-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VOtqtIrMpNkkOCvuV0RO06ZrSmrgk2s3nohU/QAqUC9ZiWG0yOmhbze4Z9Y91AfN Pe9GkFQQdPr1CU/dcKF2qw== 0001004404-98-000033.txt : 19980929 0001004404-98-000033.hdr.sgml : 19980929 ACCESSION NUMBER: 0001004404-98-000033 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980928 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VACU DRY CO CENTRAL INDEX KEY: 0000102588 STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FROZEN & PRESERVED FRUIT, VEG & FOOD SPECIALTIES [2030] IRS NUMBER: 941069729 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-01912 FILM NUMBER: 98715932 BUSINESS ADDRESS: STREET 1: 7765 HEALDSBURG AVE STREET 2: P O BOX 2418 CITY: SEBASTOPOL STATE: CA ZIP: 95473-2418 BUSINESS PHONE: 7078294600 MAIL ADDRESS: STREET 1: P O BOX 2418 STREET 2: 7765 HEALDSBURG AVENUE CITY: SEBASTOPOL STATE: CA ZIP: 95473-2418 10-K 1 FORM 10-K U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the fiscal year ended June 30, 1998. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from_______ to _______. Commission file number 01912 VACU-DRY COMPANY (Exact name of registrant as specified in its charter) California 94-1069729 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 7765 Healdsburg Ave., Sebastopol, California 95472 (Address of principal executive offices) Registrant's telephone number, including area code: (707) 829-4600 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] On September 21, 1998 non-affiliates of the Registrant held voting stock with an aggregate market value of $7,055,139 upon the average of the high and low prices of such stock on such date. As of September 25, 1998 there were 1,511,079 shares of common stock, no par value, outstanding. Portions of the following document are incorporated by reference: Proxy Statement for the 1998 Annual Meeting of Shareholders schedule to be held October 22, 1998 is incorporated by reference into Part III of this report. Part I Special Note Regarding Forward-looking Statements The Company is including the following cautionary statement in this Annual Report on Form 10-K to make applicable and take advantage of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 for any forward looking statements made by, or on behalf of, the Company. Forward looking statements include statements concerning plans, objectives, goals strategies, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. Certain statements contained herein are forward looking statements and, accordingly, involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward looking statements. In addition to other factors and matters discussed elsewhere herein, these risk and uncertainties include, but are not limited to, uncertainties affecting the food processing industry, risks associated with fluctuations in the price and availability of raw materials, management of growth, adverse publicity affecting organic foods or the Company's products, and product recalls. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectations, beliefs or projections will result or be achieved or accomplished. The Company disclaims any obligation to update any forward looking statements to reflect events or circumstances after the date hereof. Item 1. Description of Business General Vacu-dry Company (the "Company" or "Vacu-dry") was incorporated in California on December 27, 1946 and has been engaged in the production of low moisture fruits since 1933. The Company's business is the development, production and marketing of fruit products. The Company's products include low moisture and evaporated fruits, bulk apple juice, apple juice concentrate, private label drink mixes and low moisture food for the food storage market. The Company also markets a broad line of packaged organic dried fruits and organic chilled, pasteurized fruit juices and drinks under the Made In Nature(R) brand. On June 11, 1998, the Company acquired (through a subsidiary, Made In Nature Company, Inc. ("MINCO") the business, assets and certain of the liabilities of Made In Nature, Inc., a natural foods marketer. Made In Nature, Inc. was founded in 1989 and was the first company to introduce a line of certified organic fresh produce. Made In Nature, Inc. was sold to Dole Food Company in August 1994. In April of 1996, Made In Nature, Inc.'s co-founder purchased all of its stock from Dole and redirected its marketing focus from fresh produce to packaged foods. In conjunction with the Company's acquisition of Made In Nature, Inc., Takanashi Milk Products Company of Japan (its largest ingredients customer) became a minority shareholder of MINCO. The purchase of the Made In Nature brand and certain related assets was intended to further the Company's strategic objective of diversifying its fruit products. The Company believes that the acquisition of MINCO will give the Company access to the fast growing natural and organic foods categories. The Company's goal is to build a premier natural foods brand. It intends to accomplish this through marketing efforts and rapid growth achieved through the expansion of distribution as well as the introduction of new products. Effective October 13, 1992, the Company entered into a representation agreement with Confoco, Inc. for the sale of low moisture banana and pumpkin flakes. For the year ended June 30, 1996, Vacu-dry recorded sales of $2,478,000 of Confoco products. The representation agreement was terminated effective July 1, 1996. The Company has representation agreements with Zoria Farms (assorted dried fruits), Meduri Farms (dried and infused fruits) and Apple Valley Juice (apple fiber). These agreements expire, November 3, 1999, January 15, 2001 and March 30, 2001, respectively. Industry Segment Information The Company competes in a single industry segment within the food industry: all assets held are supportive of efforts to compete in that segment. Selective financial information relating to the industry segment is as follows: 1998 1997 1996 Net Sales 26,094,000 $23,798,000 $26,553,000 Earnings before income taxes $1,429,000 $749,000 $651,000 Identifiable Assets $20,776,000 $14,576,000 $13,587,000 The Company's export sales are dependent on foreign crop conditions and exchange rates. The Company's export sales were $1,883,000, $2,536,000 and $2,498,000 for fiscal year 1998, 1997 and 1996, respectively. Dried Fruit Ingredients Business. Through drying processes, the moisture in apples is reduced from original levels of 85%-90% to as low as 2%. In addition, the