U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Consent Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
| | Preliminary Consent Statement |_| Confidential For Use of the
Commission Only (as Permitted by
Rule 14a-6(e) (2))
|X| Definitive Consent Statement
|_| Definitive Additional Materials
|_| Soliciting Materials Pursuant to Rule 14a-11(c) or Rule 14a-12
VACU-DRY COMPANY
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Consent Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
| | Fee computed on table below per Exchange Act Rules 14a-6(i) (1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
$14,750,000
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(5) Total Fee Paid:
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|X| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a) (2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
$2,950
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(2) Form, Schedule or Registration Statement No.:
PRE 14A
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(3) Filing Party:
Registrant
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(4) Date Filed:
7/2/99
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NOTICE AND CONSENT STATEMENT
Vacu-dry Company
100 Stony Point Road, Suite 200
Santa Rosa, California, 95401
FOR ACTION TO BE TAKEN BY WRITTEN CONSENT
IN LIEU OF A MEETING OF SHAREHOLDERS
TO THE SHAREHOLDERS OF VACU-DRY COMPANY:
Attached hereto is a Consent Statement which solicits the written consent
of the shareholders of Vacu-dry Company (the "Company") to approve the sale of
certain of the intangible assets and some of the equipment of the Company
relating to its product lines of processed apple products and products
containing processed apple products (the "Transaction"). The affirmative written
consent of a majority of the issued and outstanding shares of Common Stock of
the Company is required to approve the Transaction.
THE COMPANY'S BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED, AND RECOMMENDS
THAT YOU VOTE "FOR", THE PROPOSED SALE OF THE COMPANY'S PROCESSED APPLE PRODUCTS
LINES OF BUSINESS.
Attached to the Consent Statement is a Consent Card which provides for
approval of the Transaction. The procedure for indicating approval of the
Consent Resolution is described in the Consent Statement. The Consent Statement
and the accompanying Consent Card are intended to be sent to Shareholders on or
about July 14, 1999. The Company has set July 26, 1999 as the target date by
which the Board of Directors desires to receive all written consents of
Shareholders.
All Shareholders are urged to sign and return the enclosed Consent Card as
promptly as possible.
By Order of the Board of Directors,
/s/ Gary L. Hess
----------------
Gary L. Hess
President
Santa Rosa, California
July 14, 1999
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VACU-DRY COMPANY
100 Stony Point Road, Suite 200
Santa Rosa, California 95401
CONSENT STATEMENT
FOR SHAREHOLDER ACTION BY WRITTEN CONSENT
This Consent Statement is furnished in connection with the solicitation by
the Board of Directors of Vacu-dry Company (the "Company") of the written
consent of shareholders to approve the sale of certain of the intangible assets
and some of the equipment of the Company relating to its product lines of
processed apple products and products containing processed apple products (the
"Transaction").
The Transaction is expected to close (the "Closing Date") as soon as
shareholder approval is obtained, but in no event later than September 30, 1999.
The Company requests that all written consents be delivered to the Company on or
before July 26, 1999. This Notice and Consent Statement and the enclosed Consent
Card are first being mailed to shareholders of record at July 2, 1999 on or
about July 14, 1999.
Accompanying the Consent Statement is a Consent Card which provides for
adoption of the Consent Resolution (the "Consent Resolution") and approval of
the Transaction. The procedure for indicating approval of the Consent Resolution
is described in detail in this Consent Statement.
VOTING SECURITIES; RECORD DATE
The matter being submitted for shareholder approval is to be acted upon by
Written Consent, without a meeting, rather than by a vote held at a meeting. The
Company has only one class of voting security, its Common Stock, entitled to one
vote per share. As of the close of business on July 2, 1999, there were
1,517,503 shares of the Company's Common Stock issued and outstanding. Only
shareholders of record at the close of business on July 2, 1999 are entitled to
act upon this matter by Written Consent.
DISSENTERS' RIGHTS
Under California law, shareholders of the Company are not entitled to
dissenter's rights in connection with the Transaction.
SOLICITATION OF WRITTEN CONSENTS
Under California law and the Company's Bylaws, any action which may be
taken at any annual or special meeting of shareholders may be taken without a
meeting and without prior notice, if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding shares having not less
than the minimum number of votes that would be necessary to authorize or take
that action at a meeting at which all shares entitled to vote on that action
were present and voted. The matter being considered by the shareholders is being
submitted for action by written consent, rather than by votes cast at a meeting.
Set forth below under the caption "Proposal 1" is the text of the Consent
Resolution being submitted for shareholder adoption by written consent. The
Consent Resolution provides for the approval of the Transaction which is more
fully described under the caption "APPROVAL OF THE SALE OF THE PROCESSED APPLE
PRODUCT LINES " below. The Consent Resolution will be effective on the date on
which the written consents of a majority of the shares of Common Stock issued
and outstanding approving the Consent Resolution are received by the Company
(the "Effective Date"). The Company requests that all written consents be
delivered to the Company on or before July 26, 1999.
Shareholders are being requested to indicate approval of and consent to
the adoption of the Consent Resolution by exercising the enclosed Consent Card
and by checking the box which corresponds to the action the shareholder wishes
to take. FAILURE TO CHECK ANY OF THE BOXES WILL, IF THE
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CONSENT CARD HAS BEEN SIGNED, CONSTITUTE APPROVAL OF AND CONSENT TO THE ADOPTION
OF THE CONSENT RESOLUTION. The text of the Consent Resolution has not been set
out on the Consent Card because of space limitations. Nevertheless, signing and
indicating approval on the Consent Card will be deemed to be written consent to
the adoption of the Consent Resolution.
Execution of the Consent Resolution by execution of the Consent Card will
constitute your approval of the Transaction as a shareholder of the Company. The
failure to execute and return a consent, and all abstentions and broker
non-votes, will have the same effect as a vote against the Consent Resolution.
Shareholders who do not approve and consent to the adoption of the Consent
Resolution by execution of the Consent Card will nonetheless be bound by the
Consent Resolution if sufficient written consents are received by the Company on
or before the Effective Date to approve the Consent Resolution.
The Board of Directors requests that each shareholder execute, date and
mail or deliver the Consent Card to the Company at the address set forth on the
enclosed postage paid envelope. Any Consent Card executed and delivered by a
shareholder may be revoked by delivering written notice of such revocation prior
to the Effective Date to the Company at the address set forth below. Consent
Cards may not be revoked after the Effective Date.
Solicitation
The Company will bear the entire cost of soliciting consents from its
shareholders, including preparation, assembly, printing and mailing of this
Consent Statement, the consent card and any additional information furnished to
shareholders. Copies of solicitation materials will be furnished to banks,
brokerage houses, fiduciaries and custodians holding in their names shares of
Common Stock beneficially owned by others to forward to such beneficial owners.
Original solicitation of consents by mail may be supplemented by telephone,
facsimile, telegram or personal solicitation by representatives of the Company.
No additional compensation will be paid to such persons for such services. The
Company has also retained the firm of D.F. King to assist in the solicitation of
consents at a cost of approximately $5,000 plus reasonable out-of-pocket
expenses.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
The Company is including the following cautionary statement in this
Consent Statement to make applicable and take advantage of the safe harbor
provisions 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 risks
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,
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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.
THE COMPANY
DESCRIPTION OF BUSINESS
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 ("Takanashi")
(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 has historically reported under a single industry segment
within the food industry. Selective financial information relating to the
industry segment is as follows:
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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
For the year ended June 30, 1999 the Company will be required to adopt
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About
Segments of An Enterprise and Other Information." SFAS 131 establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Under these standards, the Company will be required to disclose three reportable
segments: evaporated and low moisture fruits and juices and long-term food
storage (Perma Pak), organic dried fruits and juices (Made In Nature), and
real estate.
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 (Tree Top), a few smaller domestic competitors
and several 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 90% 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.
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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 dried 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 was 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.
FOOD STORAGE
BUSINESS. The Company manufactures a broad line of food storage products
under the Perma Pak label. Dried food ingredients are purchased or, in some
cases, manufactured by the Company and canned utilizing a special process which
creates a low oxygen environment, allowing prolonged shelf stability. Perma Pak
products are sold with a guaranteed life of eight years from the date of
manufacture.
SALES AND MARKETING. Sales of Perma Pak products are principally to a
master distributor located in the United States, which creates food storage
units designed to supply a family's nutritional needs for up to a year. These
units contain both Perma Pak and other products, and are sold by the master
distributor through a multi-level marketing system. Current levels of Perma Pak
inventory are high (see below), and the Company is actively seeking new channels
of distribution for its Perma Pak product lines, including direct-to-consumer
sales over an Internet web site.
SOURCES OF SUPPLY AND INVENTORY. Although certain dried fruit products
contained in the Perma Pak line are manufactured by the Company. Most supplies
are drawn from a number of vendors and the Company expects that adequate
supplies will be available. Current inventories include $1,189,000 of raw
materials and $3,360,000 of finished goods, a high level relative to current
weekly sales. This high level of inventory resulted from a rapid escalation in
sales due to Year 2000 (Y2K) concerns, followed by a sudden and unexpected sales
drop in March of 1999 as predictions of Y2K disruptions were tempered.
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 premier 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
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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 major direct competitors. In the organic dried
fruit and vegetable category (on a national basis), MINCO has two major direct
competitors. In the mass-market sector, MINCO has many large competitors, but
none of these competitors is 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 New World Marketing LLC, 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 brand
products throughout Japan.
ORGANIC CERTIFICATION. The value of the Made In Nature 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 Protection 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 March 31, 1999 were $1,948,000. It is anticipated that building the
Made In Nature 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
May 31, 1999, September 1, 1998, September 1, 1997 is $15,226,000, $12,478,000,
and $10,186,000, respectively. The dollar value of backlog varies during the
year, with the peak usually occurring during the September through December
period.
The Company anticipates that it will liquidate substantially all of the
apple ingredients inventory between the Closing Date and September 30, 1999.
Pursuant to the Purchase Agreement regarding the Transaction, ("Purchase
Agreement"), Tree Top has agreed to purchase any such Inventory remaining
unsold as of September 30, 1999, other than distressed
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Inventory, at its agreed purchase price as set forth in the Purchase Agreement.
Tree Top may not purchase more than $2,750,000 worth of inventory.
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 Company is selling the trade name, trademark rights, and
goodwill of "Vacu-dry" as part of the Transaction. 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 for the year ended June 30, 1998.
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 normally 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. A collective
bargaining agreement with those employees expired June 30, 1999, and is being
extended on a short term basis by agreement of the parties. The Company
anticipates substantially reducing its workforce following the Closing of the
Transaction.
INSURANCE
The Company maintains product, property, and general liability insurance
plus umbrella liability coverage. The Company does not carry any product recall
coverage. While 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.
PROPERTIES
The principal administrative offices for Vacu-dry and MINCO are located in
Santa Rosa, California. Approximately 9,200 square feet of office space is
leased through December, 2003.
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 to third parties, which
comprises 90% of the leaseable square footage. The Company's research and
development department is located at this facility. The Company has a $2.1
million loan associated with this property which matures in December, 2003.
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The Company owns 66 acres of land and approximately 298,000 square feet
under roof at 2064 Gravenstein Hwy. No., Sebastopol, California. As of March 31,
1999, 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 78,500 square feet of excess warehouse space to various tenants at
this location. The primary tenant, occupying 51,200 square feet extended its
lease through April 2006. The Company has no debt associated with this facility.
LEGAL PROCEEDINGS
The Company has no material legal proceedings pending.
PROPOSAL 1
APPROVAL OF THE SALE OF THE PROCESSED APPLE PRODUCT LINES
Pursuant to an Asset Purchase Agreement dated June 21, 1999 (the "Purchase
Agreement") between the Company and Tree Top, Inc., a Washington corporation
("Tree Top"), a copy of which is attached to this Consent Statement as Annex A,
the Company proposes to sell to Tree Top certain of the intangible assets and
some of the equipment relating to Vacu-dry's product lines of processed apple
products and products containing processed apple products (collectively referred
to as either the "Product Lines" or the "Transferred Assets"). Not included in
the sale are the Company's vacuum dried, mixed fruit, or organic processed apple
product lines, nor products containing processed apples sold at retail by the
Company.
The purchase price is $12,000,000, to be paid in cash at closing. In
addition, any of the Company's apple products inventory remaining unsold as of
September 30, 1999, other than distressed inventory, will be purchased by Tree
Top at an agreed purchase price. Tree Top may not purchase more than $2,750,000
worth of inventory. Tree Top is not assuming any of the Company's liabilities.
In connection with the Transaction, the Company will agree not to compete with
Tree Top in the processed apple product lines of business for a period of ten
years, and two of the Company's shareholders and directors will agree not to
compete for three years. The sale is subject, among other things, to approval by
the Company's shareholders.
BACKGROUND TO THE SALE
The decision of the Board to approve the Sale on June 14, 1999 followed
intensive efforts over a three-year period to evaluate and improve the returns
achieved by the Product Lines, as described below.
On April 3, 1997, management presented a comprehensive analysis of the
Company's strategic position to the Board and recommended a substantial
re-orientation of the Product Lines. Principal conclusions of this analysis
included the following:
o Shareholder returns from the Product Lines had been wholly inadequate for
several years;
o The commodity nature of the Product Lines made low-cost production
essential for the Company's survival;
o The current location of the Product Lines in Sebastopol, California was
unsustainable due to the inadequate local supply of apples and the
associated cost of transporting required apple tonnage from more distant
areas;
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o At the then prevailing market capitalization of the Company, liquidation
would provide shareholders with an attractive rate of return.
The Board accepted these conclusions and directed management of the
Company to intensively pursue a range of options for enhancing returns from the
Product Lines, all of which included a relocation of fresh apple processing from
the current Sebastopol location.
