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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the fiscal year ended June 30, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from_______ to _______.
Commission file number 01912
VACU-DRY COMPANY
(Exact name of registrant as specified in its charter)
California 94-1069729
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7765 Healdsburg Ave., Sebastopol, California 95472
(Address of principal executive offices)
Registrant's telephone number, including area code: (707) 829-4600
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
On September 21, 1998 non-affiliates of the Registrant held voting stock
with an aggregate market value of $7,055,139 upon the average of the high and
low prices of such stock on such date.
As of September 25, 1998 there were 1,511,079 shares of common stock,
no par value, outstanding.
Portions of the following document are incorporated by reference:
Proxy Statement for the 1998 Annual Meeting of Shareholders schedule to be
held October 22, 1998 is incorporated by reference into Part III of this report.
Part I
Special Note Regarding Forward-looking Statements
The Company is including the following cautionary statement in this Annual
Report on Form 10-K to make applicable and take advantage of the safe harbor
provision of the Private Securities Litigation Reform Act of 1995 for any
forward looking statements made by, or on behalf of, the Company. Forward
looking statements include statements concerning plans, objectives, goals
strategies, future events or performance and underlying assumptions and other
statements which are other than statements of historical facts. Certain
statements contained herein are forward looking statements and, accordingly,
involve risks and uncertainties which could cause actual results or outcomes to
differ materially from those expressed in the forward looking statements. In
addition to other factors and matters discussed elsewhere herein, these risk and
uncertainties include, but are not limited to, uncertainties affecting the food
processing industry, risks associated with fluctuations in the price and
availability of raw materials, management of growth, adverse publicity affecting
organic foods or the Company's products, and product recalls. The Company's
expectations, beliefs and projections are expressed in good faith and are
believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's expectations, beliefs or
projections will result or be achieved or accomplished. The Company disclaims
any obligation to update any forward looking statements to reflect events or
circumstances after the date hereof.
Item 1. Description of Business
General
Vacu-dry Company (the "Company" or "Vacu-dry") was incorporated in
California on December 27, 1946 and has been engaged in the production of low
moisture fruits since 1933. The Company's business is the development,
production and marketing of fruit products. The Company's products include low
moisture and evaporated fruits, bulk apple juice, apple juice concentrate,
private label drink mixes and low moisture food for the food storage market. The
Company also markets a broad line of packaged organic dried fruits and organic
chilled, pasteurized fruit juices and drinks under the Made In Nature(R) brand.
On June 11, 1998, the Company acquired (through a subsidiary, Made In
Nature Company, Inc. ("MINCO") the business, assets and certain of the
liabilities of Made In Nature, Inc., a natural foods marketer. Made In Nature,
Inc. was founded in 1989 and was the first company to introduce a line of
certified organic fresh produce. Made In Nature, Inc. was sold to Dole Food
Company in August 1994. In April of 1996, Made In Nature, Inc.'s co-founder
purchased all of its stock from Dole and redirected its marketing focus from
fresh produce to packaged foods. In conjunction with the Company's acquisition
of Made In Nature, Inc., Takanashi Milk Products Company of Japan (its largest
ingredients customer) became a minority shareholder of MINCO.
The purchase of the Made In Nature brand and certain related assets was
intended to further the Company's strategic objective of diversifying its fruit
products. The Company believes that the acquisition of MINCO will give the
Company access to the fast growing natural and organic foods categories. The
Company's goal is to build a premier natural foods brand. It intends to
accomplish this through marketing efforts and rapid growth achieved through the
expansion of distribution as well as the introduction of new products.
Effective October 13, 1992, the Company entered into a representation
agreement with Confoco, Inc. for the sale of low moisture banana and pumpkin
flakes. For the year ended June 30, 1996, Vacu-dry recorded sales of $2,478,000
of Confoco products. The representation agreement was terminated effective July
1, 1996. The Company has representation agreements with Zoria Farms (assorted
dried fruits), Meduri Farms (dried and infused fruits) and Apple Valley Juice
(apple fiber). These agreements expire, November 3, 1999, January 15, 2001 and
March 30, 2001, respectively.
Industry Segment Information
The Company competes in a single industry segment within the food
industry: all assets held are supportive of efforts to compete in that segment.
Selective financial information relating to the industry segment is as follows:
1998 1997 1996
Net Sales 26,094,000 $23,798,000 $26,553,000
Earnings before
income taxes $1,429,000 $749,000 $651,000
Identifiable Assets $20,776,000 $14,576,000 $13,587,000
The Company's export sales are dependent on foreign crop conditions and
exchange rates. The Company's export sales were $1,883,000, $2,536,000 and
$2,498,000 for fiscal year 1998, 1997 and 1996, respectively.
Dried Fruit Ingredients
Business. Through drying processes, the moisture in apples is reduced from
original levels of 85%-90% to as low as 2%. In addition, the Company purchases
other fruits such as apricots, dates, peaches and prunes, which have been
partially dried, and further reduces the moisture in these fruits to levels of
approximately 3%. The resultant low moisture products are much lighter in weight
and less bulky than their raw, canned or frozen counterparts. Because of their
extreme dryness, low moisture fruit products require no refrigeration or other
special storage conditions. Other advantages include consistent product quality,
economical packaging and convenience in handling and use.
Industry and Competition. The low moisture food industry in the United
States is comparatively small with only a few processors engaged in the
dehydration of fruits to low moisture levels (2% to 5% moisture). The Company
has one major domestic competitor and several smaller foreign competitors in the
low moisture and evaporated businesses. Numerous processors compete in the
business of producing bulk apple juice and concentrate.
Sales and Marketing. The Company's sales are worldwide but principally to
manufacturers in the United States and Canada. The Company's products are
primarily sold through brokers to major food processors, bakeries, food storage
and food service operators and to federal and state institutions.
Approximately 80% of the Company's sales are generated from annual
contracts that are normally written between August and November of each year.
Most of these contracts are for one year. The sales price is normally fixed.
During the fiscal year, the customer will order against these contracts, and the
Company will invoice the customer based upon the price and other terms and
conditions of the contract. The Company incurs risk under these contracts
because the total quantity of raw materials required to fulfill these contracts
has normally not been procured at the time the contracts are written. More than
half of the Company's raw material requirements are not purchased under
contract. If the price of raw materials increases or decreases, the Company will
either benefit from or will absorb these variances from what was budgeted. The
Company's raw material costs and the related yield in processing can vary from
year to year. This process has existed for many years, and the Company has
experience in dealing with this risk.
The Company's three largest customers accounted for approximately 17% of
gross sales in 1998. The loss of any one or more of these customers could have a
material adverse effect on the Company.
Sources of Supply. In terms of volume, apples represent the major fruit
handled by the Company. The Company's production facility is designed to process
fresh fruit in addition to partially dehydrated fruits or vegetables. The
sources of apple raw material supply are individual apple growers, apple fresh
packing operators and, in emergencies, other dried apple processors. The
majority of the Company's raw apple supply comes from California. In some years,
due to crop conditions, the percentage of fruit purchased from out-of-state
sources may increase. In those years, the Company incurs increased costs due to
additional freight. The Company strives to reflect such cost increases in
selling price adjustments, but, if unsuccessful, it will absorb such costs.