Company purchases other fruits such as apricots, dates, peaches and prunes, which have been partially dried, and further reduces the moisture in these fruits to levels of approximately 3%. The resultant low moisture products are much lighter in weight and less bulky than their raw, canned or frozen counterparts. Because of their extreme dryness, low moisture fruit products require no refrigeration or other special storage conditions. Other advantages include consistent product quality, economical packaging and convenience in handling and use. Industry and Competition. The low moisture food industry in the United States is comparatively small with only a few processors engaged in the dehydration of fruits to low moisture levels (2% to 5% moisture). The Company has one major domestic competitor and several smaller foreign competitors in the low moisture and evaporated businesses. Numerous processors compete in the business of producing bulk apple juice and concentrate. Sales and Marketing. The Company's sales are worldwide but principally to manufacturers in the United States and Canada. The Company's products are primarily sold through brokers to major food processors, bakeries, food storage and food service operators and to federal and state institutions. Approximately 80% of the Company's sales are generated from annual contracts that are normally written between August and November of each year. Most of these contracts are for one year. The sales price is normally fixed. During the fiscal year, the customer will order against these contracts, and the Company will invoice the customer based upon the price and other terms and conditions of the contract. The Company incurs risk under these contracts because the total quantity of raw materials required to fulfill these contracts has normally not been procured at the time the contracts are written. More than half of the Company's raw material requirements are not purchased under contract. If the price of raw materials increases or decreases, the Company will either benefit from or will absorb these variances from what was budgeted. The Company's raw material costs and the related yield in processing can vary from year to year. This process has existed for many years, and the Company has experience in dealing with this risk. The Company's three largest customers accounted for approximately 17% of gross sales in 1998. The loss of any one or more of these customers could have a material adverse effect on the Company. Sources of Supply. In terms of volume, apples represent the major fruit handled by the Company. The Company's production facility is designed to process fresh fruit in addition to partially dehydrated fruits or vegetables. The sources of apple raw material supply are individual apple growers, apple fresh packing operators and, in emergencies, other dried apple processors. The majority of the Company's raw apple supply comes from California. In some years, due to crop conditions, the percentage of fruit purchased from out-of-state sources may increase. In those years, the Company incurs increased costs due to additional freight. The Company strives to reflect such cost increases in selling price adjustments, but, if unsuccessful, it will absorb such costs. Other important fruits, including peaches, apricots and prunes, are obtained principally from dried fruit packing houses in California. Supplies of these fruits are expected to be sufficient to meet the needs of our regular customers. For other supplies, including cans and packaging materials, the Company draws from a number of vendors and expects that adequate supplies will be available. Seasonal Nature of Business. The business of producing evaporated apples, bulk apple juice and concentrate is seasonal, beginning in August and usually ending in March or April. In fiscal 1998, the Company changed its production plan and, as a result, production will be compressed into a shorter period of months. Inventories of fresh and dried apples, packaging materials and finished goods as of June 30, 1998, were approximately 21% of annual net sales. The Company experiences a normal seasonal increase in inventories and related short-term borrowings during the second and third quarters of the fiscal year. Organic Packaged Products and Ingredients Business. Through its subsidiary, Made In Nature Company, Inc. ("MINCO"), the Company markets a broad line of packaged organic dried fruits and organic chilled and pasteurized fruit juices and drinks under the Made In Nature(R) brand. The products are principally sold through brokers to natural food distributors and supermarkets in the United States and Canada. In addition, MINCO supplies leading food manufacturers, mostly in Japan, with organic fruit juice concentrates. The Company's objective is to build a premiere natural foods brand. The Company believes that this objective can be achieved, in part, through rapid growth. There is no assurance that such growth can be achieved or, if it can, that the resulting demands that will be placed on the Company's management, working capital, financial and management and control systems, and its supply, production and distributions systems can be adequately managed. Competition In the organic food categories in which MINCO competes, the competition is relatively small. In the organic chilled beverage category (on a national basis), MINCO has two direct competitors. In the organic dried fruit and vegetable category (on a national basis), MINCO has two direct competitors. In the mass-market sector, MINCO has many large competitors, but none of these competitors are currently marketing an organic product. MINCO's growth will depend on its ability to continue to expand distribution in conventional supermarkets and in natural food specialty markets. Distribution through both channels presents significant marketing challenges, risks and distribution costs. There is no assurance that MINCO can achieve trade or consumer expansion in either channel. MINCO's products are generally premium-priced and may be sensitive to national and regional economic conditions. Sources of Supply. MINCO contracts with growers and grower-packers for the purchase of its organic raw material. Packaging is done under contract. MINCO is a marketing company and has no production facilities. Although MINCO has contractual obligations to purchase certain raw materials, it does not take possession of the inventory until packaged and invoiced by the contract