held company. As a result, we have not been subject to any stock exchange listing or SEC rules requiring a majority of our Board of Directors to be independent or relating to the formation and functioning of Board committees, including our compensation committee. Historically, we have informally considered the competitive market for corresponding positions within comparable geographic areas and companies of similar size and stage of development, including other small, high-growth public companies. This consideration was based on the general knowledge possessed by members of our compensation committee and also included consultations with our Chief Executive Officer. As we gain experience as a public company, we expect that the specific direction, emphasis and components of our executive compensation program will continue to evolve. For example, over time, we expect to reduce our reliance upon subjective determinations in favor of a more empirically based approach that could involve, among other practices, benchmarking the compensation paid to our NEOs against peer companies that we identify and the use of clearly defined, objective targets to determine incentive compensation awards.
 
The compensation committee typically considers, but is not required to accept, our Chief Executive Officer’s evaluation regarding the performance and recommendation regarding proposed base salary and bonus and equity awards for the other NEOs, as well as himself. The compensation committee may also request the assistance of our Chief Financial Officer in evaluating the financial, accounting and tax implications of various compensation awards paid to the NEOs. However, our Chief Financial Officer does not recommend or determine the amounts or types of compensation paid to the NEOs. Our Chief Executive Officer and certain of our other NEOs may attend compensation committee meetings, as requested by the chairman of the compensation committee. Our NEOs, including our Chief Executive Officer, typically do not attend any portion of the compensation committee meetings during which their compensation is established and approved.
 
We believe the levels of compensation we provide should be competitive, reasonable and appropriate for our business needs and circumstances. To date, the compensation committee has not engaged a compensation consultant. Rather, the compensation committee and our Chief Executive Officer applied subjective discretion to make compensation decisions and they have not used a specific formula or matrix to set compensation in relation to compensation paid by other companies. To date, our compensation committee has not established any percentile targets for the levels of compensation provided to our NEOs. Similarly, the compensation committee has not performed competitive reviews of our compensation programs with those of similarly-situated companies, nor have we engaged in benchmarking of compensation paid to our NEOs. Our historical approach has been to consider competitive compensation practices and other factors such as how much compensation was necessary to recruit and retain an executive and individual performance rather than establishing compensation at specific benchmark percentiles. This approach has enabled us to respond to dynamics in the labor market and provided us with flexibility in maintaining and enhancing our NEOs’ engagement, focus, motivation and enthusiasm for our future. However, as mentioned above, we expect to build some of these practices into our compensation approach over time as we review, evaluate and refine our compensation policies and practices as a public company.
 
The amount of past compensation, including annual discretionary bonus awards and amounts realizable from prior stock option awards, is generally not a significant factor in the compensation committee’s considerations because these awards would have been earned based on performance in prior years. The compensation committee does, however, consider prior awards when considering the retention aspects of our compensation program.
 
Our NEOs are not subject to mandated stock ownership or stock retention guidelines. It is the belief of the compensation committee that the equity component of our executive compensation program ensures that our


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NEOs are also owners and those components work to align the NEOs’ goals with the best interests of our stockholders.
 
Elements of Our Executive Compensation Program
 
The principal elements of our executive compensation program have to date been base salary, a discretionary annual cash bonus and long-term equity compensation in the form of stock options. Each of these compensation elements satisfies one or more of our compensation objectives.
 
We have not adopted any policies with respect to long-term versus currently-paid compensation, but feel that both elements are necessary for achieving our compensation objectives. Currently-paid salary compensation provides financial stability for each of our NEOs and annual increases in base salary provide a reward for short-term Company and individual performance. Annual cash bonuses likewise provide a reward for short-term Company and individual performance. Long-term equity compensation rewards achievement of strategic long-term objectives and contributes toward overall stockholder value. Similarly, while we have not adopted any policies with respect to cash versus non-cash compensation (or among different forms of non-cash compensation), we feel that it is important to encourage or provide for a meaningful amount of equity ownership by our NEOs to help align their interests with those of stockholders, one of our compensation objectives. We have also used equity compensation in order to preserve the Company’s cash to the extent practicable in order to facilitate our growth and development. We combine the compensation elements for each NEO in a manner that the compensation committee believes, in its discretion and judgment, is consistent with the executive’s contributions to our Company and our overall goals with respect to executive compensation.
 
Base Salary
 
We believe that a competitive base salary is an important component of compensation as it provides a degree of financial stability for our NEOs and is critical to recruiting and retaining our executives. Base salary is also designed to recognize the scope of responsibilities placed on each NEO and reward each executive for his or her unique leadership skills, management experience and contributions. We make a subjective determination of base salary after considering such factors collectively.
 
Annual Bonuses
 
Our cash bonus compensation is designed to reward achievement of goals that support our objective of enhancing stockholder value and motivating executives to achieve superior performance in their areas of responsibility. We generally utilize incentive plans that tie payment of cash bonuses to the Company’s achievement of certain objectives, including revenue targets, EBITDA targets and new selling locations. Our incentive plans also base a portion of the bonus payment on the achievement of individual initiatives that are determined by the Chief Executive Officer, or, in the case of the Chief Executive Officer, by the compensation committee. We determined not to establish an annual incentive plan for 2009 given our desire to reduce expenses in the face of uncertain U.S. economic conditions. As a result, we paid no bonuses to our NEOs with respect to the 2009 performance year.
 
We have, however, established such an annual incentive plan for 2010, which includes an opportunity for a cash award and an equity award as follows:
 
  •  Cash award:
 
  A cash incentive pool will be created based upon the amount by which the Company’s actual earnings before interest, taxes, depreciation and amortization (“EBITDA”) for 2010 exceeds target EBITDA (based on the Company’s 2010 budget). This cash pool with be funded as follows:
 
  n  50% of the first $1.0 million of actual EBITDA in excess of target EBITDA; plus


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  n  30% of the next $1.0 million of actual EBITDA in excess of target EBITDA; plus
 
  n  20% of any actual EBITDA more than $2.0 million in excess of target EBITDA.
 
  Each participant in the annual incentive plan for 2010 will be entitled to a portion of the cash incentive pool equal to that participant’s individual 2010 salary over the total 2010 salaries of all the participants in the 2010 annual incentive plan multiplied by the total amount in the cash incentive pool.
 
  •  Equity award:
 
  Target amounts are based on Company and employee-specific performance;
 
  50% of the award will be payable in stock options and 50% will be payable in restricted stock; and
 
  Actual awards will be based on the compensation committee’s subjective evaluation of the Company’s and each individual’s performance.
 
Long-Term Equity Compensation
 
Historically, we have provided long-term equity compensation primarily through grants of stock options. However, no such equity compensation was paid in 2009 other than certain awards that were made with respect to 2008 performance. Beginning in 2010, we intend to use a combination of stock options and restricted stock.
 
We have granted stock options and intend to grant stock options and restricted stock through annually-adopted executive incentive plans, initial grants to new employees and, on occasion, through additional grants approved by our Board of Directors or the compensation committee. We believe that such grants further our compensation objectives of aligning the interests of our NEOs with those of our stockholders, encouraging long-term performance, and providing a simple and easy-to-understand form of equity compensation that promotes executive retention. We view such grants both as incentives for future performance and as compensation for past accomplishments.
 
We generally have used stock options in the past, rather than other forms of long-term incentives, because they create value for the executive only if stockholder value is increased through appreciation of our share price. Prior to this offering, all stock option grants were made pursuant to our 2004 Stock Plan. Historically, the exercise price of our stock options has been at least equal to the fair market value of our common stock on the date of grant. Prior to this offering, the fair market value of our common stock has been established by our Board of Directors using factors it considered appropriate for a reasonable valuation. Following this offering, the fair market value of our common stock will be the closing price of our common stock on the Nasdaq Global Market on the date of the grant, provided our shares are approved for listing on the Nasdaq Global Market. As a privately owned company prior to the date of this offering, we have not established a program, plan or practice pertaining to the timing of stock option grants to executive officers coinciding with the release of material non-public information. We have adopted a policy, to take effect upon completion of this offering, that provides for our compensation committee to approve stock option grants up to four times per year at its regularly scheduled quarterly meetings, and further provides that such grants will be effective on the third trading day following the date of the next public disclosure of our financial results following the date of each such meeting.
 
Following this offering, we anticipate that we will continue to use stock option grants, as well as restricted stock and other forms of equity compensation. We believe restricted stock aligns the interests of our executive officers with those of our stockholders and serves as a retention tool as it will typically be subject to a multi-year vesting period. Following this offering, all equity award grants will be made pursuant to our 2010 Omnibus Long-Term Incentive Plan. The exercise price of stock options will be based on the fair market value of our common stock on the grant date as described above.


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Our Chief Executive Officer received an initial stock option grant to purchase 100,000 shares of our common stock in 2004 in connection with the formation of the Company. Our other NEOs received stock option grants in connection with their initial hire. The number of stock options granted to our NEOs in connection with their initial hire was determined based upon negotiations with each executive, represented the number necessary to recruit each executive from his then-current position and reflected our Board of Directors’ subjective evaluation of the executive’s experience and potential for future performance.
 
We have made additional discretionary grants of equity compensation to all of our executive officers from time to time, as determined by our Board of Directors or the compensation committee taking into consideration factors such as individual performance and competitive market conditions.
 
Perquisites and Other Benefits
 
As a general matter, we do not intend to offer perquisites or other benefits to any executive officer, including the NEOs, with an aggregate value in excess of $10,000 annually, because we believe we can provide better incentives for desired performance with compensation in the forms described above. We recognize that, from time to time, it may be appropriate to provide some perquisites or other benefits in order to attract, motivate and retain our executives, with any such decision to be reviewed and approved by the compensation committee as needed.
 
Our executive officers are eligible to participate in standard employee benefit plans, including medical, dental, vision, life and any other employee benefit or insurance plan made available to employees. We maintain a 401(k) plan, which is intended to be a tax-qualified defined contribution plan under Section 401(k) of the Internal Revenue Code of 1986, as amended, or the Code. In general, all of our employees are eligible to participate in this plan. The 401(k) plan includes a salary deferral arrangement pursuant to which participants may elect to reduce their current compensation by up to 90% or the statutory limit, $16,500 in 2009, whichever is less, and have the amount of the reduction contributed to the 401(k) plan. We made no matching contributions during 2009; however, in 2010 our Board of Directors established a Company match of up to 50% of employee contributions up to 6% of their salaries, with 50% of the matching amount being contingent upon our achievement of certain objectives to be determined by our Board of Directors.
 
Employment and Severance and Change of Control Benefits
 
We believe that a strong, experienced management team is essential to the best interests of the Company and our stockholders. We recognize that the possibility of a change of control could arise and that such a possibility could result in the departure or distraction of members of the management team to the detriment of our Company and our stockholders. We are entering into new employment agreements with certain of our NEOs in connection with this offering, which are intended to minimize employment security concerns arising in the course of negotiating and completing a change of control transaction. A more detailed description of the change of control provisions provided in these employment agreements is available under the section captioned “Employment Agreements and Change of Control Arrangements” below, and the change of control benefits are quantified in the section captioned “Potential Payments Upon Termination or Change of Control.”
 
Analysis of 2009 Compensation for Named Executive Officers
 
Base Salary
 
In light of the uncertain U.S. economic conditions, we did not increase the base salaries of our NEOs for 2009 compared to 2008.
 
During 2008 and 2009, the base salary of our Chief Executive Officer, Billy D. Prim, was $400,000 per year.


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Mark Castaneda, our Chief Financial Officer, became an employee of the Company in 2008. At that time, our Board of Directors set his base salary at $225,000 per year. Mr. Castaneda’s 2009 base salary remained at $225,000 per year.
 
During 2008 and 2009, the base salary of Michael S. Gunter, our Senior Vice President, Operations, was $173,363.
 
Richard E. Belmont, our Vice President, Products, became an employee of the Company in 2008. At that time, our Board of Directors set his base salary at $183,195 per year. Mr. Belmont’s 2009 base salary remained at $183,195 per year.
 
During 2008 and 2009, the base salary of Brent C. Boydston, our former Vice President, Business Development and current Vice President, National Accounts, was $217,350.
 
In February 2010, we approved base salaries for our NEOs as follows:
 
         
Name
  Amount ($)
 
Billy D. Prim
    400,000  
Mark Castaneda
    250,000  
Michael S. Gunter
    225,000  
Richard E. Belmont
    190,000  
Brent C. Boydston
    150,000  
 
Annual Cash Bonuses
 
We did not make any cash bonus payments to NEOs for 2009. The compensation committee decided not to establish an annual incentive plan for 2009 given its desire to reduce expenses in the face of uncertain U.S. economic conditions. We paid the following cash bonuses to our NEOs for 2008:
 
         
Name
  Amount ($)
 
Billy D. Prim
     
Mark Castaneda
    30,000  
Michael S. Gunter
    22,000  
Richard E. Belmont
    15,300  
Brent C. Boydston
    14,000  
 
Long-Term Equity Compensation
 
We did not make any equity awards to NEOs for 2009 because, as noted above, the compensation committee determined not to establish an annual incentive plan for 2009. We awarded our NEOs options to purchase the following number of shares (at an exercise price of $1.25 per share) in 2009 for 2008 performance:
 
         
    Number
Name
  of Options
 
Billy D. Prim
     
Mark Castaneda
    40,000  
Michael S. Gunter
     
Richard E. Belmont
    23,800  
Brent C. Boydston
    21,000  
 
Tax Considerations
 
Other than our Chief Executive Officer, we have not provided any executive officer or director with a gross-up or other reimbursement for tax amounts the executive might pay pursuant to Section 280G or Section 409A of the


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Internal Revenue Code. As described in the section below captioned “Employment Agreements and Change of Control Arrangements,” any payments our Chief Executive Officer receives in connection with a change of control may be subject to increase to cover any excise tax imposed by Section 280G of the Internal Revenue Code.
 
Section 280G and related Code sections provide that executive officers, directors who hold significant stockholder interests and certain other service providers could be subject to significant additional taxes if they receive payments or benefits in connection with a change of control that exceed certain limits, and that we or our successor could lose a deduction on the amounts subject to the additional tax. Section 409A also imposes additional significant taxes on the individual in the event that an executive officer, director or service provider receives “deferred compensation” that does not meet the requirements of Section 409A.
 
Because of the limitations of Internal Revenue Code Section 162(m), our federal income tax deduction for compensation paid to our Chief Executive Officer and to certain other highly compensated executive officers (other than our Chief Financial Officer) may be limited if the compensation exceeds $1,000,000 per person during any fiscal year, unless it is “performance-based” under Code Section 162(m) or meets another exception to the deduction limits. In addition to salary and bonus compensation, upon the exercise of stock options that are not treated as incentive stock options, the excess of the current market price over the option price, or the option spread, is treated as compensation and accordingly, in any year, such exercise may cause an officer’s total compensation to exceed $1,000,000. However, option compensation will not be subject to the $1,000,000 cap on deductibility if the options meet certain requirements, and in the past we have granted options that we believe met those requirements. Additionally, under a special Code Section 162(m) transition rule, any compensation paid pursuant to a compensation plan in existence before the effective date of this public offering will not be subject to the $1,000,000 limitation until the first meeting of stockholders at which directors are elected after the close of the third calendar year following the year in which the public offering occurs, unless the compensation plan is materially modified. While the compensation committee cannot predict how the deductibility limit may impact our compensation programs in future years, the compensation committee intends to maintain an approach to executive compensation that links pay to performance. In addition, while the compensation committee has not adopted a formal policy regarding tax deductibility of compensation paid to our NEOs, the compensation committee intends to consider tax deductibility under Code Section 162(m) as a factor in compensation decisions.
 
Risk Analysis of Compensation Program
 
The compensation committee has reviewed the Company’s compensation program and does not believe that it encourages excessive or unnecessary risk taking. Base salaries are fixed in amount and thus do not encourage risk taking. By utilizing annual cash bonuses that are tied to individual and Company-wide performance measures and long-term equity compensation as a significant portion of total compensation, the compensation committee believes that it has aligned our executive officers’ objectives with those of our long-term stockholders.
 
Conclusion
 
The compensation committee believes that our executive leadership is a key element to our success and that the compensation package offered to our NEOs is a key element in attracting and retaining the appropriate personnel.
 
The compensation committee believes it has maintained compensation for our NEOs at levels that are reflective of the talent and success of the individuals being compensated, and with the inclusion of additional compensation directly tied to performance, the compensation committee believes executive compensation will be sufficiently comparable to its industry peers to allow us to retain our key personnel at costs which are appropriate for us.
 
The compensation committee will continue to develop, analyze and review its methods for aligning our executive officers’ long-term compensation with the benefits generated for stockholders. The compensation committee believes the idea of creating ownership helps align management’s interests with the interests of stockholders. The compensation committee has no pre-determined timeline for implementing new or ongoing


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long-term incentive plans. New plans are reviewed, discussed and implemented as the compensation committee believes it is necessary or appropriate as a measure to incentivize, retain and reward our NEOs.
 
Summary Compensation Table for 2009
 
The following table sets forth information regarding the compensation earned in 2009 for our NEOs.
 
                                         
            Option
  All Other
   
        Salary
  Awards
  Compensation
  Total
Name and Principal Position
  Year   ($)   (#)(1)   ($)(2)   ($)
 
Billy D. Prim
Chairman, Chief Executive
Officer and President
    2009       400,000             138       400,138  
Mark Castaneda
Chief Financial Officer
    2009       225,000       19,399       93       244,492  
Michael S. Gunter
Senior Vice President, Operations
    2009       173,363             62       173,425  
Richard E. Belmont
Vice President, Products
    2009       183,195       11,542       143       194,880  
Brent C. Boydston
Vice President, Business
Development(3)
    2009       217,350       10,184       62       227,596  
 
 
(1) Represents the aggregate grant date fair value of stock options awarded in 2009 calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification 718 (formerly referred to as SFAS 123(R)). For a description of the assumptions used in estimating the grant date fair value of the option awards as reported in this column, see note 9 to our consolidated financial statements for the year ended December 31, 2009.
 
(2) Amounts shown in this column consist of life insurance premiums paid on behalf of each NEO.
 
(3) Mr. Boydston served as Vice President, Business Development through February 15, 2010. Mr. Boydston currently serves the Company as Vice President, National Accounts.
 
Grants of Plan-Based Awards for 2009
 
The following table sets forth certain information regarding grants of plan-based awards to our NEOs in 2009.
 
                             
        All Other
             
        Option Awards:
             
        Number of
    Exercise or
    Grant Date
 
        Securities
    Base Price of
    Fair Value of
 
        Underlying
    Option
    Option
 
    Grant
  Options
    Awards
    Awards
 
Name
  Date   (#)(1)     ($/Sh)     ($)(2)  
Billy D. Prim
                   
Mark Castaneda
  1/29/2009     40,000       1.25       19,399  
Michael S. Gunter
                   
Richard E. Belmont
  1/29/2009     23,800       1.25       11,542  
Brent C. Boydston
  1/29/2009     21,000       1.25       10,184  
 
 
(1) We granted the stock options listed in this column under our 2004 Stock Plan in 2009 for 2008 performance. The vesting schedule applicable to each award is set forth below in the section entitled “Outstanding Equity Awards at December 31, 2009.”
 
(2) Represents the aggregate grant date fair value calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification 718 (formerly referred to as SFAS 123(R)). For a description of the assumptions used in estimating such fair value, see note 9 to our consolidated financial statements for the year ended December 31, 2009.


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Outstanding Equity Awards at December 31, 2009
 
The following table sets forth information regarding outstanding equity awards held by our NEOs as of December 31, 2009.
 
                                 
    Option Awards
    Number of Shares
  Number of Shares
       
    Underlying
  Underlying
       
    Unexercised
  Unexercised
  Option
  Option
    Options (#)
  Options (#)
  Exercise Price
  Expiration
Name
  Exercisable   Unexercisable   ($)   Date
 
Billy D. Prim
    100,000             1.00       11/01/14  
      225,000             1.00       01/01/16  
      10,000       10,000 (1)     1.25       01/25/17  
      100,000             1.98       05/01/18  
Mark Castaneda
    37,500       112,500 (2)     1.98       05/01/18  
            40,000 (3)     1.25       01/29/19  
Michael S. Gunter
    100,000             1.00       11/01/14  
      90,000             1.00       01/01/16  
      4,187       4,188 (1)     1.25       01/25/17  
            53,125 (4)     1.25       01/25/17  
Richard E. Belmont
    75,000       25,000 (5)     1.25       09/11/16  
      4,425       4,425 (1)     1.25       01/25/17  
      33,188             1.98       05/01/18  
            23,800 (3)     1.25       01/29/19  
Brent C. Boydston
    100,000             1.00       11/01/14  
      82,500             1.00       01/01/16  
      5,250       5,250 (1)     1.25       01/25/17  
            18,750 (4)     1.25       01/25/17  
      39,375             1.98       05/01/18  
            21,000 (3)     1.25       01/29/19  
 
 
(1) These options vest in two equal annual installments on January 1, 2010 and January 1, 2011.
 
(2) These options vest in three equal annual installments on May 1, 2010, May 1, 2011 and May 1, 2012.
 
(3) These options vested in their entirety on January 30, 2010.
 
(4) These options vested in their entirety on January 1, 2010.
 
(5) These options vest in their entirety on September 11, 2010.
 
Option Exercises and Stock Vested for 2009
 
No stock options held by our NEOs were exercised during 2009. As of December 31, 2009, none of our NEOs held any unvested restricted stock.
 
Employment Agreements and Change of Control Arrangements
 
The following summaries of the employment agreements of Messrs. Prim, Castaneda and Gunter describe the new employment agreements with such individuals that are being entered into in connection with this offering.
 
Employment Agreement with Mr. Prim
 
Mr. Prim’s employment agreement provides for a base annual salary of $400,000, which may be adjusted up but not down by our Board of Directors. Mr. Prim will also be eligible to receive bonuses and awards of equity and non-equity compensation as approved by our Board of Directors. The employment agreement entitles Mr. Prim to participate in all other Company benefits generally available to other senior executives. Mr. Prim’s employment


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agreement also provides for: (i) an annual automatic cost of living increase to base salary based on the Consumer Price Index; (ii) long-term disability coverage at 100% of base annual salary; (iii) an annual physical paid for by the Company; and (iv) Company’s payment of certain attorneys fees incurred in the event Mr. Prim has to take action to enforce his rights under the employment agreement. We have agreed to maintain insurance coverage for and indemnify Mr. Prim in connection with his capacity as our director and officer.
 
Our employment agreement with Mr. Prim provides for an initial three-year employment term commencing           and automatically extending for additional one-year periods unless terminated by Mr. Prim or us upon at least 90 days prior written notice of intention not to renew. The agreement may also be terminated by us or Mr. Prim for other reasons and, subject to the conditions set forth in the employment agreement, provides for certain payments to Mr. Prim upon a termination of his employment or a change of control of the Company, as described below.
 
If Mr. Prim’s employment is terminated for any reason, he will be entitled to continued coverage under our directors’ and officers’ insurance policy and to continued rights to corporate indemnification, each as offered to (and on the same terms as) other executive officers for six years following his termination date. Unless Mr. Prim is terminated for Cause or he resigns without Good Reason (each as defined below), he will be entitled to any applicable prorated annual bonus for such year and any accrued but unpaid annual bonus for the immediately preceding year. Additionally, if Mr. Prim is terminated without Cause, resigns for Good Reason or we do not renew his employment agreement at the end of its term, Mr. Prim will be entitled to (a) severance payments in an amount equal to (i) his highest annual base salary in effect during the 12 months immediately prior to his termination date plus (ii) the average annual bonus earned by him for the most recent two fiscal years ending prior to his termination date; (b) coverage under health, dental, life, accident, disability and similar benefit plans offered to (and on the same terms as) other executive officers for 12 months following his termination date; and (c) the immediate vesting of any restricted stock, stock option or other equity compensation awards scheduled to vest within six months after his termination date.
 
If Mr. Prim is terminated without Cause or if he resigns for Good Reason within two years following a Change of Control (as defined in the employment agreement), he will be entitled to (a) any applicable prorated annual bonus for such year and any accrued but unpaid annual bonus for the immediately preceding year; (b) severance payments in an amount equal to two times the sum of (i) his highest annual base salary in effect during the 12 months immediately prior to his termination date plus (ii) the average annual bonus earned by Mr. Prim for the most recent two fiscal years ending prior to his termination date; and (c) coverage under health, dental, life, accident, disability and similar benefit plans offered to (and on the same terms as) the other executive officers for the 24 months following his termination date. In addition, any restricted stock, stock option or other equity compensation awards will immediately vest as of the date of the Change of Control.
 