Other important fruits, including peaches, apricots and prunes, are
obtained principally from dried fruit packing houses in California. Supplies of
these fruits are expected to be sufficient to meet the needs of our regular
customers. For other supplies, including cans and packaging materials, the
Company draws from a number of vendors and expects that adequate supplies will
be available.
Seasonal Nature of Business. The business of producing evaporated
apples, bulk apple juice and concentrate is seasonal, beginning in August and
usually ending in March or April. In fiscal 1998, the Company changed its
production plan and, as a result, production will be compressed into a shorter
period of months. Inventories of fresh and dried apples, packaging materials and
finished goods as of June 30, 1998, were approximately 21% of annual net sales.
The Company experiences a normal seasonal increase in inventories and related
short-term borrowings during the second and third quarters of the fiscal year.
Organic Packaged Products and Ingredients
Business. Through its subsidiary, Made In Nature Company, Inc. ("MINCO"),
the Company markets a broad line of packaged organic dried fruits and organic
chilled and pasteurized fruit juices and drinks under the Made In Nature(R)
brand. The products are principally sold through brokers to natural food
distributors and supermarkets in the United States and Canada. In addition,
MINCO supplies leading food manufacturers, mostly in Japan, with organic fruit
juice concentrates. The Company's objective is to build a premiere natural foods
brand. The Company believes that this objective can be achieved, in part,
through rapid growth. There is no assurance that such growth can be achieved or,
if it can, that the resulting demands that will be placed on the Company's
management, working capital, financial and management and control systems, and
its supply, production and distributions systems can be adequately managed.
Competition In the organic food categories in which MINCO competes, the
competition is relatively small. In the organic chilled beverage category (on a
national basis), MINCO has two direct competitors. In the organic dried fruit
and vegetable category (on a national basis), MINCO has two direct competitors.
In the mass-market sector, MINCO has many large competitors, but none of these
competitors are currently marketing an organic product. MINCO's growth will
depend on its ability to continue to expand distribution in conventional
supermarkets and in natural food specialty markets. Distribution through both
channels presents significant marketing challenges, risks and distribution
costs. There is no assurance that MINCO can achieve trade or consumer expansion
in either channel. MINCO's products are generally premium-priced and may be
sensitive to national and regional economic conditions.
Sources of Supply. MINCO contracts with growers and grower-packers for the
purchase of its organic raw material. Packaging is done under contract. MINCO is
a marketing company and has no production facilities. Although MINCO has
contractual obligations to purchase certain raw materials, it does not take
possession of the inventory until packaged and invoiced by the contract packer.
Although organic farming has increased over the last five years, as with all
agricultural products, shortages can occur. A significant shortage of raw
materials may have a material adverse effect on MINCO.
Licensing Agreements. Made In Nature(R) brand fresh produce is sold under a
licensing agreement with MINCO through Made In Nature Fresh, Inc., which is a
subsidiary of Albert's Organics, the largest distributor of fresh organic
produce in North America. In 1996, Made In Nature, Inc. licensed the use of its
brand in Japan to Takanashi, which intends to market Made In Nature(R) brand
products throughout Japan.
Organic Certification. The value of the Made In Nature(R) brand is
dependent on the organic certification. The loss of this certification would
have a material adverse effect on MINCO. MINCO is dependent upon consumers'
perception of the safety, quality, and possible dietary benefits of its
products. As a result, substantial negative publicity concerning organic
products, MINCO's products or the products of its licensees could have a
material adverse effect on MINCO's business, financial condition or results of
operations.
The USDA has been developing the rules for the National Organic Program for
eight years, as mandated in the Organic Food Production Act of 1990. The
proposed rules were released in early 1998 and were met with significant
opposition. Due to this opposition the USDA is re-evaluating the proposed rules
If the USDA rules do not provide the restrictions emphasized in the opposition
to initial proposal, the image of "organic" by the consumer may be impaired
and as a result negatively affect MINCO's sales.
Inventories. MINCO's inventories of raw materials and finished goods on
hand as of June 30, 1998 were $2,319,000. It is anticipated that building the
Made In Nature(R) brand will increase working capital requirements. Based upon
Made In Nature Inc.'s prior operating losses, there is no assurance that MINCO
can achieve profitable operations.
Backlog
The dollar amount of order and contract backlog believed to be firm as of
September 1, 1998, September 1, 1997 and September 1, 1996 is $12,478,000,
$10,186,000 and $8,558,000, respectively. This backlog does not include MINCO.
The backlog as of September 1, 1996 excludes the Confoco orders. It is expected
that the order backlog will be filled and shipped within the related fiscal
year. The dollar value of backlog varies during the year, with the peak usually
occurring during the September through December period.
Trademarks
The Company holds the following registered trademarks: Vacu-dry, Made In
Nature, Apple Munchies, Noah's Ark, Fruit Galaxy, Perma-Pak and Pantri Reserve.
Sales of trademarked goods account for the majority of the Company's total
sales. Vacu-dry, Made In Nature and Perma-Pak are the predominant trademarks of
those listed above. The Made In Nature brand is important to the Company in
connection with the sale of its branded organic products.
Research and Development
For information on research and development expenditures, see Note 14 to
the Financial Statements.
Environmental Matters
The Company has complied with all governmental regulations regarding
protection of the environment. No material capital expenditures are anticipated
for environmental control facilities during the next fiscal year.
Employees
The Company employs an average of approximately 265 persons. This number
varies throughout each year and increases during periods of high production. Of
the 265 employees, approximately 200 are represented by the General Truck
Drivers, Warehousemen and Helpers Union, Local #624. The union employees are
presently covered by a signed contract.
Insurance
The Company maintains product, property and general liability insurance
plus umbrella liability coverage. The Company does not carry any product recall
coverage. Management feels the limits and coverage are adequate relative to the
related risk. There is no assurance that this insurance will be adequate to
protect the Company from product liability claims. A product recall could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Item 2. Properties
The principal administrative offices are located in Sebastopol, California.
Approximately 4,130 square feet of office space is leased through February 1999.
At the end of the term, the lease reverts to month-to-month.
The Company owns 15 acres of land and approximately 95,000 square feet
under roof at 1365 Gravenstein Hwy So., Sebastopol, California. This facility
(formerly described as Plant #1) was used for the dehydration of fruits to low
moisture prior to the consolidation of this operation into the main processing
plant (formerly described as Plant #2), located at 2064 Gravenstein Hwy No.,
Sebastopol, California. As of June 30, 1998, the Company has leased
approximately 71,400 square feet of this facility, which comprises 90% of the
leaseable square footage. The Company's research and development department is
located at this facility. The Company has no debt associated with this facility.
The Company owns 66 acres of land and approximately 298,000 square feet
under roof at 2064 Gravenstein Hwy. No., Sebastopol, California. As of June 30,
1998, this facility is the Company's only active processing plant. The buildings
include facilities to process fresh apples into dried products, bulk apple juice
and concentrate. In addition to the facilities for the dehydration of apples and
other fruits, there is also warehouse space, cold storage, and office
accommodations. During fiscal 1998, the production operations functioned at
approximately 115% of the single shift capacity. The Company has leased
approximately 54,500 square feet of excess warehouse space to various tenants.
The primary tenant, occupying 51,200 square feet extended their lease through
April 2006. The Company has no debt associated with this facility.