packer. Although organic farming has increased over the last five years, as with all agricultural products, shortages can occur. A significant shortage of raw materials may have a material adverse effect on MINCO. Licensing Agreements. Made In Nature(R) brand fresh produce is sold under a licensing agreement with MINCO through Made In Nature Fresh, Inc., which is a subsidiary of Albert's Organics, the largest distributor of fresh organic produce in North America. In 1996, Made In Nature, Inc. licensed the use of its brand in Japan to Takanashi, which intends to market Made In Nature(R) brand products throughout Japan. Organic Certification. The value of the Made In Nature(R) brand is dependent on the organic certification. The loss of this certification would have a material adverse effect on MINCO. MINCO is dependent upon consumers' perception of the safety, quality, and possible dietary benefits of its products. As a result, substantial negative publicity concerning organic products, MINCO's products or the products of its licensees could have a material adverse effect on MINCO's business, financial condition or results of operations. The USDA has been developing the rules for the National Organic Program for eight years, as mandated in the Organic Food Production Act of 1990. The proposed rules were released in early 1998 and were met with significant opposition. Due to this opposition the USDA is re-evaluating the proposed rules If the USDA rules do not provide the restrictions emphasized in the opposition to initial proposal, the image of "organic" by the consumer may be impaired and as a result negatively affect MINCO's sales. Inventories. MINCO's inventories of raw materials and finished goods on hand as of June 30, 1998 were $2,319,000. It is anticipated that building the Made In Nature(R) brand will increase working capital requirements. Based upon Made In Nature Inc.'s prior operating losses, there is no assurance that MINCO can achieve profitable operations. Backlog The dollar amount of order and contract backlog believed to be firm as of September 1, 1998, September 1, 1997 and September 1, 1996 is $12,478,000, $10,186,000 and $8,558,000, respectively. This backlog does not include MINCO. The backlog as of September 1, 1996 excludes the Confoco orders. It is expected that the order backlog will be filled and shipped within the related fiscal year. The dollar value of backlog varies during the year, with the peak usually occurring during the September through December period. Trademarks The Company holds the following registered trademarks: Vacu-dry, Made In Nature, Apple Munchies, Noah's Ark, Fruit Galaxy, Perma-Pak and Pantri Reserve. Sales of trademarked goods account for the majority of the Company's total sales. Vacu-dry, Made In Nature and Perma-Pak are the predominant trademarks of those listed above. The Made In Nature brand is important to the Company in connection with the sale of its branded organic products. Research and Development For information on research and development expenditures, see Note 14 to the Financial Statements. Environmental Matters The Company has complied with all governmental regulations regarding protection of the environment. No material capital expenditures are anticipated for environmental control facilities during the next fiscal year. Employees The Company employs an average of approximately 265 persons. This number varies throughout each year and increases during periods of high production. Of the 265 employees, approximately 200 are represented by the General Truck Drivers, Warehousemen and Helpers Union, Local #624. The union employees are presently covered by a signed contract. Insurance The Company maintains product, property and general liability insurance plus umbrella liability coverage. The Company does not carry any product recall coverage. Management feels the limits and coverage are adequate relative to the related risk. There is no assurance that this insurance will be adequate to protect the Company from product liability claims. A product recall could have a material adverse effect on the Company's business, financial condition and results of operations. Item 2. Properties The principal administrative offices are located in Sebastopol, California. Approximately 4,130 square feet of office space is leased through February 1999. At the end of the term, the lease reverts to month-to-month. The Company owns 15 acres of land and approximately 95,000 square feet under roof at 1365 Gravenstein Hwy So., Sebastopol, California. This facility (formerly described as Plant #1) was used for the dehydration of fruits to low moisture prior to the consolidation of this operation into the main processing plant (formerly described as Plant #2), located at 2064 Gravenstein Hwy No., Sebastopol, California. As of June 30, 1998, the Company has leased approximately 71,400 square feet of this facility, which comprises 90% of the leaseable square footage. The Company's research and development department is located at this facility. The Company has no debt associated with this facility. The Company owns 66 acres of land and approximately 298,000 square feet under roof at 2064 Gravenstein Hwy. No., Sebastopol, California. As of June 30, 1998, this facility is the Company's only active processing plant. The buildings include facilities to process fresh apples into dried products, bulk apple juice and concentrate. In addition to the facilities for the dehydration of apples and other fruits, there is also warehouse space, cold storage, and office accommodations. During fiscal 1998, the production operations functioned at approximately 115% of the single shift capacity. The Company has leased approximately 54,500 square feet of excess warehouse space to various tenants. The primary tenant, occupying 51,200 square feet extended their lease through April 2006. The Company has no debt associated with this facility. MINCO's office is located in San Rafael, California. Approximately 2,400 square feet of office space is leased on a month-to-month basis. This office and the Company's corporate office will be consolidated and relocated during the 1999 fiscal year. Item 3. Legal Proceedings The Company has no material legal proceedings pending. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the last quarter of the year ended June 30, 1998. Part II Item 5. Market for the Registrant's Common Stock and Related Security-Holder Matters The Company's shares are traded on the NASDAQ National Market. The Company's NASDAQ symbol is VDRY. The quarterly high and low prices for the last two fiscal years were as follows: Quarter Ending Low Bid High Bid 09/30/96 4-7/8 5-1/4 12/31/96 4-7/8 5-1/2 03/31/97 5 5-1/2 06/30/97 4-3/8 5 09/30/97 4-1/2 5-1/2 12/31/97 4-7/8 7-1/4 03/31/98 5-5/8 8-1/2 06/30/98 6-3/4 11 The above quotations were obtained from the NASDAQ monthly statistical reports. On September 8, 1998, the approximate number of holders of common stock was 661. On that date, the average of the high and low price per share of the Company's stock was $7.88. This price does not include dealer mark-ups, markdowns or commissions. In the fourth quarter of fiscal 1994 and in the first three quarters of fiscal 1995, the Company declared a $.05 per share dividend. On April 27, 1995, as a result of the decline in sales and earnings, the Board of Directors suspended the quarterly dividends. The Company's loan agreement with its bank includes a negative covenant regarding the declaring or paying of a dividend in cash, stock or any other property. This covenant would need to be waived prior to the declaration of a dividend. At this time, the Company does not intend to reinstate a cash dividend plan. Item 6. Selected Financial Data YEAR ENDED June 30, 1998 June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994 (In thousands except per share amounts) Net sales $26,094 $23,798 $26,533 $21,438 $27,773 Earnings before income taxes $1,421 $749 $651 $287 $1,887 Net earnings $899 $517 $434 $195 $1,174 Earnings per common share Basic $.57 $.31 $.25 $.11 $.70 Diluted $.56 -- -- -- -- Weighted average common shares and equivalents outstanding Basic 1,581 1,648 1,704 1,701 1,669 Diluted 1,600 -- -- -- -- Total Assets $20,776 $14,576 $13,587 $15,335 $14,929 Long-term debt $ 4,500 $ 1,808 $ 1,628 $ 2,105 $ 2,585 Cash dividends per common share $ -- $ -- $ -- $ .15 $ .05
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations LIQUIDITY AND CAPITAL RESOURCES The Company's financial condition continued to improve during fiscal year 1998. Some of this improvement is reflected in the Company's increase in shareholder equity per share. Equity per share increased from $5.37 as of fiscal 1997 to $6.21 as of fiscal 1998. This significant increase was a result of the Company's repurchase of 139,100 shares of stock at a total cost of $835,000 and net earnings of $899,000 for fiscal 1998. As a result of the acquisition of MINCO, the debt to equity ratio increased from 0.65 in fiscal 1997 to 1.16 in fiscal 1998 with a corresponding decrease in the current ratio from 2.36 to 1.0 in fiscal 1997 to 1.0 in fiscal 1998. The increase in accounts payable and inventories was a direct result of the MINCO acquisition. Because the Company's operations are subject to seasonality, the Company's liquid resources fluctuate during the year. The Company experiences a normal seasonal decrease in production in April. Inventories and related short-term borrowings are usually at their peak at this time. The slowdown in production normally extends through July and corresponds to the availability of raw fruit on an affordable basis. The Company's inventory ordinarily decreases during the period beginning in May and ending in September which creates a corresponding increase in liquidity. In fiscal 1999, the Company continues to operate under a change in its production cycle which was instituted in fiscal 1998. This change is expected to increase inventories in the first six months of the fiscal year. The Company's operating capital is obtained from internal and external sources. The Company's largest external source is a revolving line of credit provided by a bank at the bank's prime rate. The Company increased the total limit of its revolving line of credit to $4,500,000 in anticipation of higher short-term borrowing requirements as a direct result of a condensed production period and the related increase in inventory levels. The line expires November 1, 1999. As of June 30, 1998, the Company had $2,203,000 of available funds on this revolving line of credit. This compares with $2,146,000 of available funds on the $3,500,000 revolving line of credit as of June 30, 1997. The Company utilized the revolving line of credit as a source of interim financing to fund the acquisition of MINCO. In the first half of fiscal 1999, the Company intends to convert these borrowings to longer-term debt. As of June 30, 1998, the Company was in compliance with all covenants and restrictions related to its outstanding debt. The Company's loan agreement with its bank includes a negative covenant regarding the declaring or paying of dividends in cash, stock or any other property without the prior approval by the bank. The Company received approval from its bank prior to the repurchase of the 139,100 shares of common stock. The Company's long-term debt increased $835,000 as a result of this stock repurchase. Excluding the Year 2000 expenditures, which are expected to be financed through leasing arrangements, the Company has established a capital expenditure budget of approximately $998,000 for the 1999 fiscal year. These funds will primarily be used to purchase new and recondition existing equipment related to the manufacturing operation. The Company anticipates financing these expenditures through internally generated funds. The Company has reviewed its information technology (IT) systems and determined that its is not Year 2000 compliant. The Company has chosen to purchase new software, which is warranted to be Year 2000 compliant. In addition, the Company is purchasing new hardware on which to operate the new software. The Company has not completed its assessment of its non-IT systems. The initial assessment is that there are very few embedded microprocessors that will need to be replaced. This assessment will be completed by September 30, 1998. The conversion to the new software is just beginning. The Company has hired a consulting firm to manage the implementation of the software. The conversion for Vacu-dry and MINCO to this new system is expected to be completed by no later than May 31, 1999. Phase I for just Vacu-dry is expected to be completed by December 31, 1998. The final phase is expected to be completed by February 28, 1999. MINCO will begin its implementation on January 1, 1999 and is expected to complete all phases by April 30, 1999. The Company has allocated one month at the end of the conversion to make sure it has addressed all of the issues related to