As defined in Mr. Prim’s employment agreement, “Cause” means (a) continued willful failure to substantially perform his duties with the Company, (b) willful engaging in misconduct materially and demonstrably injurious to the Company or (c) his uncured material breach of the agreement. Mr. Prim may terminate his employment for “Good Reason” (i) if there is a material reduction in his duties or responsibilities, (ii) if he is required to relocate to an employment location more than 50 miles from his initial employment location, or (iii) upon our uncured material breach of the agreement.
 
If Mr. Prim becomes subject to excise taxes under Section 4999 of the Internal Revenue Code, we will make a tax gross-up payment to him in an amount sufficient to cover such excise taxes and any interest or penalties thereon.
 
Mr. Prim’s employment agreement also contains confidentiality provisions and non-competition and non-solicitation covenants prohibiting, among other things, Mr. Prim’s competition with us or his solicitation of our customers, suppliers or employees for the 12-month period following the termination of his employment.


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Employment Agreements with Messrs. Castaneda and Gunter
 
The Company’s employment agreements with Messrs. Castaneda and Gunter are substantially similar to our employment agreement with Mr. Prim, except that the economic terms differ among the agreements and their agreements do not provide for: (i) an annual automatic cost of living increase to base salary; (ii) additional long-term disability coverage; (iii) a Company-paid annual physical; (iv) Company payment of certain attorney fees; and (v) a Section 4999 excise tax gross-up payment to cover certain taxes and penalties. Mr. Castaneda’s employment agreement provides for a base annual salary of $250,000 and Mr. Gunter’s employment agreement provides for a base annual salary of $225,000, which base salaries may be adjusted up but not down by our Board of Directors. Messrs. Castaneda and Gunter will also each be eligible to receive bonuses and awards of equity and non-equity compensation as approved by our Board of Directors. The employment agreements entitle each of Messrs. Castaneda and Gunter to participate in all other Company benefits generally available to other senior executives. We have agreed to maintain insurance coverage for and indemnify each of Messrs. Castaneda and Gunter in connection with their respective capacities as officers.
 
Our employment agreements with each of Messrs. Castaneda and Gunter provide for initial three-year employment terms commencing           and automatically extending for additional one-year periods unless terminated by the NEO or us upon at least 90 days prior written notice of intention not to renew. The agreement may also be terminated by us or the NEO for other reasons and, subject to the conditions set forth in the employment agreement, provides for certain payments to be made to such NEO upon a termination of his employment or a change of control of the Company, as described below.
 
If either of Messrs. Castaneda or Gunter is terminated for any reason, he will be entitled to continued coverage under our directors’ and officers’ insurance policy and continued rights to corporate indemnification, each as offered to (and on the same terms as) other executive officers for six years following his termination date. Unless either of Messrs. Castaneda or Gunter is terminated for Cause or resigns without Good Reason (each as defined above with respect to Mr. Prim’s employment agreement), he will be entitled to any applicable prorated annual bonus for such year and any accrued but unpaid annual bonus for the immediately preceding year. Additionally, if either of Messrs. Castaneda or Gunter is terminated without Cause, resigns for Good Reason or we do not renew his employment agreement at the end of its term, he will be entitled to (a) severance payments in an amount equal to (i) his highest annual base salary in effect during the 12 months immediately prior to his termination date plus (ii) the average annual bonus earned by him for the most recent two fiscal years ending prior to his termination date; (b) coverage under health, dental, life, accident, disability and similar benefit plans offered to (and on the same terms as) other executive officers for 12 months following his termination date; and (c) the immediate vesting of any restricted stock, stock option or other equity compensation awards scheduled to vest within six months after his termination date.
 
If either of Messrs. Castaneda or Gunter is terminated without Cause or resigns for Good Reason within two years following a Change of Control (as defined in the employment agreements), he will be entitled to (a) any applicable prorated annual bonus for such year and any accrued but unpaid annual bonus for the immediately preceding year; (b) severance payments in an amount equal to 1.5 times the sum of (i) his highest base salary in effect during the 12 months immediately prior to his termination date plus (ii) the average annual bonus earned by him for the most recent two fiscal years ending prior to his termination date; and (c) coverage under health, dental, life, accident, disability and similar benefit plans offered to (and on the same terms as) the other executive officers for the 18 months following his termination date. In addition, any restricted stock, stock option or other equity compensation awards will immediately vest as of the date of the Change of Control.
 
If either of Messrs. Castaneda or Gunter becomes subject to excise taxes under Section 4999 of the Internal Revenue Code, or any interest or penalty is incurred by any of them with respect to such excise taxes, then the payments owed under the applicable employment agreement will be reduced to avoid such taxes, interest or penalties if doing so will result in greater after tax payments to the executive.


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The employment agreements also contain confidentiality provisions and non-competition and non-solicitation covenants prohibiting Messrs. Castaneda and Gunter from, among other things, competing with us or soliciting our customers, suppliers or employees for the 12-month period following the termination of their respective employment.
 
Potential Payments Upon Termination or Change of Control
 
Arrangements in Effect Prior to this Offering
 
Until Messrs. Prim, Castaneda and Gunter entered into the new employment agreements discussed below in connection with this offering, no NEO was party to any change of control agreement or employee agreement that would provide benefits to that NEO upon his termination or upon a change of control of the Company. The NEOs are entitled to certain benefits payable by our insurance carrier under our current insurance policies in the case of a termination resulting from death or disability. Certain option award agreements with our NEOs provide for accelerated vesting upon a change of control.
 
The following table sets forth the amounts payable to Messrs. Prim, Castaneda, Gunter, Belmont and Boydston upon a “Change in Control” as defined in such NEO’s option award agreement, assuming the Change of Control occurred on December 31, 2009. As of December 31, 2009, no such NEO was entitled to any other compensation or benefits in connection with his termination or upon a change of control.
 
                 
    Number of Shares Underlying
   
    Unvested Options Subject
  Amount Payable Upon a
    to Vesting Upon a Change
  Change of Control
Name
  of Control (#)   ($)(1)
 
Billy D. Prim
           
Mark Castaneda
    112,500          
Michael S. Gunter
           
Richard E. Belmont
           
Brent C. Boydston
           
 
 
(1) Represents the value of unvested stock options held at December 31, 2009, based upon the amount by which the fair market value on December 31, 2009 ($      ) of the shares of common stock underlying those options exceeded the $1.98 exercise price of such options. The fair market value on December 31, 2009 represents the midpoint range of the initial public offering price set forth on the cover page of this prospectus.
 
New Employment Agreements
 
In connection with this offering, we are entering into new employment agreements with each of Messrs. Prim, Castaneda and Gunter. Under these new agreements, these NEOs will be entitled to certain benefits upon their termination or upon a Change of Control (as defined in the employment agreement). A more detailed description of the terms of these employment agreements and the definitions of “Cause” and “Good Reason” are available under the section captioned “Employment Agreements and Change of Control Arrangements” above.
 
Unless any of Messrs. Prim, Castaneda or Gunter is terminated for Cause or resigns without Good Reason, he will be entitled to any applicable prorated annual bonus for that year and any accrued but unpaid annual bonus for the immediately preceding year.
 
Under these new employment agreements, if any of Messrs. Prim, Castaneda or Gunter is terminated without Cause or if any of Messrs. Prim, Castaneda or Gunter resigns for Good Reason, then such individual will be entitled to the following benefits:
 
  •  severance payments in an amount equal to (i) his highest annual base salary in effect during the 12 months immediately prior to his termination date plus (ii) the average annual bonus earned by him for the most recent two fiscal years ending prior to his termination date;
 
  •  coverage under health, dental, life, accident, disability and similar benefit plans offered to (and on the same terms as) the other executive officers for the 12 months following his termination date; and


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  •  the immediate vesting of any restricted stock, stock option or other equity compensation awards scheduled to vest within six months his termination date.
 
Under these new employment agreements, if any of Messrs. Prim, Castaneda or Gunter is terminated without Cause or if any such individual resigns for Good Reason within two years following a Change of Control, then he will be entitled to the following benefits under his employment agreement:
 
  •  severance payments in an amount equal to 1.5 times (two times in the case of Mr. Prim) the sum of (i) his highest annual base salary in effect during the 12 months immediately prior to his termination date plus (ii) the average annual bonus earned by him for the most recent two fiscal years ending prior to his termination date; and
 
  •  coverage under health, dental, life, accident, disability and similar benefit plans offered to (and on the same terms as) the other executive officers for the 18 months (24 months in the case of Mr. Prim) following his termination date.
 
In addition, any restricted stock, stock option or other equity compensation awards that are unvested will immediately vest as of the date of the Change of Control.
 
The following table sets forth the amounts payable to Messrs. Prim, Castaneda and, Gunter upon termination of employment or a “Change in Control” as defined in their employment agreements, assuming each of the events occurred on December 31, 2009 and assuming that the employment agreements that such individuals are entering into in connection with this offering were in effect as of December 31, 2009. As described in “Arrangements in Effect Prior to this Offering,” neither Mr. Belmont nor Mr. Boydston is entitled to any compensation or benefits in connection with his termination or upon Change of Control.
 
                                                 
    Termination
    Termination
    Termination
                   
    for Cause or
    Without Cause
    Without Cause or
    Termination
    Termination
    Change of
 
Benefits and Payments
  Without Good
    or for Good
    for Good Reason
    Due to
    Due to
    Control (No
 
Upon Termination
  Reason ($)     Reason ($)     Following a Change of Control ($)     Disability ($)(1)     Death ($)(2)     Termination) ($)(3)  
 
Billy D. Prim:
                                               
Base Salary(4)
          400,000       800,000                    
Annual Cash Bonus
                                   
Unvested Stock Options
          (5)     (6)                    
Health Insurance(7)
          5,500       11,000                    
Life Insurance(7)
          204       408                    
Disability Coverage(7)
          923       1,846                    
                                                 
Total:
                                         
                                                 
Mark Castaneda:
                                               
Base Salary(8)
          250,000       375,000                    
Annual Cash Bonus(9)
          15,000       22,500                    
Unvested Stock Options
          (5)     (6)                    
Health Insurance(10)
          7,672       11,508                    
Life Insurance(10)
          204       306                    
Disability Coverage(10)
          923       1,385                    
                                                 
Total:
                                         
                                                 


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    Termination
    Termination
    Termination
                   
    for Cause or
    Without Cause
    Without Cause or
    Termination
    Termination
    Change of
 
Benefits and Payments
  Without Good
    or for Good
    for Good Reason
    Due to
    Due to
    Control (No
 
Upon Termination
  Reason ($)     Reason ($)     Following a Change of Control ($)     Disability ($)(1)     Death ($)(2)     Termination) ($)(3)  
 
Michael S. Gunter:
                                               
Base Salary(8)
          225,000       337,500                    
Annual Cash Bonus(9)
          26,703       40,055                    
Unvested Stock Options
          (5)     (6)                    
Health Insurance(10)
          7,672       11,508                    
Life Insurance(10)
          204       306                    
Disability Coverage(10)
          846       1,296                    
                                                 
Total:
                                         
                                                 
 
 
(1) Excludes amounts payable to the executive by our insurance carrier upon termination resulting from the disability of such executive under disability insurance policies maintained for the benefit of the executive.
 
(2) Excludes amounts payable to the executive by our insurance carrier upon termination resulting from the death of such executive under life insurance policies maintained for the benefit of the executive.
 
(3) Represents the value of unvested stock options subject to vesting in connection with a Change of Control (as defined in the executive’s option award agreement) held at December 31, 2009, based upon the amount by which the fair market value on December 31, 2009 ($  ) of the shares of common stock underlying those options exceeded the exercise price of such options. The fair market value on December 31, 2009 represents the midpoint range of the initial public offering price set forth on the cover page of this prospectus.
 
(4) Represents a payment equal to Mr. Prim’s highest base salary in effect during the 12 months immediately prior to the termination date in the case of a termination without Cause or for Good Reason and a payment equal to two times Mr. Prim’s highest base salary in effect during the 12 months immediately prior to the termination date in the case of a termination without Cause or for Good Reason in connection with a Change of Control.
 
(5) Represents the value of unvested stock options held at December 31, 2009 which are scheduled to vest within six month of such date, based upon the amount by which the fair market value on December 31, 2009 ($          ) of the shares of common stock underlying those options exceeded the exercise price of such options. The fair market value on December 31, 2009 represents the midpoint range of the initial public offering price set forth on the cover page of this prospectus.
 
(6) Represents the value of all unvested stock options held at December 31, 2009, based upon the amount by which the fair market value on December 31, 2009 ($          ) of the shares of common stock underlying those options exceeded the exercise price of such options. The fair market value on December 31, 2009 represents the midpoint range of the initial public offering price set forth on the cover page of this prospectus.
 
(7) In the case of a termination without Cause or for Good Reason, represents the estimated incremental cost to maintain coverage under the applicable policy for 12 months. In the case of a termination without Cause or for Good Reason in connection with a Change of Control, represents the estimated incremental cost to us maintain coverage under the applicable policy for 24 months.
 
(8) Represents a payment equal to such executive’s highest base salary in effect during the 12 months immediately prior to the termination date in the case of a termination without Cause or for Good Reason and a payment equal to 1.5 times such executive’s highest base salary in effect during the 12 months immediately prior to the termination date in the case of a termination without Cause or for Good Reason in connection with a Change of Control.
 
(9) Represents a payment equal to the average annual bonus earned by the executive for the most recent two fiscal years ending prior to the termination date in the case of a termination without Cause or for Good Reason and a payment equal to 1.5 times the average annual bonus earned by the executive for the most recent two fiscal years ending prior to the termination date in the case of a termination without Cause or for Good Reason in connection with a Change of Control.
 
(10) In the case of a termination without Cause or for Good Reason, represents the estimated incremental cost to maintain coverage under the applicable policy for 12 months. In the case of a termination without Cause or for Good Reason in connection with a Change of Control, represents the estimated incremental cost to us maintain coverage under the applicable policy for 18 months.
 
Equity and Stock Option Plans
 
2010 Omnibus Long-Term Incentive Plan
 
In March 2010 our Board of Directors adopted and in                2010 our stockholders approved the Primo Water Corporation 2010 Omnibus Long-Term Incentive Plan, which we refer to as the 2010 Omnibus Plan

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and which will be effective prior to the closing of this offering. The material terms of the 2010 Omnibus Plan are summarized below.
 
Administration of the Plan. Our Board of Directors has such powers and authorities related to the administration of the 2010 Omnibus Plan as are consistent with our corporate governance documents and applicable law. The Board of Directors may (and in some cases under applicable law, our governance documents or regulatory requirements, must) delegate to a committee (the “committee”) administration of all or some parts of the 2010 Omnibus Plan. Following the initial public offering and to the extent required by applicable law, the committee or a sub-committee, as applicable, to which administrative responsibility will be delegated will be comprised of directors who (i) qualify as “outside directors” within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”), (ii) meet such other requirements as may be established from time to time by the SEC for plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Securities Exchange Act of 1934, as amended, and (iii) comply with the independence requirements of the stock exchange on which our common stock is listed.
 
Number of Authorized Shares. The initial number of shares of our common stock reserved for issuance under the 2010 Omnibus Plan is 7,500,000. In addition, any shares of our stock which are subject to stock options granted under the 2004 Stock Plan and are canceled, expired, forfeited, settled in cash or otherwise terminated without delivery of shares, will be available for issuance under the 2010 Omnibus Plan. Subject to the terms of the 2010 Omnibus Plan,                of the reserved shares may be issued pursuant to incentive stock options (“ISOs”). Following the end of the Transition Period (as defined herein) and subject to adjustment as described below, the maximum number of each type of award granted to any grantee in any 36-month period and intended to constitute “performance-based compensation” under Section 162(m) will not exceed the following:
 
  •  options — 1,000,000;
 
  •  stock appreciation rights — 1,000,000;
 
  •  restricted stock — 1,000,000;
 
  •  restricted stock units — 1,000,000; and
 
  •  other stock-based performance awards — 1,000,000.
 
Any shares covered by an award that are forfeited, expired, cancelled, settled in cash, settled by issuance of fewer shares than the amount underlying the award, or otherwise terminated without delivery of shares to the grantee, will be available for future grants under the 2010 Omnibus Plan. The number and class of shares available under the 2010 Omnibus Plan and/or subject to outstanding awards may be equitably adjusted by our Board of Directors in the event of various changes in the capitalization of the Company.
 
Eligibility and Participation. Eligibility to participate in the 2010 Omnibus Plan is limited to such employees, officers, non-employee directors, consultants and advisors of the Company, or of any affiliate, as our Board of Directors may determine and designate from time to time.
 
Type of Awards. The following types of awards are available for grant under the 2010 Omnibus Plan: ISOs, non-qualified stock options (“NSOs”), stock appreciation rights (“SARs”), restricted stock, restricted stock units, cash- or stock-based performance awards and other stock-based awards.
 
Stock Options and SARs
 
Grant of Options and SARs. Our Board of Directors may award ISOs, NSOs (together, “Options”), and SARs to grantees. Our Board of Directors is authorized to grant SARs either in tandem with or as a component of other awards or alone.


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Exercise Price of Options and SARs. The exercise price per share of an Option will be at least 100% of the fair market value per share of our stock underlying the award on the grant date and in no case will the exercise price of any Option be less than the par value of a share of our stock. A SAR will confer on the grantee a right to receive, upon exercise, a payment of the excess of (i) the fair market value of one share of our stock on the date of exercise over (ii) the grant price of the SAR as determined by our Board of Directors. The grant price will be fixed at the fair market value of a share of stock on the date of grant. SARs granted in tandem with an outstanding Option following the grant date of such Option will have a grant price that is equal to the Option’s exercise price; provided, however, that the SAR’s grant price may not be less than the fair market value of a share of stock on the grant date of the SAR.
 
Vesting of Options and SARs. Our Board of Directors will determine the terms and conditions (including any performance requirements) under which an Option or SAR will become exercisable and will include such information in the award agreement.
 
Special Limitations on ISOs. In the case of a grant of an Option intended to qualify as an ISO to a grantee that owns more than ten percent of the total combined voting power of all classes of our outstanding stock (a “Ten Percent Stockholder”), the exercise price of the Option will not be less than 110% of the fair market value of a share of our stock on the grant date. Additionally, an Option will constitute an ISO only (i) if the grantee is an employee of the Company or a subsidiary of the Company, (ii) to the extent such Option is specifically designated as an ISO in the related award agreement, and (iii) to the extent that the aggregate fair market value (determined at the time the option is granted) of the shares of stock with respect to which all ISOs held by such grantee become exercisable for the first time during any calendar year (under the 2010 Omnibus Plan and all other plans of the grantee’s employer and its affiliates) does not exceed $100,000.
 
Exercise of Options and SARs. An Option may be exercised by the delivery to us of written notice of exercise and payment in full of the exercise price (plus the amount of any taxes which we may be required to withhold). The minimum number of shares with respect to which an Option may be exercised, in whole or in part, at any time will be the lesser of (i) the number set forth in the applicable award agreement and (ii) the maximum number of shares available for purchase under the Option at the time of exercise. Our Board of Directors has the discretion to determine the method or methods by which a SAR may be exercised.
 
Expiration of Options and SARs. Options and SARs will expire at such time as our Board of Directors determines; provided, however, that no Option may be exercised more than ten years from the date of grant, or in the case of an ISO held by a Ten Percent Stockholder, not more than five years from the date of grant.
 
Restricted Stock and Restricted Stock Units
 
Restricted Stock. At the time a grant of restricted stock is made, our Board of Directors may, in its sole discretion, establish the applicable “restricted period” and prescribe restrictions in addition to or other than the expiration of the restricted period, including the satisfaction of corporate or individual performance objectives. Unless our Board of Directors otherwise provides in an award agreement, holders of restricted stock will have the right to vote such stock and the right to receive any dividends declared or paid with respect to such stock. Our Board of Directors may provide that any such dividends paid must be reinvested in shares of stock, which may or may not be subject to the same vesting conditions and restrictions applicable to such restricted stock. All distributions, if any, received by a grantee with respect to restricted stock as a result of any stock split, stock dividend, combination of shares, or other similar transaction will be subject to the restrictions applicable to the original grant.
 
The grantee will be required, to the extent required by applicable law, to purchase the restricted stock at a price equal to the greater of (i) the aggregate par value of the shares of stock represented by such restricted stock or (ii) the price, if any, specified in the award agreement relating to such restricted stock. If specified in the award agreement, the price may be deemed paid by services already rendered.


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Restricted Stock Units. At the time a grant of restricted stock units is made, our Board of Directors may, in its sole discretion, establish the applicable “restricted period” and prescribe restrictions in addition to or other than the expiration of the restricted period, including the satisfaction of corporate or individual performance objectives. Holders of restricted stock units will have no rights as stockholders of the Company. Our Board of Directors may provide that the holder of restricted stock units will be entitled to receive dividend equivalent rights, which may be deemed reinvested in additional restricted stock units.
 
Cash- and Stock-Based Performance Awards
 
The right of a grantee to exercise or receive a grant or settlement of any award, and the timing thereof, may be subject to such performance conditions as may be specified by our Board of Directors. Our Board of Directors may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions, and may, subject to certain limitations in the case of a performance award intended to qualify under Section 162(m) of the Code (“Section 162(m)”), exercise its discretion to reduce the amounts payable under any award subject to performance conditions.
 
Following the completion of the Transition Period (as defined herein), we intend that performance awards granted to persons who are designated by our Board of Directors as likely to be “Covered Employees” within the meaning of Section 162(m) and regulations thereunder will, if so designated by our Board of Directors, constitute “qualified performance-based compensation” within the meaning of Section 162(m) and regulations thereunder. The grant, exercise and/or settlement of such performance awards will be contingent upon achievement of pre-established performance goals which will consist of one or more business criteria and a targeted level or levels of performance with respect to each of such criterion. Performance goals will be objective and will otherwise meet the requirements of Section 162(m) and regulations thereunder. In addition, after the Transition Period, the maximum amount of each cash-based performance award intended to constitute “performance-based compensation” under Section 162(m) granted to a grantee in any 12-month period will not exceed $2,000,000.
 
One or more of the following business criteria for the Company will be used exclusively by our Board of Directors in establishing performance goals for such awards: net sales; revenue; revenue growth or product revenue growth; operating income (before or after taxes); pre-or after-tax income (before or after allocation of corporate overhead and bonuses); net earnings; earnings per share; net income (before or after taxes); return on equity; total stockholder return; return on assets or net assets; appreciation in and/or maintenance of, share price; market share; gross profits; earnings (including earnings before taxes, earnings before interest and taxes or earnings before interest, taxes depreciation and amortization); economic value-added models or equivalent metrics; comparisons with various stock market indices; reduction in costs; cash flows or cash flows per share (before or after dividends); return on capital (including return on total capital or return on invested capital); cash flow return on investment; improvement in or attainment of expense levels or working capital levels; operating margins; gross margins or cash margin; year-end cash; debt reductions; stockholder equity; regulatory performance; implementation, completion or attainment of measurable objectives with respect to research, development, products or projects and recruiting and maintaining personnel; and, prior to the completion of the Transition Period (as defined herein), to the extent permitted by applicable law, any other business criteria as determined by our Board of Directors.
 
Other Stock-Based Awards
 
Our Board of Directors may, in its discretion, grant other stock-based awards, consisting of stock units or other awards, valued in whole or in part by reference to, or otherwise based upon, our common stock. The terms of such other stock-based awards will be set forth in the applicable award agreements.
 