MINCO's office is located in San Rafael, California. Approximately 2,400
square feet of office space is leased on a month-to-month basis. This office and
the Company's corporate office will be consolidated and relocated during the
1999 fiscal year.
Item 3. Legal Proceedings
The Company has no material legal proceedings pending.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the last
quarter of the year ended June 30, 1998.
Part II
Item 5. Market for the Registrant's Common Stock and Related Security-Holder
Matters
The Company's shares are traded on the NASDAQ National Market.
The Company's NASDAQ symbol is VDRY.
The quarterly high and low prices for the last two fiscal years were as
follows:
Quarter Ending Low Bid High Bid
09/30/96 4-7/8 5-1/4
12/31/96 4-7/8 5-1/2
03/31/97 5 5-1/2
06/30/97 4-3/8 5
09/30/97 4-1/2 5-1/2
12/31/97 4-7/8 7-1/4
03/31/98 5-5/8 8-1/2
06/30/98 6-3/4 11
The above quotations were obtained from the NASDAQ monthly statistical
reports.
On September 8, 1998, the approximate number of holders of common stock
was 661. On that date, the average of the high and low price per share of the
Company's stock was $7.88. This price does not include dealer mark-ups,
markdowns or commissions.
In the fourth quarter of fiscal 1994 and in the first three quarters of
fiscal 1995, the Company declared a $.05 per share dividend. On April 27, 1995,
as a result of the decline in sales and earnings, the Board of Directors
suspended the quarterly dividends. The Company's loan agreement with its bank
includes a negative covenant regarding the declaring or paying of a dividend in
cash, stock or any other property. This covenant would need to be waived prior
to the declaration of a dividend. At this time, the Company does not intend to
reinstate a cash dividend plan.
Item 6. Selected Financial Data
YEAR ENDED
June 30, 1998 June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994
(In thousands except per share amounts)
Net sales $26,094 $23,798 $26,533 $21,438 $27,773
Earnings before income taxes
$1,421 $749 $651 $287 $1,887
Net earnings $899 $517 $434 $195 $1,174
Earnings per common share
Basic $.57 $.31 $.25 $.11 $.70
Diluted $.56 -- -- -- --
Weighted average common
shares and equivalents
outstanding
Basic 1,581 1,648 1,704 1,701 1,669
Diluted 1,600 -- -- -- --
Total Assets $20,776 $14,576 $13,587 $15,335 $14,929
Long-term debt $ 4,500 $ 1,808 $ 1,628 $ 2,105 $ 2,585
Cash dividends per common
share $ -- $ -- $ -- $ .15 $ .05
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition continued to improve during fiscal year
1998. Some of this improvement is reflected in the Company's increase in
shareholder equity per share. Equity per share increased from $5.37 as of fiscal
1997 to $6.21 as of fiscal 1998. This significant increase was a result of the
Company's repurchase of 139,100 shares of stock at a total cost of $835,000 and
net earnings of $899,000 for fiscal 1998. As a result of the acquisition of
MINCO, the debt to equity ratio increased from 0.65 in fiscal 1997 to 1.16 in
fiscal 1998 with a corresponding decrease in the current ratio from 2.36 to 1.0
in fiscal 1997 to 1.0 in fiscal 1998. The increase in accounts payable
and inventories was a direct result of the MINCO acquisition.
Because the Company's operations are subject to seasonality, the Company's
liquid resources fluctuate during the year. The Company experiences a normal
seasonal decrease in production in April. Inventories and related short-term
borrowings are usually at their peak at this time. The slowdown in production
normally extends through July and corresponds to the availability of raw fruit
on an affordable basis. The Company's inventory ordinarily decreases during the
period beginning in May and ending in September which creates a corresponding
increase in liquidity. In fiscal 1999, the Company continues to operate under a
change in its production cycle which was instituted in fiscal 1998. This change
is expected to increase inventories in the first six months of the fiscal year.
The Company's operating capital is obtained from internal and external
sources. The Company's largest external source is a revolving line of credit
provided by a bank at the bank's prime rate. The Company increased the total
limit of its revolving line of credit to $4,500,000 in anticipation of higher
short-term borrowing requirements as a direct result of a condensed production
period and the related increase in inventory levels. The line expires November
1, 1999. As of June 30, 1998, the Company had $2,203,000 of available funds on
this revolving line of credit. This compares with $2,146,000 of available funds
on the $3,500,000 revolving line of credit as of June 30, 1997. The Company
utilized the revolving line of credit as a source of interim financing to fund
the acquisition of MINCO. In the first half of fiscal 1999, the Company intends
to convert these borrowings to longer-term debt. As of June 30, 1998, the
Company was in compliance with all covenants and restrictions related to its
outstanding debt. The Company's loan agreement with its bank includes a negative
covenant regarding the declaring or paying of dividends in cash, stock or any
other property without the prior approval by the bank. The Company received
approval from its bank prior to the repurchase of the 139,100 shares of common
stock. The Company's long-term debt increased $835,000 as a result of this stock
repurchase.
Excluding the Year 2000 expenditures, which are expected to be financed
through leasing arrangements, the Company has established a capital expenditure
budget of approximately $998,000 for the 1999 fiscal year. These funds will
primarily be used to purchase new and recondition existing equipment related to
the manufacturing operation. The Company anticipates financing these
expenditures through internally generated funds.
The Company has reviewed its information technology (IT) systems and
determined that its is not Year 2000 compliant. The Company has chosen to
purchase new software, which is warranted to be Year 2000 compliant. In
addition, the Company is purchasing new hardware on which to operate the new
software. The Company has not completed its assessment of its non-IT systems.
The initial assessment is that there are very few embedded microprocessors that
will need to be replaced. This assessment will be completed by September 30,
1998. The conversion to the new software is just beginning. The Company has
hired a consulting firm to manage the implementation of the software. The
conversion for Vacu-dry and MINCO to this new system is expected to be completed
by no later than May 31, 1999. Phase I for just Vacu-dry is expected to be
completed by December 31, 1998. The final phase is expected to be completed by
February 28, 1999. MINCO will begin its implementation on January 1, 1999 and is
expected to complete all phases by April 30, 1999. The Company has allocated one
month at the end of the conversion to make sure it has addressed all of the
issues related to the conversion. A group of ten managers has formed an
"Implementation Team" which is strongly supported by upper management. Both the
Implementation Team and upper management are confident that the implementation
can be completed by May 31, 1999. Management estimates that the total cost of
the system will be approximately $800,000. The expenditures for the new system
will primarily occur in fiscal 1999. The Company anticipates financing these
costs through a lease agreement. The Company has assessed its risk relative to
the Year 2000 issue and is confident that it can accomplish the conversion prior
to December 31, 1999. If this conversion does not happen, the Company would have
to rely on PC-based software to accomplish its normal business activities until
the conversion can be completed.
The Company has been successful in leasing all of its idle production
facility other than a portion occupied by Product Development. The Company
signed a long-term lease for approximately one-half of the previously vacated
portion of this facility. The Company has secured a new short-term lease for the
balance of the available space. This lease expires January 31, 1999. The Company
is working to obtain a replacement tenant without a loss of income but has been
unsuccessful to date. In addition, the Company continues to lease a portion of
its current operating facility and has entered into a long-term lease with the
primary tenant.