the conversion. A group of ten managers has formed an "Implementation Team" which is strongly supported by upper management. Both the Implementation Team and upper management are confident that the implementation can be completed by May 31, 1999. Management estimates that the total cost of the system will be approximately $800,000. The expenditures for the new system will primarily occur in fiscal 1999. The Company anticipates financing these costs through a lease agreement. The Company has assessed its risk relative to the Year 2000 issue and is confident that it can accomplish the conversion prior to December 31, 1999. If this conversion does not happen, the Company would have to rely on PC-based software to accomplish its normal business activities until the conversion can be completed. The Company has been successful in leasing all of its idle production facility other than a portion occupied by Product Development. The Company signed a long-term lease for approximately one-half of the previously vacated portion of this facility. The Company has secured a new short-term lease for the balance of the available space. This lease expires January 31, 1999. The Company is working to obtain a replacement tenant without a loss of income but has been unsuccessful to date. In addition, the Company continues to lease a portion of its current operating facility and has entered into a long-term lease with the primary tenant. The Company may require additional capital to expand the current business and to acquire additional companies. The Company will utilize future private or public financing to satisfy this need for additional funds. After the Company obtains longer-term financing for the MINCO acquisition, it believes the existing line of credit limit of $4,500,000 will be sufficient for its own and MINCO's working capital requirements. RESULTS OF OPERATIONS The results of operations include the accounts of the Company for the year ended June 30, 1998 and the accounts of MINCO for the period from acquisition (June 11, 1998) to June 30, 1998. The results of operations for MINCO are included in the following discussions but are not significant to the consolidated results of the Company for fiscal 1998. Net Sales. The Company's sales are dictated by the competitive environment, customer demands and sales preferences. Sales volume between the years can be affected by one or more of these factors. Net sales for fiscal 1998 increased $2,296,000 or 10%. This increase was primarily the result of higher volume sales (+17%) offset by an average unit price decrease (-7%). The unit price decreases were a direct result of lower raw material costs. Net sales for fiscal 1997 decreased $2,735,000 or 10%. This decrease was primarily a result of the loss of the Confoco banana and pumpkin sales, which accounted for $2,478,000 of fiscal 1996 sales. Other Revenue. In fiscal 1998, other revenue decreased $49,000 or 8%. This decrease was primarily the result of lower rental income. Cost of Sales. As a percentage of net sales, cost of sales decreased in fiscal 1998 to 83% as compared to 89% in 1997 and 91% in 1996. These decreases in both 1998 and 1997 are a result of lower raw material prices, increased production volume, yield improvements and production efficiencies. Selling, General and Administrative Expenses. In fiscal 1998, these expenses increased $1,230,000 or 57%. The increase was due to the following items: costs incurred as the result of the exploration of new strategic initiatives; bonus and profit sharing expenses which did not occur in either fiscal 1997 or 1996; MINCO expenses; an increase in the Stock Appreciation Rights liability (as a result of the higher stock price); and greater expenses for salaries, benefits and marketing expenses. Interest Expense. The increase in fiscal 1998 interest expense of $38,000 or 14% is the result of increased average borrowings on the line of credit. Interest rates remained relatively constant between years. In fiscal 1997, interest expense decreased $26,000 or 9% from 1996 due to the decline in the weighted average interest rate on the line of credit which more than offset the increase in interest expense as a result of the increase in long-term debt. Income Taxes. The effective tax rate increased from 31 percent to 37 percent due to decreased tax credits and increased income. Item 8. Consolidated Financial Statements and Supplementary Data See Index at Item 14 for information required by this item. Item 9. Disagreements on Accounting and Financial Disclosure None. Part III Item 10. Directors and Executive Officers of the Registrant Information with respect to this item is contained in the Registrant's 1998 Proxy Statement under the heading "Election of Directors," which information is incorporated herein by reference. Executive Officers of the Registrant The following table sets forth certain information concerning the executive officers of the Company as of September 25, 1998: Name Age Position Gary L. Hess 46 President and Chief Executive Officer Esther K. Castain 60 Secretary and Manager of Employee Relations Thomas R. Eakin 44 Vice President Finance and Chief Financial Officer Mr. Hess joined the Company as of May 1, 1996 as President and Chief Executive Officer. Prior thereto he was a Senior Vice President of Dole Food Company, Inc. (fresh and processed fruit) (1993-1996); President of Cadace Enterprises, Inc. (water conservation products) and The Marketing Partnership (1992-1993); and Director of Marketing, E & J Gallo Winery (wine and distilled spirits) (1987-1992). Ms. Castain joined the Company in 1976. She has been Secretary of the Company since 1990. Prior thereto she was Manager of Employee Relations. Mr. Eakin joined the Company in 1983. For the past eleven years, he has been Vice President, Finance and Chief Financial Officer. Items 11, 12 and 13 The information required in Items 11, 12 and 13 will be included in the definitive Proxy Statement for Registrant's 1998 Annual Meeting of Shareholders or in an amendment to the Form 10-K under cover of Form 8. The information required in this Part III will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year. Part IV Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K (a) Documents filed as part of this Report: 1. Financial Statements: Page No. Report of Independent Public Accountants. 12 Statement of Earnings for the Years Ended June 30, 1998, June 30, 1997 and June 30, 1996. 14 Balance Sheets -- June 30, 1998 and June 30,1997. 