Between April of 1997 and February of 1998 the Company undertook a global
search for attractive apple processing locations. These efforts resulted in
China being identified as the most promising location for achieving low cost
production in the mid- to long-term, and in February of 1998 intensive
negotiations with a potential joint venture partner in Shandong Province, China
were initiated. Despite their best efforts, the parties were ultimately unable
to reach agreement on certain key issues and these negotiations were terminated
in May of 1998.
In June of 1998 the Company initiated an in-depth study of options for
relocating fresh apple processing operations to the Central Valley of
California. On October 12, 1998 management presented the Board with an initial
review of relocation options, and was directed by the Board to prepare a
valuation analysis of certain principal options. This analysis, presented to the
Board on November 13, 1998, included the following principal conclusions:
o Operations in Sebastopol continued to be unsustainable;
o Construction of an entirely new facility in the Central Valley of
California was not a feasible option due to the large amount of capital
which would be required and the subsequent competitive vulnerability of
the Company;
o Joint operation of an existing facility in the Central Valley which
manufactured similar products would be an attractive option if there were
sufficient overlap in equipment and processing techniques;
o Sale of the Product Lines to a party engaged in similar operations could
result in an attractive return.
The Board accepted these conclusions and directed management to pursue
negotiations for joint operation of the existing facility in the Central Valley
which had been identified as utilizing equipment and processes similar to those
of the Product Lines.
Between December of 1998 and April of 1999 management conducted intensive
negotiations with the owner of the Central Valley facility toward establishment
of a joint venture to operate the facility. As negotiations progressed, it
became clear that the initially anticipated synergies in equipment utilization
and processing techniques would be difficult to realize without substantial
modifications to the facility, and that the required capital expenditures would
be much higher than expected. On April 15, 1999, the parties held a meeting at
which it was decided to terminate further discussions relating to the proposed
joint venture.
NEGOTIATIONS RELATING TO THE SALE
In November of 1998, senior executives of Tree Top requested a meeting
with the Company to discuss a possible transaction involving the sale of the
processed apple product lines. At this meeting, the parties discussed the
possible scope and terms of such a sale. It became clear that the parties' price
expectations differed substantially, and the meeting was terminated with each
party agreeing to review its position on price.
In April of 1999, Tree Top again contacted the Company to express its
continued interest in acquiring the Product Lines. The Company indicated its
willingness to re-open discussions, and in May of 1999 a second meeting was held
to explore the scope and terms of a possible sale. At this meeting,
9
<PAGE>
preliminary agreement was reached on scope and the parties substantially
narrowed the difference between their price expectations. During several
subsequent telephone discussions between the parties sufficient consensus on
price and terms was reached to warrant the initiation of negotiations on a
definitive agreement for the proposed transaction, and on May 19, 1999 the
parties entered into a confidentiality agreement to allow for the exchange of
certain information necessary for such negotiations to commence. On May 21, 1999
the Company engaged Sutter Securities Incorporated ("Sutter"), an investment
banking and advisory firm, to advise the Company as to the fairness of the
transactions under the terms and conditions then proposed by the parties.
The parties continued negotiations through May and early June and reached
substantial agreement on the principal terms of the proposed transaction by June
11. On June 14, a Board meeting was held at which Sutter delivered its oral
opinion that the Transaction was fair, from a financial point of view, to the
Company's shareholders, and the Board authorized management to complete the
Transaction. Final negotiations between the parties were completed during the
ensuing week, and signed documents were delivered June 21.
REASONS FOR THE SALE
The Board believes that the Transaction is in the best interest of the
Company and unanimously recommends that the shareholders of the Company vote FOR
approval of the Transaction.
The following are material factors, among others, considered by the Board
in reaching its conclusion to recommend the Transaction:
o The present and prospective inability of the processed apple product lines
to generate adequate shareholder returns in its present configuration.
o The inability, despite the intensive efforts described above, to achieve
an acceptable reconfiguration of the Product Lines.
o The price offered by Tree Top, considered in light of the historical and
projected earnings of the Product Lines.
o The oral opinion of Sutter provided to the Board on June 14, 1999 stated
that the consideration to be received pursuant to the Agreement was fair,
from a financial point of view, to the Company's shareholders. Sutter is
providing a written opinion dated July 13, 1999 confirming its oral
opinion. A full text of this opinion is attached as Annex B to this
Consent Statement and is incorporated herein by reference.
o The low probability of receiving a higher price from a third party.
Although the Company did not advertise for potential purchasers, the Board
took into account the opinion of the Company's management and Sutter that
in light of the low returns generated by the Product Lines, it was
unlikely that a third party would be prepared to pay a higher price for
the Product Lines than Tree Top.
o The ability of the Company to retain its valuable real estate assets under
the terms of the Transaction. G.F. Hornsby & Associates, an independent
appraisal firm, in a report dated June 3, 1998, appraised the value of the
Company's properties in Sebastopol, California at $13,100,000.
o The financial ability of Tree Top to consummate the proposed transaction,
as evidenced by its deposit into escrow of a Letter of Credit for the
entire purchase price.
10
<PAGE>
In view of the wide variety of factors considered in connection with its
evaluation of the Transaction, the Board did not find it practical to, and did
not, quantify or otherwise assign relative weights to specific factors
considered in reaching its determination.
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
The Company retained Sutter on May 21, 1999, to render an opinion to the
Vacu-dry Board as to the fairness, from a financial point of view, of a proposed
transaction with Tree Top to the public shareholders of Vacu-dry. On June 14,
1999, Sutter rendered its oral opinion to the Board of Directors of Vacu-dry
that the Transaction was fair, from a financial point of view, to the public
shareholders of Vacu-dry. Sutter subsequently issued its written opinion to the
Board of Directors of Vacu-dry which has been updated to July 13, 1999 (the
"Sutter Opinion").
THE FULL TEXT OF THE SUTTER OPINION IS ATTACHED AS ANNEX B TO THIS CONSENT
STATEMENT. HOLDERS OF VACU-DRY COMMON STOCK ARE URGED TO, AND SHOULD, READ THE
SUTTER OPINION CAREFULLY IN ITS ENTIRETY IN CONJUNCTION WITH THIS CONSENT
STATEMENT FOR ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY
SUTTER.
The Sutter Opinion addresses only the fairness of the Merger, from a
financial point of view, to the shareholders of Vacu-dry and does not constitute
a recommendation to any shareholder of Vacu-dry as to how such shareholder
should vote with respect to the approval of the Merger. The summary of the
Sutter Opinion set forth in this Consent Statement is qualified in its entirety
by reference to the full text of such opinion.
The Company engaged Sutter as its financial advisor due to the record and
experience of its principals in rendering fairness opinions. In requesting
Sutter's fairness opinion, the Company did not give any special instructions to
Sutter or impose any limitations upon the scope of the investigations that
Sutter deemed necessary to enable it to deliver its opinion. During the past
five years, neither Sutter nor any affiliate of Sutter has performed any
investment banking or other financial services for or had any other material
relationship with Vacu-dry. Fredric Selinger, a Senior Managing Director of
Sutter, is a director of the Company; he did not participate in Sutter's
preparation of its Opinion.
In connection with rendering its written opinion, Sutter, among other
things, reviewed the Consent Statement; reviewed the Agreement; reviewed
Vacu-dry's Annual Reports to Shareholders and Annual Reports on Form 10-K for
the fiscal years ended June 30, 1996 through 1998, and its Quarterly Reports on
Form 10-Q for the periods ended September 30, 1998, December 31, 1998, and March
31, 1999; reviewed certain operating and financial information provided to us by
management relating to business and prospects of Vacu-dry's continuing
operations and of the operations being sold pursuant to the Agreement; met with
Vacu-dry's senior management to discuss the operations, historical financial
statements and future prospects of the continuing operations and of the
operations being sold pursuant to the Agreement; reviewed pro forma data
provided by the Company; visited Vacu-dry's facilities in Sebastopol,
California; reviewed the appraisal of Vacu-dry's properties in Sebastopol by G.
F. Hornsby & Associates, dated June 3, 1998; reviewed the historical market
prices and trading volume of the common shares of Vacu-dry; and conducted such
other studies, analyses, inquiries and investigations as we deemed appropriate.
Sutter relied upon and assumed the accuracy and completeness of the
financial and other information provided by Vacu-dry. Sutter further relied upon
the assurances of the management of Vacu-dry that it is unaware of any facts
that would make the information provided to it incomplete or misleading. Sutter
did not perform any independent appraisal of the assets of Vacu-dry. The Sutter
Opinion is also necessarily based upon the market, economic and other conditions
as in effect on, and the information made available to it as of, the date of the
opinion.
11
<PAGE>
The following is a brief summary of the financial analyses used by Sutter
in connection with providing its oral opinion to the Vacu-dry Board with respect
to the Transaction.
Sutter considered the historical performance and expected future
performance of the Company's dried apple business, and its competitive position.
It noted that the Company was dependent on outside sources for its supply of
apples, and that freight costs for the Company were higher than for processors
located closer to apple growers. Sutter concluded that the value of such
business to the Company was less than the consideration to be received in the
Transaction. Sutter also considered the potential rental income that the Company
could generate from the space currently utilized by it for the dried apple
business. Sutter considered the fact that, subsequent to the Transaction, the
Company's principal business would be real estate. Sutter noted that the book
value of the Company would increase from approximately $7.00 to $19.00 as a
result of the Transaction, and that the appraised value of the real estate was
greater than its book value. Sutter reviewed the historical market price and
volume relating to Vacu-dry Common Stock and noted that the price of the
Company's shares had recently been trading in the $7-$8 range, which was below
pro forma book value, excluding the difference between the book value and the
appraised value of the real estate.
Based upon the above, Sutter concluded that the Merger was fair, from a
financial point of view, to the public shareholders of Vacu-dry.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analysis as a whole, could create an incomplete view of the processes
underlying the Sutter Opinion. In arriving at its opinion, Sutter considered the
results of all such analyses. The analyses were prepared solely for purposes of
providing its opinion as to the fairness of theTransaction, from a financial
point of view, to the public shareholders of Vacu-dry. As described above, the
Sutter Opinion and presentation to the Vacu-dry Board was one of many factors
taken into consideration by the Vacu-dry Board in making its determination to
approve the Transaction. The foregoing summary does not purport to be a complete
description of the analyses performed by Sutter.
Pursuant to the engagement agreement as amended, Vacu-dry agreed to pay
Sutter a fee of $50,000 for its fairness opinion, of which $25,000 was payable
upon execution of the original letter agreement, and $25,000 was payable when
Sutter initially rendered its opinion. Vacu-dry also agreed to reimburse Sutter
for its reasonable out-of-pocket expenses and to indemnify Sutter and certain
related persons against certain liabilities in connection with the engagement of
Sutter, including certain liabilities under federal securities laws.
TERMS OF THE SALE
The following is a summary of the material provisions of the Purchase
Agreement. This summary and all other discussions of the terms and conditions of
Transaction included elsewhere in this Consent Statement are qualified in their
entirety by reference to the Purchase Agreement, a copy of which is attached as
an Annex hereto and incorporated by reference herein.
PURCHASED ASSETS
Pursuant to the Purchase Agreement, the Company will transfer to Tree Top
certain of the intangible assets and some of the equipment relating to its
product lines of processed apple products and products containing processed
apple products.
The Transferred Assets include all product specifications; customer and
supplier lists; trade secrets, technology, and know how; certain equipment owned
by Vacu-dry used in the operation of the Product Lines; Vacu-dry's goodwill in
the Product Lines; the trade name and trademark rights of "Vacu-dry"; and any
inventory as discussed below.
EXCLUDED PRODUCT LINES
12
<PAGE>
The following product lines which are used in or related to the Product
Lines will be retained by the Company: (i) processed apple products produced
primarily by means of a vacuum drying process; (ii) products which contain both
processed apple products and other processed fruit, nut or vegetable products,
provided such other processed fruit, nut or vegetable products comprise ten
percent (10%) or more of the finished product, by weight; (iii) products
containing processed apple products that are packaged by or on behalf of
Vacu-dry for retail sale; and, (iv) organic and pesticide-free processed apple
products. In addition, Vacu-dry is retaining a non-exclusive license to use its
Records and Intellectual Property (as defined in the Purchase Agreement) in
those areas of its business which are not covered by the non-competition
agreement with Tree Top.
Vacu-dry is not selling any of its real estate holdings (see "PROPERTIES")
nor any of the assets or business of MINCO.
PURCHASE PRICE; LETTER OF CREDIT
At closing, Tree Top will pay the $12,000,000 purchase price in cash. To
secure its obligations pursuant to the Purchase Agreement, Tree Top has
delivered into an escrow account a Letter of Credit issued by Bank of America in
the principal amount of $12,000,000. The costs for the Letter of Credit are
being shared equally by the parties. The Bank of San Francisco will act as
escrow holder pursuant to an Escrow Agreement.
LIMITED ASSUMPTION OF LIABILITIES
Tree Top will not assume any liabilities of the Company. Tree Top is
solely responsible for all sales, use and transfer tax resulting from the
transfer of the Transferred Assets.
CLOSING
The parties have agreed that the closing shall occur on or before
September 30, 1999. The Company anticipates that the Closing will occur
immediately upon the obtaining of shareholder approval.
INVENTORY
From the Closing Date until September 30, 1999 Vacu-dry will endeavor to
sell the Inventory of the Product Lines in the ordinary course of its business.
Tree Top will purchase any Inventory remaining unsold as of September 30, 1999,
other than distressed Inventory, at its agreed purchase price as set forth in
the Purchase Agreement. Tree Top may not purchase more than $2,750,000 worth of
Inventory.
REPRESENTATIONS AND WARRANTIES
The Purchase Agreement contains various customary representations and
warranties of the Company and Tree Top. These include, among others,
representations and warranties by the Company as to its organization, corporate
authority, regulatory approvals, assets of the Product Lines, inventory, Taxes,
litigation, liabilities and financial statements. Tree Top's representations and
warranties include those as to its organization, corporate authority,
non-contravention, and third-party consents.