Effect of Certain Transactions. Except as otherwise provided in an award agreement, in the event of (a) the liquidation or dissolution of the Company or (b) a reorganization, merger, exchange or consolidation of the Company or involving the shares of our common stock (a “Transaction”), the 2010 Omnibus Plan and the awards issued pursuant to the plan shall continue in effect in accordance with their respective terms, except that following a Transaction either (i) each outstanding award will be treated as provided for in the agreement entered into in


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connection with the Transaction or (ii) if not so provided in such agreement, each grantee will be entitled to receive in respect of each share of our common stock subject to any outstanding awards, upon exercise or payment or transfer in respect of any award, the same number and kind of stock, securities, cash, property or other consideration that each holder of a share of our common stock was entitled to receive in the Transaction in respect of a share of common stock; provided, however, that, unless otherwise determined by our Board of Directors, such stock, securities, cash, property or other consideration shall remain subject to all of the conditions, restrictions and performance criteria which were applicable to the awards prior to such Transaction. Without limiting the generality of the foregoing, the treatment of outstanding Options and SARS in connection with a Transaction in which the consideration paid or distributed to our stockholders is not entirely shares of common stock of the acquiring or resulting corporation may include the cancellation of outstanding Options and SARS upon consummation of the Transaction as long as, at the election of our Board of Directors, (x) the holders of affected Options and SARs have been given a period of at least fifteen days prior to the date of the consummation of the Transaction to exercise the Options or SARs (whether or not they were otherwise exercisable) or (y) the holders of the affected Options and SARs are paid (in cash or cash equivalents) in respect of each share covered by the Option or SAR being canceled an amount equal to the excess, if any, of the per share price paid or distributed to our stockholders in the Transaction (the value of any non-cash consideration to be determined by our Board of Directors in its sole discretion) over the Option or SAR exercise price, as applicable. For avoidance of doubt, (1) the cancellation of Options and SARs as described in the preceding sentence may be effected notwithstanding anything to the contrary contained in the 2010 Omnibus Plan or any award agreement and (2) if the amount determined pursuant to the preceding sentence is zero or less, the affected Option or SAR may be cancelled without any payment therefor.
 
Change in Control. Our Board of Directors will determine the effect of a change in control (as defined in the 2010 Omnibus Plan) of the Company with respect to any Award or Awards, including but not limited to, acceleration of vesting, termination or assumption of Awards.
 
Deferral Arrangements. Our Board of Directors may permit or require the deferral of any award payment into a deferred compensation arrangement.
 
Nontransferability of Awards. Generally, during the lifetime of a grantee, only the grantee may exercise rights under the 2010 Omnibus Plan and no award will be assignable or transferable other than by will or laws of descent and distribution. If authorized in the award agreement, a grantee may transfer, not for value, all or part of an award (other than an ISO) to certain family members (including trusts and foundations for the benefit thereof). Neither restricted stock nor restricted stock units may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the restricted period or prior to the satisfaction of any other restrictions prescribed by our Board of Directors.
 
Separation from Service. Our Board of Directors may provide in the applicable award agreements for actions that will be taken upon a grantee’s separation from service from the Company, including but not limited to, accelerated vesting or termination of awards.
 
Tax Withholding and Tax Offset Payments. We will have the right to deduct from payments of any kind otherwise due to a grantee any federal, state, or local taxes of any kind required by law to be withheld with respect to the vesting of or other lapse of restrictions applicable to an award or upon the issuance of any shares of stock upon the exercise of an Option or pursuant to an award.
 
Term of Plan. Unless earlier terminated by our Board of Directors, the authority to make grants under the 2010 Omnibus Plan will terminate on the date that is ten years after it is adopted by our Board of Directors.
 
Amendment and Termination. Our Board of Directors may, at any time and from time to time, amend, suspend, or terminate the 2010 Omnibus Plan as to any shares of stock as to which awards have not been made. An amendment will be contingent on approval of our stockholders to the extent stated by our Board of Directors, required by applicable law or required by applicable stock exchange listing requirements. No awards will be made after termination of the 2010 Omnibus Plan. No amendment, suspension, or termination of the 2010 Omnibus


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Plan will, without the consent of the grantee, impair rights or obligations under any award theretofore awarded under the 2010 Omnibus Plan.
 
New Plan Benefits. All grants of awards under the 2010 Omnibus Plan will be discretionary. Therefore, in general, the benefits and amounts that will be received under the 2010 Omnibus Plan are not determinable.
 
Federal Income Tax Consequences. The following is a summary of the general federal income tax consequences to the Company and to U.S. taxpayers of awards granted under the 2010 Omnibus Plan. Tax consequences for any particular individual or under state or non-U.S. tax laws may be different.
 
NSOs and SARs. No taxable income is reportable when a NSO or SAR is granted. Upon exercise, generally, the recipient will have ordinary income equal to the fair market value of the underlying shares of stock on the exercise date minus the exercise price. Any gain or loss upon the disposition of the stock received upon exercise will be capital gain or loss to the recipient if the appropriate holding period under federal tax law is met for such treatment.
 
ISOs. No taxable income is reportable when an ISO is granted or exercised (except for grantees who are subject to the alternative minimum tax, who may be required to recognize income in the year in which the ISO is exercised). If the recipient exercises the ISO and then sells the underlying shares of stock more than two years after the grant date and more than one year after the exercise date, the excess of the sale price over the exercise price will be taxed as long-term capital gain or loss. If the recipient exercises the ISO and sells the shares before the end of the two- or one-year holding periods, he or she generally will have ordinary income at the time of the sale equal to the fair market value of the shares on the exercise date (or the sale price, if less) minus the exercise price of the ISO.
 
Restricted Stock and Restricted Stock Units. A recipient of restricted stock or restricted stock units will not have taxable income upon the grant unless, in the case of restricted stock, he or she elects to be taxed at that time. Instead, he or she will have ordinary income at the time of vesting equal to the fair market value on the vesting date of the shares (or cash) received minus any amount paid for the shares.
 
Cash- and Stock-Based Performance Awards and Other Stock-Based Awards. Typically, a recipient will not have taxable income upon the grant of cash or stock-based performance awards or other stock-based awards. Subsequently, when the conditions and requirements for the grants have been satisfied and the payment determined, any cash received and the fair market value of any common stock received will constitute ordinary income to the recipient.
 
Tax Effect for the Company. We generally will receive a tax deduction for any ordinary income recognized by a grantee in respect of an award under the 2010 Omnibus Plan (for example, upon the exercise of a NSO). In the case of ISOs that meet the holding period requirements described above, the grantee will not recognize ordinary income; therefore, we will not receive a deduction.
 
Once we become a public company, special rules limit the deductibility of compensation paid to our CEO and to each of our three most highly compensated executive officers whose compensation is required to be reported annually in our proxy. Under Section 162(m), the annual compensation paid to each of these executives may not be deductible to the extent that it exceeds $1 million. However, we intend to rely on Treas. Reg. Section 1.162-27(f) which provides that the deduction limit of Section 162(m) does not apply to any remuneration paid pursuant to a compensation plan or agreement that existed during the period in which the company was not publicly held. Subject to certain requirements, we may rely on this “grandfather” provision until the first meeting of stockholders at which directors are elected that occurs after the end of the third calendar year following the calendar year in which the offering occurs (the “Transition Period”). Additionally, after the expiration of the grandfather period, we can preserve the deductibility of compensation over $1 million if certain conditions of Section 162(m) are met. These conditions include stockholder approval of the 2010 Omnibus Plan, setting limits on the number of awards that any individual may receive and, for awards other than Options and SARs,


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establishing performance criteria that must be met before the award will actually be granted, be settled, vest or be paid. The 2010 Omnibus Plan has been designed to permit our Board of Directors to grant awards that qualify as performance-based for purposes of satisfying the conditions of Section 162(m).
 
Registration of Shares. Following the closing of this offering we intend to file a registration statement on Form S-8 under the Securities Act to register the full number of shares of our common stock which will be reserved for issuance under the 2010 Omnibus Plan, as described in the section titled “Number of Authorized Shares” above (plus such number of shares reserved under the 2004 Stock Plan that become available for issuance under the 2010 Omnibus Plan), as well as registration statements on Form S-8 to register shares of common stock reserved for issuance under the 2004 Stock Plan.
 
2004 Stock Plan
 
On November 1, 2004, our Board of Directors adopted the Primo Water Corporation 2004 Stock Plan, which we refer to as the 2004 Stock Plan. The material terms of the 2004 Stock Plan are summarized below.
 
Administration of the Plan. Our Board of Directors has such powers and authorities related to the administration of the 2004 Stock Plan as are consistent with our corporate governance documents and applicable law and may delegate to a committee administration of all or some parts of the 2004 Stock Plan. Our Board of Directors has the authority to, among other things, interpret the plan, terminate or amend the plan, determine individuals eligible to participate in the plan and determine the size and terms of awards granted under the plan.
 
Number of Authorized Shares. A total of 4,500,000 shares of our common stock are reserved for issuance under the 2004 Stock Plan. As of March 1, 2010, options to purchase a total of 3,247,587 shares of our common stock with a weighted average exercise price of $1.26 were outstanding under our 2004 Stock Plan. In addition, 1,102,500 shares of restricted stock have been issued pursuant to the 2004 Stock Plan. We do not intend to issue any additional awards under the 2004 Stock Plan following the closing of this offering. All awards outstanding under the 2004 Stock Plan will remain in effect and will continue to be governed by their existing terms.
 
Eligibility and Participation. Eligibility to participate in the 2004 Stock Plan is limited to such key employees, non-employee directors and consultants of the Company, or of any parent or subsidiary, as our Board of Directors may determine and designate from time to time.
 
Types of Awards. The following types of awards are available for grant under the 2004 Stock Plan: incentive stock options (“ISOs”), non-qualified stock options (“NSOs”, and together with ISOs, “Options”) and rights to purchase restricted shares of our common stock (“Purchase Rights”).
 
Stock Options
 
Grant of Options. Our Board of Directors may award ISO and NSOs to grantees under the 2004 Stock Plan. The exercise price per share of an Option is determined by our Board of Directors; provided, however, in no event will the exercise price of an ISO be less than 100% of the fair market value per share of our stock underlying the award on the grant date. In the case of a grant of an Option intended to qualify as an ISO to a grantee that owns more than ten percent of the total combined voting power of all classes of our outstanding stock, the exercise price of the Option will not be less than 110% of the fair market value of a share of our stock on the grant date. Additionally, an Option will constitute an ISO only (i) if the grantee is an employee of the Company or a subsidiary of the Company, (ii) to the extent specifically provided in the related award agreement, and (iii) to the extent that the aggregate fair market value (determined at the time the option is granted) of the shares of stock with respect to which all ISOs held by such grantee become exercisable for the first time during any calendar year (under the 2004 Stock Plan and all other plans of the grantee’s employer and its affiliates) does not exceed $100,000.


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       Stock Option Vesting and Exercise. Our Board of Directors will determine the vesting terms of all Options and will include such information in the award agreement. An Option may be exercised by the delivery to us of written notice of exercise and payment in full of the exercise price (plus the amount of any taxes which we may be required to withhold). The exercise price may be paid in cash or, at the discretion of our Board of Directors, in shares of the Company’s stock having a fair market value equal to the exercise price or by a combination of cash and stock. Once vested, Options granted under the 2004 Stock Plan remain exercisable for the term of the Option, which may not exceed ten years, provided that the Options may terminate prior to the end of the term if the grantee’s service relationship with us terminates.
 
       Transferability of Options. A grantee of an Option under the 2004 Stock Plan may not transfer such Option except by will or the laws of descent or distribution.
 
       Stock Purchase Rights
 
Our Board of Directors may award Purchase Rights evidenced by restricted stock agreements and/or subscription agreements under the 2004 Stock Plan. Our Board of Directors will determine the number of shares subject to the Purchase Right and the purchase price for each share to be purchased pursuant to the Purchase Right and set forth this information in the grantee’s award agreement. Our Board of Directors will also determine any transfer restrictions on shares purchased pursuant to a Purchase Right and may, in their sole discretion, provide for a right of the Company to repurchase any shares purchased pursuant to a Purchase Right in the grantee’s award agreement. Upon the exercise of a Purchase Right, the grantee will possess all rights of a stockholder of the Company.
 
Change in Control. The 2004 Stock Plan does not specify any particular effect of a change in control of the Company on awards granted under the 2004 Stock Plan. A majority of the Option awards currently outstanding under the 2004 Stock Plan will be deemed 100% vested and exercisable upon a “Transfer of Control” (as defined in the Option award agreements) of the Company. This offering will not qualify as a Transfer of Control for purposes of the Option award agreements under the 2004 Stock Plan.
 
Corporate Event. In the event of a merger or consolidation of the Company, a sale of all or substantially all of our assets or a dissolution or liquidation of the Company, our Board of Directors may make such adjustments to the awards granted under the 2004 Stock Plan as it deems appropriate and equitable to prevent substantial dilution or enlargement of the rights granted under the 2004 Stock Plan.
 
Term of Plan. Unless earlier terminated by our Board of Directors, the authority to make grants under the 2004 Stock Plan will terminate on October 31, 2014. However, we do not intend to issue any additional awards under the 2004 Stock Plan following the closing of this offering.
 
Federal Income Tax Consequences. The following is a summary of the general federal income tax consequences to the Company and to U.S. taxpayers of awards granted under the 2004 Stock Plan. Tax consequences for any particular individual or under state or non-U.S. tax laws may be different.
 
NSOs. No taxable income is reportable when a NSO is granted. Upon exercise, generally, the recipient will have ordinary income equal to the fair market value of the underlying shares of stock on the exercise date minus the exercise price. Any gain or loss upon the disposition of the stock received upon exercise will be capital gain or loss to the recipient if the appropriate holding period under federal tax law is met for such treatment.
 
ISOs. No taxable income is reportable when an ISO is granted or exercised (except for grantees who are subject to the alternative minimum tax, who may be required to recognize income in the year in which the ISO is exercised). If the recipient exercises the ISO and then sells the underlying shares of stock more than two years after the grant date and more than one year after the exercise date, the excess of the sale price over the exercise price will be taxed as long-term capital gain or loss. If the recipient exercises the ISO and sells the shares before the end of the two- or one-year holding periods, he or she generally will have ordinary income at the time


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of the sale equal to the fair market value of the shares on the exercise date (or the sale price, if less) minus the exercise price of the ISO.
 
Purchase Rights. A recipient of a Purchase Right will recognize ordinary income on the later of the date the Purchase Right is exercised and the date any applicable vesting conditions with respect to the Purchase Rights have been met. The amount of taxable income recognized by the recipient will be the difference between the fair market value of the stock on the exercise or vesting date, as applicable, and the purchase price paid for the shares.
 
Tax Effect for the Company. We generally will receive a tax deduction for any ordinary income recognized by a grantee in respect of an award under the 2004 Stock Plan (for example, upon the exercise of a NSO). In the case of ISOs that meet the holding period requirements described above, the grantee will not recognize ordinary income; therefore, we will not receive a deduction.
 
Once we become a public company, special rules limit the deductibility of compensation paid to our CEO and to each of our three most highly compensated executive officers (other than our Chief Financial Officer) whose compensation is required to be reported annually in our proxy. Under Section 162(m), the annual compensation paid to each of these executives may not be deductible to the extent that it exceeds $1 million. However, we intend to rely on Treas. Reg. Section 1.162-27(f) which provides that the deduction limit of Section 162(m) does not apply to any remuneration paid pursuant to a compensation plan or agreement that existed during the period in which the company was not publicly held. Subject to certain requirements, we may rely on this “grandfather” provision until the first meeting of stockholders at which directors are elected that occurs after the end of the third calendar year following the calendar year in which the offering occurs (the “Transition Period”). Additionally, after the expiration of the grandfather period, we can preserve the deductibility of compensation over $1 million if certain conditions of Section 162(m) are met. These conditions include stockholder approval of the 2004 Stock Plan, setting limits on the number of awards that any individual may receive and, for awards other than Options, establishing performance criteria that must be met before the award will actually be granted, be settled, vest or be paid.
 
Registration of Shares. Following the closing of this offering we intend to file a registration statement on Form S-8 under the Securities Act to register the           shares of common stock reserved for issuance pursuant to outstanding awards under the 2004 Stock Plan.
 
2010 Employee Stock Purchase Plan
 
In March 2010 our Board of Directors adopted and in          2010 our stockholders approved the 2010 Employee Stock Purchase Plan, or the ESPP. Our ESPP is intended to qualify as an “employee stock purchase plan” as defined under Section 423 of the Code and will become effective on the day preceding the consummation of this offering.
 
Administration of the ESPP. The compensation committee of our Board has authority to interpret and implement the terms of the ESPP. The committee will have the discretion to set the terms of each offering in accordance with the provisions of the ESPP, to make all determinations regarding the ESPP, including eligibility, and otherwise administer the ESPP.
 
Number of Authorized Shares. A total of 250,000 shares of our common stock will be made available for sale under our ESPP, subject to adjustment in the event of any significant change in our capitalization, such as a stock split, a combination or exchange or shares, or a stock dividend or other distribution.
 
Eligibility and Participation. All of our employees generally are eligible to participate if they are customarily employed by us or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. The committee may exclude from an offering period highly-compensated employees or employees


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who have not satisfied a minimum period of employment with us which may not exceed a period of two years. In addition, an employee may not be granted rights to purchase stock under our ESPP if such employee would:
 
  •  immediately after any grant of purchase rights, own stock possessing 5% or more of the total combined voting power or value of all classes of our capital stock; or
 
  •  hold rights to purchase stock under all of our employee stock purchase plans that would accrue at a rate that exceeds $25,000 worth of our stock for each calendar year.
 
Offer Periods and Purchase Periods. The ESPP provides for offering periods of up to 27 months. The initial offering period under the ESPP will begin on the effective date of this offering and will end on December 31, 2010. Subsequent offerings are expected to consist of 12-month offering periods, with a new offering period beginning every January 1 and separate purchases taking place every 6 months during each offering period. However, we may change the timing and duration of offering periods and the frequency of purchases, as long as such changes comply with the terms of the ESPP. Unless otherwise specified by the committee, a participant may purchase a maximum of 50,000 shares of common stock during an offering period. No grant of purchase rights will be made under the ESPP prior to the consummation of this offering.
 
Payroll Deductions. Our ESPP permits participants to exercise their stock purchase rights under the ESPP through payroll deductions of up to 15% of their eligible compensation, which includes a participant’s gross base compensation from the Company, excluding overtime payments, sales commissions, incentive compensation, bonuses, expense reimbursements, fringe benefits and other special payments.
 
Exercise of Purchase Rights. Amounts deducted and accumulated by the participant are used to purchase shares of our common stock at the end of each purchase period during an offering period. The purchase price of the shares will not be less than 85% of the fair market value of our common stock on the first trading day of the offering period or on the last day of the applicable purchase period, whichever is lower. Participants may withdraw from participation in the ESPP at any time during an offering period, and will be paid their accrued payroll deductions that have not yet been used to purchase shares of common stock. Participation ends automatically upon termination of employment with us.
 
Change in Control. In the event of a “Change in Control” (as defined in the ESPP), the committee may provide for the successor corporation to assume or substitute each outstanding purchase right, cashout of the participant’s purchase right, acceleration of the next purchase date or termination of the current offering period without a purchase.
 
Amendment and Termination. The ESPP will automatically terminate in 2020, unless we terminate it sooner. In addition, our Board of Directors has the authority to amend, suspend or terminate our ESPP, except that, subject to certain exceptions described in the ESPP, no such action may adversely affect any outstanding rights to purchase stock under our ESPP.
 
Registration of Shares. Following the completion of this offering we intend to file a registration statement on Form S-8 under the Securities Act to register the full number of shares of our common stock which will be reserved for issuance under the ESPP, as described in the section titled “Number of Authorized Shares” above.


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PRINCIPAL STOCKHOLDERS
 
The following table sets forth certain information regarding the beneficial ownership of our common stock as of March 1, 2010, and as adjusted to reflect the sale of our common stock offered by this prospectus, by:
 
  •  each of our named executive officers;
 
  •  each of our directors;
 
  •  all of our directors and current executive officers as a group; and
 
  •  each person (or group of affiliated persons) known to us to be the beneficial owner of more than 5% of our common stock.
 
Beneficial ownership is determined in accordance with the rules of the SEC and includes any shares over which a person exercises sole or shared voting or investment power. Under these rules, beneficial ownership also includes any shares as to which the individual or entity has the right to acquire beneficial ownership of within 60 days of March 1, 2010 through the exercise of any warrant, stock option or other right. Except as noted by footnote, and subject to community property laws where applicable, we believe that the stockholders named in the table below have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them.
 
Beneficial ownership is based upon 59,054,196 shares of common stock outstanding as of March 1, 2010, and assumes the conversion of all of our issued and outstanding Series A and Series C convertible preferred stock into shares of common stock effective upon such date. The information in the table below has not been adjusted to reflect our anticipated reverse stock split.
 
Except as set forth below, the address of all stockholders listed under “Directors and named executive officers” and “5% or greater stockholders” is c/o 104 Cambridge Plaza Drive, Winston-Salem, North Carolina 27104.
 
                                 
        Percentage Ownership
            After Offering
  After Offering
            (Assuming No
  (Assuming Full
    Number of
  Prior to
  Exercise of Over-
  Exercise of Over-
    Shares (#)   Offering (%)   Allotment) (%)   Allotment) (%)
 
Directors and named executive officers
                               
Billy D. Prim(1)
    17,949,276       29.4                  
Richard A. Brenner(2)
    506,676       *                
David W. Dupree(3)
    8,715,532       14.7                  
Malcolm McQuilkin(4)
    1,785,274       3.0                  
David L. Warnock(5)
    5,672,037       9.4                  
Richard E. Belmont(6)
    356,632       *                
Brent C. Boydston(7)
    513,164       *                
Mark Castaneda(8)
    686,298       1.2                  
Michael S. Gunter(9)
    422,561       *                
All directors and current executive officers as a group (8 individuals)
    35,737,654       56.5                  
5% or greater stockholders
                               
Primo Investors, L.P.(10)
    8,648,125       14.5                  
Camden Partners Strategic Fund III, L.P.(11)
    5,365,075       8.9                  
Andrew J. Filipowski(12)
    5,965,014       10.1                  
Craig J. Duchossois Revocable Trust(13)
    4,935,003       8.3                  
Charles Ergen(14)
    4,263,149       7.2                  
Edward A. Fortino Trust(15)
    3,230,190       5.4                  


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Indicates less than 1%.
 
(1) Consists of (a) 15,320,336 shares of common stock held directly; (b) shares issuable upon the exercise of warrants to purchase 1,470,250 shares of common stock held directly; (c) shares issuable upon the exercise of options to purchase 440,000 shares of common stock held directly; (d) 50,000 shares of common stock held by Mr. Prim’s spouse; (e) shares issuable upon the exercise of warrants to purchase 18,690 shares of common stock held by Mr. Prim’s spouse; (f) 50,000 shares of common stock held by BD Prim, LLC, of which Mr. Prim is the sole manager; (g) 250,000 shares of common stock held by the Billy Dean Prim 2010 Irrevocable Trust fbo Sarcanda Westmoreland Bellissimo, of which Mr. Prim is the sole trustee; (h) 250,000 shares of common stock held by the Billy Dean Prim 2010 Irrevocable Trust fbo Anthony Gray Westmoreland, of which Mr. Prim is the sole trustee; (i) 50,000 shares of common stock held by the Billy Dean Prim 2010 Irrevocable Trust fbo Jager Grayln Dean Bellissimo, of which Mr. Prim is the sole trustee; (j) 50,000 shares of common stock held by the Billy Dean Prim 2010 Irrevocable Trust fbo Joseph Alexander Bellissimo, of which Mr. Prim is the sole trustee. Mr. Prim may be deemed to have voting and investment power with respect to securities held by his spouse, BD Prim, LLC or the aforementioned irrevocable trusts and expressly disclaims beneficial ownership of any such securities, except to the extent of his pecuniary interest therein, if any.
 
(2) Consists of (a) 410,000 shares of common stock held directly, which includes 60,000 shares of restricted common stock over which Mr. Brenner has voting but not dispositive power; (b) shares issuable upon the exercise of warrants to purchase 71,194 shares of common stock held directly; (c) shares issuable upon the exercise of options to purchase 24,000 shares of common stock held directly; (d) shares issuable upon the exercise of warrants to purchase 741 shares of common stock held by the ALB-3 Trust, of which he is the trustee; and (e) shares issuable upon the exercise of warrants to purchase 741 shares of common stock held by the ALB-5 Trust, of which he is the trustee. Mr. Benner may be deemed to have voting and investment power with respect to securities held by the ALB-3 Trust or the ALB-5 Trust and expressly disclaims beneficial ownership of any such securities, except to the extent of his pecuniary interest therein, if any.
 