13 Statements of Changes in Shareholders' Equity for the Years Ended June 30, 1998, June 30, 1997 and June 30, 1996. 15 Statements of Cash Flows for the Years Ended June 30, 1998, June 30, 1997 and June 30, 1996. 16 Notes to Financial Statements. 17-25 2. Financial statements and schedules not included herein have been omitted because of the absence of conditions under which they are required or because the required information, where material, is shown in the financial statements or notes thereto. 3. Exhibits: Page No. See Exhibit Index 27 (b) Reports on Form 8-K. A report on Form 8-K was filed on June 22, 1998 relating to the Company's acquisition (through a subsidiary, Made In Nature Company, Inc., the business, assets and certain of the liabilities of Made In Nature, Inc., a natural foods marketer. SIGNATURES Pursuant to the requirements of Section 13 of 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VACU-DRY COMPANY (Registrant) Date: September 25, 1998 By: /s/ Gary L. Hess ------------------------------------ Gary L. Hess, President & CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURES TITLE DATE /s/ Gary L. Hess President & Chief Executive Officer September 25,1998 - ----------------------------------------- Director Gary L. Hess /s/ Kenneth P. Gill Director September 25, 1998 - ----------------------------------------- Kenneth P. Gill Director - ----------------------------------------- Edward Koplovsky /s/ Roger S. Mertz Director September 25, 1998 - ----------------------------------------- Roger S. Mertz /s/ Craig Stapleton Director September 25, 1998 - ----------------------------------------- Craig Stapleton /s/ Donal Sugrue Director September 25, 1998 - ----------------------------------------- Donal Sugrue /s/ Thomas R. Eakin Vice President Finance & Chief Financial September 25, 1998 - ----------------------------------------- Officer Thomas R. Eakin
VACU-DRY COMPANY COMMISSION FILE NUMBER 01912 EXHIBIT INDEX For the year ended June 30, 1998 Exhibit No. Document Description Page No. or Reference - ----------- -------------------- ---------------------- 3.1 Articles of Incorporation (2) 3.2 By-laws of Vacu-dry Company (4) 10.1 Employment Agreement between Vacu-dry Company and Gary L. Hess dated March 14, 1996 (5) 10.2 Stock Appreciation Rights Plan (4) 10.3 1996 Stock Option Plan (6) 10.4 1993 Employee Stock Purchase Plan (7) 10.5 Agreement dated June 11, 1998 between MIN Acquisition Corp., Vacu-dry Company and Global Walk, Inc. 10.6 Co-Sale Agreement dated June 11, 1998 between Vacu-dry Company and Global Walk, Inc. 10.7 Asset Purchase Agreement dated June 11, 1998 between Vacu-dry Company, MIN Acquisition Corp., Made In Nature, Inc and Gerald E. Prolman 10.8 Warrant to Purchase Common Stock dated June 11, 1998 issued by Vacu-dry Company to Made In Nature, Inc. 10.9 Warrant to Purchase Common Stock dated June 11, 1998 issued by Vacu-dry Company to Gerald E. Prolman 11. Computation of Per Share Earnings 23. 1 Consent of Independent Public Accountants 27. 1 Financial Data Schedule (EDGAR Filing Only)
Incorporated by reference to the Company's: (2) Form 10-K for the year ended June 30, 1988 (4) Form 10-K for the year ended June 30, 1992 (5) Form 10-K for the year ended June 30, 1996 (6) Form 10-K/A for the year ended June 30, 1996 (7) Form S-8 Registration Statement No. 33-70870 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Vacu-dry Company: We have audited the accompanying consolidated balance sheets of Vacu-dry Company (a California corporation) and Subsidiary as of June 30, 1998 and 1997, and the related consolidated statements of earnings, changes in shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vacu-dry Company and Subsidiary as of June 30, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1998, in conformity with generally accepted accounting principles. San Francisco, California, August 21, 1998
VACU-DRY COMPANY AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS--JUNE 30, 1998 AND 1997 1998 1997 ---------------- --------------- ASSETS CURRENT ASSETS: Cash $ 385,000 $ 283,000 Accounts receivable, less allowances for uncollectible accounts of $58,000 and $63,000 in 1998 and 1997, respectively 2,298,000 1,567,000 Income tax receivable 127,000 70,000 Inventories, less LIFO reserves of $1,114,000 and $2,180,000 in 1998 and 1997, respectively 7,926,000 5,055,000 Prepaid expenses 334,000 131,000 Current deferred income taxes, net 360,000 239,000 ---------------- --------------- Total current assets 11,430,000 7,345,000 ---------------- --------------- PROPERTY, PLANT, AND EQUIPMENT: Land 231,000 231,000 Buildings and improvements 6,604,000 6,570,000 Machinery and equipment 11,362,000 11,059,000 Construction in progress 390,000 77,000 ---------------- --------------- Total property, plant, and equipment 18,587,000 17,937,000 Accumulated depreciation (11,803,000) (10,706,000) ---------------- --------------- Net property, plant, and equipment 6,784,000 7,231,000 ---------------- --------------- GOODWILL, net of accumulated amortization of $5,000 in 1998 2,562,000 0 ---------------- --------------- Total assets $ 20,776,000 $ 14,576,000 ================ =============== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Borrowings under line of credit $ 0 $ 1,354,000 Current maturities of long-term debt 438,000 557,000 Accounts payable 3,789,000 490,000 Accrued payroll and related liabilities 936,000 539,000 Other accrued expenses 353,000 173,000 ---------------- --------------- Total current liabilities 5,516,000 3,113,000 ---------------- --------------- BORROWINGS UNDER LINE OF CREDIT 2,297,000 0 ---------------- --------------- LONG-TERM DEBT, net of current maturities 2,203,000 1,808,000 ---------------- --------------- DEFERRED INCOME TAXES, net 865,000 826,000 ---------------- --------------- MINORITY INTEREST 509,000 0 ---------------- --------------- SHAREHOLDERS' EQUITY: Preferred stock: 2,500,000 shares authorized; no shares outstanding 0 0 Common stock: 5,000,000 shares authorized, no par value; 1,511,079 and 1,642,757 shares outstanding in 1998 and 1997, respectively 2,837,000 3,635,000 Warrants for common stock 456,000 0 Retained earnings 6,093,000 5,194,000 ---------------- --------------- Total shareholders' equity 9,386,000 8,829,000 ================ =============== Total liabilities and shareholders' equity $ 20,776,000 $ 14,576,000 ================ =============== The accompanying notes are an integral part of these consolidated statements.