COVENANTS OF THE PARTIES
From the date of the Purchase Agreement through the Closing Date: (i) the
Company will, except as contemplated by the Purchase Agreement, operate the
Product Lines in the ordinary course and as currently conducted; and (ii) Tree
Top has agreed to supply products to the Company's customers under current
forward sale contracts in the event that the Company exhausts its inventory of
any of such products during the period from the Signing Date to September 30,
1999.
COVENANT NOT TO COMPETE
Neither the Company nor its directors Gary Hess and Donal Sugrue will, for
a period of ten years (the Company) and three years (the directors),
respectively, after the Closing Date directly or indirectly, own, manage,
control, participate in, perform services for or otherwise carry on a business
competitive with the Product Lines anywhere in the world; nor induce any
customer of Tree Top or the Product Lines to reduce such customer's purchases of
products from the Tree Top or the Product Lines; nor use for its own
13
<PAGE>
benefit or disclose to any third party the name and/or requirements of any
customer; nor use for its own benefit or disclose to any third party any of the
Transferred Assets.
The non-competition covenant does not prohibit the Company from engaging
in any business unrelated to processed apple products or from selling or
distributing (i) processed apple products produced primarily by means of a
vacuum drying process; (ii) products which contain both processed apple products
and other processed fruit, nut or vegetable products, provided such other
processed fruit, nut or vegetable products comprise 10% or more of the finished
product, by weight; (iii) products containing processed apple products that are
packaged by or on behalf of Vacu-dry for retail sale; (iv) organic and
pesticide-free processed apple products; and (v) Vacu-dry apple products
Inventory not purchased by Tree Top pursuant to the Purchase Agreement.
CONDITIONS TO CLOSING
The obligations of the Company and Tree Top to consummate the transaction
are subject to the satisfaction and waiver of the following conditions: (i)
there shall have been no material breach by the other parties in the performance
of their covenants and agreements; (ii) each of the representations and
warranties of the other parties shall be true and correct as of the Closing
Date, except as permitted or otherwise contemplated by the Purchase Agreement or
is consented to by the other party; (iii) the transaction shall have been
approved by the holders of a majority of the Company's outstanding shares of
Common Stock; and (iv) no court or government agency shall have issued any
orders enjoining the Transaction.
In addition, as a condition precedent to the obligations of Tree Top: (i)
Vacu-dry and its directors Gary Hess and Donal Sugrue must deliver to Tree Top
non-competition agreements; and (ii) all Vacu-dry's directors and William
Burgess must deliver to Tree Top a confidentiality and non-disclosure agreement.
TERMINATION
The Purchase Agreement may be terminated prior to closing of the
Transaction under the following circumstances: (i) by mutual consent of the
parties; (ii) by Tree Top, if the Company shall have failed to comply in any
material respect with any of its covenants and such failure has not been waived
by Tree Top; (iii) by the Company if Tree Top shall have failed to comply in any
material respect with its obligations and covenants and such failure has not
been waived by Vacu-dry; and (iv) by either the Company or Tree Top, if the
closing has not been effected by the close of business on September 30, 1999.
INDEMNIFICATION
The Purchase Agreement provides that the Company and Tree Top will
indemnify the other against, and hold the other harmless from, all losses,
liabilities and expenses suffered or incurred in connection with or arising from
a breach of a representation, warranty or obligation contained in the Purchase
Agreement. Tree Top is also obligated to indemnify the Company for any bodily
injury to any person or property damage to Vacu-dry's property plant or
equipment or other damages as a result of the disconnection and removal of
equipment by Tree Top, exclusive of non-structural damage to the Company's
property in an amount not exceeding $10,000, which shall be the Company's
responsibility. Except as provided in the preceding sentence, no claim for
indemnification shall be made by Vacu-dry until its aggregate claims exceed
$25,000.
ACCOUNTING TREATMENT
The Transaction will be treated as a sale for accounting purposes. A gain
(net of tax) will be recognized to the extent that the proceeds from the
Transaction exceed the book value of the equipment sold, the cost of completing
the Transaction and severance liabilities resulting directly from the
Transaction.
FEDERAL INCOME TAX CONSEQUENCES
14
<PAGE>
For tax purposes, the gain will be included in federal taxable income.
Consummation of the Transaction will not be a taxable event for income tax
purposes for the Company's shareholders.
GOVERNMENTAL AND REGULATORY APPROVALS
The Company is aware of no governmental or regulatory approvals required
for the consummation of the Transaction other than filing this Consent Statement
with the Securities and Exchange Commission.
RECOMMENDATION OF THE BOARD OF DIRECTORS FOR THE TRANSACTION
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE TRANSACTION.
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS APPROVAL OF THE TRANSACTION BY
THE SHAREHOLDERS OF THE COMPANY.
15
<PAGE>
PRO FORMA FINANCIAL INFORMATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The following unaudited pro forma condensed consolidated balance sheet at
March 31, 1999, has been prepared to reflect the proposed Sale of the Company's
apple product lines based on the assumption that the sale was consummated at
that date. The pro forma condensed consolidated balance sheet should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included in the Company's 1998 Annual Report and the condensed
consolidated financial statements of the Company for the nine months ended March
31, 1999 and 1998 included in the Company's March 1999 Quarterly Report.
ACTUAL PRO FORMA PRO FORMA
ADJUSTMENTS(1)
(In thousands, except per share amounts)
Cash ................................ $ 172 -- $ 172
Accounts Receivable ................. 3,478 -- 3,478
Other Receivables ................... 816 -- 816
Income tax receivable ............... -- -- --
Inventories ......................... 14,892 -- 14,892
Prepaid Expenses .................... 74 -- 74
Current deferred taxes .............. 360 -- 360
---------------------------------------
Total current assets ............ $ 19,792 -- $ 19,792
---------------------------------------
Property, Plant & Equipment ......... 6,663 (1,465) 5,198
Goodwill, net of amortization ....... 2,682 -- 2,682
---------------------------------------
Total Assets .................... $ 29,137 ($ 1,465) $ 27,672
---------------------------------------
Current maturities of long term
debt ................................ 438 (438) --
Accounts payable .................... 5,938 -- 5,938
Accrued payroll & related
liabilities ......................... 1,021 -- 1,021
Accrued Expenses .................... 395 -- 395
Income tax payable .................. 452 -- 452
Total current liabilities ...... $ 8,244 ($ 438) $ 7,806
Borrowings under line of credit ..... 5,000 (2,654) 2,346
Long term debt-net of current
maturities .......................... 3,914 (3,914) --
Deferred Income taxes ............... 865 -- 865
Minority interest ................... 329 -- 329
Capital Stock ....................... 2,876 -- 2,876
Warrants for common stock ........... 456 -- 456
Retained Earnings ................... 7,453 5,541 12,994
---------------------------------------
Total shareholders' equity ..... $ 10,785 $ 5,541 $ 16,326
---------------------------------------
Total liabilities and
shareholders' equity ................ $ 29,137 ($ 1,465) $ 27,672
16
<PAGE>
Book value per common share
outstanding ......................... $ 7.11 $ 10.76
Shares outstanding .................. 1,517,503 1,517,503
(1) To give effect to the proposed sale as of March 31, 1999, including the
elimination of equipment to be sold to the buyer and the planned use of
cash proceeds from the sale. The pro forma gain applicable to the above
proposed sale is as follows:
Proceeds from the sale.......... $12,000,000
Equipment sold.................. (1,465,000)(2)
Income tax payable by Company... (3,694,000)
Estimated Expenses related to
the sale...................... (1,300,000)(3)
Pro forma gain.................. $5,541,000(4)
(2) Included in the equipment sold is approximately $965,000 which represents
an excess of book value of the Transferred Assets over the agreed upon
purchase price of $500,000.
(3) Includes approximately $880,000 in severance payments to both unionized
and non-unionized employees, and $420,000 in professional fees in
connection with the Transaction.
(4) The pro forma gain does not take into account interest which may be earned
on the Transaction proceeds from investing in short-term interest bearing
instruments pending further use of the proceeds.
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited pro forma condensed consolidated statements of
operations for the year ended June 30, 1998 and for the nine months ended March
31, 1999, have been prepared to reflect the proposed Sale of the apple product
lines of the Company and assuming that such sale took place on July 1, 1998. The
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the period ending June 30, 1998 (the "1998 Annual Report") and the
condensed consolidated financial statements for the six months ended March 31,
1999 and 1998 in the Company's Quarterly Report on Form 10-Q for the quarter
ending March 31, 1999 (the "March 1999 Quarterly Report"). The pro forma
condensed consolidated statements of operations are not necessarily indicative
of the results of operations of the Company as they may be in the future or as
they might have been had the Sale been effective July 1, 1998.
17
<PAGE>
YEAR ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Pro Forma
Actual Adjustments Pro Forma
------ ----------- ---------
(In thousands, exept per share amounts)
(a)
<S> <C> <C> <C>
Net Sales ............................................... $ 26,094 ($21,181) $ 4,913
Other Income ............................................ 586 -- 586
Cost of sales ........................................... 21,565 (17,241) 4,324
Selling, general and
administrative expenses ................................. 3,384 (2,078) 1,306
Interest expense ........................................ 310 310
----------- ----------
Income (loss) from continuing
operations .............................................. $ 1,421 ($ 1,862) ($ 441)
Income (loss) from continuing operations per common share
Basic ............................................. $ 0.90 ($ 0.28)
Diluted ........................................... $ 0.89 ($ 0.28)
Weighted average shares
Basic ............................................. 1,581,014 1,581,014
Diluted ........................................... 1,600,327 1,581,014
</TABLE>
NINE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
Pro Forma
Actual Adjustments Pro Forma
------ ----------- ---------
(In thousands, exept per share amounts)
<S> <C> <C> <C>
Net Sales ............................................... $ 29,929 ($14,886) $ 15,043
Other Income ............................................ 523 -- 523
Cost of sales ........................................... 23,315 (12,593) 10,722
Selling, general and
administrative expenses ................................. 4,859 (1,852) 3,007
Interest expense ........................................ 375 375
----------- ----------
Income (loss) from continuing
operations .............................................. $ 1,903 ($ 441) $ 1,462
Income (loss) from continuing operations per common share
Basic ............................................. $ 1.26 $ 0.97
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C> <C>
Diluted ........................................... $ 1.23 $ 0.94
Weighted average shares
Basic ............................................. 1,513,411 1,513,411
Diluted ........................................... 1,547,902 1,547,902
</TABLE>
(a) To eliminate the operations of the apple product lines
19
<PAGE>
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
QUARTER YEAR
ENDED ENDED
March 31, June 30, June 30, June 30, June 30, June 30,
1999 1998 1997 1996 1995 1994
-------------------------------------------------------------------------
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Net sales $29,929 $26,094 $23,798 $26,533 $21,438 $27,773
Earnings before income
taxes 1,903 $ 1,421 $ 749 $ 651 $ 287 $ 1,887
Net earnings 1,360 $ 899 $ 517 $ 434 $ 195 $ 1,174
Earnings per common share
Basic $ .90 $ .57 $ .31 $ .25 $ .11 $ .70
Diluted $ .88 $ .56 -- -- -- --
Weighted average common
shares and equivalents
outstanding
Basic 1,513 1,581 1,648 1,704 1,701 1,669
Diluted 1,548 1,600 -- -- -- --
Total Assets $29,137 $20,776 $14,576 $13,587 $15,335 $14,929
Long-term debt $ 8,914 $ 4,500 $ 1,808 $ 1,628 $ 2,105 $ 2,585
Cash dividends per
common share $ -- $ -- $ -- $ -- $ .15 $ .05
</TABLE>
MARKET PRICE OF THE COMPANY'S COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market System
(symbol: VDRY). The high and low last sale prices of the Common Stock as
reported by Nasdaq on the date preceding public announcement of the Transaction
were:
High: $8
Low: $7 1/2
The quarterly high and low prices for the last two fiscal years and
interim periods 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
20
<PAGE>
Quarter Ending Low Bid High Bid
-------------- ------- --------
09/30/98 6-3/8 9-1/2
12/31/98 5-13/16 9-7/32
03/31/99 6-7/8 14
The above quotations were obtained from the NASDAQ monthly statistical
reports.
On June 29, 1999, the approximate number of holders of common stock was
636. On that date, the average of the high and low price per share of the
Company's stock was $9.28. 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.
DESCRIPTION OF THE COMPANY FOLLOWING THE TRANSACTION
If the Transaction is consummated, the Company's remaining operations will
initially consist of the following: (i) vacuum drying of apples and other fruit;
(ii) representation agreements with third party producers, including Zoria Farms
and Meduri Farms; (iii) certain custom mixing and processing operations; (iv)
the Company's Perma Pak food storage business; (v) the Company's 85% interest in
MINCO; and (vi) the leasing of excess real property held by the Company.
The businesses listed in items (i)-(iii) above (the "Ingredients Product
Lines") have historically been adjunct to the Product Lines. If the Transaction
is consummated, management intends to review the stand-alone viability of the
Ingredients Product Lines. It is presently anticipated that the majority of the
Ingredients Product Lines would be terminated as soon as practicable after the
Transaction. The Perma Pak and MINCO businesses are presently considered to be
viable on a stand-alone basis, and management intends to retain these
businesses, along with the Company's real property holdings, immediately after
the Transaction pending review of the Company's strategic options. Such
terminations and retentions are assumed in the presentation of pro forma
financial information set forth above under the heading "Pro Forma Financial
Information".
USE OF PROCEEDS
The Company intends to use the cash proceeds from the Transaction, the
sale of the ingredients inventory, and the disposition of equipment rendered
surplus by the Transaction to retire interest-bearing debt and reduce accounts
payable. The balance of the proceeds from these actions will initially be
retained to provide working capital for the Company's remaining operations and
for general corporate purposes. Pending use of the proceeds for these purposes,
the Company plans to invest such proceeds in short-term interest bearing
obligations.