The Company may require additional capital to expand the current business
and to acquire additional companies. The Company will utilize future private or
public financing to satisfy this need for additional funds.
After the Company obtains longer-term financing for the MINCO acquisition,
it believes the existing line of credit limit of $4,500,000 will be sufficient
for its own and MINCO's working capital requirements.
RESULTS OF OPERATIONS
The results of operations include the accounts of the Company for the year
ended June 30, 1998 and the accounts of MINCO for the period from acquisition
(June 11, 1998) to June 30, 1998. The results of operations for MINCO are
included in the following discussions but are not significant to the
consolidated results of the Company for fiscal 1998.
Net Sales. The Company's sales are dictated by the competitive environment,
customer demands and sales preferences. Sales volume between the years can be
affected by one or more of these factors. Net sales for fiscal 1998 increased
$2,296,000 or 10%. This increase was primarily the result of higher volume sales
(+17%) offset by an average unit price decrease (-7%). The unit price decreases
were a direct result of lower raw material costs. Net sales for fiscal 1997
decreased $2,735,000 or 10%. This decrease was primarily a result of the loss of
the Confoco banana and pumpkin sales, which accounted for $2,478,000 of fiscal
1996 sales.
Other Revenue. In fiscal 1998, other revenue decreased $49,000 or 8%. This
decrease was primarily the result of lower rental income.
Cost of Sales. As a percentage of net sales, cost of sales decreased in
fiscal 1998 to 83% as compared to 89% in 1997 and 91% in 1996. These decreases
in both 1998 and 1997 are a result of lower raw material prices, increased
production volume, yield improvements and production efficiencies.
Selling, General and Administrative Expenses. In fiscal 1998, these
expenses increased $1,230,000 or 57%. The increase was due to the following
items: costs incurred as the result of the exploration of new strategic
initiatives; bonus and profit sharing expenses which did not occur in either
fiscal 1997 or 1996; MINCO expenses; an increase in the Stock Appreciation
Rights liability (as a result of the higher stock price); and greater expenses
for salaries, benefits and marketing expenses.
Interest Expense. The increase in fiscal 1998 interest expense of $38,000
or 14% is the result of increased average borrowings on the line of credit.
Interest rates remained relatively constant between years. In fiscal 1997,
interest expense decreased $26,000 or 9% from 1996 due to the decline in the
weighted average interest rate on the line of credit which more than offset the
increase in interest expense as a result of the increase in long-term debt.
Income Taxes. The effective tax rate increased from 31 percent to 37
percent due to decreased tax credits and increased income.
Item 8. Consolidated Financial Statements and Supplementary Data
See Index at Item 14 for information required by this item.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
Information with respect to this item is contained in the Registrant's 1998
Proxy Statement under the heading "Election of Directors," which information is
incorporated herein by reference.
Executive Officers of the Registrant
The following table sets forth certain information concerning the
executive officers of the Company as of September 25, 1998:
Name Age Position
Gary L. Hess 46 President and Chief Executive Officer
Esther K. Castain 60 Secretary and Manager of Employee Relations
Thomas R. Eakin 44 Vice President Finance and Chief Financial
Officer
Mr. Hess joined the Company as of May 1, 1996 as President and Chief
Executive Officer. Prior thereto he was a Senior Vice President of Dole Food
Company, Inc. (fresh and processed fruit) (1993-1996); President of Cadace
Enterprises, Inc. (water conservation products) and The Marketing Partnership
(1992-1993); and Director of Marketing, E & J Gallo Winery (wine and distilled
spirits) (1987-1992).
Ms. Castain joined the Company in 1976. She has been Secretary of the
Company since 1990. Prior thereto she was Manager of Employee Relations.
Mr. Eakin joined the Company in 1983. For the past eleven years, he has
been Vice President, Finance and Chief Financial Officer.
Items 11, 12 and 13
The information required in Items 11, 12 and 13 will be included in the
definitive Proxy Statement for Registrant's 1998 Annual Meeting of Shareholders
or in an amendment to the Form 10-K under cover of Form 8. The information
required in this Part III will be filed with the Securities and Exchange
Commission no later than 120 days after the end of the fiscal year.
Part IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(a) Documents filed as part of this Report:
1. Financial Statements: Page No.
Report of Independent Public Accountants. 12
Statement of Earnings for the Years Ended
June 30, 1998, June 30, 1997 and June 30, 1996. 14
Balance Sheets -- June 30, 1998 and June 30,1997. 13
Statements of Changes in Shareholders' Equity for
the Years Ended June 30, 1998, June 30, 1997 and
June 30, 1996. 15
Statements of Cash Flows for the Years Ended
June 30, 1998, June 30, 1997 and June 30, 1996. 16
Notes to Financial Statements. 17-25
2. Financial statements and schedules not included herein have been omitted
because of the absence of conditions under which they are required or because
the required information, where material, is shown in the financial statements
or notes thereto.
3. Exhibits: Page No.
See Exhibit Index 27
(b) Reports on Form 8-K. A report on Form 8-K was filed on June 22, 1998
relating to the Company's acquisition (through a subsidiary, Made In Nature
Company, Inc., the business, assets and certain of the liabilities of Made In
Nature, Inc., a natural foods marketer.
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VACU-DRY COMPANY
(Registrant)
Date: September 25, 1998 By: /s/ Gary L. Hess
------------------------------------
Gary L. Hess, President & CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/ Gary L. Hess President & Chief Executive Officer September 25,1998
- ----------------------------------------- Director
Gary L. Hess
/s/ Kenneth P. Gill Director September 25, 1998
- -----------------------------------------
Kenneth P. Gill
Director
- -----------------------------------------
Edward Koplovsky
/s/ Roger S. Mertz Director September 25, 1998
- -----------------------------------------
Roger S. Mertz
/s/ Craig Stapleton Director September 25, 1998
- -----------------------------------------
Craig Stapleton
/s/ Donal Sugrue Director September 25, 1998
- -----------------------------------------
Donal Sugrue
/s/ Thomas R. Eakin Vice President Finance & Chief Financial September 25, 1998
- ----------------------------------------- Officer
Thomas R. Eakin
VACU-DRY COMPANY
COMMISSION FILE NUMBER 01912
EXHIBIT INDEX
For the year ended June 30, 1998
Exhibit No. Document Description Page No. or Reference
- ----------- -------------------- ----------------------
3.1 Articles of Incorporation (2)
3.2 By-laws of Vacu-dry Company (4)
10.1 Employment Agreement between Vacu-dry Company and Gary L. Hess
dated March 14, 1996 (5)
10.2 Stock Appreciation Rights Plan (4)
10.3 1996 Stock Option Plan (6)
10.4 1993 Employee Stock Purchase Plan (7)
10.5 Agreement dated June 11, 1998 between MIN Acquisition Corp.,
Vacu-dry Company and Global Walk, Inc.
10.6 Co-Sale Agreement dated June 11, 1998 between Vacu-dry Company
and Global Walk, Inc.
10.7 Asset Purchase Agreement dated June 11, 1998 between Vacu-dry
Company, MIN Acquisition Corp., Made In Nature, Inc and Gerald E.
Prolman
10.8 Warrant to Purchase Common Stock dated June 11, 1998 issued by
Vacu-dry Company to Made In Nature, Inc.