(3) Consists of (a) 60,000 shares of restricted common stock over which Mr. DuPree has voting but not dispositive power; (b) shares issuable upon the exercise of warrants to purchase 7,407 shares of common stock held directly; (c) 8,220,000 shares of common stock held by Primo Investors, L.P.; and (d) shares issuable upon the exercise of warrants to purchase 428,125 shares of common stock held by Primo Investors, L.P. Mr. Dupree is the managing member of GenPar Primo, L.L.C., the general partner of Primo Investors, L.P., and as such, he may be deemed to have voting and investment power with respect to all securities beneficially owned by Primo Investors, L.P. Mr. Dupree disclaims beneficial ownership of any such securities held by Primo Investors, L.P. except to the extent of his pecuniary interest therein, if any.
 
(4) Consists of (a) 60,000 shares of restricted common stock over which Mr. McQuilken has voting but not dispositive power; (b) shares issuable upon the exercise of options to purchase 87,000 shares of common stock held directly; (c) 1,384,000 shares of common stock held by the Malcolm McQuilkin Living Trust; and (d) shares issuable upon the exercise of warrants to purchase 254,274 shares of common stock held by the Malcolm McQuilkin Living Trust. Mr. McQuilkin is a co-trustee of the Malcolm McQuilkin Living Trust and as such, he may be deemed to have shared voting and investment power with respect to such shares. Mr. McQuilken expressly disclaims beneficial ownership of any such securities held in the trust, except to the extent of his pecuniary interest therein, if any.
 
(5) Consists of (a) 60,000 shares of restricted common stock over which Mr. Warnock has voting but not dispositive power; (b) shares issuable upon the exercise of options to purchase 24,000 shares of common stock held directly; (c) 4,416,461 shares of common stock held by Camden Partners Strategic Fund III, L.P.; (d) shares issuable upon the exercise of warrants to purchase 948,614 shares of common stock held by Camden Partners Strategic Fund III, L.P.; (e) 183,540 shares of common stock held by Camden Partners Strategic Fund III-A, L.P.; and (f) shares issuable upon the exercise of warrants to purchase 39,422 shares of common stock held by Camden Partners Strategic Fund III-A, L.P. Mr. Warnock is the managing member of the general partner of both Camden Partners Strategic Fund III, L.P. and Camden Partners Strategic Fund III-A, L.P., and as such, he may be deemed to have voting and investment power with respect to all securities beneficially owned by such entities. Mr. Warnock expressly disclaims beneficial ownership of any such securities held by Camden Partners Strategic Fund III, L.P. and Camden Partners Strategic Fund III-A, L.P. except to the extent of his pecuniary interest therein, if any.
 
(6) Consists of (a) shares issuable upon the exercise of warrants to purchase 7,407 shares of common stock held directly; (b) shares issuable upon the exercise of options to purchase 138,625 shares of common stock held directly; (c) 150,000 restricted shares of common stock over which Mr. Belmont has voting but not dispositive power; (d) 19,200 shares of common stock held by Mr. Belmont’s spouse; (e) shares issuable upon the exercise of warrants to purchase 1,000 shares of common stock held by Mr. Belmont’s spouse; (f) 19,200 shares of common stock held by Mr. Belmont’s son; (g) warrants to purchase 1,000 shares of common stock held by Mr. Belmont’s son; (h) 19,200 shares of common stock held by Mr. Belmont’s daughter; and (i) shares issuable upon the exercise of warrants to purchase 1,000 shares of common stock held by Mr. Belmont’s daughter. Mr. Belmont may be deemed to have voting and investment power with respect to securities held by his spouse or children and expressly disclaims beneficial ownership of any such securities, except to the extent of his pecuniary interest therein, if any.
 
(7) Consists of (a) 241,998 shares of common stock held directly; (b) shares issuable upon the exercise of warrants to purchase 1,666 shares of common stock held directly; and (c) shares issuable upon the exercise of options to purchase 269,500 shares of common stock held directly.
 
(8) Consists of (a) 524,056 shares of common stock held directly, which includes 250,000 shares of restricted common stock over which Mr. Castaneda has voting but not dispositive power; (b) shares issuable upon the exercise of warrants to purchase 47,242 shares of common stock held directly; and (c) shares issuable upon the exercise of options to purchase 115,000 shares of common stock held directly.
 
(9) Consists of (a) 170,000 shares of common stock held directly, which includes 150,000 shares of restricted common stock over which Mr. Gunter has voting but not dispositive power; (b) shares issuable upon the exercise of warrants to purchase 3,155 shares of common stock held directly; and (c) shares issuable upon the exercise of options to purchase 249,406 shares of common stock held directly.


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(10) Consists of (a) 8,220,000 shares of common stock; and (b) shares issuable upon the exercise of warrants to purchase 428,125 shares of common stock.
 
(11) Consists of (a) 4,416,461 shares of common stock; and (b) shares issuable upon the exercise of warrants to purchase 948,614 shares of common stock.
 
(12) Consists of (a) 5,900,000 shares of common stock; (b) shares issuable upon the exercise of warrants to purchase 44,014 shares of common stock; and (c) shares issuable upon the exercise of options to purchase 21,000 shares of common stock.
 
(13) Consists of (a) 4,474,999 shares of common stock; and (b) shares issuable upon the exercise of warrants to purchase 460,004 shares of common stock.
 
(14) Consists of (a) 4,000,001 shares of common stock held directly; and (b) shares issuable upon the exercise of warrants to purchase 263,148 shares of common stock held directly.
 
(15) Consists of (a) 2,875,000 shares of common stock held directly; and (b) shares issuable upon the exercise of warrants to purchase 355,190 shares of common stock held directly.


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RELATED PARTY TRANSACTIONS
 
Our Audit Committee Charter that we are adopting in connection with this offering will require our Audit Committee to review and approve or ratify any transaction that is required to be disclosed under Item 404 of Regulation S-K. In the course of its review or approval of a transaction, our Audit Committee will consider:
 
  •  the nature of the related person’s interest in the transaction, including the actual or apparent conflict of interest of the related person;
 
  •  the material terms of the transaction and their commercial reasonableness;
 
  •  the significance of the transaction to the related person;
 
  •  the significance of the transaction to us and the benefit and perceived benefits, or lack thereof, to us;
 
  •  opportunity costs of alternate transactions;
 
  •  whether the transaction would impair the judgment of a director or executive officer to act in the best interest of the Company; and
 
  •  any other matters the Committee deems appropriate.
 
Our audit committee will not approve or ratify a related person transaction unless it determines that, upon consideration of all relevant information, the transaction is in, or is not inconsistent with, the best interests of our Company and stockholders. No related person transaction will be consummated without the approval or ratification of our audit committee, and directors interested in a related person transaction will recuse themselves from any vote relating to a related person transaction in which they have an interest.
 
Set forth below are certain transactions that have occurred since January 1, 2007, and through the date of this prospectus with our directors, executive officers, holders of more than five percent of our voting securities and affiliates of our directors, executive officers and five percent stockholders. We did not have a formal review and approval policy for related party transactions at the time of any transaction described in this “Certain Relationships and Related Party Transactions” section. Based on our experience in the business sectors in which we participate and the terms of our transactions with unaffiliated third persons, we believe that all of the transactions set forth below were on terms and conditions that were not materially less favorable to us than could have been obtained from unaffiliated third parties.
 
Sale of Subordinated Convertible Notes and Warrants
 
Messrs. Prim, Castaneda, Belmont, Brenner, Dupree, McQuilkin and Warnock (either individually or through an affiliated entity) purchased an aggregate of $3.52 million of our 2011 Notes with an aggregate of 260,740 warrants to purchase shares of our common stock in a private placement transaction on December 30, 2009. We issued a total of $15.0 million of 2011 Notes and a total of 1,111,109 warrants in this private placement transaction. The exercise price of these warrants after giving effect to this offering will be           per share. The following table sets forth certain information regarding such persons’ ownership of the 2011 Notes and the related warrants.
 
                                         
    Maximum
    Amount Owned at
                   
    Amount Owned
    December 31, 2009
    Principal Paid in
    Interest Paid in
       
Name
  in 2009 ($)     ($)     2009 ($)     2009 ($)     Warrants (#)  
 
Billy D. Prim
    540,000       540,000                   40,000  
Mark Castaneda
    300,000       300,000                   22,222  
Rick E. Belmont
    100,000       100,000                   7,407  
Richard A. Brenner(1)
    80,000       80,000                   5,926  
David W. Dupree
    100,000       100,000                   7,407  
Malcolm McQuilkin(2)
    1,000,000       1,000,000                   74,074  
David L. Warnock(3)
    1,400,000       1,400,000                   103,704  


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(1) Consists of $60,000 in 2011 Notes and 4,444 warrants held by Mr. Brenner individually, $10,000 in 2011 Notes and 741 warrants held by the ALB-3 Trust and $10,000 in 2011 Notes and 741 warrants held by the ALB-5 Trust. Mr. Brenner is the trustee of both the ALB-3 Trust and the ALB-5 Trust. Mr. Brenner disclaims beneficial ownership of 2011 Notes owned by the ALB-3 Trust and the ALB-5 Trust except to the extent of his pecuniary interest therein.
 
(2) Consists of $1,000,000 in 2011 Notes and 74,074 warrants held by the Malcolm McQuilkin Living Trust. Mr. McQuilkin is a co-trustee of the Malcolm McQuilkin Living Trust.
 
(3) Consists of $1,344,140 in 2011 Notes and 99,566 warrants held by Camden Partners Strategic Fund III, L.P. and $55,860 in 2011 Notes and 4,138 warrants held by Camden Partners Strategic Fund III-A, L.P. Mr. Warnock is the managing member of the general partner of both Camden Partners Strategic Fund III, L.P. and Camden Partners Strategic Fund III-A, L.P. Mr. Warnock disclaims beneficial ownership of 2011 Notes owned by Camden Partners Strategic Fund III, L.P. and Camden Partners Strategic Fund III-A, L.P. except to the extent of his pecuniary interest therein.
 
Sale of Series C Convertible Preferred Stock and Warrants
 
Messrs. Prim, Castaneda, Belmont, Boydston, Dupree, McQuilkin, Warnock, Ergen and Duchossois (either individually or through an affiliated entity) purchased an aggregate of 8,906,976 shares of Series C convertible preferred stock and warrants to purchase an aggregate of 890,697 shares of common stock at an exercise price of $1.98 per share in private placement transactions between December 14, 2007 and May 20, 2008. We issued a total of 12,520,001 shares of Series C convertible preferred stock and warrants to purchase 1,252,001 shares of common stock during in connection with these private placement transactions. The following table sets forth certain information regarding such persons’ ownership of those shares and warrants.
 
                         
                Amount Paid for
 
                Shares and Warrants
 
Name
  Shares Purchased (#)     Warrants Purchased (#)     ($)  
 
Billy D. Prim
    512,363       51,237       1,229,671  
Mark Castaneda
    116,696       11,670       280,070  
Rick E. Belmont(1)
    30,000       3,000       72,000  
Brent C. Boydston
    16,666       1,666       39,998  
David W. Dupree(2)
    4,281,250       428,125       10,275,000  
Malcolm McQuilkin(3)
    200,000       20,000       480,000  
David L. Warnock(4)
    833,334       83,333       2,000,002  
Charles Ergen
    2,083,334       208,333       5,000,002  
Craig J. Duchossois(5)
    833,333       83,333       1,999,999  
 
 
(1) Consists of: (a) 10,000 shares of Series C convertible preferred stock and warrants to purchase 1,000 shares of common stock purchased by Mr. Belmont’s spouse; (b) 10,000 shares of Series C convertible preferred stock and warrants to purchase 1,000 shares of common stock purchased by Mr. Belmont’s son; and (c) 10,000 shares of Series C convertible preferred stock and warrants to purchase 1,000 shares of common stock purchased by Mr. Belmont’s daughter.
 
(2) Consists of 4,281,250 shares of Series C convertible preferred stock and warrants to purchase 428,125 shares of common stock purchased by Primo Investors, L.P. Mr. Dupree is the managing member of GenPar Primo, L.L.C., the general partner of Primo Investors, L.P. Mr. Dupree disclaims beneficial ownership of the Series C convertible preferred stock and warrants owned by Primo Investors, L.P. except to the extent of his pecuniary interest therein.
 
(3) Consists of 200,000 shares of Series C convertible preferred stock and warrants to purchase 20,000 shares of common stock purchased by the Malcolm McQuilkin Living Trust. Mr. McQuilkin is a co-trustee of the Malcolm McQuilkin Living Trust.
 
(4) Consists of 800,084 shares of Series C convertible preferred stock and warrants to purchase 80,008 shares of common stock purchased by Camden Partners Strategic Fund III, L.P. and 33,250 shares of Series C convertible preferred stock and warrants to purchase 3,325 shares of common stock purchased by Camden Partners Strategic Fund III-A, L.P. Mr. Warnock is the managing member of the general partner of both Camden Partners Strategic Fund III, L.P. and Camden Partners Strategic Fund III-A, L.P. Mr. Warnock disclaims beneficial ownership of the Series C convertible preferred stock and warrants owned by Camden Partners Strategic Fund III, L.P. and Camden Partners Strategic Fund III-A, L.P. except to the extent of his pecuniary interest therein.
 
(5) Consists of 833,333 shares of Series C convertible preferred stock and warrants to purchase 83,333 shares of common stock purchased by Craig J. Duchossois Revocable Trust UAD 9/11/1989. Mr. Duchossois is trustee of the Craig J. Duchossois Revocable Trust UAD 9/11/1989.


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Sale of Series B Preferred Stock and Warrants
 
Messrs. Prim, Brenner, McQuilkin, Warnock, Castaneda, Gunter, Filipowski, Duchossois and Fortino (either individually or through an affiliated entity) purchased an aggregate of 11,561,511 shares of Series B preferred stock and warrants to purchase an aggregate of 3,086,921 shares of common stock at an exercise price of $1.25 per share in private placement transactions between April 28, 2006 and June 30, 2007. We issued a total of 23,280,221 shares of Series B preferred stock and warrants to purchase a total of 6,215,813 shares of common stock in these private placement transactions. The following table sets forth certain information regarding such persons’ ownership of those shares and warrants.
 
                         
            Amount Paid for Shares
Name
  Shares Purchased (#)   Warrants Purchased (#)   and Warrants ($)
 
Billy D. Prim(1)
    5,234,846       1,397,703       5,234,846  
Richard Brenner
    250,000       66,750       250,000  
Malcolm McQuilkin(2)
    600,000       160,200       600,000  
David L. Warnock(3)
    3,000,000       800,999       3,000,000  
Mark Castaneda
    50,000       13,350       50,000  
Michael S. Gunter
    11,820       3,155       11,820  
Andrew J. Filipowski
    164,845       44,014       164,845  
Craig J. Duchossois(4)
    1,125,000       300,375       1,125,000  
Edward A Fortino(5)
    1,125,000       300,375       1,125,000  
 
 
(1) Consists of 5,164,846 shares of Series B preferred stock and warrants to purchase 1,379,013 shares of common stock purchased by Mr. Prim and 70,000 shares of Series B preferred stock and warrants to purchase 18,690 shares of common stock purchased by Mr. Prim’s spouse.
 
(2) Consists of 600,000 shares of Series B preferred stock and warrants to purchase 160,200 shares of common stock purchased by the Malcolm McQuilkin Living Trust. Mr. McQuilkin is a co-trustee of the Malcolm McQuilkin Living Trust.
 
(3) Consists of 2,880,300 shares of Series B preferred stock and warrants to purchase 769,040 shares of common stock purchased by Camden Partners Strategic Fund III, L.P. and 119,700 shares of Series B preferred stock and warrants to purchase 31,959 shares of common stock purchased by Camden Partners Strategic Fund III-A, L.P. Mr. Warnock is the managing member of the general partner of both Camden Partners Strategic Fund III, L.P. and Camden Partners Strategic Fund III-A, L.P. Mr. Warnock disclaims beneficial ownership of the Series B preferred stock and warrants to purchase common stock owned by Camden Partners Strategic Fund III, L.P. and Camden Partners Strategic Fund III-A, L.P. except to the extent of his pecuniary interest therein.
 
(4) Consists of 1,125,000 shares of Series B preferred stock and warrants to purchase 300,375 shares of common stock purchased by the Craig J. Duchossois Revocable Trust UAD 9/11/1989. Mr. Duchossois is trustee of the Craig J. Duchossois Revocable Trust UAD 9/11/1989.
 
(5) Consists of 1,125,000 shares of Series B preferred stock and warrants to purchase 300,375 shares of common stock purchased by the Edward A. Fortino Trust UAD 12/15/1994. Mr. Fortino is trustee of the Edward A. Fortino Trust UAD 12/15/1994.
 
PWC Leasing, LLC
 
On March 29, 2006 we entered into a Master Equipment Lease Agreement with PWC Leasing, LLC (the “Lease Agreement”), pursuant to which we leased certain equipment used in our water bottle exchange service. Primier, LLC, a company wholly-owned by Mr. Prim, was a one third owner of PWC Leasing, LLC. We made payments to PWC Leasing, LLC pursuant to the Lease Agreement that totaled approximately $693,000 and $318,000 in 2007 and the first six months of 2008, respectively. On June 30, 2008, we purchased the leased assets from PWC Leasing, LLC at their fair value of $3,500,000 and terminated the Lease Agreement. Our Board of Directors authorized and approved this transaction after obtaining an independent, third-party evaluation of a fair and reasonable price for the assets.
 
Spin-Off of Prima Bottled Water, Inc. and Related Transactions
 
On December 31, 2009, we distributed all of the shares of our wholly-owned subsidiary, Prima Bottle Water, Inc. (“Prima”), to all of the holders of our Series A and Series C preferred stock and common stock on a pro rata basis assuming the conversion of all Series A and Series C preferred stock into common stock (the “Spin-Off”). Recipients of the Prima shares included our directors, officers and holders of more than five percent of our voting securities, but only in direct proportion to each individual’s ownership of our Series A and Series C preferred stock and common stock at the time of the Spin-Off. On                     , 2010, we entered into a license agreement with Prima pursuant to which we license the Prima® trademark to Prima in exchange for a license fee based upon the number of bottles manufactured from bioresin by Prima, an affiliate of Prima and certain third parties.


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DESCRIPTION OF CAPITAL STOCK
 
The following is a description of the material provisions of our capital stock, as well as other material terms of our amended and restated certificate of incorporation and amended and restated bylaws as they will be in effect as of the completion of this offering. This description is only a summary. For more detailed information, you should refer to our amended and restated certificate of incorporation and amended and restated bylaws filed as exhibits to the registration statement, of which this prospectus is a part.
 
Authorized Capital
 
Prior to the closing of this offering, our authorized capital stock consists of: (1) 200,000,000 shares of common stock (15,158,305 of which were outstanding at March 1, 2010) and (2) 100,000,000 shares of preferred stock, including 18,780,000 authorized shares of Series A convertible preferred stock (18,755,000 of which were outstanding at March 1, 2010), 30,000,000 authorized shares of Series B preferred stock (23,280,221 of which were outstanding at March 1, 2010) and 14,000,000 authorized shares of Series C convertible preferred stock (12,520,001 of which were outstanding at March 1, 2010). Each share of Series A convertible preferred stock is convertible into one share of common stock and each share of Series C convertible preferred stock is convertible into 1.92 shares of common stock. As of March 1, 2010, there were 18 holders of record of our common stock, 37 holders of record of our Series A convertible preferred stock, 41 holders of record of our Series B preferred stock and 38 holders of record of our Series C convertible preferred stock.
 
Upon the closing of this offering, we will amend and restate our certificate of incorporation to provide that our authorized capital stock will consist of (1)           shares of common stock, $0.01 par value per share and (2)           shares of preferred stock, par value $0.01 per share. Immediately prior to the closing of this offering, all outstanding shares of our Series A and Series C preferred stock will be converted into shares of common stock and a           -for-          reverse stock split of our common stock will occur. Following the sale of shares of common stock in this offering, we expect to have           shares of common stock and no shares of preferred stock outstanding (or           shares of common stock and no shares of preferred stock outstanding if the underwriters exercise in full their option to purchase additional shares to cover overallotments, if any).
 
Common Stock
 
Voting. Except as otherwise required by Delaware law, at every annual or special meeting of stockholders, every holder of common stock is entitled to one vote per share. There is no cumulative voting in the election of directors.
 
Dividend Rights. Subject to preferences that may be applicable to any outstanding series of preferred stock, the holders of our common stock will receive ratably any dividends declared by our Board of Directors out of funds legally available for the payment of dividends. We have never paid or declared cash dividends on our common stock. We currently intend to retain all available funds and any future earnings to finance the development and expansion of our business. We do not expect to pay any dividends on our common stock in the foreseeable future. Any future determination to pay dividends will be at the discretion of our Board of Directors and will depend upon various factors, including our results of operations, financial condition, capital requirements, investment opportunities and other factors that our Board of Directors deems relevant. Our senior revolving credit agreement currently limits our ability to pay cash dividends. See “Dividend Policy.”
 
Liquidation and Preemptive Rights. In the event of our liquidation, dissolution or winding-up, the holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of our preferred stock, if any, then outstanding. The holders of our common stock have no preemptive or other subscription rights.
 
Our outstanding shares of common stock are, and the shares offered by us in this offering will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of common


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stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future.
 
Preferred Stock
 
Following the closing of this offering, there will be no shares of preferred stock outstanding. Upon the closing of this offering and the effectiveness of our amended and restated certificate of incorporation, our Board of Directors will be authorized to issue from time to time up to      million shares of preferred stock in one or more series without stockholder approval. Our Board of Directors will have the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock on the rights of holders of common stock until our Board of Directors determines the specific rights associated with that preferred stock. Although we have no current plans to issue shares of preferred stock, the effects of issuing preferred stock could include one or more of the following:
 
  •  decreasing the amount of earnings and assets available for distribution to holders of common stock;
 
  •  restricting dividends on the common stock;
 
  •  diluting the voting power of the common stock;
 
  •  impairing the liquidation rights of the common stock; or
 
  •  delaying, deferring or preventing changes in our control or management.
 
We believe that the ability of our Board of Directors to issue one or more series of preferred stock will provide us with flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs that may arise. The authorized shares of preferred stock, as well as authorized and unissued shares of common stock, will be available for issuance without action by our stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which our securities may be listed or traded.
 
Our Board of Directors may authorize, without stockholder approval, the issuance of preferred stock with voting and conversion rights that could adversely affect the voting power and other rights of holders of common stock. Although our Board of Directors has no current intention of doing so, it could issue a series of preferred stock that could, depending on the terms of such series, impede the completion of a merger, tender offer or other takeover attempt of our Company. Our Board of Directors could also issue preferred stock having terms that could discourage an acquisition attempt through which an acquirer may be able to change the composition of our Board of Directors, including a tender offer or other transaction that some, or a majority, of our stockholders might believe to be in their best interests or in which stockholders might receive a premium for their stock over the then-current market price. Any issuance of preferred stock therefore could have the effect of decreasing the market price of our common stock.
 
Our Board of Directors will make any determination to issue such shares based on its judgment as to the best interests of our Company and its stockholders. We have no current plan to issue any preferred stock after this offering.
 
Stock Options and Restricted Stock
 
As of March 1, 2010, we had granted options to purchase a total of 3,247,587 shares of common stock at a weighted average exercise price of $1.26 per share. Of this total, 2,615,145 options have vested and 632,442 remain unvested. As of March 1, 2010, we had also granted 1,102,500 shares of restricted stock, all of which are unvested. As of March 1, 2010, an additional 16,608 shares of common stock were available for future awards


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under our 2004 Stock Plan. Upon the closing of this offering, an additional 7,500,000 shares of our common stock will be available for future awards under our 2010 Omnibus Long-Term Incentive Plan.
 
Warrants
 
As of March 1, 2010, we had issued warrants to purchase a total of 8,678,923 shares of common stock at a weighted average exercise price of $      per share.
 
Warrants to purchase a total of 1,111,109 shares of our common stock were issued in connection with our 2011 Notes. These warrants will remain outstanding after this offering, will expire December 30, 2019 and will have an exercise price of $      per share.
 
Warrants to purchase a total of 6,215,813 shares of our common stock were issued in connection with the private placement of our Series B preferred stock. The exercise price of these warrants is $1.25 per share and they will expire      days after the closing of this offering.
 
Warrants to purchase a total of 1,252,001 shares of our common stock were issued in connection with the private placement of our Series C convertible preferred stock. The exercise price of these warrants is $1.98 per share and they will expire      days after the closing of this offering.
 
A warrant to purchase a total of 100,000 shares of common stock was issued on June 4, 2008 to two individuals in connection with a potential business arrangement. The exercise price of the warrant is $1.98 per share and it will expire     days after the closing of this offering.
 