Management currently plans to evaluate the strategic position of the
Company's remaining operations after consummation of the Transaction. It is
presently anticipated that MINCO may provide an attractive base on which to
expand the Company's presence in the natural foods sector, and the Company may
decide to expand its presence in this sector through acquisition of businesses
complementary to MINCO.
MANAGEMENT AND EMPLOYEES
21
<PAGE>
The management and employees of the Company following the Transaction have
not been fully decided upon at this point in time. Management is currently
evaluating the operations remaining after the Transaction to determine their
individual and collective stand-alone viability in the absence of the
Transferred Assets. Such analysis will determine the number and type of
management and employees required. At a minimum, approximately twelve employees
are expected to be required if only the MINCO, Perma Pak and the real estate
businesses will be retained (and assuming Perma Pak is manufactured for the
Company under contract). Considerably more employees (but at this time an
indeterminate number) would be required to run the other operations, should they
be retained, or to self-manufacture the Perma Pak line of business.
FACILITIES
The Company currently utilizes approximately 220,000 square feet of space
at its plant on Gravenstein Highway North, including both processing and
warehousing facilities. As a result of the Transaction, a significant amount of
this space will become available for leasing to third parties. Because the plant
is served by an on-site wastewater treatment system, such space may be
particularly attractive to local winery and dairy operations, and the Company
currently intends to pursue tenants operating in these industries as rapidly as
possible after consummation of the Transaction.
Santa Rosa, California
July 14, 1999
By Order of the Board of Directors
VACU-DRY COMPANY
/s/ Gary L. Hess
----------------
Gary L. Hess,
President
22
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM PAGE
----
Condensed Consolidated Statements of Earnings for the nine months ended
March 31, 1999 and March 31, 1998 and for the three months ended
March 31, 1999 and March 31, 1998................................... F-1
Consolidated Balance Sheets as of March 31, 1999, March 31, 1998 and
June 30, 1998....................................................... F-2
Consolidated Statements of Cash Flows (unaudited) for the nine months
ended March 31, 1999 and 1998....................................... F-3
Notes to Interim Financial Statements for the nine months ended March 31,
1999................................................................ F-4
Management's Discussion and Analysis of Financial Condition and Results
of Operations for the quarter ended March 31, 1999 F-5
Report of Independent Public Accountants................................ F-8
Consolidated Balance Sheets as of June 30, 1998 and 1997................ F-9
Consolidated Statements of Earnings for the years ended June 30, 1998,
1997 and 1996 ...................................................... F-10
Consolidated Statements of Changes in Shareholders' Equity for the years
ended June 30, 1998, 1997 and 1996.................................. F-11
Consolidated Statements of Cash Flows for the years ended June 30, 1998,
1997 and 1996....................................................... F-12
Notes to Consolidated Financial Statements for the year ended June 30,
1998................................................................ F-13
Management's Discussion and Analysis of Financial Condition and Results
of Operations for the year ended June 30, 1998...................... F-24
<PAGE>
HISTORICAL FINANCIAL STATEMENTS
QUARTER ENDED MARCH 31, 1999
VACU-DRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
3/31/99 3/31/98 3/31/99 3/31/98
----------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Net Sales............ $29,929 $19,897 $12,800 $6,208
Other................ 523 417 175 142
----------------------------------------------------------
Total revenue.... $30,452 $20,314 $12,975 $6,350
Costs & Expenses.........
Cost of sales........ 23,315 16,465 9,241 5,007
Selling, general &
administrative........... 4,859 2,345 1,778 1,051
Interest............. 375 215 147 90
----------------------------------------------------------
Total cost &
expenses......... $28,549 $19,025 $11,166 $6,148
EARNINGS BEFORE INCOME
TAXES AND MINORITY INTEREST 1,903 1,289 1,809 202
MINORITY INTEREST........ 180 0 46 0
----------------------------------------------------------
EARNINGS BEFORE INCOME
TAXES ................... 2,083 1,289 1,855 202
PROVISION FOR INCOME TAXES 723 438 688 68
----------------------------------------------------------
NET EARNINGS............. $1,360 $851 $1,167 $134
WEIGHTED AVERAGE COMMON
SHARES AND EQUIVALENTS:
Basic................ 1,513,411 1,604,779 1,515,742 1,525,274
Diluted.............. 1,547,902 -- 1,564,067 --
EARNINGS PER COMMON SHARE
Basic................ $0.90 $0.53 $0.77 $0.09
Diluted.............. $0.88 -- 0.75 --
</TABLE>
See Notes to Interim Financial Statements
F-1
<PAGE>
VACU-DRY COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
3/31/99 3/31/98 6/30/98
-------------------------------------------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash........................... $172 $194 $385
Accounts receivable............ 3,478 2,570 2,298
Other receivables.............. 816 16 0
Income tax receivable.......... 0 0 163
Inventories.................... 14,892 7,853 7,926
Prepaid expenses............... 74 17 298
Current deferred taxes......... 360 240 360
-------------------------------------------------
Total current assets........... $19,792 $10,890 $11,430
-------------------------------------------------
Property, plant & equipment, net 6,663 6,665 6,784
Goodwill, net of amortization.. 2,682 0 2,562
-------------------------------------------------
Total Assets................... $29,137 $17,555 $20,776
-------------------------------------------------
CURRENT LIABILITIES
Current maturities of long-term
debt........................... $ 438 $595 $438
Accounts payable............... 5,938 1,369 3,789
Accrued payroll & related
liabilities.................... 1,021 761 936
Accrued expenses............... 395 318 353
Income taxes payable........... 452 30 0
-------------------------------------------------
Total current liabilities...... $8,244 $3,073 $5,516
-------------------------------------------------
Borrowings under line of credit 5,000 2,600 2,297
Long term debt-net of current
maturities..................... 3,914 2,185 2,203
DEFERRED INCOME TAXES.......... 865 826 865
MINORITY INTEREST.............. 329 0 509
SHAREHOLDERS' EQUITY:
Capital stock.................. 2,876 2,826 2,837
Warrants for common stock...... 456 0 456
Retained earnings.............. 7,453 6,045 6,093
-------------------------------------------------
Total shareholders' equity..... 10,785 8,871 9,386
-------------------------------------------------
Total liabilities and
shareholders' equity........... $29,137 $17,555 $20,776
-------------------------------------------------
</TABLE>
See notes to interim financial statements
F-2
<PAGE>
VACU-DRY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998
------------------------------
<S> <C> <C>
Net earnings...................................... $1,360 $851
Adjustments to reconcile net earnings to net cash
used for operating activities:
Depreciation and amortization expense......... 952 821
Deferred income tax provision................. -0- (1)
Minority interest............................. (180) -0-
Changes in assets & liabilities:
Accounts receivable, net...................... (1,226) (949)
Other receivables............................. (816) -0-
Income tax receivable......................... 163 -0-
Inventories, net.............................. (7,001) (2,798)
Prepaid assets................................ 224 114
Accounts payable.............................. 1,999 879
Accrued payroll & related liabilities......... 85 222
Accrued expenses.............................. 42 145
Income taxes payable.......................... 452 30
------- -------
Net adjustments.......................... (5,306) (1,537)
------- -------
Net cash used for operating activities... (3,946) (686)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.......................... (722) (255)
------- -------
Net cash used for investing activities... (722) (255)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under the line of credit........... 20,540 8,385
Payments on line of credit.................... (17,837) (7,139)
Principal payments of long-term debt.......... (388) (420)
Proceeds from MINCO financing................. 2,100 -0-
Issuance of common stock...................... 40 26
------- -------
Net cash provided by financing activities 4,455 852
------- -------
NET DECREASE IN CASH.............................. (213) (89)
CASH AT THE BEGINNING OF THE YEAR................. 385 283
---- ----
TOTAL CASH AT THE END OF THE PERIOD............... $172 $194
</TABLE>
See notes to Interim Financial Statement
F-3
<PAGE>
VACU-DRY COMPANY
NOTES TO INTERIM FINANCIAL STATEMENTS
NINE MONTHS ENDED MARCH 31, 1999
Note 1 - The accompanying fiscal 1999 and 1998 unaudited interim statements
have been prepared pursuant to the rules of the Securities and
Exchange Commission. Certain information and disclosures normally
included in annual financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company
believes these disclosures are adequate to make the information not
misleading. In the opinion of management, all adjustments necessary
for a fair presentation for the periods presented have been
reflected and are of a normal recurring nature. These interim
financial statements should be read in conjunction with the
financial statements and notes thereto for each of the three years
in the period ended June 30, 1998. The results of operations for the
nine month period ended March 31, 1999 are not indicative of the
results that may be achieved for the entire year ending June 30,
1999.
Due to the seasonal nature of the Company's business, the prior year
interim balance sheet is presented in the accompanying unaudited
financial statement.
During the third quarter approximately 50% of sales were for storage
items to primarily one customer.
Reclassification - Certain 1998 amounts were reclassified to conform
to the 1999 presentation.
Note 2 - Inventories -
Inventories are stated at LIFO cost for Vacu-dry; FIFO cost for
MINCO. The excess of current cost of the inventory over LIFO cost
was $657,000 at March 31, 1999 and $1,115,000 at June 30, 1998.
Inventories at March 31, 1999 and June 30, 1998, consisted of the
following:
3/31/99 6/30/98
------- -------
Vacu-dry LIFO
Finished goods $9,027,000 $4,695,000
Work in progress 982,000 470,000
Raw materials, &
containers 2,871,000 442,000
$12,880,000 $5,607,000
MINCO FIFO
Finished goods 2,012,000 2,319,000
Total Inventories $14,892,000 $7,926,000
Note 3 - Statement of Cash Flows -
Interest and income tax payments and stock repurchase reflected in
the Consolidated Statement of Cash Flows were as follows:
1999 1998
---- ----
Interest paid $338,000 $210,000
Income taxes paid $108,000 $409,000
Repurchase of stock through
issuance of notes payable -0- $835,000
F-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1999
The financial statements herein presented for the quarter and nine months
ended March 31, 1999, reflect all the adjustments that in the opinion of
management are necessary for the fair presentation of the financial position and
results of operations for the period then ended. All adjustments during the
periods presented are of a normal recurring nature unless otherwise stated. In
June of 1998, Vacu-dry Company formed a new company, Made In Nature Company,
Inc. (MINCO), for the purpose of acquiring substantially all of the business and
assets of Made In Nature, Inc., a natural foods marketer of organic consumer
packaged goods. Accordingly, the results of operations of MINCO are included in
the consolidated results herein.
LIQUIDITY AND CAPITAL RESOURCES
Because the Company's operations, except for MINCO, are seasonal, the
Company's liquid resources normally fluctuate during the year. The Company
experiences a normal seasonal decrease in production beginning 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. The normal operating cycle
of the Company has been significantly affected by the recent high level of sales
of food storage (canned goods) products. Consumer concerns over potential Year
2000 (Y2K) computer-related problems have resulted in demand that has
significantly exceeded prior year's sales. These increased sales have required
higher production and inventory levels during the current fiscal year. MINCO has
contracts with organic growers and packers and is normally able to schedule
production as needed to meet demand.
The Company experienced lower cash flow during the current fiscal quarter
due to the build-up of food storage inventories and negative results from
MINCO'S operations. MINCO's fiscal year-to-date sales and profitability have not
met management's expectations. The Company is exploring alternate strategies
such as new products and expense reductions in many areas in an attempt to
achieve break-even results from MINCO. However, there is no assurance that
profitable operations can be achieved in the near term. As a result of the
acquisition of MINCO and the build-up of the food storage products, the debt to
equity ratio increased from .90 in fiscal 1998 to 1.60 in fiscal 1999. Also
during the current fiscal year the Company obtained a $2,100,000 five year note
to finance the MINCO acquisition. The current ratio 2.4 at March 31,1999
compares to 3.5 at March 31,1998. The decrease was due to higher accounts
payable for the purchase of food storage ingredients.
Operating capital for the Company is obtained from external and internal
sources. The Company's largest external source is a $8,000,000 revolving line of
credit provided by a bank at the bank's prime rate. On April 20,1999, the
company signed a new agreement with its existing bank which resulted in the line
of credit being increased from $5,000,000 to $8,000,000. Under the terms of the
revolving line of credit agreement, the Company can elect short term LIBOR
financing or long term prime rate financing. Since it was anticipated that the
Company would not have any availability under the previous $5,000,000 line of
credit, a short-term loan from its current lender was arranged prior to March
31,1999. This borrowing was granted and included as part of the line of credit
increase. At March 31,1998, the Company had $1,900,000 of availability under a
$4,500,000 revolving line of credit. The decline in available borrowings
resulted from the Company's utilization of the revolving line to fund higher
inventory levels particularly for the food storage products and funding the
negative cash flow of MINCO.
As of March 31, 1999, the Company was in compliance with all of the
covenants and restrictions related to its outstanding debt. The Company's loan
agreement with its bank includes a negative covenant
F-5
<PAGE>
prohibiting the declaring or paying of a dividend in cash, stock or any other
property without the prior approval by the bank.
Excluding computer system expenditures which are expected to be financed
through leasing arrangements, a capital expenditure budget of approximately
$988,000 has been established by the Company for the 1999 fiscal year. These
funds will primarily be used to purchase new and recondition existing equipment
related to the manufacturing operation as well as to make certain structural
repairs needed to maintain the value of building improvements.