10.9 Warrant to Purchase Common Stock dated June 11, 1998 issued by
Vacu-dry Company to Gerald E. Prolman
11. Computation of Per Share Earnings
23. 1 Consent of Independent Public Accountants
27. 1 Financial Data Schedule (EDGAR Filing Only)
Incorporated by reference to the Company's:
(2) Form 10-K for the year ended June 30, 1988 (4) Form 10-K for the year ended
June 30, 1992 (5) Form 10-K for the year ended June 30, 1996 (6) Form 10-K/A for
the year ended June 30, 1996 (7) Form S-8 Registration Statement No. 33-70870
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Vacu-dry Company:
We have audited the accompanying consolidated balance sheets of Vacu-dry Company
(a California corporation) and Subsidiary as of June 30, 1998 and 1997, and the
related consolidated statements of earnings, changes in shareholders' equity,
and cash flows for each of the three years in the period ended June 30, 1998.
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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vacu-dry Company and Subsidiary
as of June 30, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1998, in
conformity with generally accepted accounting principles.
San Francisco, California,
August 21, 1998
VACU-DRY COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS--JUNE 30, 1998 AND 1997
1998 1997
---------------- ---------------
ASSETS
CURRENT ASSETS:
Cash $ 385,000 $ 283,000
Accounts receivable, less allowances for uncollectible accounts of $58,000 and
$63,000 in 1998 and 1997, respectively 2,298,000 1,567,000
Income tax receivable 127,000 70,000
Inventories, less LIFO reserves of $1,114,000 and $2,180,000 in 1998 and 1997,
respectively 7,926,000 5,055,000
Prepaid expenses 334,000 131,000
Current deferred income taxes, net 360,000 239,000
---------------- ---------------
Total current assets 11,430,000 7,345,000
---------------- ---------------
PROPERTY, PLANT, AND EQUIPMENT:
Land 231,000 231,000
Buildings and improvements 6,604,000 6,570,000
Machinery and equipment 11,362,000 11,059,000
Construction in progress 390,000 77,000
---------------- ---------------
Total property, plant, and equipment 18,587,000 17,937,000
Accumulated depreciation (11,803,000) (10,706,000)
---------------- ---------------
Net property, plant, and equipment 6,784,000 7,231,000
---------------- ---------------
GOODWILL, net of accumulated amortization of $5,000 in 1998 2,562,000 0
---------------- ---------------
Total assets $ 20,776,000 $ 14,576,000
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Borrowings under line of credit $ 0 $ 1,354,000
Current maturities of long-term debt 438,000 557,000
Accounts payable 3,789,000 490,000
Accrued payroll and related liabilities 936,000 539,000
Other accrued expenses 353,000 173,000
---------------- ---------------
Total current liabilities 5,516,000 3,113,000
---------------- ---------------
BORROWINGS UNDER LINE OF CREDIT 2,297,000 0
---------------- ---------------
LONG-TERM DEBT, net of current maturities 2,203,000 1,808,000
---------------- ---------------
DEFERRED INCOME TAXES, net 865,000 826,000
---------------- ---------------
MINORITY INTEREST 509,000 0
---------------- ---------------
SHAREHOLDERS' EQUITY:
Preferred stock: 2,500,000 shares authorized; no shares outstanding 0 0
Common stock: 5,000,000 shares authorized, no par value; 1,511,079 and 1,642,757
shares outstanding in 1998 and 1997, respectively 2,837,000 3,635,000
Warrants for common stock 456,000 0
Retained earnings 6,093,000 5,194,000
---------------- ---------------
Total shareholders' equity 9,386,000 8,829,000
================ ===============
Total liabilities and shareholders' equity $ 20,776,000 $ 14,576,000
================ ===============
The accompanying notes are an integral part of these consolidated statements.
VACU-DRY COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
1998 1997 1996
---------------- ---------------- ---------------
REVENUE:
Net sales $26,094,000 $ 23,798,000 $ 26,533,000
Other 586,000 635,000 685,000
---------------- ---------------- ---------------
Total revenue 26,680,000 24,433,000 27,218,000
---------------- ---------------- ---------------
COSTS AND EXPENSES:
Cost of sales 21,565,000 21,258,000 24,142,000
Selling, general, and administrative 3,384,000 2,154,000 2,127,000
Interest 310,000 272,000 298,000
---------------- ---------------- ---------------
Total costs and expenses 25,259,000 23,684,000 26,567,000
---------------- ---------------- ---------------
Earnings before minority interest and provision
for income taxes 1,421,000 749,000 651,000
Minority interest 8,000 0 0
---------------- ---------------- ---------------
Earnings before provision for income taxes 1,429,000 749,000 651,000
PROVISION FOR INCOME TAXES 530,000 232,000 217,000
================ ================ ===============
Net earnings $ 899,000 $ 517,000 $ 434,000
================ ================ ===============
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
Basic 1,581,014 1,647,723 1,703,968
Diluted 1,600,327
EARNINGS PER COMMON SHARE:
Basic $0.57 $.31 $.25
Diluted 0.56
The accompanying notes are an integral part of these consolidated statements.
VACU-DRY COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
Common Stock Warrants for Total
Number Common Retained Shareholders'
of Shares Amount Stock Earnings Equity
------------- -------------- --------------- -------------- ---------------
BALANCE, JUNE 30, 1995 1,698,030 $ 3,936,000 $ 0 $ 4,243,000 $ 8,179,000
Net earnings 0 0 0 434,000 434,000
Issuance of common stock 15,324 65,000 0 0 65,000
------------- -------------- --------------- -------------- ---------------
BALANCE, JUNE 30, 1996 1,713,354 4,001,000 0 4,677,000 8,678,000
Net earnings 0 0 0 517,000 517,000
Repurchase of common stock (80,000) (407,000) 0 0 (407,000)
Issuance of common stock 9,403 41,000 0 0 41,000
------------- -------------- --------------- -------------- ---------------
BALANCE, JUNE 30, 1997 1,642,757 3,635,000 0 5,194,000 8,829,000
Net earnings 0 0 0 899,000 899,000
Repurchase of common stock (139,100) (835,000) 0 0 (835,000)
Issuance of common stock 7,422 37,000 0 0 37,000
Issuance of warrants 0 0 456,000 0 456,000
============= ============== =============== ============== ===============
BALANCE, JUNE 30, 1998 1,511,079 $ 2,837,000 $ 456,000 $ 6,093,000 $ 9,386,000
============= ============== =============== ============== ===============
The accompanying notes are an integral part of these consolidated statements.