Anti-Takeover Provisions
 
Delaware law, our amended and restated certificate of incorporation and our amended and restated bylaws that will be effective upon the closing of this offering contain provisions that could delay or prevent a change of control of our Company or changes in our Board of Directors that our stockholders might consider favorable. The following is a summary of these provisions.
 
Delaware Law
 
We are subject to Section 203 of the Delaware General Corporation Law. Section 203 generally prohibits a public Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless:
 
  •  prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;
 
  •  upon the consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding (a) shares owned by persons who are directors and also officers, and (b) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
 
  •  on or subsequent to the date of the transaction, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder.


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Section 203 defines a business combination to include:
 
  •  any merger or consolidation involving the corporation and the interested stockholder;
 
  •  any sale, lease, exchange, mortgage, transfer, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation;
 
  •  subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; and
 
  •  the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.
 
In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or person.
 
Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws
 
Undesignated Preferred Stock. Our Board of Directors has the ability to issue preferred stock with voting or other rights, preferences and privileges that could have the effect of deterring hostile takeovers or delaying changes in control of our Company or management.
 
Limits on Ability to Act by Written Consent or Call a Special Meeting. We have provided in our amended and restated certificate of incorporation and our amended and restated bylaws that our stockholders may not act by written consent. This limit on the ability of our stockholders to act by written consent may, in the future, lengthen the amount of time required to take stockholder actions. As a result, a holder controlling a majority of our capital stock would not be able to amend our certificate of incorporation or bylaws or remove directors without holding a meeting of our stockholders called in accordance with our amended and restated bylaws.
 
In addition, our amended and restated certificate of incorporation and amended and restated bylaws provide that special meetings of the stockholders may be called only by our Board of Directors. A stockholder may not call a special meeting, which may delay the ability of our stockholders to force consideration of a proposal or for holders controlling a majority of our capital stock to take any action, including the removal of directors.
 
Requirements for Advance Notification of Stockholder Nominations and Proposals. Our amended and restated bylaws establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of our Board of Directors or a committee of our Board of Directors. Stockholders must notify our corporate secretary in writing prior to the meeting at which the matters are to be acted upon or directors are to be elected. The notice must contain the information specified in our amended and restated bylaws. To be timely, the notice must be received at our principal executive office not later than the 90th day nor earlier than the 120th day prior to the first anniversary of the date of the prior year’s annual meeting of stockholders. If the date of the annual meeting is more than 30 days before or after such anniversary date, or if no annual meeting was held in the preceding year, notice by the stockholder, to be timely, must be received not earlier than the 120th day prior to the annual meeting, and not later than the later of the 90th day prior to the annual meeting, or the 10th day following the day on which public announcement of the date of such meeting is first made or notice of the meeting date is mailed, whichever occurs first.
 
Our amended and restated bylaws may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed. These provisions may also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our Company.
 
Board of Directors. Our Board of Directors may elect a director to fill a vacancy, including vacancies created by the expansion of our Board of Directors.


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Our amended and restated certificate of incorporation and the amended and restated bylaws will not provide for cumulative voting in the election of directors. The absence of cumulative voting may make it more difficult for stockholders who own an aggregate of less than a majority of our voting power to elect any directors to our Board of Directors.
 
Our amended and restated certificate of incorporation and the amended and restated bylaws provide that our Board of Directors is divided into three classes, with members of each class serving staggered three-year terms. Our classified Board of Directors could have the effect of delaying or discouraging an acquisition of us or a change in management.
 
Limitations of Directors’ Liability and Indemnification
 
Our amended and restated certificate of incorporation will limit the liability of our directors to the fullest extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except for liability for any:
 
  •  breach of their duty of loyalty to us or our stockholders;
 
  •  act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
 
  •  unlawful payment of dividends or redemption of shares as provided in Section 174 of the Delaware General Corporation Law; or
 
  •  transaction from which the directors derived an improper personal benefit.
 
These limitations of liability do not apply to liabilities arising under federal securities laws and do not affect the availability of equitable remedies such as injunctive relief or rescission.
 
Our amended and restated bylaws, in the form that will become effective upon the closing of this offering, provide that we will indemnify and advance expenses to our directors and officers to the fullest extent permitted by law or, if applicable, pursuant to indemnification agreements. They further provide that we may choose to indemnify other employees or agents of the corporation from time to time. Section 145(g) of the Delaware General Corporation Law and our amended and restated bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in connection with his or her services to us, regardless of whether our bylaws permit indemnification. We have obtained a directors’ and officers’ liability insurance policy.
 
We have entered into indemnification agreements with each of our directors that provide, in general, that we will indemnify them to the fullest extent permitted by law in connection with their service to us or on our behalf.
 
At present, there is no pending litigation or proceeding involving any of our directors or officers as to which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification.
 
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission this indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
 
Transfer Agent and Registrar
 
The transfer agent and registrar for our common stock is                    .
 
Stock Market
 
We intend to apply to have our common stock listed on the Nasdaq Global Market under the symbol “     ”.


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SHARES ELIGIBLE FOR FUTURE SALE
 
Prior to this offering, there has been no market for our common stock, and a liquid trading market for our common stock may not develop or be sustained after this offering. Future sales of amounts of our common stock in the public market, or the perception that such sales may occur, could adversely affect prevailing market prices of our common stock. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of certain contractual and legal restrictions on resale described below, sales of amounts of our common stock in the public market after the restrictions lapse could also adversely affect the market price of our common stock and our ability to raise equity capital in the future. See “Risk Factors.”
 
Eligibility of Restricted Shares for Resale in the Public Markets
 
Upon the closing of this offering, based on our outstanding shares as of March 1, 2010, and assuming the conversion of our Series A and Series C convertible preferred stock and no exercise of options or warrants, we will have outstanding an aggregate of           shares of our common stock (           shares if the underwriters’ over-allotment is exercised in full). Of these shares, all of the shares sold in this offering will be freely transferable without restriction or registration under the Securities Act, except for any shares purchased by one of our existing “affiliates,” as that term is defined in Rule 144 under the Securities Act, who may sell only the volume of shares described below and whose sales would be subject to additional restrictions described below. The remaining           shares of common stock will be held by our existing stockholders and will be considered “restricted securities” as defined in Rule 144. Of these restricted securities,           shares will be subject to transfer restrictions for 180 days from the date of this prospectus pursuant to the lock-up agreements described below. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144 or 701 of the Securities Act, as described below. In addition, the shares underlying options and warrants will become available for resale into the public markets as described below under “— Options, Restricted Stock and Warrants.”
 
Lock-up Agreements
 
All of our officers and directors, holders of           shares of our common stock (after giving effect to the conversion of our Series A and Series C convertible preferred stock) and holders of           shares of our common stock issuable upon exercise of outstanding options and warrants have entered into lock-up agreements pursuant to which they have agreed, subject to certain exceptions, not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of any shares of common stock, or any securities convertible into, exchangeable for or that represent the right to receive shares of common stock for a period of 180 days from the date of this prospectus without the prior written consent of Thomas Weisel Partners LLC. There are no contractually specified conditions for the waiver of lock-up restrictions and any waiver is at the sole discretion of Thomas Weisel Partners LLC, which may be granted by Thomas Weisel Partners LLC for any reason. The 180-day lock-up period will be automatically extended if (i) during the last 17 days of the 180-day restricted period we issue an earnings release or announce material news or a material event or (ii) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 15-day period following the last day of the 180-day period, in which case the restrictions described in this paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or material event. After the lock-up period, these shares may be sold, subject to applicable securities laws. See “Underwriting.”
 
Rule 144
 
In general, and beginning 90 days after the date of this prospectus, under Rule 144 as in effect on the date of this prospectus, a person who is not one of our affiliates at any time during the three months preceding a sale, and who has beneficially owned shares of our common stock for at least six months, would be entitled to sell an unlimited number of shares of our common stock provided current public information about us is available and, after owning such shares for at least one year, would be entitled to sell an unlimited number of shares of our


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common stock without restriction. Beginning 90 days after the date of this prospectus, our affiliates who have beneficially owned shares of our common stock for at least six months are entitled to sell within any three-month period a number of shares that does not exceed the greater of:
 
  •  1% of the number of shares of our common stock then outstanding; or
 
  •  the average weekly trading volume of our common stock on the Nasdaq Global Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.
 
Sales under Rule 144 by our affiliates are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us.
 
Upon expiration of the lock-up period described above,           additional shares of our common stock will be eligible for sale under Rule 144, including shares eligible for resale immediately upon the closing of this offering as described above. We cannot estimate the number of shares of our common stock that our existing stockholders will elect to sell under Rule 144.
 
Rule 701
 
In general, under Rule 701, any of our employees, directors, officers, consultants or advisors who acquires common stock from us in connection with a compensatory stock or option plan or other written agreement before the effective date of this offering, to the extent not subject to a lock-up agreement, is entitled to resell such shares 90 days after the effective date of this offering in reliance on Rule 144.
 
The SEC has indicated that Rule 701 will apply to typical stock options granted by an issuer before it becomes subject to the reporting requirements of the Exchange Act, along with the shares acquired upon exercise of such options, including exercises after the date of this prospectus. Securities issued in reliance on Rule 701 are restricted securities and, subject to the lock-up agreements described above, beginning 90 days after the date of this prospectus, may be sold by persons other than affiliates, as defined in Rule 144, subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with its minimum holding period requirement.
 
Options, Restricted Stock and Warrants
 
Upon the closing of this offering, options to purchase a total of 3,247,587 shares of our common stock will be outstanding with a weighted average per share exercise price of $1.26 and expiration dates between November 1, 2014 and January 29, 2019. As of March 1, 2010, we had also granted 1,102,500 shares of restricted stock, all of which are unvested. As of March 1, 2010, an additional 16,608 shares of common stock were available for future awards under our 2004 Stock Plan. We have also reserved an additional 7,500,000 shares of common stock for issuance pursuant to our 2010 Omnibus Long-Term Incentive Plan and an additional 250,000 shares of common stock for issuance pursuant to our 2010 Employee Stock Purchase Plan, both of which we will adopt in connection with this offering.
 
Upon the closing of this offering, warrants to purchase a total of 8,678,923 shares of our common stock will be outstanding with a weighted average per share exercise price of $      per share.
 
Warrants to purchase a total of 1,111,109 shares of our common stock were issued in connection with our 2011 Notes. These warrants will remain outstanding after this offering, will expire December 30, 2019 and will have an exercise price of $      per share.
 
Warrants to purchase a total of 6,215,813 shares of our common stock were issued in connection with the private placement of our Series B preferred stock. The exercise price of these warrants is $1.25 per share and they will expire      days after the closing of this offering.


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Warrants to purchase a total of 1,252,001 shares of our common stock were issued in connection with the private placement of our Series C convertible preferred stock. The exercise price of these warrants is $1.98 per share and they will expire      days after the closing of this offering.
 
A warrant to purchase a total of 100,000 shares of common stock was issued on June 4, 2008 to two individuals in connection with a potential business arrangement. The exercise price of the warrant is $1.98 per share and it will expire     days after the closing of this offering.
 
In general, under Rule 701 of the Securities Act as currently in effect, any of our employees, consultants or advisors who purchase shares of our common stock from us pursuant to options granted prior to the closing of this offering under our 2004 Stock Plan or other written agreement is eligible to resell those shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with some of the restrictions, including the holding period, contained in Rule 144.
 
Additionally, following the closing of this offering, we intend to file one or more registration statements on Form S-8 under the Securities Act to register the sale of shares issued or issuable upon the exercise of our currently outstanding stock options as well as pursuant to our 2010 Omnibus Long-Term Incentive Plan and 2010 Employee Stock Purchase Plan. The registration statements will become effective upon filing. Subject to the exercise of issued and outstanding options and contractual restrictions, shares of our directors and executive officers to which Rule 701 is applicable or which are to be registered under the registration statement on Form S-8 will be available for sale into the public market after the expiration of the 180-day lock-up agreements with the underwriters described under the caption “Underwriting.”


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MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF OUR COMMON STOCK
 
The following discussion summarizes certain material U.S. federal income and estate tax considerations relating to the acquisition, ownership and disposition of our common stock purchased in this offering by a non-U.S. holder (as defined below). This discussion is based on the provisions of the Internal Revenue Code of 1986, as amended, final, temporary and proposed U.S. Treasury regulations promulgated thereunder and current administrative rulings and judicial decisions, all as in effect as of the date hereof. All of these authorities may be subject to differing interpretations or repealed, revoked or modified, possibly with retroactive effect, which could materially alter the tax consequences to non-U.S. holders described in this prospectus.
 
There can be no assurance that the IRS will not take a contrary position to the tax consequences described herein or that such position will not be sustained by a court. No ruling from the IRS has been obtained with respect to the U.S. federal income or estate tax consequences to a non-U.S. holder of the purchase, ownership or disposition of our common stock.
 
This discussion is for general information only and is not tax advice. All prospective non-U.S. holders of our common stock should consult their own tax advisors with respect to the U.S. federal, state, local and non-U.S. tax consequences of the purchase, ownership and disposition of our common stock.
 
As used in this discussion, the term “non-U.S. holder” means a beneficial owner of our common stock that is not any of the following for U.S. federal income tax purposes:
 
  •  an individual who is a citizen or a resident of the United States;
 
  •  a corporation or other entity taxable as a corporation for U.S. federal income tax purposes that was created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
 
  •  an estate whose income is subject to U.S. federal income taxation regardless of its source;
 
  •  a trust (a) if a U.S. court is able to exercise primary supervision over the trust’s administration and one or more U.S. persons have the authority to control all of the trust’s substantial decisions or (b) that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person; or
 
  •  an entity that is disregarded as separate from its owner for U.S. federal income tax purposes if all of its interests are owned by a single person described above.
 
An individual may be treated, for U.S. federal income tax purposes, as a resident of the United States in any calendar year by being present in the United States on at least 31 days in that calendar year and for an aggregate of at least 183 days during a three-year period ending in the current calendar year. The 183-day test is determined by counting all of the days the individual is treated as being present in the current year, one-third of such days in the immediately preceding year and one-sixth of such days in the second preceding year. Residents are subject to U.S. federal income tax as if they were U.S. citizens.
 
This discussion assumes that a prospective non-U.S. holder will hold shares of our common stock as a capital asset (generally, property held for investment). This discussion does not address all aspects of U.S. federal income and estate taxation that may be relevant to a particular non-U.S. holder in light of that non-U.S. holder’s individual circumstances. In addition, this discussion does not address any aspect of U.S. federal alternative minimum, U.S. state or U.S. local or non-U.S. taxes, or the special tax rules applicable to particular non-U.S. holders, such as:
 
  •  insurance companies and financial institutions;


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  •  tax-exempt organizations;
 
  •  partnerships or other pass-through entities;
 
  •  regulated investment companies or real estate investment trusts;
 
  •  pension plans;
 
  •  persons who received our common stock as compensation;
 
  •  brokers and dealers in securities;
 
  •  owners that hold our common stock as part of a straddle, hedge, conversion transaction, synthetic security or other integrated investment; and
 
  •  former citizens or residents of the United States subject to tax as expatriates.
 
If a partnership or other entity treated as a partnership for U.S. federal income tax purposes is an owner of our common stock, the treatment of a partner in the partnership generally will depend on the status of the partner and the activities of the partnership. We urge any owner of our common stock that is a partnership and partners in that partnership to consult their tax advisors regarding the U.S. federal income tax consequences of acquiring, owning and disposing of our common stock.
 
Distributions on Our Common Stock
 
Any distribution on our common stock paid to non-U.S. holders will generally constitute a dividend for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess of our current and accumulated earnings and profits will generally constitute a return of capital to the extent of the non-U.S. holder’s adjusted tax basis in our common stock, and will be applied against and reduce the non-U.S. holder’s adjusted tax basis. Any remaining excess will be treated as capital gain, subject to the tax treatment described below in “— Gain on Sale, Exchange or Other Disposition of Our Common Stock.”
 
Dividends paid to a non-U.S. holder that are not treated as effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States generally will be subject to withholding of U.S. federal income tax at a rate of 30% on the gross amount paid, unless the non-U.S. holder is entitled to an exemption from or reduced rate of withholding under an applicable income tax treaty. In order to claim the benefit of a tax treaty, a non-U.S. holder must provide a properly executed IRS Form W-8BEN (or successor form) prior to the payment of dividends. A non-U.S. holder eligible for a reduced rate of withholding pursuant to an income tax treaty may be eligible to obtain a refund of any excess amounts withheld by timely filing an appropriate claim for a refund with the IRS.
 
Dividends paid to a non-U.S. holder that are treated as effectively connected with a trade or business conducted by the non-U.S. holder within the United States (and, if an applicable income tax treaty so provides, are also attributable to a permanent establishment or a fixed base maintained within the United States by the non-U.S. holder) are generally exempt from the 30% withholding tax if the non-U.S. holder satisfies applicable certification and disclosure requirements. To obtain the exemption, a non-U.S. holder must provide us with a properly executed IRS Form W-8ECI (or successor form) prior to the payment of the dividend. Dividends received by a non-U.S. holder that are treated as effectively connected with a U.S. trade or business generally are subject to U.S. federal income tax at rates applicable to U.S. persons. A non-U.S. holder that is a corporation may, under certain circumstances, be subject to an additional “branch profits tax” imposed at a rate of 30%, or such lower rate as specified by an applicable income tax treaty between the United States and such holder’s country of residence.


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A non-U.S. holder who provides us with an IRS Form W-8BEN, Form W-8ECI or other form must update the form or submit a new form, as applicable, if there is a change in circumstances that makes any information on such form incorrect.
 
Gain On Sale, Exchange or Other Disposition of Our Common Stock
 
In general, a non-U.S. holder will not be subject to any U.S. federal income tax or withholding on any gain realized from the non-U.S. holder’s sale, exchange or other disposition of shares of our common stock unless:
 
  •  the gain is effectively connected with a U.S. trade or business (and, if an applicable income tax treaty so provides, is also attributable to a permanent establishment or a fixed base maintained within the United States by the non-U.S. holder), in which case the gain will be taxed on a net income basis generally in the same manner as if the non-U.S. holder were a U.S. person, and, if the non-U.S. holder is a corporation, the additional branch profits tax described above in “Distributions on Our Common Stock” may also apply;
 
  •  the non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of the disposition and certain other conditions are met, in which case the non-U.S. holder will be subject to a 30% tax on the net gain derived from the disposition, which may be offset by U.S.-source capital losses of the non-U.S. holder, if any; or
 
  •  we are, or have been at any time during the five-year period preceding such disposition (or the non-U.S. holder’s holding period, if shorter), a “United States real property holding corporation.”
 
Generally, we will be a “United States real property holding corporation” if the fair market value of our U.S. real property interests equals or exceeds 50% of the sum of the fair market values of our worldwide real property interests and other assets used or held for use in a trade or business, all as determined under applicable U.S. Treasury regulations. We believe that we have not been and are not currently, and do not anticipate becoming in the future, a “United States real property holding corporation” for U.S. federal income tax purposes.
 
Backup Withholding and Information Reporting
 
We must report annually to the IRS and to each non-U.S. holder the amount of distributions paid to such holder and the amount of tax withheld, if any. Copies of the information returns filed with the IRS to report the distributions and withholding may also be made available to the tax authorities in a country in which the non-U.S. holder is a resident under the provisions of an applicable income tax treaty or agreement.
 
The United States imposes a backup withholding tax on the gross amount of dividends and certain other types of payments. Dividends paid to a non-U.S. holder will not be subject to backup withholding if proper certification of foreign status (usually on IRS Form W-8BEN) is provided, and we do not have actual knowledge or reason to know that the non-U.S. holder is a U.S. person. In addition, no backup withholding or information reporting will be required regarding the proceeds of a disposition of our common stock made by a non-U.S. holder within the United States or conducted through certain U.S. financial intermediaries if the payor receives the certification of foreign status described in the preceding sentence and the payor does not have actual knowledge or reason to know that such non-U.S. holder is a U.S. person or the non-U.S. holder otherwise establishes an exemption. Non-U.S. holders should consult their own tax advisors regarding the application of the information reporting and backup withholding rules to them.
 
Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules from a payment to a non-U.S. holder can be refunded or credited against the non-U.S. holder’s U.S. federal income tax liability, if any, provided that certain required information is furnished to the IRS in a timely manner.


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U.S. Federal Estate Tax
 
An individual non-U.S. holder who is treated as the owner, or who has made certain lifetime transfers, of an interest in our common stock will be required to include the value of the common stock in his or her gross estate for U.S. federal estate tax purposes and may be subject to U.S. federal estate tax, unless an applicable estate tax treaty provides otherwise or no U.S. federal estate tax is in effect.
 
Proposed Legislation Relating to Foreign Accounts
 
Legislation has been introduced into the U.S. Congress that would impose withholding taxes on certain types of payments made to “foreign financial institutions” and certain other non-U.S. entities. A substantially similar proposal was also included as a part of President Obama’s proposed budget plan for fiscal year 2011. If this legislation or other similar legislation is enacted, the failure to comply with additional certification, information reporting and other specified requirements could result in withholding tax being imposed on payments of dividends and sales proceeds to foreign intermediaries and certain non-U.S. holders. Any such legislation could substantially change some of the rules discussed above relating to certification requirements, information reporting and withholding. The U.S. House of Representatives and the U.S. Senate have each passed, as parts of different bills, a version of this legislation that would apply to payments made after December 31, 2012. No assurances can be given whether, or in what form, this legislation will be enacted. Prospective investors should consult their own tax advisers regarding this legislation and similar proposals.


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UNDERWRITING
 
Subject to the terms and conditions set forth in the underwriting agreement, each of the underwriters named below has severally agreed to purchase from us the aggregate number of shares of common stock set forth opposite its name below:
 
         
Underwriters
 
Number of Shares
 
 
Thomas Weisel Partners LLC
       
BB&T Capital Markets, a division of Scott & Stringfellow, LLC
       
Signal Hill Capital Group LLC
           
         
Total
           
         
 
All of the           shares to be purchased by the underwriters will be purchased from us.
 
The underwriting agreement provides that the obligations of the several underwriters are subject to various conditions, including approval of legal matters by counsel. The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below.
 
The underwriting agreement provides that we will indemnify the underwriters against liabilities specified in the underwriting agreement under the Securities Act, or will contribute to payments that the underwriters may be required to make relating to these liabilities.
 
The underwriters expect to deliver the shares of common stock to purchasers on or about          , 2010.
 
Over-Allotment Option
 
We have granted a 30-day over-allotment option to the underwriters to purchase up to a total of           additional shares of our common stock from us at the initial public offering price, less the underwriting discount payable by us, as set forth on the cover page of this prospectus. If the underwriters exercise this option in whole or in part, then each of the underwriters will be separately committed, subject to the conditions described in the underwriting agreement, to purchase the additional shares of our common stock in proportion to their respective commitments set forth in the table above.
 
Determination of Offering Price
 
Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations between us and the underwriters. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price will include the valuation multiples of publicly-traded companies that the representatives of the underwriters believe are comparable to us, our financial information, our history and prospects and the outlook for our industry, an assessment of our management, our past and present business operations and relationships, and the prospects for, and timing of, our future sales and an assessment of these factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours.
 
We cannot assure you that an active or orderly trading market will develop for our common stock or that our common stock will trade in the public markets subsequent to this offering at or above the initial offering price.
 
Commissions and Discounts
 
The underwriters propose to offer the shares of common stock directly to the public at the public offering price set forth on the cover page of this prospectus, and at this price less a concession not in excess of $      per


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share of common stock to other dealers specified in a master agreement among underwriters who are members of the Financial Industry Regulatory Authority, Inc. The underwriters may allow, and the other dealers specified may re-allow, concessions not in excess of $      per share of common stock to these other dealers. After this offering, the offering price, concessions and other selling terms may be changed by the underwriters. Our common stock is offered subject to receipt and acceptance by the underwriters and to other conditions, including the right to reject orders in whole or in part.
 
The following table summarizes the compensation to be paid to the underwriters by us and the proceeds, before expenses, payable to us:
 
                         
          Total  
          Without
    With
 
    Per Share
    Over-Allotment
    Over-Allotment
 
    ($)     ($)     ($)  
 
Public offering price
                                   
Underwriting discount
                       
Proceeds, before expenses, to us
                       
 
Indemnification of Underwriters
 
We will indemnify the underwriters against some civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of our representations and warranties contained in the underwriting agreement. If we are unable to provide this indemnification, we will contribute to payments the underwriters may be required to make in respect of those liabilities.
 