The Company has reviewed its information technology (IT) systems and
determined that it is not Year 2000 compliant. The Company has purchased new
software, which is warranted to be Year 2000 compliant. In addition the Company
has acquired new hardware on which to operate the new software. The Company has
completed its assessment of its non-IT systems. All identified non-IT systems
have been certified Year 2000 compliant by the original manufacturers. 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 June 30, 1999. The conversion to the new software is divided
into two Phases. Phase I for just the ingredient business was successfully
completed on January 31, 1999. The completion of the final Phase has been
delayed until May 31, 1999. MINCO was also able to successfully install the new
software on May 1, 1999. We have allocated one month at the end of the
conversion to make sure we have addressed all of the issues related to the
conversion. A group of ten managers have formed an "Implementation Team" and are
strongly supported by upper management. Both the Implementation Team and upper
management are confident that the implementation can be completed by June 30,
1999. Management estimates that the total cost of the system will be
approximately $900,000. The expenditures for the new system will primarily occur
in fiscal 1999. As of March 31, 1999, the Company has expended approximately
$800,000 of the total budget. The Company will finance 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.
Until recently, the Company has been successful in leasing all of its idle
production facility other than a portion occupied by the product development
group. The Company signed a long-term lease for approximately one-half of the
previously vacated portion of this facility. 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.
RESULTS OF OPERATIONS
QUARTER
Net sales increased $6,592,000 or 106.2% in the third quarter of fiscal
1999. This increase was primarily due to record food storage sales primarily to
one customer of $6,540,000, which represents an increase of $5,770,000 versus
the prior year's sales of $770,000. However, since the Quarter's end the Company
has experienced a significant decline in food storage sales and the level of
future sales is uncertain. Also as a result of the decline, inventories of the
food storage items are high.
MINCO'S sales for the current quarter were $550,000, there were no MINCO
sales for the prior year. Declines in both the prices and volume for the
remaining food ingredients business have partially offset the aforementioned
higher sales.
Cost of sales for the quarter ended March 31, 1998 decreased from 80.6% to
72.2% of net sales. This decrease was a result of lower raw material costs and
higher margins on the food storage line.
F-6
<PAGE>
Selling, general and administrative expenses increased $727,000 or 69.2%
in the third quarter. Of this change, approximately $600,000 is a result of
MINCO. The remaining balance of $127,000 is a result of staffing increases and
their related wages.
Interest expense increased $57,000 as a result of our increased average
borrowings on the line of credit. This was due to funding needs for increased
food storage inventory and MINCO'S negative cash flow.
YEAR-TO DATE
Net sales increased $10,032,000 or 50.4% for the nine months ended March
31, 1999. This increase was primarily due to second and third quarter food
storage sales, currently as noted above. The portion of the increase due to the
inclusion of MINCO'S sales was $1,808,000. Fiscal year-to-date sales for the
food ingredients business have been adversely affected by competitive pricing.
As a result of the growing concern regarding the Y2K issue, food storage product
sales have been at record levels. However, as of the date of this filing, we
have returned to the lower normal levels for food storage sales with high
amounts of unsold inventory on-hand. Since the Company is uncertain as to future
revenue from the food storage line, the Company faces significant uncertainties
in establishing inventory levels.
Cost of sales as a percent of net sales decreased from 82.7% as of March
31, 1998 to 77.9% as of March 31, 1999. The primary reason for the decrease was
higher margins on food storage sales and lower raw material costs. The effect of
MINCO'S results in the consolidated costs of sales for fiscal 1999 was
approximately 5.4% or $1,622,000.
Selling, general and administrative ex penses increased $2,514,000 or
107.1% through the nine months ended March 31, 1999. The portion of the increase
due to the inclusion of MINCO was $2,027,000 or 80.7%. The remaining balance was
due to increases in staffing and professional services
Interest expense increased $160,000 as a result of our higher average
borrowings on the line of credit. This was due to funding needs for increased
food storage inventory and MINCO'S negative cash flow.
The effective tax rate for the nine months ended March 31, 1999 of 38% is
comparable to the 37% incurred for the fiscal year ended June 30, 1998.
F-7
<PAGE>
YEAR ENDED JUNE 30, 1998
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.
ARTHUR ANDERSEN LLP
San Francisco, California,
August 21, 1998
F-8
<PAGE>
VACU-DRY COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS--JUNE 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------------------------
<S> <C> <C>
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
</TABLE>
F-9
<PAGE>
<TABLE>
<S> <C> <C>
----------------------------
Total shareholders' equity .............................. 9,386,000 8,829,000
----------------------------
Total liabilities and shareholders' equity .............. $ 20,776,000 $ 14,576,000
============================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-10
<PAGE>
<TABLE>
<CAPTION>
VACU-DRY COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
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
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-11
<PAGE>
<TABLE>
<CAPTION>
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
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
=====================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-12
<PAGE>
<TABLE>
<CAPTION>
VACU-DRY COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
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
============================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-13
<PAGE>
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.
F-14
<PAGE>
Supplemental Statements of Cash Flows Information
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------
<S> <C> <C> <C>
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
========================================
</TABLE>
F-15
<PAGE>
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
F-16
<PAGE>
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
==========
F-17
<PAGE>
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 goods $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
F-18
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997
--------------------------
<S> <C> <C>
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
==========================
</TABLE>
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
============
F-19
<PAGE>
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:
<TABLE>
<CAPTION>
1998 % 1997 % 1996 %
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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%
==========================================================
</TABLE>
Temporary differences that gave rise to deferred tax assets and liabilities for
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------
<S> <C> <C>
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)
========================
</TABLE>
F-20
<PAGE>
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.
F-21
<PAGE>
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
F-22
<PAGE>
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
===========
F-23
<PAGE>
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.
F-24
<PAGE>
15. RELATED-PARTY TRANSACTIONS:
A member of the Company's Board is employed by 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):
<TABLE>
<CAPTION>
For the Year Ended June 30, 1998
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
<CAPTION>
For the Year Ended June 30, 1997
------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
F-25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1998
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
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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
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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.
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<PAGE>
VACU-DRY COMPANY
CONSENT CARD
THIS CONSENT IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF VACU-DRY COMPANY
The undersigned Shareholder by checking the box below takes the following
identified action with respect to the Consent Resolution:
(1) Approval of the Consent Resolution authorizing the sale of
substantially all of the Company's assets relating to its processed apple
product lines of business on the terms contained in an Asset Purchase Agreement
dated June 21, 1999
|_| FOR |_| AGAINST |_| ABSTAIN
all as set forth in the Notice and Consent Statement dated July 14, 1999, the
receipt of which is hereby acknowledged.
Where no specification is made, the shares will be deemed to have
consented to the approval of the Consent Resolution.
PLEASE DATE AND SIGN THE CONSENT CARD BELOW. IF STOCK IS REGISTERED IN THE NAME
OF TWO OR MORE PERSONS, EACH MUST SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A
CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY THE PRESIDENT OR OTHER
AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AN
AUTHORIZED PERSON.
YOUR VOTE IS IMPORTANT. PLEASE FILL IN AND RETURN PROMPTLY.
Dated:____________________________, 1999
Signature:______________________________
Signature:______________________________
<PAGE>
ANNEX A
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made as of June 21,
1999 by and between Vacu-dry Company, a California corporation ("Seller"), and
Tree Top, Inc., a Washington corporation ("Buyer").
R E C I T A L S:
WHEREAS, in addition to its other activities, Seller is engaged in the
business of developing, producing, distributing, selling, and/or marketing
product lines of processed apple products and products containing processed
apple products. As used herein the term "Business" shall mean all of Seller's
above-described activities, excepting therefrom only that portion thereof that
involves (i) processed apple products produced primarily by means of a vacuum
drying process; (ii) products which contain both processed apple products and
other processed fruit, nut or vegetable products, provided such other processed
fruit, nut or vegetable products comprise ten percent (10%) or more of the
finished product, by weight; (iii) products containing processed apple products
that are packaged by or on behalf of Seller for retail sale; and, (iv) organic
and pesticide-free processed apple products.
WHEREAS, Seller desires to sell, and Buyer desires to buy, on the terms
and conditions set forth in this Agreement, certain of Seller's assets as set
forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements hereinafter contained, the parties hereto agree as follows:
ARTICLE 1
PURCHASE AND SALE OF ASSETS
1.1 Transferred Assets.
Subject to and upon the terms and conditions of this Agreement including,
but not limited to, the rights reserved pursuant to Section 1 below, Seller
agrees to sell, assign, transfer, convey and deliver to Buyer, and Buyer agrees
to purchase from Seller on the Closing Date (as defined in Section 12.1), the
Business of Seller (as above defined),
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which includes those certain assets of Seller described below (all of which are
sometimes collectively referred to as either the "Business" or the "Transferred
Assets").
(a) All product specifications, cost and pricing information,
business plans, customer lists, credit records of customers, supplier lists,
mailing lists, advertising promotional materials, catalogs, price and product
lists, sales records and files, correspondence and reports, whether in paper or
electronic form, related to or useful in the Business (collectively, the
"Records");
(b) All trade secrets, improvements, formulae, research and product
development, technology, know-how, practices, processes, methods, procedures,
software files, market surveys and marketing know-how related to or useful in
the Business, whether or not patentable and whether or not used or being
developed for use in the Business, and all records, files and reports, related
thereto, whether in paper or electronic form (the "Intellectual Property");
(c) Certain equipment owned by Seller which is used in the operation
of the Business, which is listed on Schedule 3.1(a) hereto (the "Equipment");
(d) Seller's goodwill in the Business, including the exclusive right
to represent oneself as the successor to the Business (the "Goodwill");
(e) The trade name and trademark rights and goodwill of "Vacu-dry,"
and associated trade dress, including, but not limited to, Trademark
Registration No. 430,736, Serial No. 71-492,974, Trademark Registration No.
1,708,449, Serial No. 74-191,119, and Trademark Registration No. 680,103, Serial
No. 72-052,921, (all collectively referred to as either the "Trademark" or
"Trade Name"), and all forms thereof, and all trademarks, trademark
applications, service marks, and service mark applications associated with that
Trade Name;
(f) Inventory purchased by Buyer under Section 3.5 ("Inventory").
1.2 TRANSFER OF TITLE.
Except as to the Trade Name, title and risk of loss to the Transferred
Assets shall pass to Buyer at the Closing and the Transferred Assets shall be
deemed delivered to Buyer at the respective locations of the Transferred Assets.
1.3 RESERVED RIGHTS.
Vacu-dry reserves for itself the following:
(a) An irrevocable, non-exclusive, perpetual, worldwide, fully-paid,
royalty-free, assignable license, with the right to sublicense, to the Records
and Intellectual property for all fields of use except those activities in which
Seller may not engage pursuant to the provisions of Section 14.1 below; and
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(b) A worldwide, fully paid license, with no right to sublicense, to
the trade name "Vacu-dry" for use in connection with the disposition of its
inventory and for all other purposes until the earlier of (i) December 31, 1999,
or (ii) the date on which Seller changes its corporate name pursuant to the
obligations contained in Section 14.6, below.
ARTICLE 2
PURCHASE PRICE
2.1 PURCHASE PRICE.
The purchase price to be paid by Buyer to Seller for the Transferred
Assets (excluding the Inventory) shall be Twelve Million Dollars ($12,000,000),
which shall be paid by wire transfer of immediately available funds at the time
of Closing.
2.2 DEPOSIT.
As security for the performance of Buyer's obligations pursuant to this
Agreement, within five (5) business days following the date of this Agreement,
Buyer shall deliver to Bank of San Francisco, as Escrow Holder, pursuant to an
Escrow Agreement substantially in the form of Exhibit A hereto (the "Escrow
Agreement") a letter of credit issued by Bank of America or Seattle First
National Bank of Washington in the principal amount of $12,000,000 and in
substantially the form attached to the Escrow Agreement (the "Letter of
Credit"). Buyer's cost for the Letter of Credit shall be shared equally by Buyer
and Seller.
2.3 LIABILITIES NOT ASSUMED.
(a) Except as is expressly set forth in subsection (b) below, Buyer
does not assume any obligations, responsibilities, liabilities, or debts of
Seller, including, without limitation, liability with respect to environmental
claims and suits; liability for the payment of Seller's outstanding loans and
credit lines; any liability for making payments of any kind (including, as a
result of the transactions contemplated hereby, for the termination of
employment by Seller of employees, or as a result of union contracts, if any,
grievances, or other labor claims, or otherwise) to employees of Seller;
liability for pensions or other benefits to employees of Seller; liability for
making payments of any kind as a result of the termination of any agency,
distributorship or contract; liability for making payments of any kind pursuant
to any agreements, arrangements or understandings with any persons out of the
proceeds from the sale of the Transferred Assets; liability for other accrued or
deferred and unpaid taxes, including income, sales, real estate and personal
property taxes and any interest and penalties with respect thereto; liabilities
for all income, franchise or similar taxes resulting from this Agreement or the
transactions contemplated hereby; for any fees or expenses incurred by Seller in
connection with the transaction contemplated by the Agreement, including but not
limited to those referred to in Article 15, any obligations, charges or
liabilities of Seller, the
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existence of which constitute a breach of any representation, warranty or
agreement of Seller contained in this Agreement; and any obligations,
responsibilities, liabilities, or debts of Seller arising out of or related to
the consummation of the transactions contemplated by this Agreement.
(b) The only obligation, responsibility, liability, or debt of
Seller being assumed by Buyer hereunder is the obligation to supply products to
Seller's customers as is expressly set forth in Section 6.4.
2.4 TRANSFER TAXES.
Buyer shall be responsible for the following sales taxes as a result of
the transfer of the Transferred Assets:
(a) Sales tax on the Equipment, as hereinafter defined, the fair
market value of which Buyer and Seller agree is $500,000, at the rate of 7-1/2%;
and
(b) Unless Buyer provides Seller with a valid resale certificate,
sales tax on the Inventory purchased by Buyer, at the rate of 7-1/2%. However,
if Buyer provides Seller with a valid resale certificate, no sales tax will be
imposed as a result of the purchase of Inventory by Buyer.
Seller shall provide to Buyer, as soon as practicable after Closing, any
resale use certificates, exempt use certificates or any other exemption
certifications held by it which are required to enable Buyer to benefit from any
sales and use or other tax exemption.
