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 March 31, 1999 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
- --------------------------------------------------
- ---------------------------------------------------
(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 May 12, 1999, there were 1,517,503 shares of common stock, no par value,
outstanding.
<PAGE>
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 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 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 $770,00. 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.
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 expenses 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.
<PAGE>
<TABLE>
<CAPTION>
VACU-DRY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(Dollars in thousands)
<S> <C> <C> <C> <C>
Nine Months Nine Months Three Months Three Months
Ended Ended Ended Ended
3/31/99 3/31/98 3/31/99 3/31/98
----------- ----------- ------------ -------------
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 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 --
===== ====
See Notes to Interim Financial Statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VACU-DRY COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
3/31/99 3/31/98 6/30/98 3/31/99 3/31/98 6/30/98
------- ------ ------- ------- ------- -------
CURRENT ASSETS: CURRENT LIABILITIES:
Cash $172 $194 $385 Current maturities of long-term debt $ 438 $595 $438
Accounts receivable 3,478 2,570 2,298 Accounts payable 5,938 1,369 3,789
Other receivables 816 16 0
Income tax receivable 0 0 163 Accrued payroll & related liabilities 1,021 761 936
Inventories 14,892 7,853 7,926 Accrued expenses 395 318 353
Prepaid expenses 74 17 298 Income taxes payable 452 30 0
Current deferred taxes 360 240 360 ______ ______ ______
------- ------- ------
Total current assets $19,792 $10,890 $11,430 Total current liabilities $8,244 $3,073 $5,516
------ ------ ------
Borrowings under line of credit 5,000 2,600 2,297
------ ------ ------
Property, plant & Long term debt-net of
equipment, net 6,663 6,665 6,784 current maturities 3,914 2,185 2,203
----- ----- -----
DEFERRED INCOME TAXES 865 826 865
--- --- ---
MINORITY INTEREST 329 0 509
--- -- ---
SHAREHOLDERS' EQUITY:
Goodwill, net of amortization 2,682 0 2,562
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 _______ _____ ______
Total Assets $29,137 17,555 $20,776 shareholders' equity $29,137 $17,555 $20,776
======= ====== ======= ======= ======= =======
See notes to interim financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
VACU-DRY COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 1999 AND 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998
---- ----
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
==== ====
See notes to Interim Financial Statement
</TABLE>
<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 food
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
<PAGE>
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 April 20, 1999, 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
<PAGE>
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: May 13, 1999 /s/ Gary L. Hess
-----------------------
Gary L. Hess, President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
10-Q FOR THE QUARTER ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 172,000
<SECURITIES> 0
<RECEIVABLES> 14,892,000
<ALLOWANCES> 85,000
<INVENTORY> 14,892,000<F1>
<CURRENT-ASSETS> 19,792,000
<PP&E> 19,323,000
<DEPRECIATION> 10,660,000
<TOTAL-ASSETS> 29,137,000
<CURRENT-LIABILITIES> 8,244,000
<BONDS> 0
0
0
<COMMON> 2,876,000<F3>
<OTHER-SE> 7,909,000<F2>
<TOTAL-LIABILITY-AND-EQUITY> 29,137,000
<SALES> 29,929,000
<TOTAL-REVENUES> 30,452,000
<CGS> 23,315,000
<TOTAL-COSTS> 28,549,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 375,000
<INCOME-PRETAX> 1,903,000<F4>
<INCOME-TAX> 723,000
<INCOME-CONTINUING> 1,360,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,360,000
<EPS-PRIMARY> .90
<EPS-DILUTED> .88
<FN>
<F1> Net of LIFO RTeserve of $657,000
<F2> Retained earnings
<F3> 1,517,503 total common shares outstanding
<F4> Minority interest of 180,000
</FN>
</TABLE>