No Sales of Similar Securities
 
The underwriters will require all of our directors and officers and certain other of our stockholders to agree, subject to certain exceptions, not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of any shares of common stock, or any options or warrants to purchase any shares of common stock, or any securities convertible into, exchangeable for or that represent the right to receive shares of common stock without the prior written consent of Thomas Weisel Partners LLC for a period of 180 days after the date of this prospectus.
 
We have agreed that for a period of 180 days after the date of this prospectus, we will not, without the prior written consent of Thomas Weisel Partners LLC, offer, sell, contract to sell or otherwise dispose of any securities that are substantially similar to the common stock, including but not limited to any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or any such substantially similar securities except for the shares of common stock offered in this offering, the shares of common stock issuable upon exercise of outstanding options and warrants on the date of this prospectus and the shares of our common stock that are issued under our 2010 Omnibus Long-Term Incentive Plan, which we will adopt in connection with this offering.
 
The 180-day restricted period described in the preceding two paragraphs will be automatically extended if: (1) during the last 17 days of the 180-day restricted period we release earnings results or announce material news or a material event or (2) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 15-day period following the last day of the 180-day period, in which case the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the date of release of the earnings results or the announcement of the material news or material event.
 
Nasdaq Global Market Listing
 
We intend to apply to have our common stock listed on the Nasdaq Global Market under the symbol “    ”.


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Short Sales, Stabilizing Transactions and Penalty Bids
 
In order to facilitate this offering, persons participating in this offering may engage in transactions that stabilize, maintain or otherwise affect the price of our common stock during and after this offering. Specifically, the underwriters may engage in the following activities in accordance with the rules of the SEC.
 
Short sales. Short sales involve the sales by the underwriters of a greater number of shares than they are required to purchase in the offering. Covered short sales are short sales made in an amount not greater than the underwriters’ over-allotment option to purchase additional shares from us in this offering. The underwriters may close out any covered short position by either exercising their over-allotment option to purchase shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. Naked short sales are any short sales in excess of such over-allotment option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in this offering.
 
Stabilizing transactions. The underwriters may make bids for or purchases of the shares for the purpose of pegging, fixing or maintaining the price of the shares, so long as stabilizing bids do not exceed a specified maximum.
 
Penalty bids.  If the underwriters purchase shares in the open market in a stabilizing transaction or syndicate covering transaction, they may reclaim a selling concession from the underwriters and selling group members who sold those shares as part of this offering. Stabilization and syndicate covering transactions may cause the price of the shares to be higher than it would be in the absence of these transactions. The imposition of a penalty bid might also have an effect on the price of the shares if it discourages presales of the shares.
 
The transactions above may occur on the Nasdaq Global Market or otherwise. Neither we nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on the price of the shares. If these transactions are commenced, they may be discontinued without notice at any time.
 
Relationships
 
The underwriters may, from time to time, perform investment banking and advisory services for us or engage in transactions with us for which they may receive customary fees and expenses.


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LEGAL MATTERS
 
The validity of the shares of common stock offered hereby and certain other legal matters will be passed upon for us by K&L Gates LLP, Raleigh, North Carolina. Certain legal matters in connection with this offering will be passed upon for the underwriters by Latham & Watkins LLP, Washington, DC.
 
EXPERTS
 
The financial statements of Primo Water Corporation and subsidiaries as of December 31, 2009 and 2008, and for each of the three years ended December 31, 2009 included in this prospectus and registration statement have been so included in reliance on the report of McGladrey & Pullen, LLP, an independent registered public accounting firm, as set forth in its report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
 
CHANGE IN INDEPENDENT REGISTERED ACCOUNTING FIRM
 
On February 10, 2009, our Board of Directors approved the dismissal of Ernst & Young LLP (“E&Y”), as our independent registered public accounting firm, which was immediately effective, and appointed McGladrey & Pullen, LLP (“McGladrey”) as our independent registered public accounting firm for the year ended December 31, 2008.
 
E&Y’s report on our financial statements for the year ended December 31, 2007, did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. During our two most recent fiscal years and any subsequent interim period preceding the dismissal of E&Y, there were no disagreements with E&Y on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which, if not resolved to E&Y’s satisfaction, would have caused E&Y to make reference to the matter in their report, and there have been no “reportable events” as defined in Item 304 (a)(1)(v) of Regulation S-K.
 
Prior to the engagement of McGladrey, we did not consult with such firm regarding the application of accounting principles to a specific completed or contemplated transaction, or any matter that was either the subject of a disagreement or a reportable event. We also did not consult with McGladrey regarding the type of audit opinion which might be rendered on our financial statements and no oral or written report was provided by McGladrey.
 
We have provided E&Y with a copy of this disclosure prior to its filing with the Commission and have requested E&Y to furnish us with a letter addressed to the Commission stating whether it agrees with the above statements regarding E&Y and, if not, stating the respects in which is does not agree. A copy of this letter, dated March 12, 2010, which states that E&Y agrees with these statements, is filed as Exhibit 16.1 to the registration statement of which this prospectus forms a part.
 
WHERE YOU CAN FIND MORE INFORMATION
 
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered by this prospectus. This prospectus does not contain all of the information included in the registration statement, portions of which are omitted as permitted by the rules and regulations of the SEC. For further information pertaining to us and the common stock to be sold in this offering, you should refer to the registration statement and its exhibits. Whenever we make reference in this prospectus to any of our contracts, agreements or other documents, the references are not necessarily complete, and you should refer to the exhibits attached to the registration statement for copies of the actual contract, agreement or other document filed as an exhibit to the registration statement or such other document, each such statement being qualified in all


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respects by such reference. On the closing of this offering, we will be subject to the informational requirements of the Securities Exchange Act of 1934 and will be required to file annual, quarterly and current reports, proxy statements and other information with the SEC. We anticipate making these documents publicly available, free of charge, on our website (www.primowater.com) as soon as reasonably practicable after filing such documents with the SEC.
 
You can read the registration statement and our future filings with the SEC over the Internet at the SEC’s website at www.sec.gov. You may request copies of the filing, at no cost, by telephone at (336) 331-4000 or by mail at Primo Water Corporation, 104 Cambridge Plaza Drive, Winston-Salem, North Carolina 27104. You may also read and copy any document we file with the SEC at its public reference facility at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.


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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
         
    F-2  
    F-3  
    F-4  
    F-5  
    F-6  
    F-7  


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Stockholders of
Primo Water Corporation
 
We have audited the accompanying consolidated balance sheets of Primo Water Corporation and subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Primo Water Corporation and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with U.S. generally accepted accounting principles.
 
/s/ MCGLADREY & PULLEN, LLP
Raleigh, North Carolina
March 12, 2010


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PRIMO WATER CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except par value data)
 
                 
    December 31,  
    2008     2009  
 
Assets
               
Current assets:
               
Cash
  $ 516     $  
Accounts receivable, net
    3,205       1,888  
Inventories
    2,818       1,849  
Prepaid expenses and other current assets
    281       1,083  
Assets associated with discontinued operations
    4,573        
                 
Total current assets
    11,393       4,820  
Bottles, net
    2,069       1,997  
Property and equipment, net
    15,574       14,321  
Intangible assets, net
    1,427       1,077  
Other assets
    107       153  
                 
Total assets
  $ 30,570     $ 22,368  
                 
Liabilities and equity
               
Current liabilities:
               
Accounts payable
  $ 2,704     $ 2,756  
Accrued expenses and other current liabilities
    2,925       4,144  
Current portion of long-term debt, capital leases and notes payable
    7,006       426  
Liabilities associated with discontinued operations
    1,322        
                 
Total current liabilities
    13,957       7,326  
Long-term debt, capital leases and notes payable, net of current portion
    5       14,403  
Other long-term liabilities
    481       1,048  
                 
Total liabilities
    14,443       22,777  
Commitments and contingencies
               
Stockholders’ equity (deficit)
               
Common stock, $0.001 par value — 200,000 shares authorized, 15,158 and 15,157 shares issued and outstanding at December 31, 2009 and 2008, respectively
    15       15  
Preferred stock, $0.001 par value — 100,000 shares authorized
               
Series A preferred stock, 18,755 shares issued and outstanding
    19       19  
Series B preferred stock, 23,280 shares issued and outstanding
    23       23  
Series C preferred stock, 12,520 shares issued and outstanding
    13       13  
Additional paid-in capital
    86,343       86,723  
Common stock warrants
    3,797       3,797  
Accumulated deficit
    (74,083)       (90,999)  
                 
Total stockholders’ equity (deficit)
    16,127       (409)  
                 
Total liabilities and stockholders’ equity (deficit)
  $ 30,570     $ 22,368  
                 
 
See accompanying notes.


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PRIMO WATER CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
 
                         
    Years Ended December 31,  
    2007     2008     2009  
 
Net sales
  $ 13,453     $ 34,647     $ 46,981  
Cost of sales
    11,969       30,776       38,771  
                         
Gross profit
    1,484       3,871       8,210  
Selling, general and administrative expenses
    13,719       17,409       14,127  
                         
Loss from operations
    (12,235)       (13,538)       (5,917)  
Interest expense
    (29)       (153)       (2,258)  
Other income, net
    94       83       1  
                         
Loss from continuing operations before income taxes
    (12,170)       (13,608)       (8,174)  
Provision for income taxes
                 
                         
Loss from continuing operations
    (12,170)       (13,608)       (8,174)  
Loss from discontinued operations, net of income taxes
    (1,904)       (5,738)       (3,650)  
                         
Net loss
    (14,074)       (19,346)       (11,824)  
Preferred dividends
    (2,147)       (2,327)       (3,042)  
                         
Net loss attributable to common stockholders
  $ (16,221)     $ (21,673)     $ (14,866)  
                         
Basic and diluted loss per common share:
                       
Loss from continuing operations attributable to common stockholders
  $ (0.95)     $ (1.05)     $ (0.74)  
Loss from discontinued operations attributable to common stockholders
    (0.12)       (0.38)       (0.24)  
                         
Net loss attributable to common stockholders
  $ (1.07)     $ (1.43)     $ (0.98)  
                         
Basic and diluted weighted average common shares outstanding
    15,114       15,150       15,158  
                         
 
See accompanying notes.


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PRIMO WATER CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands)
 
                                                                                                         
                Preferred Stock     Preferred Stock
    Additional
    Common
          Total
 
    Common Stock     Series A     Series B     Series C     Subscriptions
    Paid-in
    Stock
    Accumulated
    Stockholders’
 
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Receivable     Capital     Warrants     Deficit     Equity (Deficit)  
 
Balance, December 31, 2006
    15,085     $   15       18,755     $  19       23,274     $  23           $   —     $   (3,773)     $ 39,404     $ 2,742     $ (18,641)     $ 19,789  
Issuance of common stock
    62                                                       62                   62  
Issuance of preferred stock, Series B
                            6                         3,773       (508)                   3,265  
Warrants attached to Series B Preferred Stock
                                                                510             510  
Issuance of preferred stock, Series C
                                        4,515       5       (489)       10,633                   10,149  
Warrants attached to Series C Preferred Stock
                                                                181             181  
Stock-based compensation expense, net of forfeitures
                                                          181                   181  
Dividends accrued
                                                                      (2,147)       (2,147)  
Net loss
                                                                      (14,074)       (14,074)  
                                                                                                         
Balance, December 31, 2007
    15,147       15       18,755       19       23,280       23       4,515       5       (489)       49,772       3,433       (34,862)       17,916  
Issuance of common stock
    10                                                       12                   12  
Issuance of preferred stock, Series C
                                        8,005       8       489       18,735                   19,232  
Warrants attached to Series C Preferred Stock
                                                                320             320  
Warrants issued
                                                                44             44  
Stock-based compensation expense, net of forfeitures
                                                          276                   276  
Beneficial conversion feature of Series C Preferred Stock
                                                          17,548             (17,548)        
Dividends accrued
                                                                      (2,327)       (2,327)  
Net loss
                                                                      (19,346)       (19,346)  
                                                                                                         
Balance, December 31, 2008
    15,157       15       18,755       19       23,280       23       12,520       13             86,343       3,797       (74,083)     $ 16,127  
Issuance of common stock
    1                                                       2                   2  
Stock-based compensation expense, net of forfeitures
                                                          378                   378  
Dividend of subsidiary stock
                                                                      (2,050)       (2,050)  
Dividends accrued
                                                                      (3,042)       (3,042)  
Net loss
                                                                      (11,824)       (11,824)  
                                                                                                         
Balance, December 31, 2009
    15,158     $ 15       18,755     $ 19       23,280     $ 23       12,520     $ 13     $     $ 86,723     $ 3,797     $ (90,999)     $ (409)  
                                                                                                         
 
See accompanying notes.
 


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PRIMO WATER CORPORATION AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 
                         
    Years Ended December 31,  
    2007     2008     2009  
 
Operating activities
                       
Net loss
  $ (14,074)     $ (19,346)     $ (11,824)  
Less: Loss from discontinued operations
    (1,904)       (5,738)       (3,650)  
                         
Loss from continuing operations
    (12,170)       (13,608)       (8,174)  
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
                       
Depreciation and amortization
    3,366       3,618       4,205  
Stock-based compensation expense
    156       259       298  
Non-cash interest expense
          26       696  
Bad debt expense
    362       139       153  
Other
    20       120       15  
Changes in operating assets and liabilities:
                       
Accounts receivable
    (427)       (1,943)       1,164  
Inventories
    (316)       (1,277)       969  
Prepaid expenses and other assets
    (89)       (93)       (782)  
Accounts payable
    1,004       1,140       198  
Accrued expenses and other liabilities
    1,342       (213)       (714)  
                         
Net cash used in operating activities
    (6,752)       (11,832)       (1,972)  
Investing activities
                       
Purchases of property and equipment
    (3,917)       (8,331)       (1,589)  
Purchases of bottles, net of disposals
    (1,076)       (1,089)       (835)  
Proceeds from the sale of property and equipment
    1       24       22  
Additions to and acquisitions of intangible assets
          (232)       (48)  
                         
Net cash used in investing activities
    (4,992)       (9,628)       (2,450)  
Financing activities
                       
Net borrowings from revolving line of credit
          7,004       (6,580)  
Issuance of long term debt
                20,350  
Note payable and capital lease payments
    (74)       (13)       (5,353)  
Debt issuance costs
          (134)       (636)  
Prepaid equity issuance costs
                (105)  
Net change in book overdraft
          266       (147)  
Proceeds from issuance of common stock
    62       13       2  
Net proceeds from issuance of preferred stock
    14,104       19,552        
Dividends paid
    (1,563)       (2,327)       (1,257)  
                         
Net cash provided by financing activities
    12,529       24,361       6,274  
                         
Net increase in cash from continuing operations
    785       2,901       1,852  
Cash, beginning of year
    7,638       5,776       516  
Cash used in discontinued operations from:
                       
Operating Activities
    (2,269)       (6,764)       (1,514)  
Investing Activities
    (378)       (1,194)       (41)  
Financing Activities
          (203)       (813)  
                         
Cash used in discontinued operations
    (2,647)       (8,161)       (2,368)  
                         
Cash, end of year
  $ 5,776     $ 516     $  
                         
Supplemental cash flow information
                       
Cash paid for interest
  $ 8     $ 69     $ 1,535  
                         
Assets acquired under capital lease
  $     $ 8     $  
                         
Preferred dividends accrued not paid
  $ 584     $     $ 1,785  
                         
 
See accompanying notes.


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PRIMO WATER CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
 
1.  Description of Business and Significant Accounting Policies
 
Business
 
Primo Water Corporation (together with its consolidated subsidiaries, “Primo”, “we”, “our”, the “Company”) is a rapidly growing provider of three- and five-gallon purified bottled water and water dispensers sold through major retailers nationwide.
 
Principles of Consolidation
 
Our consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany amounts and transactions have been eliminated in consolidation. Our consolidated statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”).
 
Operating Segments
 
We manage our business primarily through two reporting segments, Primo Bottled Water Exchange (Exchange) and Primo Products (Products). Our Exchange segment sells three- and five-gallon purified bottled water through retailers in the each of the contiguous United States. We service the retail locations through our national network of primarily independent bottlers and distributors. Our Products segment sells water dispensers that are designed to dispense Primo and other dispenser-compatible bottled water through major U.S. retailers. We design, market and arrange for certification and inspection of our products.
 
Unless otherwise indicated, information in these notes to consolidated financial statements relates to continuing operations. Certain of our operations have been presented as discontinued. See Note 13.
 
Use of Estimates
 
The preparation of our financial statements in conformity with GAAP requires us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions used to determine certain amounts that affect the financial statements are reasonable, based on information available at the time they are made. To the extent there are material differences between these estimates and actual results, our consolidated financial statements may be affected. Some of the more significant estimates include allowances for doubtful accounts, valuation of inventories, depreciation, valuation of deferred taxes and allowance for sales returns.
 
Revenue Recognition
 
We recognize revenue from the sale of our products when title to the product has transferred to the buyer, collectability of a fixed and determinable sales price is reasonably assured and we have no further obligations to assist in the resale of the products. Revenue is recognized for the sale of three- and five-gallon purified bottled water upon either the delivery of inventory to the retail stores or the purchase by the consumer. Our water dispensers are sold primarily through a direct-import model, where we recognize revenue when title is transferred to our retail customers. Cash consideration provided for discounts and sales incentives, as well as provisions for returns and other adjustments are recorded as a reduction to sales.


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PRIMO WATER CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share amounts)
 
Cash and Cash Equivalents
 
All highly liquid investments with an original maturity of three months or less at the date of purchase are considered to be cash equivalents.
 
Accounts Receivable
 
All trade accounts receivable are due from customers located within the United States. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. The allowance for doubtful accounts is based on a review of specifically identified accounts in addition to an overall aging analysis. Judgments are made with respect to the collectability of accounts receivable based on historical experience and current economic trends. Actual losses could differ from those estimates.
 
The following table shows the changes in the allowance for doubtful accounts for the preceding three years:
 
                                 
          Amounts
             
          Charged to
             
    Beginning
    Sales, Costs
          End
 
    of Year     or Expense     Deductions     of Year  
 
December 31, 2007
  $       362,000       (58,000)     $ 304,000  
                                 
December 31, 2008
  $ 304,000       139,000       (18,000)     $ 425,000  
                                 
December 31, 2009
  $ 425,000       166,000       (479,000)     $ 112,000  
                                 
 
Inventories
 
Our inventories consist primarily of finished goods and are valued at the lower of cost or realizable value, with cost determined using the first-in, first-out (FIFO) method. Miscellaneous selling supplies such as labels are expensed when incurred.
 
Bottles
 
Bottles consist of three- and five- gallon refillable polycarbonate bottles used in our exchange business and are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful life of three years.
 
Property and Equipment
 
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are calculated using straight-line methods over estimated useful lives that range from two to 10 years.
 
Intangible Assets
 
Intangible assets consist of customer lists, patents, and trademarks. Intangible assets not subject to amortization are tested for impairment on an annual basis or more frequently if indicators of impairment are present. Patent costs are amortized using a straight-line basis over estimated lives of three years, while customer lists are amortized on an accelerated basis over an estimated useful life of 10 years.


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Table of Contents

 
PRIMO WATER CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share amounts)
 
Long-Lived Assets
 
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset at the date it is tested for recoverability, whether in use or under development. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. We recorded an impairment charge in 2008 of $98, reflected in selling, general and administrative expenses of the Exchange segment in the statement of operations, related to display racks no longer in use and to be disposed.
 
Fair Value Measurements
 
Effective January 1, 2008, we adopted Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, for financial assets and liabilities. ASC 820 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. The adoption of ASC 820 did not have a material impact on the Company’s financial condition or results of operations.
 
ASC 820 defines fair value as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also describes three levels of inputs that may be used to measure fair value:
 
  •  Level 1 — quoted prices in active markets for identical assets and liabilities.
 
  •  Level 2 — observable inputs other than quoted prices in active markets for identical assets and liabilities.
 
  •  Level 3 — unobservable inputs in which there is little or no market data available, which require the reporting entity to develop its own assumptions.
 
The table below presents our assets and liabilities measured at fair value on a recurring basis as of December 31, 2009:
 
                                 
    Total     Level 1     Level 2     Level 3  
 
Common stock warrants
  $ 600                 $ 600  
                                 
 
The following is a reconciliation of the common stock warrants, which are measured at fair value on a recurring basis using significant unobservable inputs (Level 3 inputs):
 
         
Balance as of January 1, 2008
  $  
Total (gains) losses recognized
     
         
Balance at December 31, 2008
     
Total (gains) losses recognized
     
Initial fair value
    600  
         
Balance at December 31, 2009
  $   600  
         


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Table of Contents

 
PRIMO WATER CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share amounts)
 
The carrying amounts of the Company’s financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable, and other accrued expenses, approximate their fair values due to their short maturities. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of long-term debt, capital leases and notes payable approximates fair value.
 
Advertising Costs
 
Costs incurred for producing and distributing advertising and advertising materials are expensed when incurred. Advertising costs totaled approximately $948, $717 and $270 for 2007, 2008 and 2009, respectively, and are included in selling, general, and administrative expenses.
 
Beneficial Conversion Charges
 
Our Series C Preferred Stock (Series C) is convertible into common stock and was issued with an adjustable conversion feature, which was based upon consolidated sales for the year ending December 31, 2008 with a conversion price ranging from $1.25 to $2.40 per common equivalent share. A beneficial conversion charge is measured as the difference between the initial price of $2.40 per share and the conversion price at December 31, 2008 of $1.25 per share.
 
At December 31, 2008 we recorded a beneficial conversion charge (also referred to as a deemed dividend) of approximately $17,500 related to the adjustment in the conversion price of the Series C convertible preferred stock, based upon consolidated sales for the year ending December 31, 2008. The beneficial conversion charge for equity instruments is recorded to additional paid in capital with no effect on total stockholders’ equity or the consolidated statement of operations.
 
Concentrations of Risk
 
Our principal financial instruments subject to potential concentration of credit risk are cash and cash equivalents, trade receivables, accounts payable and accrued expenses. We invest our funds in a highly rated institution and believe the financial risks associated with cash and cash equivalents are minimal. At December 31, 2008 and 2009, approximately $250 and $0, respectively, of our cash on deposit exceeded the federally insured limits.
 
We perform ongoing credit evaluations of our customers’ financial condition and maintain allowances for doubtful accounts that we believe are sufficient to provide for losses that may be sustained on realization of accounts receivable. We had one customer that accounted for approximately 59% of sales in 2007 and two customers that accounted for 42% and 21% of sales in 2008 and three customers that accounted for approximately 33%, 19% and 15% of sales in 2009. We had two customers that accounted for approximately 32% and 11% of total trade receivables at December 31, 2008 and one customer with a balance that accounted for approximately 21% of total trade receivables at December 31, 2009.
 
Basic and Diluted Net loss Per Share
 
Net loss per share has been computed using the weighted average number of shares of common stock outstanding during each period. Diluted amounts per share include the dilutive impact, if any, of the Company’s outstanding potential common shares, such as options and warrants and convertible preferred stock. Potential common shares that are anti-dilutive are excluded from the calculation of diluted net loss per common share.


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PRIMO WATER CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share amounts)
 
The following outstanding options, convertible preferred stock and warrants were excluded from the computation of diluted net loss per share for the periods indicated because including them would have had an anti-dilutive effect:
 
                         
    Years Ended December 31,  
    2007     2008     2009  
Options to purchase common stock
    2,451       1,478       1,448  
Convertible preferred stock
    34,279       52,992       57,952  
Common stock warrants
    6,215              
 
Income Taxes
 
We account for income taxes using the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent that utilization is not presently more likely than not.
 
Effective January 1, 2007, we adopted the provisions of Accounting Standards Codification (“ASC”) 740-10, Income Taxes. Previously, we had accounted for tax contingencies in accordance with ASC 450-10, Contingencies. As required by ASC 740-10, we recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, we applied ASC 740-10 to all tax positions for which the statute of limitations remained open. The implementation of ASC 740-10 did not have a material impact on our consolidated financial statements.
 
Recent Accounting Pronouncements
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance which established the Accounting Standards Codification (“ASC” or “Codification”) as the source of authoritative GAAP recognized by the FASB to be applied to nongovernmental entities, and rules and interpretive releases of the SEC as authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards upon its effective date and, subsequently, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. The guidance is not intended to change or alter existing GAAP. The guidance became effective in our fourth quarter of 2009. The guidance did not have an impact on our consolidated financial position, results of operations or cash flows.
 