ARTICLE 3
EQUIPMENT USED IN THE BUSINESS; INVENTORY
3.1 DESIGNATION OF EQUIPMENT
Schedule 3.1 sets forth certain items of equipment owned by Seller and
which are used in the operation of the Business which are being purchased by
Buyer as a part of the Twelve Million Dollar purchase price (the "Equipment").
3.2 DISPOSITION OF EQUIPMENT
Within thirty days after the Closing, Buyer shall, at its expense,
cause the removal of all Equipment, using licensed and insured contractors
skilled in industrial equipment disconnection and removal. Any bodily injury to
any person or property damage to Seller's property, plant or equipment or other
damages caused as a result of such disconnection and removal shall be Buyer's
responsibility (exclusive of non-structural damage to Seller's property in an
amount not exceeding $10,000, in the aggregate, which shall be Seller's
responsibility), unless the same is caused by Seller's negligence or by latent
conditions of the equipment being removed or latent conditions of
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the premises, which shall be Seller's responsibility. Notwithstanding the
preceding sentence, Buyer shall not be required to (i) remove any electrical
wiring, conduits, flumes, shoots, ducts, piping, equipment, etc., that is
attached to, but not a part of, the removed equipment; (ii) fill in or cover any
holes in the building that were made to accommodate the installation and
operation of the equipment being removed; (iii) remove footings or other
structures connecting the removed equipment to the building or other equipment;
(iv) provide structural support to the building or to other property of Seller
to replace any structural support that was provided by the equipment being
removed; or (v) leave the items being disconnected from the removed equipment or
leave the areas from which the removed equipment was taken in a safe condition,
or in compliance with OSHA or other workplace safety standards.
Equipment not acquired by Buyer pursuant to Section 3.2 may be retained or
disposed of by Seller at its sole discretion.
3.3 DESIGNATION OF INVENTORY
Schedule 3.4 sets forth certain inventory of the Business owned by Seller
(the "Inventory").
3.4 DISPOSITION OF INVENTORY.
From the Signing Date until September 30, 1999 (which date shall not be
extended, notwithstanding a change of the Closing Date), Seller shall use good
faith efforts, consistent with past practices (except Seller may make such
changes to pricing as are commercially reasonable in the circumstances), to sell
the Inventory in the ordinary course of business. Inventory that is suitable for
satisfying Seller's obligations regarding the "Contracted Products," as that
term is defined in Section 6.4, shall be utilized first by Seller to meet those
obligations and only that Inventory which is in excess of such obligations will
be sold on a "spot" basis. On September 30, 1999, any of Seller's remaining
Inventory shall be divided into the following categories, on a item-by-item,
lot-by-lot basis, having the following characteristics:
CUSTOMER GRADE INVENTORY--Inventory that (i) on September 30, 1999 meets
the customer specifications required for the Contracted Products, and (ii)
is expected to continue to meet such specifications through the contracted
delivery date for such Inventory.
SALEABLE INVENTORY--Inventory not falling within the Customer Grade
Inventory category that (i) on September 30, 1999, meets customer
specifications normally required for such Inventory, and (ii) is expected
to continue to meet such specifications for a commercially reasonable
period of time to permit the orderly disposition of such Inventory.
REWORK INVENTORY--Inventory not falling within the above two categories
that can be reworked in a commercially economic manner so as to qualify as
Saleable
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Inventory. Examples of Rework Inventory include, but are not limited to,
those items of Inventory with SO2 below 1,000 PPM or with above-standard
levels of clumping, defects or moisture. At Seller's option, Rework
Inventory may be classified as Distressed Inventory.
DISTRESSED INVENTORY--Inventory not falling into any of the above
categories. Colored or flavored Inventory items that do not fall within
the Customer Grade or Saleable Inventory categories shall be considered
Distressed Inventory, even though such Inventory may fit within another
category.
Each SKU of Customer Grade Inventory will be purchased by Buyer at a price
per pound equal to ninety percent (90%) of the weighted average of the purchase
prices for the SKU (when measured FOB shipping point) set forth in the remaining
portions of the contracts for such Inventory. Buyer shall be responsible for all
broker commissions in connection with such sale.
Each separate SKU of Saleable Inventory will be purchased by Buyer at a
price per pound equal to ninety percent (90%) of the anticipated sales price of
such Inventory, which shall be established by agreement of Seller and Buyer. In
the event they are unable to agree on such price, the price shall be equal to
ninety percent (90%) of Seller's weighted average sales price (when measured FOB
shipping point) for the closest comparable product sold by Seller during the
period of July 1, 1998, to May 15, 1999.
Each SKU of Rework Inventory will be purchased by Buyer at a price per
pound equal to the Saleable Inventory price for SKU into which such Inventory
will be reworked, less Buyer's reasonable anticipated costs of reworking the
Inventory.
Buyer may, but is not obligated to, purchase the Distressed Inventory at
such price as Buyer and Seller may agree.
Inventory not purchased by Buyer pursuant to this Section 3.5 may be
disposed of by Seller in any manner, including by sale to customers.
The purchase price for the purchased Inventory shall be paid no later than
October 8, 1999, unless extended to resolve any issue or dispute. Any issue or
dispute over the interpretation and/or application of this Section shall be
resolved by arbitration in accordance with Section 17.1.
Notwithstanding anything in this Section to the contrary, Buyer may not
purchase any Inventory the purchase price of which will cause the sum of (i)
such purchase price, and (ii) $12,000,000, to exceed an aggregate amount of
$14,750,000.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF SELLER
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Now, and at the time of Closing, Seller hereby represents and warrants to
Buyer as follows:
4.1 ORGANIZATION AND QUALIFICATION.
Seller is a corporation duly organized, validly existing and in good
standing under the laws of the State of California, with full corporate power
and authority to carry on its business as presently conducted by it, and on the
Closing Date shall have full corporate power and authority to consummate the
transactions contemplated hereby.
4.2 NON-CONTRAVENTION.
Except for the consents of Seller's lenders which consents shall have been
obtained by Closing, the execution, delivery and performance of this Agreement
and each of the Related Agreements (defined in Section 4.7) by Seller and the
consummation of the transactions contemplated do not and will not, with or
without the giving of notice or the lapse of time, or both, violate, conflict
with, result in the breach of or accelerate the performance required by any of
the terms, conditions or provisions of the charter documents or by-laws or other
governing documents of Seller or any covenant, agreement or understanding to
which Seller is a party or any order, ruling, decree, judgment, or arbitration
award to which Seller is subject or constitute a default thereunder.
4.3 REGULATORY APPROVALS.
Seller is not required to file, seek or obtain any governmental or
regulatory notice, filing, authorization, approval, order or consent, or any
bond in satisfaction of any governmental regulation, in connection with the
execution, delivery and performance of this Agreement by Seller, other than
filing a shareholder consent or proxy statement with the Securities and Exchange
Commission.
4.4 TITLE TO ASSETS.
Seller has good and marketable title to the Transferred Assets. At the
time of Closing, the Transferred Assets shall be free and clear of restrictions
on or conditions to transfer or assignment, and free and clear of mortgages,
liens, tax liens, successor tax liability claims, pledges, charges,
encumbrances, equities, claims, covenants, conditions, or restrictions.
4.5 TRANSFERRED ASSETS AS IS/WHERE IS.
EXCEPT AS IS SET FORTH HEREIN OR IN ANY SCHEDULE ATTACHED HERETO, THE
TRANSFERRED ASSETS, EXCLUDING INVENTORY, ARE TO BE SOLD ON AN "AS IS/WHERE IS"
BASIS, AND SELLER MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED,
WITH RESPECT TO THE TRANSFERRED ASSETS, INCLUDING WITHOUT LIMITATION ANY IMPLIED
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
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4.6 INVENTORY LIMITED WARRANTY.
Seller warrants that at the time of sale and transfer to Buyer (i) all
Inventory purchased by Buyer shall be free from any defects in material and
workmanship, shall have been processed, packed and stored in accordance with
United States Federal Good Manufacturing Practices, and shall be suitable for
its intended use in or with food products; (ii) the Inventory shall comply with
the United States Federal Insecticide, Fungicide, and Rodenticide Act, as
amended; (iii) the Inventory shall not be adulterated or misbranded within the
meaning of the United States Federal Food, Drug and Cosmetic Act ("FDA Act"), as
amended, including the Food Additives Amendment of 1958, and regulations
promulgated thereunder, or within the meaning of any applicable state or
municipal law which have substantially similar definitions of adulteration and
misbranding; and (iv) the Inventory shall conform in all material respects to
the requirements of the FDA Act, and regulations thereunder. Seller has good and
marketable title to the Inventory. Seller further warrants that at the time of
transfer the Inventory shall be free and clear of restrictions on or conditions
to transfer or assignment, and free and clear of mortgages, liens, tax liens,
successor tax liability claims, pledges, charges, encumbrances, equities,
claims, covenants, conditions, or restrictions.
4.7 AUTHORIZATION.
The execution and delivery of this Agreement, the Escrow Agreement, the
Bill of Sale (as defined in Section 7.4), and all other instruments and
agreements delivered or to be delivered by Seller in connection herewith
(collectively referred to as the "Related Agreements"), and the consummation of
the transactions contemplated hereby and thereby, have been duly authorized by
all necessary corporate action on the part of Seller, subject only to the
approval of this Agreement by Seller's shareholders. This Agreement has been
duly executed and delivered by Seller and constitutes a legal, valid and binding
obligation of Seller, enforceable against it in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
moratorium or other similar laws affecting the rights of creditors generally and
by general equitable principles.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as follows:
5.1 CORPORATE ORGANIZATION.
Buyer is a corporation duly organized, validly existing and in good
standing under the laws of the State of Washington with full corporate power and
authority to consummate the transactions contemplated hereby.
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5.2 AUTHORIZATION.
The execution and delivery by Buyer of this Agreement and each of the
other instruments and agreements of Buyer provided for herein, and the
performance of its obligations hereunder and thereunder, have been duly and
validly authorized by all necessary corporate action on the part of Buyer and
this Agreement, and any other instruments and agreements delivered to or to be
delivered in connection herewith are or shall be the valid and binding
obligations of Buyer enforceable against it in accordance with their respective
terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting the rights of creditors
generally and by general equitable principles
5.3 NON-CONTRAVENTION.
Except as is set forth in Schedule 5.3, the execution, delivery and
performance of this Agreement and each of the Related Agreements by Buyer and
the consummation of the transactions contemplated do not and will not, with or
without the giving of notice or the lapse of time, or both, violate, conflict
with, result in the breach of or accelerate the performance required by any of
the terms, conditions or provisions of the charter documents or by-laws or other
governing documents of Buyer or any covenant, agreement or understanding to
which Buyer is a party or any order, ruling, decree, judgment, or arbitration
award to which Buyer is subject or constitute a default thereunder.
5.4 CONSENTS.
Except as is set forth in Schedule 5.4, no consent, approval or agreement
of any person, party, court, government or entity is required to be obtained by
Buyer in connection with the execution and delivery of this Agreement or the
Related Agreements.
5.5 RESALE CERTIFICATE.
Buyer will furnish any resale certificate or other document related to the
purchase of Inventory reasonably requested by Seller to comply with the
provisions of the sale and use tax laws of the State of California.
ARTICLE 6
SELLER'S AND BUYER'S OBLIGATIONS PRIOR TO THE CLOSING
Seller covenants and agrees with Buyer and Buyer covenants and agrees with
Seller, as follows:
6.1 CONDUCT OF BUSINESS.
From the date hereof until the Closing Date, except as Buyer may otherwise
consent in writing, Seller agrees to do the following:
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(a) use all reasonable efforts to maintain its relationships with
its customers; and
(b) not mortgage, pledge, subject to a lien or security interest or
otherwise encumber any of the Transferred Assets.
6.2 ACCESS.
Between the Signing Date and the Closing Date, Seller shall provide to
Buyer such information with respect to the Transferred Assets as Buyer or its
representatives may reasonably request. Buyer shall hold, and shall cause its
representatives to hold, in strict confidence, and shall not disclose, and shall
cause its representatives not to disclose, any information given to it or its
representatives regarding the Transferred Assets. In the event of termination of
this Agreement, Buyer and its representatives shall return to Seller all copies
of statements, documents, schedules or other written information obtained in
connection therewith and shall promptly turn over or destroy all reports or
analyses prepared by Buyer or its representatives based thereon.
6.3 PUBLIC ANNOUNCEMENTS.
From the date hereof to the Closing Date no party hereto shall make, or
permit any of its affiliates or representatives to make, any news release or
other public disclosure of this Agreement or the transactions contemplated
hereby, except as may be required by law, without the prior approval of the
other party hereto, which approval shall not be unreasonably withheld.
6.4 CUSTOMER CONTRACTS.
Schedule 6.4 hereto sets forth a list of products which Seller is
contractually obligated to produce and sell to customers (the "Contracted
Products"). In the event Seller exhausts its inventory of any of the Contracted
Products subsequent to the Signing Date, Buyer agrees to supply to Seller's
customers such products up to the amount of Seller's remaining commitments at
prices and on the terms set forth in Schedule 6.4, provided, Seller gives Buyer
reasonable advance written notice of its inability to meet such needs to give to
Buyer a commercially reasonable time in which to meet such needs in accordance
with the terms set forth in Schedule 6.4 and the customer specifications
described in the following sentence. All such products shall meet those customer
specifications which have previously been supplied in writing by Seller to Buyer
prior to the Signing Date. Seller shall deliver to Buyer, at Signing, velo-bound
binders containing all of the existing customer contracts and specifications.
Except as is expressly set forth in this Section 6.4, Buyer shall have no
obligations with regard to the Contracted Products or the contracts associated
therewith. This Section shall not create any third-party beneficiary obligations
and only Seller may enforce the provisions of this Section.
