SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
X of the Securities Exchange Act of 1934.
For the quarterly period ended December 31, 1998 or
Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934.
For the transition period from_______ to _______.
Commission File Number 01912
VACU-DRY COMPANY
(Exact name of registrant as specified in its charter)
California 94-1069729
(State of incorporation) (IRS Employer Identification #)
100 Stony Point Road, Suite 200 Santa Rosa, California 95401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 707/535-4000
7765 Healdsburg Avenue, Sebastopol, California 95472
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES: __X__ NO:____
As of February 12, 1999, there were 1,515,722 shares of common stock, no par
value, outstanding.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISK AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN OF
THE FACTORS SET FORTH IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
YEAR ENDED JUNE 30, 1998
The financial statements herein presented for the quarter and six months ended
December 31, 1998, 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 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 new strategies in an attempt to achieve break-even results from
MINCO operations by the end of the fiscal year. As a result of the
acquisition of MINCO and the build-up of the food storage products, the debt
to equity ratio increased from .82 in fiscal 1998 to 1.52 in fiscal 1999.
The current ratio 2.20 for fiscal 1999 compares to 2.42 for the previous
fiscal year. 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 $5,000,000 revolving
line of credit provided by a bank at the bank's prime rate. Under the terms
of the revolving line of credit agreement, the Company can elect short term
LIBOR financing or long term prime rate financing. As of December 31, 1998,
the Company had $1,508,000 of available funds under the line of credit. This
amount is less than the $2,806,000 of availability under the $4,500,000
revolving line of credit at December 31, 1997. 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. The Company has finalized a
short-term agreement with its current lender to increase the existing bank
line of credit to fund the increased working capital requirements associated
with the higher food storage sales. During the quarter, the Company obtained
longer term financing to fund the MINCO acquisition. The five-year term note
in the amount of $2,100,000 is secured by real estate at a fixed interest
rate of 7.365%. The agreement requires monthly principal and interest
payments with the unpaid balance due December 1, 2003.
As of December 31, 1998, the Company was not in compliance with one of the
covenants related to its outstanding debt. The Company has received a waiver .
of this non-compliance by its bank. The Company's loan agreement with its bank
includes a negative covenant 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 anticipates financing these expenditures through internally
generated funds.
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 is in the final stages of completion. The completion of the final
Phase has been delayed until May 31, 1999. MINCO will begin their
implementation on March 1, 1999 and is expected to complete all phases by
May 31, 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 December 31, 1998, the Company has expended
approximately $350,000 of the total budget. 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.
Until recently, 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 short-term lease,
which expires February 28, 1999 for the balance of the available space. 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 and MINCO consolidated their corporate offices and moved into a new
location in December 1998.
Results of Operations
Quarter
Net sales increased $1,627,000 or 21.7% in the second quarter of fiscal 1999.
This increase was primarily due to food storage sales of $3,355,000, which
represents an increase of $2,806,000 versus the prior year's sales of $305,000.
MINCO'S sales for the quarter were $565,000. 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 December 31, 1998 approximated those for
the prior year: 78.3% versus 78.5% of net sales.
Selling, general and administrative expenses increased $924,000 or 129% in the
second quarter. Of this change, approximately $652,000 is a result of MINCO.
The remaining balance of $272,000 is a result of staffing increases and their
related wages.
Interest expense increased $71,000 as a result of our increased average
borrowings on the line of credit. This was due to funding needs for increased
food storage sales and MINCO'S negative cash flow.
Year-to Date
Net sales increased $3,440,000 or 25.1% for the six months ended December 31,
1998. This increase was primarily due to second quarter food storage sales,
currently as noted above. The portion of the increase due to the inclusion of
MINCO'S sales was $1,258,000. 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 steadily increasing. As of the date of filing, we
believe that it is prudent to forecast further increases as "Year 2000" (Y2K)
and "end of the millennium" concerns are expected to build in 1999. We are
optimistic about our prospects in this business but must maintain an
appropriate level of caution. New competitors are continually entering this
category. Even as concerns build over the Y2K issue, so do arguments that
the concerns are unfounded or overblown. The increase in sales the Company is
currently experiencing is expected to return to prior lower levels as we
approach January 1, 2000, if not earlier. Until then, it is our challenge
to rapidly, but cost effectively, build production capacity
and scale up inventories without subjecting ourselves to undue risk associated
with the anticipated decline in sales. At this time we are increasing our
short-term capacity to meet the forecasted demand.