VACU-DRY COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996 1998 1997 1996 ---------------- ---------------- --------------- REVENUE: Net sales $26,094,000 $ 23,798,000 $ 26,533,000 Other 586,000 635,000 685,000 ---------------- ---------------- --------------- Total revenue 26,680,000 24,433,000 27,218,000 ---------------- ---------------- --------------- COSTS AND EXPENSES: Cost of sales 21,565,000 21,258,000 24,142,000 Selling, general, and administrative 3,384,000 2,154,000 2,127,000 Interest 310,000 272,000 298,000 ---------------- ---------------- --------------- Total costs and expenses 25,259,000 23,684,000 26,567,000 ---------------- ---------------- --------------- Earnings before minority interest and provision for income taxes 1,421,000 749,000 651,000 Minority interest 8,000 0 0 ---------------- ---------------- --------------- Earnings before provision for income taxes 1,429,000 749,000 651,000 PROVISION FOR INCOME TAXES 530,000 232,000 217,000 ================ ================ =============== Net earnings $ 899,000 $ 517,000 $ 434,000 ================ ================ =============== WEIGHTED AVERAGE COMMON SHARES AND EQUIVALENTS: Basic 1,581,014 1,647,723 1,703,968 Diluted 1,600,327 EARNINGS PER COMMON SHARE: Basic $0.57 $.31 $.25 Diluted 0.56 The accompanying notes are an integral part of these consolidated statements.
VACU-DRY COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996 Common Stock Warrants for Total Number Common Retained Shareholders' of Shares Amount Stock Earnings Equity ------------- -------------- --------------- -------------- --------------- BALANCE, JUNE 30, 1995 1,698,030 $ 3,936,000 $ 0 $ 4,243,000 $ 8,179,000 Net earnings 0 0 0 434,000 434,000 Issuance of common stock 15,324 65,000 0 0 65,000 ------------- -------------- --------------- -------------- --------------- BALANCE, JUNE 30, 1996 1,713,354 4,001,000 0 4,677,000 8,678,000 Net earnings 0 0 0 517,000 517,000 Repurchase of common stock (80,000) (407,000) 0 0 (407,000) Issuance of common stock 9,403 41,000 0 0 41,000 ------------- -------------- --------------- -------------- --------------- BALANCE, JUNE 30, 1997 1,642,757 3,635,000 0 5,194,000 8,829,000 Net earnings 0 0 0 899,000 899,000 Repurchase of common stock (139,100) (835,000) 0 0 (835,000) Issuance of common stock 7,422 37,000 0 0 37,000 Issuance of warrants 0 0 456,000 0 456,000 ============= ============== =============== ============== =============== BALANCE, JUNE 30, 1998 1,511,079 $ 2,837,000 $ 456,000 $ 6,093,000 $ 9,386,000 ============= ============== =============== ============== =============== The accompanying notes are an integral part of these consolidated statements.
VACU-DRY COMPANY AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 1998, 1997, AND 1996 1998 1997 1996 ----------------- ---------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 899,000 $ 517,000 $ 434,000 ----------------- ---------------- ----------------- Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization expense 1,102,000 1,025,000 947,000 Loss on sale of assets 0 0 20,000 Deferred income tax provision 27,000 64,000 (86,000) Minority interest (8,000) 0 0 Changes in assets and liabilities: Accounts receivable, net (569,000) 1,117,000 (1,005,000) Income tax receivable (57,000) (70,000) 155,000 Inventories, net (648,000) (1,625,000) 1,984,000 Prepaid expenses (136,000) (15,000) 60,000 Accounts payable 117,000 (188,000) 285,000 Accrued payroll and related liabilities 383,000 63,000 (50,000) Accrued expenses (37,000) 35,000 (253,000) ----------------- ---------------- ----------------- 174,000 406,000 2,057,000 ----------------- ---------------- ----------------- Net cash provided by operating activities 1,073,000 923,000 2,491,000 ----------------- ---------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (595,000) (1,338,000) (470,000) Proceeds from sale of assets 0 0 8,000 Acquisition of Made In Nature, net of cash acquired (297,000) 0 0 ----------------- ---------------- ----------------- Net cash used for investing activities (892,000) (1,338,000) (462,000) ----------------- ---------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under the line of credit 11,245,000 8,030,000 11,002,000 Payments on line of credit (10,302,000) (7,502,000) (12,527,000) Proceeds from issuance of long-term debt 0 805,000 0 Principal payments of long-term debt (1,059,000) (483,000) (542,000) Repurchase of common stock 0 (407,000) 0 Issuance of common stock 37,000 41,000 65,000 ----------------- ---------------- ----------------- Net cash provided by (used for) financing activities (79,000) 484,000 (2,002,000) ----------------- ---------------- ----------------- NET INCREASE IN CASH 102,000 69,000 27,000 CASH AT BEGINNING OF YEAR 283,000 214,000 187,000 ================= ================ ================= CASH AT END OF YEAR $ 385,000 $ 283,000 $ 214,000 ================= ================ ================= The accompanying notes are an integral part of these consolidated statements.