6.5 BUYER'S CONSENTS.
Buyer shall obtain all consents and approvals required to permit Buyer to
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consummate the transactions contemplated hereby.
ARTICLE 7
CONDITIONS PRECEDENT TO CLOSING BY BUYER
The obligation of Buyer to purchase the Transferred Assets and to
consummate the transactions contemplated hereby, is subject to the fulfillment
and satisfaction by Seller or waiver in writing by Buyer prior to or at the
Closing Date of each of the following conditions:
7.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties of Seller contained in this Agreement
and in any Schedule attached hereto shall be true and correct in all material
respects on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of such date and Buyer
shall have received a certificate, executed by the President and the Secretary
(or Assistant Secretary) of Seller, dated the Closing Date, to such effect.
7.2 PERFORMANCE AGREEMENTS.
Each and all of the agreements of Seller to be performed on or before the
Closing Date pursuant to the terms hereof shall have been duly performed in all
material respects, and Buyer shall have received a certificate, executed by the
President and the Secretary (or Assistant Secretary) of Seller, dated the
Closing Date, to such effect.
7.3 AUTHORIZATION.
All corporate and shareholder action necessary to authorize the execution,
delivery and performance by Seller of this Agreement and the transactions
contemplated hereby shall have been duly and validly taken and Buyer shall have
received a certificate executed by the President and the secretary (or Assistant
Secretary) of Seller, dated the Closing date, to such effect.
7.4 BILL OF SALE.
Seller shall have executed and delivered to Buyer a bill of sale conveying
to Buyer all of the tangible and intangible personal assets to be acquired by
Buyer, substantially in the form attached hereto as Exhibit B (the "Bill of
Sale").
7.5 OPINION OF COUNSEL.
Buyer shall have received an opinion from Severson & Werson, A
Professional Corporation, counsel to Seller, dated the Closing Date,
substantially in the form attached hereto as Exhibit C .
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7.6 THIRD PARTY CONSENTS.
All consents and approvals of third parties required to permit Seller to
consummate the transactions contemplated hereby, shall have been obtained by
Seller.
7.7 CONFIDENTIALITY AND NON-DISCLOSURE AGREEMENT.
All directors, and William Burgess shall each have delivered to Buyer a
Confidentiality and Non-Disclosure Agreement, substantially in the form attached
hereto as Exhibit D.
7.8 CERTIFICATES; ASSIGNMENTS.
Buyer shall have received from Seller certificates, (i) as of the most
recent practicable date, as to the legal existence of Seller issued by the
Secretary of State of the State of California; and (ii) dated the Closing Date
by the Secretary of Seller, as to the incumbency and signatures of those
officers of Seller authorized to execute this Agreement and the Related
Agreements and resolutions of the Board of Directors and Shareholders of Seller
authorizing this Agreement and the transactions contemplated hereby.
7.9 SHAREHOLDERS' NON-COMPETITION.
Gary L. Hess and Donal Sugrue shall each have delivered to Buyer a
non-competition agreements, substantially in the forms attached hereto as
Exhibits F and G.
7.10 NO INJUNCTIONS.
No orders, judgments, injunctions or decrees of any court or governmental
agency with respect to which Seller or Buyer or the Transferred Assets have been
named or to which Seller or Buyer is a party, have been issued, entered or
granted enjoining the transaction contemplated by its agent.
ARTICLE 8
CONDITIONS PRECEDENT TO CLOSING BY SELLER
The obligation of Seller to sell the Transferred Assets and to consummate
the transactions contemplated hereby, is subject to the fulfillment and
satisfaction by Buyer or waiver in writing by Seller prior to or at the Closing
Date of each of the following conditions:
8.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES.
The representations and warranties of Buyer contained in this Agreement
shall be true and correct in all material respects as of the Closing Date with
the same effect as though such representations and warranties had been made on
and as of such date, and
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Seller shall have received a certificate, executed by the President and
Secretary (or Assistant Secretary) of Buyer, dated the Closing Date to such
effect.
8.2 PERFORMANCE OF AGREEMENTS.
Each and all of the agreements of Buyer to be performed on or before the
Closing Date pursuant to the terms hereof shall have been duly performed in all
material respects, and Seller shall have received a certificate, executed by the
President and Secretary (or Assistant Secretary) of Buyer, dated the Closing
Date, to such effect.
8.3 OPINION OF COUNSEL.
Seller shall have received an opinion from Halverson & Applegate, P.S.,
counsel to Buyer, dated the Closing Date, addressed to Seller, substantially in
the form attached hereto as Exhibit E.
8.4 AUTHORIZATION.
All corporate and shareholder action necessary to authorize the execution,
delivery and performance by Buyer of this Agreement and the transactions
contemplated hereby shall have been duly and validly taken, and Seller shall
have received a certificate executed by an executive officer of Buyer, dated the
Closing Date, to such effect.
8.5 FINANCIAL ADVISOR'S FAIRNESS OPINION.
The fairness opinion rendered by Seller's financial advisor shall not have
been revoked as of the Closing Date.
8.6 APPROVAL OF SELLER'S SHAREHOLDERS.
Seller's shareholders shall have approved this Agreement and the
transaction contemplated thereby as required under California law.
8.7 NO INJUNCTIONS.
No orders, judgments, injunctions or decrees of any court or governmental
agency with respect to which Seller or Buyer or the Transferred Assets have been
named or to which Seller or Buyer is a party, have been issued, entered or
granted enjoining the transaction contemplated by its agent.
ARTICLE 9
FURTHER ASSURANCES
9.1 EXECUTION OF OTHER INSTRUMENTS.
From time to time after the Closing, at Buyer's request and without
further consideration or additional cost to Seller, Seller shall execute and
deliver such other and
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further instruments of conveyance, assignment, transfer and consent, and take
such other action, as Buyer may reasonably request for the more effective
conveyance and transfer of ownership of the Transferred Assets.
ARTICLE 10
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
10.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
A claim for any loss, liability, cost, damage or expense relating to the
representations and warranties set forth in this Agreement shall survive the
Closing and the consummation of the transactions contemplated hereby for a
period of one (1) year after the Closing Date,(except the provision of Section
4.6 shall survive for a period of eighteen (18) months following transfer to
Buyer, and provisions relating to state or federal taxes relating to the
Business, shall survive for a period of three (3) years following the Closing
Date; provided, however, that all such representations and warranties shall
survive after the applicable survival period with respect to any claim made by
Buyer prior to the expiration thereof until, and shall expire when, such claim
is finally resolved. The parties hereto shall be entitled to rely upon such
representations and warranties whether or not either party relied on the
representations and warranties or had knowledge, acquired before or after the
date hereof, from its own investigation or otherwise, of any fact at variance
with or any breach of any such representation or warranty. The limitations set
forth in this Section 10.1 shall not affect the enforceability of any covenant
of this Agreement regardless of whether that covenant may also be deemed a
representation or warranty.
10.2 OBLIGATION OF SELLER TO INDEMNIFY.
Seller shall indemnify, defend, and hold Buyer harmless from and against
any liability, loss, cost, damage or expense sustained by Buyer based upon,
arising out of or resulting from any of the following; provided, however, that
such indemnification shall not be effective until the aggregate dollar amount of
all such liabilities, losses, costs, damages and expenses (including reasonable
attorneys' fees) exceeds $25,000, provided any such loss was not known by Seller
or could not have been known or discovered by Seller in exercise of reasonable
care and diligence prior to the time of Closing:
(a) any misrepresentation, breach of warranty, breach of a covenant
of Seller under this Agreement, or non-fulfillment of any agreement on the part
of Seller under this Agreement or any of the Related Agreements or any
misrepresentation in, or omission from, any certificate or other instrument
furnished or to be furnished to Buyer hereunder or thereunder;
(b) liabilities of Seller not specifically assumed by Buyer
including, but not limited to, any successor tax claims and liabilities;
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(c) any bodily injury or property damage to third parties arising
out of or related to the Inventory, except to the extent such bodily injury or
property damage is the result of acts or omissions by Buyer;
(d) any claim that Buyer is liable for obligations,
responsibilities, liabilities, or debts of Seller, except as is expressly set
forth in Section 2.3(b).
(e) any loss, claim, suit or damage arising out of or related to any
claims by Seller's shareholders related to this Agreement or the transactions
contemplated thereby;
(f) any loss, claim, suit or damage arising out of or related to
Seller's use of the Transferred Assets prior to the Closing Date; and/or
(g) any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs and expenses, including attorneys' fees, incident
to any of the foregoing.
10.3 OBLIGATION OF BUYER TO INDEMNIFY.
Buyer shall indemnify and hold Seller harmless from and against any
liability, loss, cost, damage or expense sustained by Seller based upon, arising
out of, or resulting from any of the following:
(a) any misrepresentation, breach of warranty, breach of a covenant
of Seller under this Agreement, or non-fulfillment of any agreement on the part
of Buyer under this Agreement or any of the Related Agreements or from any
misrepresentation in, or omission from, any certificate or other instrument
furnished or to be furnished to Seller hereunder or thereunder;
(b) any liability of Seller specifically assumed by Buyer in
connection with the transactions contemplated herein;
(c) any bodily injury or property damage to third parties arising
out of or related to the Inventory, except to the extent such bodily injury or
property damage is the result of acts or omissions by Seller;
(d) any bodily injury to any person or property damage to Seller's
property, plant or equipment or other damages as a result of disconnection and
removal of Equipment by Buyer or Buyer's agents pursuant to Section 3.2; and/or
(e) any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs and expenses, including attorneys' fees, incident
to any of the foregoing.
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10.4 PROCEDURE FOR INDEMNIFICATION.
Each party hereto agrees to give the other party prompt written notice of
any claim, assertion, event or proceeding by or in respect to a third party of
which it has knowledge concerning any liability or damage as to which it may
request indemnification hereunder; provided, however, that failure to give such
notice shall not affect a party's right to be indemnified hereunder.
10.5 OTHER RIGHTS.
The rights of each party under this Article 10 shall be in addition to any
other rights or remedies that might otherwise be available to such party.
ARTICLE 11
TERMINATION
This Agreement may be terminated and the transactions contemplated hereby
abandoned at any time prior to the Closing Date as follows:
(a) by mutual consent of Seller and Buyer;
(b) by Buyer if any of the conditions set forth in Article 7 hereof
shall have become impossible of fulfillment and shall not have been waived by
Buyer;
(c) by Seller if any of the conditions set forth in Article 8 hereof
shall have become impossible of fulfillment and shall not have been waived by
Seller;
(d) by either Buyer or Seller if the transactions contemplated
hereby are not consummated on or before September 30, 1999 for any reason other
than the failure of the party seeking termination to fulfill the conditions set
forth in Article 7 hereof, if Seller, or Article 8 hereof, if Buyer.
If this Agreement is terminated pursuant hereto, this Agreement shall
become void and of no further force and effect except that such termination
shall be without prejudice to the rights of any party because of the
non-satisfaction of conditions set forth in Articles 7 and 8 hereof resulting
from the intentional or willful breach or violation of the representations,
warranties, covenants or agreements of another party under this Agreement.
ARTICLE 12
CLOSING
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12.1 CLOSING DATE.
The closing of the purchase and sale of the Transferred Assets hereunder
shall be held at the offices of Severson & Werson, One Embarcadero Center, 26th
Floor, San Francisco, California at 10:00 a.m., local time, on July 21, 1999
(the anticipated "Closing Date") or such later date as all conditions to Closing
have been satisfied or waived, but not later than September 30, 1999. The time
and place of closing is herein referred to as the "Closing" and the date of the
Closing is herein referred to as the "Closing Date".
ARTICLE 13
REMEDIES
13.1 REMEDIES.
Seller agrees that the Transferred Assets are unique and that Buyer will
be irreparably harmed in the event this Agreement is not specifically enforced.
The parties further agree that it is impossible to measure in money the damage
that will accrue by reason of a refusal by Seller to perform its obligations
under this Agreement. Therefore, Seller hereby acknowledges that, in the event
that Buyer shall institute any action to enforce the provisions of this
Agreement, Buyer will not have an adequate remedy at law and that injunctive or
other equitable relief will not constitute any hardship upon Seller.
ARTICLE 14
COVENANTS OF SELLER AND BUYER AFTER THE CLOSING
Seller covenants and agrees with Buyer and Buyer covenants and agrees with
Seller provided the Closing occurs hereunder:
14.1 NON-COMPETITION.
(a) Except as is provided in subsection (b) below, so long as Buyer,
or its successors or assigns, shall carry on any portion of the Business, but
not later than ten (10) years from the Closing Date, Seller shall not, directly
or indirectly, (i) engage or become interested in, as owner, partner, through
stock ownership, investment of capital, lending of money or property, rendering
of services or otherwise, either alone or in association with others, in the
operation of any business which develops, produces, distributes, sells or
markets (A) products of the Business; (B) fresh chilled apple pieces, frozen
apple pieces, apple juice concentrate; and (C) or artificial imitations or
replicas of products of the Business, except for artificial imitations or
replicas not exceeding a combined total of 200,000 pounds of such products per
year (other than sales of Inventory by Seller pursuant to Section 3.4 hereof);
(ii) use for its own benefit or disclose to any other person or persons, natural
or corporate, the name and/or requirements of any such customer to any other
person, or (iii) except as permitted by this Agreement, use for its own benefit
or disclose to any other person or persons, natural or corporate, any of the
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Transferred Assets. The obligations of Seller under this Section 14.1 shall
extend to all countries of the world, all states of the United States and to
each of the counties in the State of California. Breach hereof shall entitle
Buyer to invoke all of available remedies, at law or in equity, including
injunctive relief. If a court of competent jurisdiction determines that the
restrictions contained in this Section are too broad to be enforced, it shall
modify such provisions to the extent necessary to permit their enforceability.