VACU-DRY COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
1998 1997 1996
----------------- ---------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 899,000 $ 517,000 $ 434,000
----------------- ---------------- -----------------
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization expense 1,102,000 1,025,000 947,000
Loss on sale of assets 0 0 20,000
Deferred income tax provision 27,000 64,000 (86,000)
Minority interest (8,000) 0 0
Changes in assets and liabilities:
Accounts receivable, net (569,000) 1,117,000 (1,005,000)
Income tax receivable (57,000) (70,000) 155,000
Inventories, net (648,000) (1,625,000) 1,984,000
Prepaid expenses (136,000) (15,000) 60,000
Accounts payable 117,000 (188,000) 285,000
Accrued payroll and related liabilities 383,000 63,000 (50,000)
Accrued expenses (37,000) 35,000 (253,000)
----------------- ---------------- -----------------
174,000 406,000 2,057,000
----------------- ---------------- -----------------
Net cash provided by operating activities
1,073,000 923,000 2,491,000
----------------- ---------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (595,000) (1,338,000) (470,000)
Proceeds from sale of assets 0 0 8,000
Acquisition of Made In Nature, net of cash acquired (297,000) 0 0
----------------- ---------------- -----------------
Net cash used for investing activities (892,000) (1,338,000) (462,000)
----------------- ---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under the line of credit 11,245,000 8,030,000 11,002,000
Payments on line of credit (10,302,000) (7,502,000) (12,527,000)
Proceeds from issuance of long-term debt 0 805,000 0
Principal payments of long-term debt (1,059,000) (483,000) (542,000)
Repurchase of common stock 0 (407,000) 0
Issuance of common stock 37,000 41,000 65,000
----------------- ---------------- -----------------
Net cash provided by (used for) financing
activities (79,000) 484,000 (2,002,000)
----------------- ---------------- -----------------
NET INCREASE IN CASH 102,000 69,000 27,000
CASH AT BEGINNING OF YEAR 283,000 214,000 187,000
================= ================ =================
CASH AT END OF YEAR $ 385,000 $ 283,000 $ 214,000
================= ================ =================
The accompanying notes are an integral part of these consolidated statements.
VACU-DRY COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Vacu-dry Company (Vacu-dry) is engaged in the business of the development,
production, and marketing of fruit-related products. Vacu-dry's products include
low-moisture fruits, bulk apple juice, apple juice concentrate, private label
drink mixes, and low-moisture food products, which are sold to manufacturers
principally in the United States and Canada. On June 11, 1998, Vacu-dry formed
Made In Nature Company, Inc. (MINCO) upon the acquisition of certain assets and
liabilities of Made In Nature, Inc. (see Note 2). MINCO is engaged in the
business of marketing certified organic, packaged foods and chilled pasteurized
beverages. The consolidated company is referred to as the Company.
The low-moisture food industry in the United States is comparatively small, with
only a few organizations engaged in the dehydration of fruits to low moisture
levels. Vacu-dry has one major direct competitor in the low-moisture and
evaporated business. Numerous processors compete in the business of bulk apple
juice and concentrate. The organic food industry in the United States is also
comparatively small, with only a few organizations engaged in the marketing of
organic dried fruits and juices.
Effective July 1, 1996, a representation agreement with Confoco, Inc. (Confoco)
for the sale of low-moisture banana and pumpkin flakes terminated. For the year
ended June 30, 1996, Vacu-dry recorded gross profit on Confoco products of
$368,000. Under the agreement with Confoco, for two years from the date of
termination, Vacu-dry is prohibited from distributing banana products to those
customers in the United States, Canada, and Mexico that currently purchase
Confoco's products from the Company.
Vacu-dry's three largest customers accounted for approximately 17 percent and 22
percent of net sales in 1998 and 1997, respectively.
Basis of Presentation
The accompanying financial statements include the accounts of Vacu-dry and its
85 percent-owned subsidiary, MINCO. The accompanying consolidated statements of
earnings for the year ended June 30, 1998, include the accounts of MINCO for the
period from June 11, 1998, to June 30, 1998. All significant intercompany
transactions have been eliminated in consolidation.
Supplemental Statements of Cash Flows Information
1998 1997 1996
---------------- ------------- -------------
Cash paid for:
Interest $ 309,000 $ 264,000 $ 309,000
================ ============= =============
Income taxes $ 657,000 $ 381,000 $ 316,000
================ ============= =============
Supplemental disclosure of noncash transactions:
Repurchase of common stock through issuance of notes payable
$ 835,000 $ 0 $ 0
================ ============= =============
Details of acquisition of Made In Nature:
Fair value of assets acquired $ 5,223,000 $ 0 $ 0
Liabilities assumed (3,813,000) 0 0
Creditor debt subsequently converted to equity (517,000) 0 0
Warrants issued (456,000) 0 0
Accrued acquisition costs (101,000) 0 0
---------------- ------------- -------------
Cash paid 336,000 0 0
Less: Cash acquired (39,000) 0 0
================ ============= =============
Net cash paid for acquisition $ 297,000 $ 0 $ 0
================ ============= =============
Inventories
Vacu-dry's inventories are stated at the lower of cost, using the last-in,
first-out (LIFO) method, or market. MINCO's inventories are valued at the lower
of cost (first-in, first-out method) or market (Note 3).
Property, Plant, and Equipment
Property and equipment acquired in connection with the acquisition of Made In
Nature were recorded at estimated fair value on the acquisition date. All other
property, plant, and equipment are stated at cost. Depreciation is computed
using the straight-line method based upon the estimated useful lives of the
assets as follows:
Buildings and improvements 10 to 40 years
Machinery and equipment 3 to 15 years
Improvements that extend the life of the asset are capitalized; other
maintenance and repairs are expensed. The cost of maintenance and repairs was
$1,142,000 in 1998, $936,000 in 1997, and $856,000 in 1996.
Income Taxes
The Company records income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109
requires the Company to compute deferred taxes based upon the amount of taxes
payable in future years after considering changes in tax rates and other
statutory provisions that will be in effect in those years.
Deferred taxes are recorded based upon differences between the financial
statement and tax bases of assets and liabilities and available tax credit
carryforwards.
Revenue
The Company recognizes revenue upon shipment of the product.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of employee stock options equals the market price of the underlying stock
on the date of grant, no compensation expense is recorded. The Company has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock
Based Compensation."
Earnings per Common Share
Basic earnings per common share are computed by dividing net earnings by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per common share include the dilutive effects of stock options
using the treasury stock method.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." In February 1998, the Financial
Accounting Standards Board issued SFAS No. 132, "Employer's Disclosures about
Pension Plans and Other Postretirement Benefits." SFAS Nos. 130 and 132 are not
expected to impact the Company's financial reporting. The disclosure
requirements of SFAS No. 131 will be required in fiscal year 1999. Management
anticipates disclosing the Company's results as three business segments.
2. ACQUISITION OF MADE IN NATURE:
On April 22, 1998, MINCO was formed for the purpose of acquiring Made In Nature,
Inc. On June 11, 1998, Vacu-dry acquired the assets and certain liabilities of
Made In Nature, Inc. In addition to the assumption of liabilities, Vacu-dry paid
$336,000 in cash and issued to Made In Nature, Inc. and its primary shareholder
a total of 112,000 warrants to purchase Vacu-dry's common stock at $8.00 per
share, expiring through June 2003. The warrant price was equal to the market
price of the Company's stock on June 11, 1998. The value assigned to the
warrants at acquisition date was $456,000 and is included in equity as warrants
for common stock. Subsequent to the purchase, Vacu-dry entered into an agreement
with a creditor of Made In Nature, Inc. whereby this creditor converted its debt
into a 15 percent equity in MINCO. The acquisition was accounted for using the
purchase method of accounting. The excess of purchase price over the estimated
fair values of assets acquired and liabilities assumed of $2,567,000 has been
recorded as goodwill and is being amortized on a straight-line basis over 20
years. The estimated fair value of assets acquired and liabilities assumed is
summarized as follows:
Assets:
Current assets $ 2,601,000
Property and equipment 55,000
-------------
Total assets 2,656,000
-------------
Liabilities:
Other current liabilities 1,218,000
Creditor debt subsequently converted to equity 517,000
Short-term notes payable 2,095,000
Other long-term debt 500,000
-------------
Total liabilities 4,330,000
=============
Net liabilities acquired $ 1,674,000
=============
Goodwill is calculated as follows:
Cash purchase price $ 336,000
Acquisition costs 101,000
Value of warrants issued 456,000
Excess of liabilities assumed over assets acquired 1,674,000
=============
Goodwill $ 2,567,000
=============
The following unaudited pro forma consolidated results of operations for the
years ended June 30, 1998 and 1997, are presented as if the Made In Nature
acquisition had been made at the beginning of each period presented. The
unaudited pro forma information is not necessarily indicative of either the
results of operations that would have occurred had the purchase been made during
the periods presented or the future results of the combined operations.