In May 2009, the FASB issued authoritative guidance on the accounting for and disclosure of events that occur after the balance sheet date. This guidance was effective for interim and annual financial periods ending after June 15, 2009. This guidance was amended in February 2010. It requires public reporting companies to evaluate subsequent events through the date that the financial statements are issued. The adoption did not impact our consolidated financial position, results of operations or cash flows.
 
In January 2010, the FASB issued guidance which clarifies that the stock portion of a distribution to stockholders that allows them to receive cash or stock with a potential limitation on the total amount of cash that all stockholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share


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PRIMO WATER CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share amounts)
 
prospectively and is not a stock dividend. This update is effective for our first quarter of 2010. The adoption is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
 
In January 2010, the FASB issued guidance that clarifies ASC 810 implementation issues relating to a decrease in ownership of a subsidiary that is a business or non-profit activity. This amendment affects entities that have previously adopted ASC 810-10. This update is effective for our first quarter of 2010. The adoption is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
 
2.  Change in Accounting Estimate
 
Effective January 1, 2008, we changed our method of depreciation for property and equipment from accelerated methods to the straight-line method. Originally, we utilized accelerated methods due to our business model being new and the related uncertainty in the sustainability of the business model. Also, initial projections showed that upon installation of a new retail customer the sales would initially peak and then diminish over time, so using accelerated methods of depreciation was expected to reflect the pattern of use. However, after we developed some history and sustainability in our business model we determined that sales did not peak after installation and then diminish over time. Instead, sales have maintained at their initial level or increased steadily following the installation of our water bottle exchange services at a retail customer. Therefore, the straight-line method is more reflective of the pattern of use and also provides a better matching of depreciation expense to the related sales. We accounted for the change as a change in accounting estimate in the period of the change and did not restate prior periods. The effect on depreciation expense for 2008 was a decrease of approximately $1,100.
 
3.  Bottles
 
Bottles are summarized as follows at December 31:
 
                 
    2008     2009  
 
Cost
  $ 2,600     $ 2,637  
Less accumulated depreciation
    (531)       (640)  
                 
    $  2,069     $  1,997  
                 
 
Depreciation expense for bottles was approximately $721, $853 and $907 in 2007, 2008 and 2009, respectively, and is reflected in selling, general and administrative expenses in the consolidated statements of operations.
 
4.  Property and Equipment
 
Property and equipment is summarized as follows at December 31:
 
                 
    2008     2009  
 
Leasehold improvements
  $ 72     $ 72  
Machinery and equipment
    3,232       3,640  
Racks and display panels
    11,530       12,389  
Office furniture and equipment
    218       218  
Software and computer equipment
    2,521       2,770  
Transportation racks
    3,944       4,039  
                 
      21,517       23,128  
Less accumulated depreciation and amortization
    (5,943)       (8,807)  
                 
    $ 15,574     $ 14,321  
                 


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Table of Contents

 
PRIMO WATER CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share amounts)
 
Depreciation expense for property and equipment was approximately $1,935, $2,223 and $2,897 in 2007, 2008 and 2009, respectively, and is reflected in selling, general and administrative expenses in the consolidated statements of operations.
 
5.  Intangible Assets
 
Intangible assets are summarized as follows at December 31:
 
                                                 
    December 31, 2008     December 31, 2009  
    Gross Carrying
    Accumulated
          Gross Carrying
    Accumulated
       
    Amount     Amortization     Net     Amount     Amortization     Net  
 
Amortized intangible assets:
                                               
Customer lists
  $ 2,985     $ (1,699)     $ 1,286     $ 2,985     $ (2,089)     $ 896  
Patent costs
    35       (26)       9       71       (36)       35  
                                                 
      3,020       (1,725)       1,295       3,056       (2,125)       931  
Unamortized intangible assets:
                                               
Trademarks
    132             132       146             146  
                                                 
Total
  $ 3,152     $ (1,725)     $ 1,427     $ 3,202     $ (2,125)     $ 1,077  
                                                 
 
Amortization expense for intangible assets was approximately $710, $542 and $401 respectively, in 2007, 2008 and 2009, respectively, and is reflected in selling, general and administrative expenses in the consolidated statements of operations.
 
Amortization expense related to intangible assets, which is an estimate for each future year and subject to change, is as follows:
 
         
2010
  $ 295  
2011
    215  
2012
    150  
2013
    106  
2014
    77  
2015 and thereafter
    88  
         
Total
  $ 931  
         


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PRIMO WATER CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share amounts)
 
 
6.  Accrued Expenses and Other Current Liabilities
 
Accrued expenses and other current liabilities is summarized as follows at December 31:
 
                 
    2008     2009  
 
Dividends payable
  $ 582     $ 2,367  
Accrued payroll and related items
    410       184  
Accrued professional and other expenses
    927       580  
Accrued interest
    80       107  
Accrued sales tax payable
    518       534  
Accrued advertising
    87       17  
Accrued receipts not invoiced
    244       182  
Other
    77       173  
                 
    $ 2,925     $ 4,144  
                 
 
7.  Long-Term Debt, Capital Leases and Notes Payable
 
Long-term debt, capital leases and notes payable are summarized as follows at December 31:
 
                 
    2008     2009  
 
Senior loan agreement
  $ 7,004     $ 423  
Subordinated convertible notes payable, net of original issue discount
          14,400  
Capital leases
    7       6  
                 
      7,011       14,829  
Less current portion
    (7,006 )     (426 )
                 
Long-term debt, capital leases and notes payable, net of current portion
  $ 5     $ 14,403  
                 
 
We entered into a Loan and Security Agreement in June 2005 that was amended in April 2006, April 2007, June 2008, January 2009 and December 2009 (the “Senior Loan Agreement”) pursuant to which the bank originally provided a $25,000 revolving loan commitment (the “Revolver”). In June 2008, the Revolver commitment was reduced to $20,000 and subsequently reduced to $10,000 in January 2009. The Revolver is subject to certain borrowing base restrictions based on eligible accounts receivable, eligible inventory less reserves, and the aggregate face amount of undrawn trade letters of credit of which the Company is the beneficiary. The Revolver also provides for letters of credit issued to our vendors, which reduce the amount available for cash borrowings. The availability under the Revolver was approximately $1,500 and $5,900 at December 31, 2008 and 2009, respectively. All amounts outstanding under the Revolver are due in full on June 30, 2010; however, at December 31, 2008 the Revolver is classified as current in the consolidated balance sheet due to the terms and conditions included in the Senior Loan Agreement. At December 31, 2008 and 2009, there were outstanding letters of credit under the Revolver totaling approximately $296 and $371, respectively.
 
Interest on the outstanding borrowings under the Revolver is payable quarterly at the option of the Company at (i) the LIBOR Market Index Rate plus the applicable margin or (ii) the greater of (a) the federal funds rate plus 0.50% or (b) the bank’s prime rate plus in either case the applicable margin. At December 31, 2009 and 2008, the interest rate on the outstanding balance on the Revolver was based on the bank’s prime rate plus 2.50% and 0.75%, respectively (5.75% at December 31, 2009 and 4.00% at December 31, 2008). Beginning in January


F-14


Table of Contents

 
PRIMO WATER CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share amounts)
 
2010 and effective with the December 2009 amendment, the applicable margin for both the prime rate and the federal funds rate options was decreased to 1.00%.
 
We are required to pay a fee of 3.50% on the outstanding amount of letters of credit issued under the Revolver. In addition, there is a fee of 0.50% on the unused portion of the Revolver lending commitment.
 
On January 7, 2009, we entered into a Loan and Security Agreement with our primary bank that was subordinated to the Senior Loan Agreement (the “Prior Subordinated Loan Agreement”), pursuant to which a $10,000 term loan was provided (the “Prior Subordinated Loan”). The bank acted as syndication agent and provided $4,100 of the facility. Twelve existing investors in the Company (including our CEO and CFO) funded the $5,900 balance of the facility. The proceeds of the Prior Subordinated Loan were used to repay the then outstanding balance on the Revolver and for working capital purposes. Interest on the Prior Subordinated Loan was at the bank’s prime rate plus 10.0%, payable monthly. The Prior Subordinated Loan had an original maturity of January 6, 2010; however, the balance was paid in full in December 2009. In connection with the Prior Subordinated Loan the Company paid fees totaling approximately $575, which were deferred and amortized as a component of interest expense.
 
The Senior Loan Agreement contains and the Prior Subordinated Loan Agreement contained various conditions precedent to extensions of credit and restrictive covenants including minimum EBITDA and gross sales requirements. We were in violation of certain covenants and received a waiver from the bank at December 31, 2009. Substantially all of the Company’s assets are pledged as collateral to for borrowings under the Senior Loan Agreement and were pledged as collateral for borrowings under the Prior Subordinated Loan Agreement.
 
On December 30, 2009, we issued Subordinated Convertible Promissory Notes (“Notes”) to existing and new investors that have a total face value of $15,000 and are subordinated to the Senior Loan Agreement. The Notes pay quarterly interest at 14% and are payable in full on March 31, 2011 (the “Maturity Date”). We may prepay the Notes at any time prior to the Maturity Date with a prepayment premium of 2% of the principal amount being prepaid, except where such prepayment is made in connection with an initial public offering of our common stock. Upon (i) an initial public offering of the Company’s common stock resulting in net proceeds to the Company of at least $30,000 (a “Qualified IPO”), (ii) the consummation by the Company of a merger or consolidation with or into another entity or other corporate reorganization in which the Company is not the surviving entity, (iii) the sale of all of the capital stock of the Company, or (iv) the sale of all or substantially all of the assets of the Company, the holders of the Notes may elect to sell to the Company and the Company will be required to purchase the Notes in full by payment of an amount equal to the unpaid principal balance thereof, plus, all unpaid interest accrued thereon through the date of redemption, plus in the case of clauses (ii), (iii), and (iv) above the principal amount of the Notes being redeemed multiplied by the prepayment premium of 2%.
 
In addition, if a Qualified IPO has not occurred by the Maturity Date and the Company has completed a sale of shares of its capital stock within 90 days of the Maturity Date or anytime thereafter resulting in net proceeds to the Company of at least $5,000 (a “Qualified Equity Financing”), all unpaid principal on any Notes and unpaid accrued interest is convertible, at the option of the Note holders, into the securities being issued in the Qualified Equity Financing. If the Notes become convertible there would be a beneficial conversion that would be calculated as the intrinsic value at the measurement or commitment date.
 
The Notes are accompanied by detachable warrants with a value at issuance equal to 4% of the face amount of the corresponding Notes. The exercise price per share of the warrants is equal to 80% of the purchase price per share of common stock in a Qualified IPO (if a Qualified IPO has occurred by the time of such exercise) or ($1.25 if a Qualified IPO has not occurred by the time of such exercise). The total number of shares of common


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PRIMO WATER CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share amounts)
 
stock issuable under the warrants is 1,111. The initial fair value of the warrants is $600 and resulted in an original issue discount on the Notes which will be amortized as interest expense over the term of the Notes. The fair value of the warrants is included in other long-term liabilities in the consolidated balance sheet based upon the estimated fair value and will be adjusted periodically until such time as the exercise price becomes fixed at which time the then fair value will be reclassified as a component of stockholders’ equity (deficit).
 
Our CEO, CFO, Vice President of Products and certain members of our Board of Directors (either individually or through an affiliated entity) purchased an aggregate of $3,520 of the Notes with an aggregate of 261 warrants to purchase common stock. Substantially all of the Company’s assets are pledged as collateral to secure the Notes, which security interest is junior to that securing the Senior Loan Agreement.
 
The aggregate future maturities of long-term debt, capital leases and notes payable as of December 31, 2009 are as follows:
 
         
2010
  $ 426  
2011
    15,003  
         
      15,429  
Less: Amounts representing interest
     
         
Total
  $ 15,429  
         
 
8.  Stockholders’ Equity
 
Common Stock
 
In 2008, we amended and restated our Certificate of Incorporation to increase the number of shares authorized to be issued to 200,000 shares of $0.001 par value common stock.
 
Series A Preferred Stock
 
We are authorized to issue up to 100,000 shares of $0.001 par value preferred stock. We designated 18,780 shares of preferred stock as Series A Preferred Stock (“Series A”). At December 31, 2009 and 2008, the Company had outstanding 18,755 shares of the Series A that were issued at a price of $1.00 per share. Dividends on the Series A are neither mandatory nor cumulative; however, no dividends will be paid on common stock unless equivalent dividends are paid on the Series A on a pro rata basis with the common stock and Series C.
 
In liquidation, either voluntary or involuntary, holders of the Series A will be entitled to receive an amount equal to the original purchase price per share together with any dividends declared but unpaid thereon in preference to the holders of the common stock. Each share of the Series A is convertible, at the option of the holder, at any time into common stock. The initial conversion price of the shares is equal to the consideration paid per share and the initial conversion ratio is 1:1. Conversion will be mandatory in the event of a public offering of common stock at a price per share of at least $5.00 (as adjusted for any stock splits, reverse stock splits or other similar events) resulting in gross proceeds to the Company of at least $20,000 or upon a vote or written consent of the holders of more than 50% of the then-outstanding shares of the Series A.


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PRIMO WATER CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share amounts)
 
Series B Preferred Stock
 
The Company designated 30,000 shares of preferred stock as Series B Preferred Stock (“Series B”). At December 31, 2009 and 2008, the Company had outstanding 23,280 shares of Series B that were issued at a price of $1.00 per share. The Series B shares are non-voting and non-convertible. Each share of the Series B is accompanied by a warrant to purchase 0.267 shares of common stock with an exercise price of $1.25 per share (both subject to adjustment in the case of stock splits, reverse stock splits or other similar events). Each warrant will be exercisable through the earliest to occur of (i) the sixteenth (16th) day after delivery of a notice of an exercise event (which includes an initial public offering of the Company’s common stock resulting in proceeds of at least $20,000), (ii) ten (10) years from the date of such warrant, or (iii) five (5) years after the date of exercise of either the put or repurchase rights with respect to the Series B. The value of the warrants was determined to be approximately $3,252 and is included in common stock warrants on the consolidated balance sheet. No warrants had been exercised as of December 31, 2009.
 
Dividends on the Series B accrue at an annual rate of $0.10 per share or 10%, payable when declared by the Board of Directors, and are cumulative. All accrued dividends on the Company’s Series B will be paid prior to the payment of any dividends on the Company’s Series A, Series C or common stock. In January 2009, the Company offered Series B investors the option to suspend their current dividend payment of 10% in exchange for a dividend accrual of 15% for 2009. In January 2010 the dividends began to accrue at 10%. Series B dividends paid during 2007, 2008 and 2009 were $1,563, $2,327 and $1,257, respectively. At December 31, 2008 and 2009 the accrued and unpaid dividends were $582 and $2,367, respectively, which is included in accrued expenses and other current liabilities in the consolidated balance sheet.
 
In liquidation, either voluntary or involuntary, holders of the Series B will be entitled to receive an amount equal to the original purchase price per share together with any dividends declared but unpaid thereon in preference to the holders of the Company’s Series A and common stock.
 
Series C Preferred Stock
 
In 2008, the Company amended and restated its Certificate of Incorporation to increase the number of shares authorized to be issued and designated 14,000 shares of preferred stock as Series C. As of December 31, 2009 and 2008, the Company had issued 12,520 shares of the Series C, at a price of $2.40 per share. The Series C is convertible into the Company’s common stock based upon a formula taking into account the Company’s sales for the year ending December 31, 2008, which resulted in a conversion ratio of 1:1.92 as of December 31, 2008. In accordance with GAAP the Company determined that a beneficial conversion resulted from the change in the conversion ratio from 1:1 on the issuance date of the Series C to 1:1.92 on December 31, 2008. The value of the beneficial conversion feature is analogous to a dividend and is recognized as a return to the preferred stockholders over the period from the date of issuance to the commitment or measurement date, which was December 31, 2008. At December 31, 2008, the Company recorded a beneficial conversion or deemed dividend of approximately $17,500.
 
Conversion of the Series C will be mandatory in the event of a public offering of common stock at a price per share of at least $5.00 (as adjusted for any stock splits, reverse stock splits or similar events) resulting in gross proceeds to the Company of at least $20,000 or upon a vote or written consent of the holders of more than 50% of the then-outstanding shares of Series C.
 
Each share of Series C is accompanied by a warrant to purchase 0.10 shares of common stock with an exercise price of $1.98 per share (subject to adjustment in the case of stock splits, reverse stock splits or other


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PRIMO WATER CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share amounts)
 
similar events). Each warrant will be exercisable through the earlier to occur of (i) the sixteenth (16th) day after delivery of a notice of an exercise event (which includes an initial public offering of the Company’s common stock resulting in gross proceeds to the Company of at least $20,000) or (ii) December 14, 2017. The total value of the warrants was determined to be approximately $501 and is included in common stock warrants in the Consolidated Balance Sheet. No warrants had been exercised as of December 31, 2009.
 
Dividends on Series C are neither mandatory nor cumulative; however, no dividends will be paid on common stock or the Series A unless equivalent dividends are paid on the Series C.
 
In liquidation, either voluntary or involuntary, holders of the Series C will be entitled to receive an amount equal to the original purchase price per share together with any dividends declared but unpaid thereon in preference to the holders of the Company’s Series A, Series B and common stock. Each share of Series C is convertible, at the option of the holder, at any time into common stock.
 
9.  Stock-Based Compensation
 
The Company has a stock-based compensation plan (the “Plan”) for employees, including officers, non-employee directors and non-employee consultants. The Plan provides for the issuance of incentive or nonqualified stock options and restricted common stock. The Company has reserved 4,500 shares of common stock for issuance under the Plan.
 
We account for our stock-based employee and director compensation plans in accordance with ASC 718, Compensation-Stock Compensation. ASC 718 requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). In 2007, 2008 and 2009 compensation expense related to stock options was approximately $157, $215 and $298 and is included in selling, general, and administrative expenses from continuing operations, respectively, and approximately $25, $61 and $80 is included in discontinued operations, respectively.
 
Stock options are granted with an exercise price equal to 100% of the fair market value per share of the common stock on the date of grant. The options generally vest over a period of one to four years, based on graded vesting, and expire ten years from the date of grant. The terms and conditions of the awards made under the Plan vary but, in general, are at the discretion of the board of directors or its appointed committee.
 
We measure the fair value of each stock option grant at the date of grant using a Black-Scholes option pricing model. The weighted-average fair value per share of the options granted during 2007, 2008 and 2009 was $0.67, $0.83, and $0.49 respectively. The following assumptions were used in arriving at the fair value of options granted:
 
                         
    2007     2008     2009  
 
Expected life of options in years
    6.3       5.9       5.5  
Risk-free interest rate
    4.6 %     3.2 %     2.0 %
Expected volatility
    45.0 %     39.0 %     39.0 %
Dividend yield
    0.0 %     0.0 %     0.0 %
 
The risk free interest rate is based on the U.S. Treasury rate for the expected life of the options at the time of grant. As a non-public entity, historic volatility is not available for our shares. As a result, we estimated volatility based on a peer group of companies, which collectively provide a reasonable basis for estimating volatility. We intend to continue to consistently use the same group of publicly traded peer companies to determine volatility in the future


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PRIMO WATER CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share amounts)
 
until sufficient information regarding volatility of our share price becomes available or the selected companies are no longer suitable for this purpose. The expected life is based on the estimated average life of the options, and forfeitures are estimated on the date of grant based on certain historical data and management estimates.
 
A summary of awards under the Plan at December 31, 2007, 2008 and 2009, and changes during the years then ended is presented in the table below:
 
                                 
                Weighted
       
                Average
       
          Weighted
    Remaining
    Average
 
    Number of
    Average Price
    Contractual
    Intrinsic
 
    Shares     per Share     Life (Years)     Value  
 
Outstanding at December 31, 2006
    2,115     $ 1.04                  
Granted
    677       1.38                  
Exercised
    (62 )     1.00                  
Forfeited
    (265 )     1.05                  
                                 
Outstanding at December 31, 2007
    2,465       1.13       8.1     $ 3,123  
                                 
Exercisable at December 31, 2007
    1,368     $ 1.03       8.1     $ 3,114  
                                 
Available for grant at December 31, 2007
    1,913                          
                                 
Outstanding at December 31, 2007
    2,465     $ 1.13                  
Granted
    552       1.98                  
Exercised
    (10 )     1.25                  
Forfeited
    (175 )     1.73                  
                                 
Outstanding at December 31, 2008
    2,832       1.26       7.5     $ 367  
                                 
Exercisable at December 31, 2008
    1,672     $ 1.04       6.7     $ 349  
                                 
Available for grant at December 31, 2008
    1,536                          
                                 
Outstanding at December 31, 2008
    2,832     $ 1.26                  
Granted
    142       1.25                  
Exercised
    (1 )     1.25                  
Forfeited
    (50 )     1.20                  
                                 
Outstanding at December 31, 2009
    2,923       1.26       6.6     $ 331  
                                 
Exercisable at December 31, 2009
    2,197     $ 1.21       6.2     $ 329  
                                 
Available for grant at December 31, 2009
    1,444                          
                                 
 
The total intrinsic value of the options exercised during 2007, 2008 and 2009 was approximately $16, $8 and $0, respectively, with proceeds to the Company of $62, $13 and $2, respectively.
 
As of December 31, 2009 there was approximately $244 of total unrecognized compensation cost related to non-vested stock-based compensation grants. This unrecognized compensation is expected to be recognized over a weighted-average period of approximately 1.0 years.


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Table of Contents

 
PRIMO WATER CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share amounts)
 
Employee Stock Purchase Plan
 
In March 2010 our Board of Directors adopted the 2010 Employee Stock Purchase Plan (the “2010 ESPP”). The 2010 ESPP provides for the purchase of common stock and is generally available to all employees. The Company has reserved 250 shares of common stock for issuance under the 2010 ESPP.
 
2010 Omnibus Long-Term Incentive Plan
 
In March 2010 our Board of Directors adopted the 2010 Omnibus Long-Term Incentive Plan (the “2010 Plan”). The 2010 Plan is limited to employees, officers, non-employee directors, consultants and advisors. The 2010 Plan provides for the issuance of incentive or nonqualified stock options, restricted stock, stock appreciation rights, restricted stock units, cash- or stock-based performance awards and other stock-based awards. The Company has reserved 7,500 shares of common stock for issuance under the 2010 Plan.
 
10.  Commitments and Contingencies
 
Operating Leases
 
The Company leases office space and vehicles under various lease arrangements. Total rental expense from continuing operations for 2007, 2008 and 2009 was approximately $1,658, $1,496 and $1,101, respectively. The rental expense includes $693 and $325 in 2007 and 2008, respectively, paid to PWC Leasing, LLC, which is an entity with common ownership. On June 30, 2008, we purchased the leased assets of PWC Leasing, LLC at the fair value of $3,500 and terminated the related lease agreement. At December 31, 2009, future minimum rental commitments under noncancelable operating leases are as follows:
 
         
2010
  $ 691  
2011
    472  
2012
    369  
2013
    266  
2014
    128  
2015 and thereafter
    82  
         
Total
  $ 2,008  
         
 
Sales Tax
 
We routinely purchase equipment for use in operations from various vendors. These purchases are subject to sales tax depending on the equipment type and local sales tax regulations, however, certain vendors have not assessed the appropriate sales tax. For purchases that are subject to sales tax in which the vendor did not assess the appropriate amount, we accrue an estimate of the sales tax liability we ultimately expect to pay.
 
Other Contingencies
 
In the normal course of business the Company may be involved in various claims and legal actions. Management believes that the outcome of such legal actions will not have a significant adverse effect on the Company’s financial position, results of operations or cash flows.


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Table of Contents

 
PRIMO WATER CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share amounts)
 
 
11.  Income Taxes
 
There is no income tax provision (benefit) for federal or state income taxes as the Company has incurred operating losses since inception.
 