Cost of sales as a percent of net sales decreased from 83.7% as of December 31,
1997 to 82.2% as of December 31, 1998. The primary reason for the decrease was
lower raw material costs. The effect of MINCO'S results in the consolidated
costs of sales for fiscal 1999 was approximately 6.8% or $1,161,000.
Selling, general and administrative expenses increased $1,810,000 or 139%
through the six months ended December 31, 1998. The portion of the increase due
to the inclusion of MINCO was $1,427,000 or 110%. The remaining balance was
due to increases in staffing and professional services.
Interest expense increased $104,000 as a result of our higher average
borrowings on the line of credit. This was due to funding needs for increased
food storage sales and MINCO'S negative cash flow.
The effective tax rate for the second quarter ended December 31, 1998 of 36% is
comparable to the 37% incurred for the fiscal year ended June 30, 1998.
VACU-DRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Dollars in thousands)
<TABLE>
<C> <C> <C> <C>
Six Months Six Months Three Months Three Months
Ended Ended Ended Ended
12/31/98 12/31/97 12/31/98 12/31/97
REVENUES:
Net Sales $17,129 $13,689 $9,108 $7,481
Other 373 275 193 107
________ ________ ________ ________
Total revenue 17,502 13,964 9,301 7,588
Costs & Expenses
Cost of sales 14,074 11,457 7,128 5,870
S, G & A 3,106 1,296 1,639 715
Interest 228 124 129 58
________ ________ ________ ________
Total cost & expenses 17,408 12,877 8,896 6,643
EARNINGS BEFORE INCOME TAXES
AND MINORITY 94 1,087 405 945
MINORITY INTEREST 132 0 59 0
________ ________ ________ ________
EARNINGS BEFORE INCOME TAXES 226 1,087 464 945
PROVISION FOR INCOME TAXES 35 370 144 323
________ ________ ________ ________
NET EARNINGS $191 $717 $320 $622
WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS:
Basic 1,512,270 1,643,668 1,515,722 1,644,559
Diluted 1,539,843 1,648,390 1,539,827 1,652,776
EARNINGS PER COMMON SHARE
Basic $0.13 $0.44 $0.21 $0.38
Diluted $0.12 $0.43 $0.21 $0.38
See Notes to Interim Financial Statements
</TABLE>
VACU-DRY COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
<TABLE>
<C> <C> <C> <C> <C> <C>
12/31/98 12/31/97 6/30/98 12/31/98 12/31/97 6/30/98
ASSETS LIABILITIES & SHAREHOLDERS' EQUITY
CURRENT ASSETS: CURRENT LIABILITIES:
Cash $132 $155 $385 Current maturities of long-term debt $ 438 $595 $438
Accounts receivable 2,402 2,722 2,298 Accounts payable 5,374 2,904 3,789
Income tax receivable 234 70 163 Accrued payroll & related liabilities 939 719 936
Inventories 12,376 8,170 7,926 Accrued expenses 350 233 353
Prepaid expenses 119 56 298 Income taxes payable -0- 256 -0-
Current deferred taxes 360 240 360 ______ _____ ______
_______ _______ ______
Total current assets $15,623 $11,413 $11,430 Total current liabilities $7,101 $4,707 $5,516
Borrowings under line of credit 3,492 1,694 2,297
Property, plant & Long term debt-net of
equipment , net 7,114 6,867 6,784 current maturities 4,020 1,492 2,203
DEFERRED INCOME TAXES 865 826 865
MINORITY INTEREST 376 -0- 509
SHAREHOLDERS' EQUITY:
Goodwill ,
net of amortization 2,708 -0- 2,562
Capital stock 2,851 3,650 2,837
Warrants for common stock 456 -0- 456
Retained earnings 6,284 5,911 6,093
______ ______ ______
Total shareholders' equity 9,591 9,561 9,386
_______ _______ _______ Total liabilities and _______ _______ _______
Total Assets $25,445 $18,280 $20,776 shareholders' equity $25,445 $18,280 $20,776
See notes to interim financial statements
</TABLE>
VACU-DRY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997
Net earnings $191 $717
Adjustments to reconcile net earnings to net
cash used for operating activities:
Depreciation and amortization expense 624 541
Deferred income tax provision -0- (1)
Minority interest (132) -0-
Changes in assets & liabilities:
Accounts receivable, net (148) (1,155)
Income tax receivable (70) -0-
Inventories, net (4,487) (3,115)
Prepaid assets 179 75