1998 1997
---------------- ---------------
(unaudited)
Net sales $ 30,861,000 $ 28,697,000
Net loss (125,000) (767,000)
Basic loss per common share $(.08) $(.47)
3. INVENTORIES:
Inventories at June 30 consist of the following (LIFO cost for Vacu-dry; FIFO
cost for MINCO):
1998 1997
-------------- ---------------
Finished good $ 7,014,000 $ 4,208,000
Work in process 470,000 291,000
Raw material and containers 442,000 556,000
-------------- ---------------
Total $ 7,926,000 $ 5,055,000
============== ===============
4. BORROWINGS UNDER LINE OF CREDIT:
Borrowings under the line of credit are secured by Vacu-dry's inventory and
accounts receivable. Interest accrues monthly at the bank's prime lending rate.
1998 1997
------------------------- -------------------------
Balance at June 30 $2,297,000 $ 1,354,000
Maximum amount available
under the line of credit $4,500,000 $ 3,500,000
Average borrowings $1,078,000 $ 982,000
Maximum borrowings $2,316,000 $ 3,160,000
Interest at Prime Prime
Interest rate at June 30 8.50% 8.50%
Weighted average interest rate 8.62% 8.32%
Expiration date November 1, 1999 November 1, 1997
In accordance with the covenants of the revolving line of credit note with
the Company's bank, the Company will not, without prior written consent of the
bank, declare or pay any dividend or distribution either in cash, stock, or any
other property on the Company's stock now or hereafter outstanding. No dividends
were declared in fiscal 1998, 1997, or 1996. Among the restrictions under the
line of credit are provisions that require the Company to maintain certain
financial ratios. The Company obtained a waiver for the repurchase of stock (see
Note 7) and amended a financial covenant during the year to remain in compliance
with the agreement.
5. LONG-TERM DEBT:
Long-term debt consists of the following:
1998 1997
--------------- ---------------
Note payable: five-year consolidation note, interest fixed at 7.83 percent,
interest and principal due monthly, maturing in September 1998, secured by
accounts receivable, inventory, equipment, and fixtures
$ 67,000 $ 267,000
Note payable: seven-year consolidation note, interest fixed at 8.5 percent,
interest and principal due monthly, principal due in annual installments of
$215,000 in 1999 and 2000, with a final payment of $717,000 due at maturity,
maturing in September 2000, secured by accounts receivable, inventory,
equipment, and fixtures
1,147,000 1,361,000
Note payable: five-year note, interest at the yield of 30-day commercial paper
(5.55 percent at June 30, 1998) plus 2.1 percent, interest and principal due
monthly, maturing December 2001, secured by equipment
592,000 737,000
Notes payable: unsecured five-year notes resulting from repurchase of stock,
interest at 8.5 percent, interest due monthly, principal due on
January 20, 2003 835,000 0
--------------- ---------------
Total 2,641,000 2,365,000
Less: Current maturities (438,000) (557,000)
--------------- ---------------
Long-term debt $ 2,203,000 $ 1,808,000
=============== ===============
Maturities of long-term debt are as follows:
Year Ending
June 30
----------------------
1999 $ 438,000
2000 383,000
2001 898,000
2002 87,000
2003 835,000
--------------
Total $ 2,641,000
==============
6. INCOME TAXES:
The following is a summary of the Company's provision for income taxes:
1998 1997 1996
------------- ------------- --------------
Current:
Federal $ 486,000 $ 257,000 $ 259,000
State 71,000 39,000 44,000
Deferred:
Federal 49,000 (50,000) 101,000
State (76,000) (14,000) (187,000)
============= ============= ==============
Provision $ 530,000 $ 232,000 $ 217,000
============= ============= ==============
A reconciliation of the income tax provision to the expected provision at the
federal statutory income tax rate is as follows:
1998 % 1997 % 1996 %
------------- ------- ------------- ------- ------------- -------
Provision at federal statutory rate $ 486,000 34% $ 253,000 34% $ 221,000 34%
State taxes, less federal tax benefit 88,000 6 47,000 6 41,000 6
Tax credits and other (44,000) (3) (68,000) (9) (45,000) (7)
============= ======= ============= ======= ============= =======
Total provision $ 530,000 37% $ 232,000 31% $ 217,000 33%
============= ======= ============= ======= ============= =======
Temporary differences that gave rise to deferred tax assets and liabilities for
1998 and 1997 were as follows:
1998 1997
-------------- -------------
Deferred tax assets:
Employee benefit accruals $ 140,000 $ 145,000
Unicap and inventory reserves 246,000 119,000
Tax credit carryforwards 22,000 65,000
State income taxes 13,000 1,000
Other 2,000 25,000
-------------- -------------
Total deferred tax assets 423,000 355,000
-------------- -------------
Deferred tax liabilities:
Depreciation (879,000) (892,000)
Property taxes (49,000) (50,000)
-------------- -------------
Total deferred tax liabilities (928,000) (942,000)
-------------- -------------
$ (505,000) $ (587,000)
============== =============
At June 30, 1998, the Company has state alternative minimum tax credit
carryforwards of $22,000 to offset future state taxable income.
7. STOCK REPURCHASE:
During the year, the Company repurchased 139,100 shares from three existing
shareholders in exchange for notes payable in the amount of $835,000. The
purchase price was determined based upon the market price at or about the time
of the negotiated transaction.
8. STOCK APPRECIATION RIGHTS PLAN:
The Company has a stock appreciation rights (SAR) plan as an incentive for key
employees. Under the SAR plan, key employees are granted rights entitling them
to market price increases in the Company's stock. At June 30, 1998 and 1997,
100,000 SARs were authorized. A summary of the outstanding SARs is as follows:
Rights Outstanding
at June 30
-------------------------
Price per Right 1998 1997
- --------------------- ------------ ------------
$2.69 4,550 4,950
3.75 1,600 1,600
4.31 1,500 1,500
4.63 6,500 9,900
5.63 200 200
8.88 2,000 4,500
9.63 3,000 3,000
-------------------------
19,350 25,650
============ ============
All rights are granted at fair market value at the date of grant. Rights
generally vest ratably over a period from the second to the sixth anniversary
date of the grant. The SAR liability and expense or credit recorded quarterly is
based on the market price of the Company's stock as of the balance sheet date.