A reconciliation of the statutory U.S. federal tax rate and effective tax rates is as follows:
 
                                     
    2007       2008       2009    
 
Federal statutory taxes
    34 .0   %     34 .0   %     34 .0   %
State income taxes, net of federal tax benefit
    3 .5   %     3 .9   %     3 .9   %
Permanent differences
    (0 .5 ) %     (0 .2 ) %     (0 .2 ) %
Change in valuation allowance
    (35 .9 ) %     (37 .7 ) %     (37 .9 ) %
Other
    (1 .1 ) %     0 .0   %     0 .2   %
                               
      0 .0   %     0 .0   %     0 .0   %
                               
 
Deferred income taxes are recorded based upon differences between the financial reporting and income tax basis of assets and liabilities. The following deferred income taxes are recorded:
 
                 
    2008     2009  
 
Deferred tax assets:
               
Federal net operating loss carryforward
  $ 15,131     $ 18,802  
State net economic loss carryforward
    1,967       2,314  
Intangible assets
    1,240       1,325  
Allowance for bad debts
    538       506  
Reserve for obsolescence
    546       3  
Stock-based compensation
    254       399  
Other
    84       93  
                 
Total gross deferred tax assets
    19,760       23,442  
                 
Deferred tax liabilities:
               
Fixed assets
  $ (861 )   $ (67 )
                 
Total gross deferred tax liabilities
    (861 )     (67 )
                 
Valuation allowance
    (18,899 )     (23,375 )
                 
Total net deferred tax liability
  $     $  
                 
 
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, available taxes in the carryback periods, projected future taxable income, and tax planning strategies in making this assessment.
 
Accordingly, in connection with the losses incurred in 2008 and 2009, the Company has provided a valuation allowance of $18,899 and $23,375 at December 31, 2008 and 2009, respectively to reduce the net deferred tax asset to a realizable value. The net increase in the valuation allowance of $4,476 primarily reflects the net increase in the federal and state NOL deferred tax assets.


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PRIMO WATER CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share amounts)
 
The Company has approximately $55,000 in federal net operating loss carryforwards that begin to expire in 2025, and approximately $51,000 state net economic loss carryforwards that begin to expire in 2020. Utilization of net operating loss carryforwards and other deferred tax assets may be subject to certain limitations under Internal Revenue Code Section 382 and similar state income tax provisions.
 
12.  Segments
 
We manage our business primarily through two reporting segments, Primo Bottled Water Exchange (Exchange) and Primo Products (Products). Our Exchange segment sells three- and five-gallon purified bottled water through retailers in each of the contiguous United States. We service the retail locations through our national network of primarily independent bottlers and distributors. Our Products segment sells water dispensers that are designed to dispense Primo and other dispenser-compatible bottled water through major U.S. retailers. We design, market and arrange for certification and inspection of our products.
 
We utilize segment net sales and segment income (loss) from operations before depreciation and amortization because we believe they provide useful information for effectively allocating resources among business segments, evaluating the health of our business segments based on metrics that management can actively influence, and gauging our investments and our ability to service, incur or pay down debt.
 
Operating segments that do not meet quantitative thresholds for segment reporting are included in Other.
 
Cost of sales for Exchange consists of costs for bottling, related packaging materials and distribution costs for our bottled water. Cost of sales for Products consists of contract manufacturing, freight, duties, and warehousing costs of our water dispensers.
 
Selling, general and administrative expenses consist primarily of personnel costs for sales, marketing, operations support, customer service, as well as other supporting cost for operating the segment.
 
Selling, general and administrative expenses not specifically related to operating segments are shown separately as Corporate. Corporate expenses are comprised mainly of the compensation and other related expenses for corporate support, information systems and human resources and administration. Corporate expenses also include certain professional fees and expenses and compensation of our Board of Directors.
 
The following table presents segment information for each of the last three years:
 
                         
    Year Ended December 31,  
    2007     2008     2009  
 
Segment Net Sales
                       
Exchange
  $ 10,875     $ 19,237     $ 22,638  
Products
    949       13,758       22,824  
Other
    1,818       1,874       1,611  
Inter-company elimination
    (189 )     (222 )     (92 )
                       
Total net sales
  $ 13,453     $ 34,647     $ 46,981  
                       


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PRIMO WATER CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share amounts)
 
                         
    Year Ended December 31,  
    2007     2008     2009  
 
Segment Income (Loss) From Operations
                       
Exchange
  $ (2,834 )   $ (1,267)     $ 3,374  
Products
    (631 )     (1,447)       (272 )
Other
    (175 )     (116)       (34 )
Inter-company elimination
          (13)       9  
Corporate
    (5,229 )     (7,077)       (4,789 )
Depreciation and amortization
    (3,366 )     (3,618)       (4,205 )
                       
Loss from operations
  $ (12,235 )   $ (13,538)     $ (5,917 )
                       
Depreciation and Amortization Expense:
                       
Exchange
  $ 2,084     $ 2,592     $ 3,124  
Products
          69       133  
Other
    774       618       491  
Corporate
    508       339       457  
                       
Total
  $ 3,366     $ 3,618     $ 4,205  
                       
Capital Expenditures:
                       
Exchange
  $ 4,487     $ 8,174     $ 1,916  
Products
    105       336       95  
Other
    189       238       165  
Corporate
    212       672       248  
                       
Total
  $ 4,993     $ 9,420     $ 2,424  
                       
                         
                         
          As of December 31  
          2008     2009  
 
Identifiable Assets:
                       
Exchange
          $ 18,939     $ 16,685  
Products
            3,541       2,655  
Other
            2,000       1,601  
Corporate
            1,517       1,427  
                       
Total
          $ 25,997     $ 22,368  
                       
 
13.  Discontinued Operations
 
In July, 2008, the Company and its Board of Directors made the decision to divest the operations of its subsidiary, Prima Bottled Water, Inc. (“Prima”). As a result, the related assets, liabilities and results of the operations of Prima are accounted for as discontinued operations. In December 2009, the Company completed the divesture by distributing the stock in Prima to existing stockholders of the Company. Each stockholder received a number of shares in Prima based upon such stockholder’s proportionate ownership of our Series A, Series C and common stock on an as converted basis as of the date of distribution. This transaction is reflected as a dividend of subsidiary stock in the statement of stockholders’ equity (deficit) in the amount of $2,050, the book value of the net assets of Prima as of the distribution date.

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PRIMO WATER CORPORATION AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share amounts)
 
Net sales and operating results classified as discontinued operations were as follows:
 
                         
    Year Ended December 31  
    2007     2008     2009  
 
Net sales
  $ 239     $ 1,888     $ 561  
Cost of sales
    443       4,456       428  
                         
Gross profit
    (204 )     (2,568 )     133  
Selling, general and administrative expenses
    1,700       2,930       1,313  
Impairment of assets held for sale
          174       2,407  
                         
Operating loss
    (1,904 )     (5,672 )     (3,587 )
Interest (expense) income, net
          (66 )     (63 )
                         
Loss from discontinued operations, before income taxes
    (1,904 )     (5,738 )     (3,650 )
Provision for income taxes
                 
                         
Loss from discontinued operations
  $ (1,904 )   $ (5,738 )   $ (3,650 )
                         
 
The assets and liabilities that comprise the discontinued operations are summarized as follows at December 31, 2008:
 
         
Discontinued Assets
       
Accounts receivable
  $ 246  
Inventory
    1,962  
Property and equipment
    2,185  
Other
    180  
         
    $ 4,573  
         
Discontinued Liabilities
       
Accounts payable
  $ 476  
Notes payable
    829  
Other
    17  
         
    $ 1,322  
         
 
14.  Employee Retirement Savings Plan
 
Effective April 1, 2005, the Company established the Primo Water Corporation 401(k) Plan & Trust retirement plan covering substantially all full-time employees who are at least 21 years of age and who have completed at least two months of service. Plan participants may make before tax elective contributions up to the maximum percentage of compensation and dollar amount allowed under the Internal Revenue Code. The Company’s matching contributions to the Plan are discretionary and determined with respect to each Plan year. The Company did not make any matching contributions during 2007, 2008 or 2009. Plan participants are 100% vested in their elective contributions at all times, and are vested 25% per year of service for four years in the Company’s discretionary contributions. A year of service for vesting purposes is 1,000 hours of service in a Plan year. In 2010, our Board of Directors established a Company match of up to 50% of the employee contributions up to 6% of their salaries, with 50% of the matching amount being contingent upon our achievement of certain specified objectives to be determined by our Board of Directors.


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Primo Water Logo
 
          Shares
Common Stock
 
 
 
 
PROSPECTUS
     , 2010
 
 
 
 
Thomas Weisel Partners LLC
BB&T Capital Markets
Signal Hill
 
 
Neither we nor the underwriters have authorized anyone to provide information different from that contained in this prospectus. When you make a decision about whether to invest in our common stock, you should not rely upon any information other than the information in this prospectus. Neither the delivery of this prospectus nor the sale of our common stock means that information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or solicitation of an offer to buy these shares of common stock in any circumstances under which the offer or solicitation is unlawful.
 
Until          , 2010 (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.


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PART II
 
INFORMATION NOT REQUIRED IN PROSPECTUS
 
Item 13.  Other Expenses Of Issuance And Distribution
 
The following table sets forth all costs and expenses, other than the underwriting discount payable by us, in connection with the offer and sale of the securities being registered. All amounts shown are estimates except the SEC registration fee, the Financial Industry Regulatory Authority, Inc. filing fee and the Nasdaq Global Market listing fee.
 
         
Item
  Amount  
 
SEC Registration Fee
  $ 4,278  
FINRA Fee
    6,500  
Nasdaq Global Market Listing Fee
    100,000  
Printing Fees and Expenses
    *  
Legal Fees and Expenses
    *  
Accounting Fees and Expenses
    *  
Transfer Agent and Registrar Fees and Expenses
    *  
Miscellaneous
    *  
         
Total
  $  
         
 
 
* To be filed by amendment.
 
Item 14.  Indemnification Of Directors And Officers
 
We are a corporation organized under the laws of the State of Delaware. Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to an action by reason of the fact that he or she was a director, officer, employee or agent of the corporation or is or was serving at the request of the corporation against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action if he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful, except that, in the case of an action by or in right of the corporation, no indemnification may generally be made in respect of any claim as to which such person is adjudged to be liable to the corporation. Our amended and restated bylaws, in the form that will become effective upon the closing of this offering, provide that we will indemnify and advance expenses to our directors and officers (and may choose to indemnify and advance expenses to other employees and other agents) to the fullest extent permitted by law; provided, however, that if we enter into an indemnification agreement with such directors or officers, such agreement controls.
 
Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duties as a director, except for liability for any:
 
  •  breach of a director’s duty of loyalty to the corporation or its stockholders;
 
  •  act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;
 
  •  unlawful payment of dividends or redemption of shares; or
 
  •  transaction from which the director derives an improper personal benefit.


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Our amended and restated certificate of incorporation, in the form that will become effective upon the closing of this offering, provides that our directors are not personally liable for breaches of fiduciary duties to the fullest extent permitted by the Delaware General Corporation Law.
 
These limitations of liability do not apply to liabilities arising under federal securities laws and do not affect the availability of equitable remedies such as injunctive relief or rescission.
 
Section 145(g) of the Delaware General Corporation Law permits a corporation to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation. Our amended and restated bylaws, in the form that will become effective upon the closing of this offering, permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in connection with their services to us, regardless of whether our bylaws permit indemnification. We have directors’ and officers’ liability insurance.
 
As permitted by the Delaware General Corporation Law, we have entered into indemnity agreements with each of our directors that require us to indemnify such persons against various actions including, but not limited to, third-party actions where such director, by reason of his or her corporate status, is a party or is threatened to be made a party to an action, or by reason of anything done or not done by such director in any such capacity. We intend to indemnify directors against all costs, judgments, penalties, fines, liabilities, amounts paid in settlement by or on behalf such directors and for any expenses actually and reasonably incurred by such directors in connection with such action, if such directors acted in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal proceeding, had no reasonable cause to believe their conduct was unlawful. We also intend to advance to our directors expenses (including attorney’s fees) incurred by such directors in advance of the final disposition of any action after the receipt by the corporation of a statement or statements from directors requesting such payment or payments from time to time, provided that such statement or statements are accompanied by an undertaking, by or on behalf of such directors, to repay such amount if it shall ultimately be determined that they are not entitled to be indemnified against such expenses by the corporation.
 
The indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification or advancement of expenses, including, among others, provisions about providing notice to the corporation of any action in connection with which a director seeks indemnification or advancement of expenses from the corporation and provisions concerning the determination of entitlement to indemnification or advancement of expenses.
 
Prior to the closing of this offering we plan to enter into an underwriting agreement, which will provide that the underwriters are obligated, under some circumstances, to indemnify our directors, officers and controlling persons against specified liabilities.
 
Item 15.  Recent Sales of Unregistered Securities
 
In the three years preceding the filing of this registration statement, we issued the securities indicated below that were not registered under the Securities Act. All share and price information does not reflect the conversion of all of our issued and outstanding shares Series A and Series C convertible preferred stock into common stock or the reverse stock split of our common stock, both of which will occur immediately prior to the closing of this offering.
 
Stock, Warrants and Convertible Subordinated Notes
 
1. On February 18, 2010, we granted to 18 employees and four non-employee directors 1,102,500 shares of restricted common stock. We received no consideration from the individuals in connection with the grant of the restricted stock.


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2. On December 30, 2009, we issued subordinated convertible promissory notes, bearing interest at 14% per annum, in an aggregate original principal amount of $15,000,000, and warrants to purchase an aggregate of 1,111,109 shares of common stock to 28 accredited investors. The aggregate consideration received by us was $15,000,000.
 
3. On June 4, 2008, we issued a warrant to purchase 100,000 shares of common stock to two residents of Ontario, Canada. The consideration received by us was $10.
 
4. Between December 14, 2007 and June 2, 2008, we issued an aggregate of 12,520,001 shares of Series C convertible preferred stock and warrants to purchase an aggregate of 1,252,001 shares of common stock to 37 accredited investors. The aggregate consideration received by us was $30,048,002.
 
5. Between November 19, 2007 and February 26, 2009, we issued an aggregate of 73,305 shares of our common stock to five employees. The aggregate consideration received by us was $76,118.
 
6. Between June 1, 2007 and July 13, 2007, we issued an aggregate of 3,530,495 shares of Series B preferred stock to 26 accredited investors. The aggregate consideration received by us was $3,530,495.
 
7. On January 10, 2007, we issued 3,000 shares of Series B preferred stock and warrants to purchase 801 shares of common stock to one accredited investor. The consideration received by us was $3000.
 
The grants of restricted common stock described in (1) above were made pursuant to our 2004 Stock Plan to our officers, directors and employees in reliance upon an available exemption from the registration requirements of the Securities Act, including those contained in Rule 701 promulgated under Section 3(b) of the Securities Act. Among other things, we relied on the fact that, under Rule 701, companies that are not subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act are exempt from registration under the Securities Act with respect to certain offers and sales of securities pursuant to “compensatory benefit plans” as defined under that rule. We believe that our 2004 Stock Plan qualifies as a compensatory benefit plan.
 
We believe that the offer and sale of the securities referenced in (2), (4), (6) and (7) above were exempt from registration under the Securities Act by virtue of Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder as transactions not involving any public offering. All of the purchasers of unregistered securities for which we relied on Section 4(2) and/or Regulation D represented that they were accredited investors as defined under the Securities Act. The purchasers in each case represented that they intended to acquire the securities for investment only and not with a view to the distribution thereof and that they either received adequate information about the registrant or had access, through employment or other relationships, to such information; appropriate legends were affixed to the stock certificates issued in such transactions; and offers and sales of these securities were made without general solicitation or advertising.
 
The sales of common stock referenced in (5) above was made pursuant to the exercise of stock options granted under our 2004 Stock Plan to our officers, directors, employees and consultants and, we believe, were made in reliance upon an available exemption from the registration requirements of the Securities Act, including those contained in Rule 701 promulgated under Section 3(b) of the Securities Act. Among other things, we relied on the fact that, under Rule 701, companies that are not subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act are exempt from registration under the Securities Act with respect to certain offers and sales of securities pursuant to “compensatory benefit plans” as defined under that rule. We believe that our 2004 Stock Plan qualifies as a compensatory benefit plan.
 
We believe the sales of common stock referenced in (3) above were exempt from registration under the Securities Act by virtue of Regulation S promulgated thereunder. All of the purchasers of unregistered securities for which we relied on Regulation S represented that they were not acquiring the securities for the account or benefit of any U.S. Person as defined by Regulation S.


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There were no underwriters engaged in connection with any of the transactions referenced above.
 
Stock Options
 
1. On February 18, 2010, we granted one of our employees an option to purchase 100,000 shares of our common stock at an exercise price of $1.23 per share. We received no consideration from this individual in connection with the issuance of such option.
 
2. On January 28, 2010, we granted to three of our employees options to purchase 225,000 shares of our common stock at an exercise price of $1.23 per share. We received no consideration from these individuals in connection with the issuance of such options.
 
3. On January 29, 2009, we granted to seven of our employees options to purchase an aggregate of 142,000 shares of our common stock at an exercise price of $1.25 per share. We received no consideration from these individuals in connection with the issuance of such options.
 
4. On August 1, 2008, we granted to two of our employees options to purchase an aggregate of 30,000 shares of our common stock at an exercise price of $1.98 per share. We received no consideration from these individuals in connection with the issuance of such options.
 
5. On July 23, 2008, we granted to one employee an option to purchase 40,000 shares of our common stock at an exercise price of $1.98 per share. We received no consideration from this individual in connection with the issuance of such options.
 
6. On June 25, 2008, we granted to one employee an option to purchase 8,310 shares of our common stock at an exercise price of $1.98 per share. We received no consideration from this individual in connection with the issuance of such options.
 
7. On May 1, 2008, we granted to 18 employees options to purchase an aggregate of 471,807 shares of our common stock at an exercise price of $1.98 per share. We received no consideration from these individuals in connection with the issuance of such options.
 
8. On January 31, 2008, we granted to one employee an option to purchase 1,944 shares of our common stock at an exercise price of $1.98 per share. We received no consideration from this individual in connection with the issuance of such options.
 
9. On December 31, 2007, we granted to three employees options to purchase an aggregate of 75,000 shares of our common stock at an exercise price of $2.40 per share. We received no consideration from these individuals in connection with the issuance of such options.
 
10. On October 31, 2007, we granted to three employees options to purchase an aggregate of 72,038 shares of our common stock at an exercise price of $1.25 per share. We received no consideration from these individuals in connection with the issuance of such options.
 
11. On August 15, 2007, we granted to one employee an option to purchase 10,000 shares of our common stock at an exercise price of $1.25 per share. We received no consideration from this individual in connection with the issuance of such options.
 
12. On August 10, 2007, we granted to two employees options to purchase and aggregate of 15,000 shares of our common stock at an exercise price of $1.25 per share. We received no consideration from these individuals in connection with the issuance of such options.


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13. On April 26, 2007, we granted to one employee an option to purchase 10,000 shares of our common stock at an exercise price of $1.25 per share. We received no consideration from this individual in connection with the issuance of such options.
 
14. On January 25, 2007, we granted to 16 employees options to purchase an aggregate of 347,295 shares of our common stock at an exercise price of $1.25 per share. We received no consideration from these individuals in connection with the issuance of such options.
 
15. On January 25, 2007, we granted to four non-employee directors options to purchase an aggregate of 148,000 shares of our common stock at an exercise price of $1.25 per share. We received no consideration from these individuals in connection with the issuance of such options.
 
All of the stock options described above were granted under our 2004 Stock Plan to our officers, directors, employees and consultants in reliance upon an available exemption from the registration requirements of the Securities Act, including those contained in Rule 701 promulgated under Section 3(b) of the Securities Act. Among other things, we relied on the fact that, under Rule 701, companies that are not subject to the reporting requirements of Section 13 or Section 15(d) of the Exchange Act are exempt from registration under the Securities Act with respect to certain offers and sales of securities pursuant to “compensatory benefit plans” as defined under that rule. We believe that our 2004 Stock Plan qualifies as a compensatory benefit plan.
 
There were no underwriters engaged in connection with any of the transactions referenced above.
 
Item 16.  Exhibits and Financial Statement Schedules
 
See Exhibit Index following the signature page.
 
Item 17.  Undertakings
 
The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
 
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
 
The undersigned registrant hereby undertakes that:
 
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
 
(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.


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SIGNATURES
 
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Winston-Salem, State of North Carolina, on March 12, 2010.
 
PRIMO WATER CORPORATION
 
  By:  
/s/  Billy D. Prim
Billy D. Prim
Chairman, Chief Executive Officer and President
 
POWER OF ATTORNEY
 
Each person whose signature appears below constitutes and appoints Billy D. Prim and Mark Castaneda and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, severally, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, any subsequent registration statements pursuant to Rule 462 of the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney my be executed in counterparts.
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, in each case on March 12, 2010:
 
         
Signature
 
Title
 
     
/s/  Billy D. Prim

Billy D. Prim
  Chairman, Chief Executive Officer, President and Director (Principal Executive Officer)
     
/s/  Mark Castaneda

Mark Castaneda
  Chief Financial Officer (Principal Financial Officer)
     
/s/  David J. Mills

David J. Mills
  Controller (Principal Accounting Officer)
     
/s/  Richard A. Brenner

Richard A. Brenner
  Director
     
/s/  David W. Dupree

David W. Dupree
  Director
     
/s/  Malcolm McQuilkin

Malcolm McQuilkin
  Director
     
/s/  David L. Warnock

David L. Warnock
  Director


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INDEX TO EXHIBITS
 
         
Exhibit
   
Number
 
Description
 
  1 .1*   Underwriting Agreement
  3 .1*   Amended and Restated Certificate of Incorporation of Primo Water Corporation
  3 .2*   Amended and Restated Bylaws of Primo Water Corporation
  4 .1*   Specimen Certificate representing shares of common stock of Primo Water Corporation
  5 .1*   Opinion of K&L Gates LLP
  10 .1*   Loan and Security Agreement, dated as June 23, 2005, among Primo Water Corporation, Primo To Go, LLC, Primo Products, LLC, Primo Direct, LLC, and Wachovia Bank, National Association (the “Credit Agreement”)
  10 .2*   First Amendment to Loan and Security Agreement, dated as of April 26, 2006, among Primo Water Corporation, Primo To Go, LLC, Primo Products, LLC, Primo Direct, LLC, and Wachovia Bank, National Association
  10 .3*   Second Amendment to Loan and Security Agreement, dated as of April 30, 2007, among Primo Water Corporation, Primo To Go, LLC, Primo Products, LLC, Primo Direct, LLC, and Wachovia Bank, National Association
  10 .4*   Third Amendment to Loan and Security Agreement, dated as of June 24, 2008, among Primo Water Corporation, Primo To Go, LLC, Primo Products, LLC, Primo Direct, LLC, and Wachovia Bank, National Association
  10 .5*   Fourth Amendment to Loan and Security Agreement, dated as of January 7, 2009, among Primo Water Corporation, Primo To Go, LLC, Primo Products, LLC, Primo Direct, LLC, and Wachovia Bank, National Association
  10 .6*   Fifth Amendment to Loan and Security Agreement, dated as of December 30, 2009, among Primo Water Corporation, Primo To Go, LLC, Primo Products, LLC, Primo Direct, LLC, and Wachovia Bank, National Association
  10 .7*   Sixth Amendment to Loan and Security Agreement, dated as of December 30, 2009, among Primo Water Corporation, Primo To Go, LLC, Primo Products, LLC, Primo Direct, LLC, and Wachovia Bank, National Association
  10 .8*   2004 Stock Option Plan**
  10 .9*   2010 Omnibus Long-Term Incentive Plan (“2010 Omnibus Plan”)**
  10 .10*   Form of Option Agreement under 2010 Omnibus Plan**
  10 .11*   Form of Restricted Stock Award Agreement under 2010 Omnibus Plan**
  10 .12*   2010 Employee Stock Purchase Plan**
  10 .13*   Non-Employee Director Compensation Policy**
  10 .14*   Employment Agreement dated as of          , 2010 between the Company and Billy D. Prim**
  10 .15*   Employment Agreement dated as of          , 2010 between the Company and Mark Casteneda**
  10 .16*   Employment Agreement dated as of          , 2010 between the Company and Michael S. Gunter**
  10 .17*   Employment Agreement dated as of          , 2010 between the Company and Duane G. Goodwin**
  10 .18*   Form of Indemnification Agreement for Directors**
  16 .1   Letter from Independent Registered Accounting Firm
  21 .1*   List of subsidiaries of Primo Water Corporation
  23 .1   Consent of McGladrey & Pullen LLP
  23 .3*   Consent of K&L Gates LLP (contained in Exhibit 5.1)
  24 .1   Powers of Attorney (Included on Page II-6)
 
 
* To be filed by amendment.
 
** Indicates management contract or compensatory plan or arrangement


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