(b) Nothing contained in the foregoing section is intended to prohibit
Seller from engaging in any business involving (i) processed apple products
produced primarily by means of a vacuum drying process; (ii) products which
contain both processed apple products and other processed fruit, nut or
vegetable products, provided such other processed fruit, nut or vegetable
products comprise ten percent (10%) or more of the finished product, by weight;
(iii) products containing processed apple products that are packaged by or on
behalf of Seller for retail sale; (iv) organic and pesticide-free processed
apple products; or (v) the sale of Inventory not purchased by Buyer under
Section 3.5.
14.2 REFERRAL OF INQUIRIES.
After the Closing Date and so long as the non-competition provisions of
Section 14.1 are enforceable, in whole or in part, Seller shall refer to Buyer
all inquiries which it may receive, whether from customers or otherwise,
relating to the Business and shall forward to Buyer any written orders which it
may receive relating to the Business, provided, however, that Seller shall not
be obligated to refer inquiries which are reasonably related to the sale of
Seller's remaining inventory as provided in Section 3.5.
14.3 PURCHASE OF PROCESSED APPLE PRODUCTS.
(a) Seller's Purchase of Processed Apple Products. From the Closing
Date and for a period of ten (10) years thereafter, Seller agrees to provide
first option to Buyer to supply all of its requirements of processed apple
products.
(b) Buyer's Option to Supply. If Seller intends to purchase any
processed apple products from a supplier other than Buyer, Seller shall provide
evidence satisfactory to Buyer of the terms and conditions of said supplier's
offer. Buyer shall have seven (7) days thereafter to meet said offer. If Buyer
elects not to meet the terms and conditions of the offer, Seller may then fill
that offer through the other supplier.
14.4 CONFIDENTIALITY AND NON-DISCLOSURE.
(a) Seller shall not, disclose, divulge, communicate or otherwise
make known, directly or indirectly, to any person any Confidential or
Proprietary Information, as hereinafter defined. In addition, Seller shall use
all commercially reasonable efforts to keep such information confidential. As
used herein, Confidential or Proprietary Information means all production
methods and processes, financial information, customer specifications, customer
information, contract terms and product specifications related to the Business
and constituting a part of Transferred Assets. Except as to the express use
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permitted Seller under Section 1.3, Seller shall not, directly or indirectly,
make any use of or exploitation of any such information or cause or permits
others to make any use or exploitation of any such information. Breach hereof
shall entitle Buyer to invoke all of available remedies, at law or in equity,
including injunctive relief. If a court of competent jurisdiction determines
that the restrictions contained in this Section are too broad to be enforced, it
shall modify such provisions to the extent necessary to permit their
enforceability.
(b) Confidential and Proprietary Information does not include any
information that: (i) is in the public domain through no act or omission by
Seller, its employees, agents, or others working on its behalf; (ii) is
demonstrated by Seller to have been independently developed by Seller (or by a
third party and lawfully disclosed to Seller) after the date hereof; (iii) is
rightfully received by Seller from third parties who were entitled to receive
and transfer the information; or (iv) is specifically identified in a written
agreement, which is signed by an officer of Buyer and specifically refers to
this Agreement, that approves Seller's use of the information.
14.5 CHANGE OF CORPORATE NAME.
On or before December 31, 1999, Seller shall amend its Articles of
Incorporation to change its name to a name not containing the word "Vacu-dry" or
a word or words similar thereto.
14.6 ACCESS.
For a period of six months following Closing, Seller, subject to the
availability of relevant employees at no additional cost to Seller, shall
provide to Buyer, its employees, agents, or its representatives such information
with respect to the Transferred Assets as Buyer or its representatives may
reasonably request.
ARTICLE 15
EXPENSES OF THE PARTIES
15.1 EXPENSES OF THE PARTIES.
Each party shall pay its respective expenses incurred in connection with
the negotiation, execution and performance of this Agreement.
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ARTICLE 16
NOTICES
16.1 NOTICES.
Any notice to any party hereto given pursuant to this Agreement shall be
in writing addressed as follows:
if to Buyer: Tree Top, Inc.
220 E. Second
P. O. Box 48
Selah, Washington 98942
Attn: President - Ingredient Division
Telephone: (509) 697-7251
Telecopier: (509) 697-0463
with a copy to: Halverson & Applegate, P.S.
311 North 4th Street
Yakima, Washington 98907
Attn: Terry C. Schmalz, Esq.
Telephone: (509) 575-6611
Telecopier: (509) 457-2419
if to Seller: Vacu-dry Company
100 Stony Point Road, Suite 200
Santa Rosa, California 95401
Attn: President
Telephone: (707) 535-4000
Telecopier: (707) 535-4010
with a copy to: Severson & Werson
One Embarcadero Center, 26th Floor
San Francisco, California 94111
Attn: Roger S. Mertz, Esq.
Telephone: (415) 398-3344
Telecopier: (415) 956-0439
Any such address may be changed by any party by written notice to the
other party. Any notice shall be deemed delivered (i) if transmitted by
electronic facsimile transmission, when the appropriate number is transmitted
and written acknowledgement by recipient is received by sender, (ii) if
delivered personally, when received, or (iii) if mailed by registered or
certified mail, postage prepaid, return receipt requested, when received.
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ARTICLE 17
DISPUTE RESOLUTION
17.1 MANDATORY ARBITRATION.
Any controversy or claim between or among the parties, their agents,
employees and affiliates, arising out of or relating to this Agreement or the
Related Agreements, including without limitation any claim based on or arising
from an alleged tort, shall, at the option of any party, be resolved through
mandatory arbitration in accordance with the rules then in effect of the
American Arbitration Association ("AAA") and Title 9 of the U. S. Code,
notwithstanding any other choice of law provision in the Agreement or the
Related Agreements. All statutes of limitations or any waivers contained herein
which would otherwise be applicable shall apply to any arbitration proceeding
under this Section 17.1. The parties agree that related arbitration proceedings
may be consolidated. The arbitrator shall prepare written reasons for the award.
The location of the arbitration shall be in San Francisco, California. The
arbitrator or arbitrators shall be generally skilled in the legal and business
aspects of the subject matter at issue. If the parties so agree, a single
arbitrator shall be selected jointly by Buyer and Seller to settle the dispute.
If the parties cannot agree upon the selection of an arbitrator within fifteen
(15) days after the receipt by one party from the other of a notice of
arbitration, then each party shall within fifteen (15) days after the expiration
of said fifteen (15) day period select one arbitrator. If either party fails to
appoint an arbitrator within that fifteen (15) days period, the other party may
designate an arbitrator for the party who failed to make such appointment. The
two arbitrators shall select a third arbitrator within fifteen (15) days after
their appointment; if the two arbitrators selected by the parties cannot agree
upon a third arbitrator, the third arbitrator shall be appointed by the AAA. The
arbitrators shall promptly determine whether and in what amount a payment should
be made to the prevailing party and shall submit a written report of their
decision to Buyer and Seller. The decision of the majority of the arbitrators
shall be binding upon all parties. The arbitrators shall not be entitled to
award punitive damages. Judgment upon the award rendered may be entered in any
court having jurisdiction.
17.2 PROVISIONAL REMEDIES AND SELF HELP.
No provision of, or the exercise of any rights under, Section 17.1 shall
limit the right of any party to exercise self help remedies such as set-off, or
to obtain provisional or ancillary remedies such as injunctive relief or the
appointment of a receiver from a court having jurisdiction before, during or
after the pendency of any arbitration.
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ARTICLE 18
MISCELLANEOUS
18.1 ENTIRE AGREEMENT; WAIVERS.
This Agreement (including all attachments hereto) comprises the entire
agreement between the parties hereto as to the subject matter hereof and
supersedes all prior agreements and understandings between them relating
thereto. Each party may extend the time for, or waive the performance of, any of
the obligations of the other, waive any inaccuracies in the representations or
warranties of the other, or waive compliance by the other with any of the
covenants or conditions contained in this Agreement, but only by an instrument
in writing signed by the party granting such extension or waiver. 18.2 Attorneys
Fees.
18.2 ATTORNEYS FEES
If any legal action, arbitration, mediation or other proceeding is brought
for the enforcement of this Agreement or the Related Agreements, or because of
an alleged dispute, breach, default, or misrepresentation in connection with any
of the provisions of this Agreement or the Related Agreements, the successful or
prevailing party or parties shall be entitled to recover reasonable attorneys'
fees and other costs incurred in that action or proceeding, in addition to any
other relief to which it or they may be entitled.
18.3 GOVERNING LAW.
This Agreement is made and shall be construed in accordance with the laws
of the State of California.
18.4 SUCCESSORS AND ASSIGNS.
This Agreement shall inure to the benefit of, and be binding upon and
enforceable against, the respective successors and assigns of the parties hereto
but may not be assigned by any party without the prior written consent of the
other parties.
18.5 CAPTIONS.
Captions are supplied herein for convenience only and shall not be deemed
a part of this Agreement for any purpose.
18.6 COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original for all purposes.
18.7 SEVERABILITY.
If any term or provision of this Agreement or the application thereof to
any person or circumstances shall to any extent be invalid or unenforceable, the
remainder of this
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Agreement or the application of such terms or provisions to persons or
circumstances other than those as to which it is invalid or unenforceable, shall
not be affected thereby and each term and provision of this Agreement shall be
valid and enforced to the fullest extent permitted by law.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written by their duly authorized officers.
Attest: Seller:
VACU-DRY COMPANY
/s/ William Burgess By /s/ Gary L. Hess
- ------------------------------------ -------------------------------------
William Burgess, Assistant Secretary Gary L. Hess, President
Buyer:
Attest: TREE TOP, INC.
/s/ R.W. Bailey By /s/ Ray Dilschneider
- ------------------------------------ -------------------------------------
/s/ R.W. Bailey, Assistant Secretary Ray Dilschneider, President -
Ingredient Division
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LIST OF SCHEDULES AND EXHIBITS
SCHEDULES
Schedule 3.1(a) Transferred Equipment
Schedule 3.3 Inventory
Schedule 5.3 Non-Contravention Exceptions
Schedule 5.4 Consent Exceptions
Schedule 6.4 Customer Contracts
EXHIBITS
Exhibit A Escrow Agreement
Exhibit B Bill of Sale
Exhibit C Form of Opinion of Seller's Counsel
Exhibit D Confidentiality and Non-Disclosure Agreement
Exhibit E Form of Opinion of Buyer's Counsel
Exhibit F Form of Non-Competition Agreement
Exhibit G Form of Non-Competition Agreement
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[LOGO OMITTED]
SUTTER SECURITIES INCORPORATED
ANNEX B
FAIRNESS OPINION OF SUTTER SECURITIES INCORPORATED
July 13, 1999
Board of Directors
Vacu-dry Company
100 Stony Point Road, Suite 200
Santa Rosa 95401
Attention: Gary Hess, President and Chief Executive Officer
Dear Sirs:
We understand that Vacu-dry Company ("Vacu-dry") has entered into an agreement
with Tree Top, Inc. ("Tree Top") pursuant to which Tree Top would purchase
certain assets of Vacu-dry's air dried and drum dried evaporated and low
moisture apple business (the "Transaction"). You have provided us with the Asset
Purchase Agreement dated June 21, 1999, between Tree Top and Vacu-dry (the
"Agreement") and with the Consent Statement with respect to the transaction in
substantially the form to be sent to the shareholders of Vacu-dry ("Consent
Statement").
The Agreement provides that Tree Top will pay $12,000,000 for the assets of the
business, including certain equipment and the trade name, but excluding current
assets. Tree Top also will buy salable inventory unsold as of September 30,
1999, and will have the option to buy certain other inventory; however, Tree Top
will not buy inventory in excess of an aggregate purchase price of $2,750,000.
You have asked us to render our opinion as to whether the Transaction is fair,
from a financial point of view, to the shareholders of Vacu-dry.
In the course of our analyses for rendering this opinion, we have:
1. reviewed the Consent Statement;
2. reviewed the Agreement;
3. reviewed Vacu-dry's Annual Reports to Shareholders and Annual
Reports on Form 10-K for the fiscal years ended June 30, 1996
through 1998, and its Quarterly Reports on Form 10-Q for the periods
ended September 30, 1998, December 31, 1998, and March 31, 1999;
4. reviewed certain operating and financial information provided to us
by management relating to business and prospects of Vacu-dry's
continuing operations and of the operations being sold pursuant to
the Agreement;
5. met with Vacu-dry's senior management to discuss the operations,
historical financial statements and future prospects of the
continuing operations and of the operations being sold pursuant to
the Agreement;
6. reviewed pro forma data provided by Arthur Andersen LLP;
7. visited Vacu-dry's facilities in Sebastopol, California;
8. reviewed the appraisal of Vacu-dry's properties in Sebastopol by
G.F. Hornsby & Associates, dated June 3, 1998;
9. reviewed the historical market prices and trading volume of the
common shares of Vacu-dry; and
10. conducted such other studies, analyses, inquiries and investigations
as we deemed appropriate.
In the course of our review, we have relied upon and assumed the accuracy and
completeness of the financial and other information provided to us by Vacu-
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dry. We have not assumed any responsibility for the information provided to us
and we have further relied upon the assurances of the management of Vacu-dry
that it is unaware of any facts that would make the information provided to us
incomplete or misleading. In arriving at our opinion, we have not performed any
independent appraisal of the assets of Vacu-dry. Our opinion is necessarily
based on economic, market and other conditions, and the information made
available to us, as of the date hereof.
Based on the foregoing, it is our opinion that the Transaction is fair, from a
financial point of view, to the shareholders of Vacu-dry.
Very truly yours,
SUTTER SECURITIES INCORPORATED
/s/ G.E. Matthews
By:_____________________________________
Senior Managing Director
ONE SANSOME STREET, SUITE 3950, SAN FRANCISCO, CA 94104
415-288-2350 800-568-2372 FAX 415-288-2355
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