In 1998, 1997, and 1996, the Company increased (decreased) selling, general, and
administrative expenses by $43,000, ($4,000), and ($1,000), respectively, in
order to reflect the current SAR liability.
9. EMPLOYEE STOCK PURCHASE PLAN:
The Employee Stock Purchase Plan enables substantially all employees to
purchase shares of the Company's common stock at 85 percent of the market value
on the first or last business day of the quarterly offering period, whichever is
lower. A maximum of 100,000 shares is authorized for issuance over the ten-year
term of the plan that began on January 1, 1994. The following shares were issued
under the terms of the plan:
Shares Average Price
Issued per Share
---------- ------------------
1998 7,422 $4.98
1997 9,403 4.26
1996 15,324 4.25
10. EMPLOYEE STOCK OPTION PLAN:
During 1996, the Board of Directors (the Board) approved a stock option plan
(the Plan) for employees and nonemployee consultants covering 90,000 shares of
common stock. In 1998, the Plan was amended to cover 150,000 shares of common
stock. The Plan includes incentive stock options (ISOs) and nonqualified stock
options (NSOs). Some of the terms and conditions of the Plan are different for
ISOs and NSOs. The purchase price of each ISO granted will not be less than the
fair market value of the Company's common shares at the date of grant. The
purchase price of each NSO granted shall be determined by the Board in its
absolute discretion, but in no event shall such price be less than 85 percent of
the fair market value at the time of grant. NSO and ISO options granted are
exercisable for ten years from the date of grant.
The number of shares available for granting future options was 60,526 as of June
30, 1998, and 526 as of June 30, 1997 and 1996. Options for 89,474 shares were
granted in 1996 and remain outstanding. These options have an exercise price of
$5.00 per share and a remaining life of eight years and vest 25 percent in year
one, 50 percent in year two, and 25 percent in year three. At June 30, 1998 and
1997, 67,107 and 22,369 options were exercisable, respectively.
The Company accounts for the Plan under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for the Plan been
determined consistent with SFAS No. 123, the Company's net income and earnings
per share would have been reduced to the following pro forma amounts:
1998 1997 1996
-------------- ------------- -------------
Net income:
As reported $ 899,000 $ 517,000 $ 434,000
Pro forma 854,000 472,000 389,000
Basic earnings per share:
As reported 0.57 0.31 0.25
Pro forma 0.54 0.29 0.23
Diluted earnings per share:
As reported 0.56
Pro forma 0.53
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model, with the following weighted-average
assumptions used for the 1996 grant: weighted average risk-free interest rate of
6.61 percent; expected dividend yield of 0 percent; expected life of five years
for the Plan options; expected volatility of 37.44 percent.
11. EARNINGS PER SHARE CALCULATION:
The Company computes earnings per share in accordance with SFAS No. 128,
"Earnings per Share." The following table provides the detail of the basic and
diluted earnings per share computations:
Year Ended
June 30, 1998
-----------------------------
Diluted Basic
-------------- --------------
Net income $899,000 $899,000
============== ==============
Weighted average shares outstanding 1,581,014 1,581,014
==============
Effect of dilutive stock options 19,313
-----------
Weighted average shares outstanding 1,600,327
===========
Earnings per common share and common share
equivalent $0.56 $0.57
============== ==============
12. COMMITMENTS:
MINCO has purchase agreements with certain growers and processors to provide the
Company with products and services to be used in the normal course of
operations. The aggregate purchase commitment as of June 30, 1998, under these
agreements was approximately $2,165,000. Most of the agreements provide for
multiple-year future purchases at fixed prices.
The Company leases office space and equipment under leases that expire in 1999.
At June 30, 1998, future minimum rental payments are $213,000.
Rental expense under these leases was $259,000 in 1998, $244,000 in 1997, and
$249,000 in 1996.
The Company has been leasing excess warehouse space, generating revenues of
$518,000 in 1998, $537,000 in 1997, and $441,000 in 1996. These amounts are
classified as other revenue in the statements of earnings. The leases have
varying terms, which range from month-to-month to expiration dates through 2007.
Future minimum lease income as of June 30, 1998, is as follows:
Year Ending
June 30
------------
1999 $ 701,000
2000 586,000
2001 515,000
2002 515,000
2003 515,000
Thereafter 630,000
-------------
Total $ 3,462,000
==============
In order to resolve Year 2000 issues and to improve system efficiencies and
capabilities, the Company is in the process of acquiring and developing a new
computer system, including hardware and software packages. Management estimates
that the total cost of the system will be approximately $800,000. The
expenditures for the new system will primarily occur in fiscal year 1999.
13. RETIREMENT PLANS:
The Company has a contributory retirement savings and profit-sharing plan
covering nonunion employees. The Company contributes one and one-half times the
first 3 percent of employee contributions to the retirement savings plan.
Profit-sharing contributions are derived using a specific formula based upon the
Company's earnings. Company contributions to the retirement savings and profit
sharing plan are funded currently and were approximately $148,000 in 1998 and
$79,000 in 1997 and 1996. The employer's contributions for any fiscal year may
not exceed the amount lawfully deductible by the Company under the provisions of
the Internal Revenue Code.
The Company contributes to a defined contribution plan for employees covered by
collective bargaining agreements. These contributions, funded currently, were
$477,000 in 1998, $335,000 in 1997, and $256,000 in 1996.
14. RESEARCH AND DEVELOPMENT:
The Company sponsors research activities relating to the development of new
products and the improvement of existing products. The cost of such activities
charged to expense was $370,000 in 1998, $321,000 in 1997, and $269,000 in 1996.
15. RELATED-PARTY TRANSACTIONS:
A member of the Company's Board is a member of the law firm that serves as the
Company's general counsel. During 1998, 1997, and 1996, the Company incurred
$168,000, $28,000, and $21,000, respectively, for legal services from this firm.
Amounts payable to this firm as of June 30, 1998, totaled $33,000.
The Company entered into an agreement with a member of the Board to provide
consulting services to the Company during the 1997 fiscal year. The Company
recorded an expense of $30,000 in fiscal 1997 related to this agreement.
16. QUARTERLY RESULTS (UNAUDITED):
For the Year Ended June 30, 1998
--------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-----------------------------------------------------------------------
Net sales $6,208,000 $7,481,000 $6,208,000 $6,197,000 $ 26,094,000
Earnings before income taxes 142,000 945,000 202,000 140,000 1,429,000
Net earnings 95,000 622,000 134,000 48,000 899,000
Earnings per common share:
Basic $0.06 $0.38 $0.09 $0.03 $0.57
Diluted $0.06 $0.38 $0.09 $0.03 $0.56
For the Year Ended June 30, 1997
--------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-----------------------------------------------------------------------
Net sales $6,043,000 $6,296,000 $5,894,000 $5,565,000 $23,798,000
Earnings (loss) before income taxes 69,000 636,000 51,000 (7,000) 749,000
Net earnings 42,000 382,000 27,000 66,000 517,000
Earnings per common share:
Basic $0.03 $0.23 $0.02 $0.03 $0.31
Diluted $0.03 $0.23 $0.02 $0.03 $0.31
Form 10-K
Copies of the Company's Form 10-K on file with the Securities and Exchange
Commission may be obtained by writing to:
Esther K. Castain
Vacu-dry Company
P.O. Box 2418
Sebastopol, California 95473-2418