Accounts payable 1,457 2,414
Accrued payroll & related liabilities 3 180
Accrued expenses (5) 60
Income taxes payable -0- 256
_______ _______
Net adjustments (2,579) (745)
_______ _______
Net cash used for operating activities (2,388) (28)
_______ _______
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (891) (177)
_______ _______
Net cash used for investing activities (891) (177)
_______ _______
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under the line of credit 12,812 5,070
Payments on line of credit (11,617) (4,730)
Principal payments of long-term debt (283) (278)
Proceeds from MINCO financing 2,100 -0-
Issuance of common stock 14 15
_______ _______
Net cash provided by financing activities 3,026 77
_______ _______
NET DECREASE IN CASH (253) (128)
CASH AT THE BEGINNING OF THE YEAR 385 283
____ ____
TOTAL CASH AT THE END OF THE PERIOD $132 $155
See notes to Interim Financial Statement
VACU-DRY COMPANY
NOTES TO INTERIM FINANCIAL STATEMENTS
SIX MONTHS ENDED DECEMBER 31, 1998
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 six month period ended December
31, 1998 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.
Reclassification - Certain 1997 amounts were reclassified to
conform to the 1998 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 $914,000 at December 31, 1998 and $1,115,000 at June
30, 1998.
Inventories at December 31, 1998 and June 30, 1998, consisted
of the following:
12/31/98 6/30/98
Vacu-dry LIFO
Finished goods $6,073,000 $4,695,000
Work in progress 778,000 470,000
Raw materials, &
containers 3,308,000 442,000
_________ _________
$10,159,000 $5,607,000
MINCO FIFO
Finished goods 2,217,000 2,319,000
_________ _________
Total Inventories $12,376,000 $7,926,000
Note 3 - Statement of Cash Flows -
Interest and income tax payments reflected in the Consolidated
Statement of Cash Flows were as follows:
1998 1997
Interest paid $198,000 $126,000
Income taxes paid $102,000 $114,000
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
There are no legal proceedings pending.
Item 2. Changes in Securities
The Company's revolving line of credit agreement with its Bank dated
November 17, 1998, includes a convenant which prohibits the
declaring or paying of any dividend or distribution in either cash,
stock or any other property on the Company's stock now or hereafter
outstanding, nor redeem, retire, repurchase or otherwise acquire
shares of any class of the Company's stock now or hereafter
outstanding, without the prior approval by the Bank.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the
period covered by this report.
Item 6. Exhibits & Reports on Form 8-K
a. Exhibits
(27) Financial Data Schedule (by electronic filing only)
b. Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 12, 1999 /s/ Gary L. Hess
_______________________
Gary L. Hess, President
Date: February 12, 1999 /s/ Tom R. Eakin
_______________________
Tom R. Eakin, VP Finance
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10Q FOR
THE QUARTER ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMTENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 132,000
<SECURITIES> 0
<RECEIVABLES> 2,515,000
<ALLOWANCES> 113,000
<INVENTORY> 12,376,000<F1>
<CURRENT-ASSETS> 15,623,000
<PP&E> 19,479,000
<DEPRECIATION> 12,365,000
<TOTAL-ASSETS> 25,445,000
<CURRENT-LIABILITIES> 7,101,000
<BONDS> 0
0
0
<COMMON> 2,851,000<F3>
<OTHER-SE> 6,284,000<F2>
<TOTAL-LIABILITY-AND-EQUITY> 25,445,000
<SALES> 17,129,000
<TOTAL-REVENUES> 17,502,000
<CGS> 14,074,000
<TOTAL-COSTS> 14,074,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 228,000
<INCOME-PRETAX> 94,000<F4>
<INCOME-TAX> 35,000
<INCOME-CONTINUING> 191,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 191,000
<EPS-PRIMARY> .13
<EPS-DILUTED> .12
<FN>
<F1>NET OF LIFO RESERVE OF $ 914,000
<F2>RETAINED EARNINGS
<F3>1,515,722 TOTAL COMMON SHARES OUTSTANDING
<F4>BEFORE MINORITY INTEREST OF $ 132,000
</FN>
</TABLE>