VACU-DRY COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Vacu-dry Company (Vacu-dry) is engaged in the business of the development, production, and marketing of fruit-related products. Vacu-dry's products include low-moisture fruits, bulk apple juice, apple juice concentrate, private label drink mixes, and low-moisture food products, which are sold to manufacturers principally in the United States and Canada. On June 11, 1998, Vacu-dry formed Made In Nature Company, Inc. (MINCO) upon the acquisition of certain assets and liabilities of Made In Nature, Inc. (see Note 2). MINCO is engaged in the business of marketing certified organic, packaged foods and chilled pasteurized beverages. The consolidated company is referred to as the Company. The low-moisture food industry in the United States is comparatively small, with only a few organizations engaged in the dehydration of fruits to low moisture levels. Vacu-dry has one major direct competitor in the low-moisture and evaporated business. Numerous processors compete in the business of bulk apple juice and concentrate. The organic food industry in the United States is also comparatively small, with only a few organizations engaged in the marketing of organic dried fruits and juices. Effective July 1, 1996, a representation agreement with Confoco, Inc. (Confoco) for the sale of low-moisture banana and pumpkin flakes terminated. For the year ended June 30, 1996, Vacu-dry recorded gross profit on Confoco products of $368,000. Under the agreement with Confoco, for two years from the date of termination, Vacu-dry is prohibited from distributing banana products to those customers in the United States, Canada, and Mexico that currently purchase Confoco's products from the Company. Vacu-dry's three largest customers accounted for approximately 17 percent and 22 percent of net sales in 1998 and 1997, respectively. Basis of Presentation The accompanying financial statements include the accounts of Vacu-dry and its 85 percent-owned subsidiary, MINCO. The accompanying consolidated statements of earnings for the year ended June 30, 1998, include the accounts of MINCO for the period from June 11, 1998, to June 30, 1998. All significant intercompany transactions have been eliminated in consolidation.
Supplemental Statements of Cash Flows Information 1998 1997 1996 ---------------- ------------- ------------- Cash paid for: Interest $ 309,000 $ 264,000 $ 309,000 ================ ============= ============= Income taxes $ 657,000 $ 381,000 $ 316,000 ================ ============= ============= Supplemental disclosure of noncash transactions: Repurchase of common stock through issuance of notes payable $ 835,000 $ 0 $ 0 ================ ============= ============= Details of acquisition of Made In Nature: Fair value of assets acquired $ 5,223,000 $ 0 $ 0 Liabilities assumed (3,813,000) 0 0 Creditor debt subsequently converted to equity (517,000) 0 0 Warrants issued (456,000) 0 0 Accrued acquisition costs (101,000) 0 0 ---------------- ------------- ------------- Cash paid 336,000 0 0 Less: Cash acquired (39,000) 0 0 ================ ============= ============= Net cash paid for acquisition $ 297,000 $ 0 $ 0 ================ ============= =============
Inventories Vacu-dry's inventories are stated at the lower of cost, using the last-in, first-out (LIFO) method, or market. MINCO's inventories are valued at the lower of cost (first-in, first-out method) or market (Note 3). Property, Plant, and Equipment Property and equipment acquired in connection with the acquisition of Made In Nature were recorded at estimated fair value on the acquisition date. All other property, plant, and equipment are stated at cost. Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets as follows: Buildings and improvements 10 to 40 years Machinery and equipment 3 to 15 years Improvements that extend the life of the asset are capitalized; other maintenance and repairs are expensed. The cost of maintenance and repairs was $1,142,000 in 1998, $936,000 in 1997, and $856,000 in 1996. Income Taxes The Company records income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 requires the Company to compute deferred taxes based upon the amount of taxes payable in future years after considering changes in tax rates and other statutory provisions that will be in effect in those years. Deferred taxes are recorded based upon differences between the financial statement and tax bases of assets and liabilities and available tax credit carryforwards. Revenue The Company recognizes revenue upon shipment of the product. Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recorded. The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock Based Compensation." Earnings per Common Share Basic earnings per common share are computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share include the dilutive effects of stock options using the treasury stock method. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates New Accounting Standards In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." In February 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employer's Disclosures about Pension Plans and Other Postretirement Benefits." SFAS Nos. 130 and 132 are not expected to impact the Company's financial reporting. The disclosure requirements of SFAS No. 131 will be required in fiscal year 1999. Management anticipates disclosing the Company's results as three business segments. 2. ACQUISITION OF MADE IN NATURE: On April 22, 1998, MINCO was formed for the purpose of acquiring Made In Nature, Inc. On June 11, 1998, Vacu-dry acquired the assets and certain liabilities of Made In Nature, Inc. In addition to the assumption of liabilities, Vacu-dry paid $336,000 in cash and issued to Made In Nature, Inc. and its primary shareholder a total of 112,000 warrants to purchase Vacu-dry's common stock at $8.00 per share, expiring through June 2003. The warrant price was equal to the market price of the Company's stock on June 11, 1998. The value assigned to the warrants at acquisition date was $456,000 and is included in equity as warrants for common stock. Subsequent to the purchase, Vacu-dry entered into an agreement with a creditor of Made In Nature, Inc. whereby this creditor converted its debt into a 15 percent equity in MINCO. The acquisition was accounted for using the purchase method of accounting. The excess of purchase price over the estimated fair values of assets acquired and liabilities assumed of $2,567,000 has been recorded as goodwill and is being amortized on a straight-line basis over 20 years. The estimated fair value of assets acquired and liabilities assumed is summarized as follows: Assets: Current assets $ 2,601,000 Property and equipment 55,000 ------------- Total assets 2,656,000 ------------- Liabilities: Other current liabilities 1,218,000 Creditor debt subsequently converted to equity 517,000 Short-term notes payable 2,095,000 Other long-term debt 500,000 ------------- Total liabilities 4,330,000 ============= Net liabilities acquired $ 1,674,000 ============= Goodwill is calculated as follows: Cash purchase price $ 336,000 Acquisition costs 101,000 Value of warrants issued 456,000 Excess of liabilities assumed over assets acquired 1,674,000 ============= Goodwill $ 2,567,000 ============= The following unaudited pro forma consolidated results of operations for the years ended June 30, 1998 and 1997, are presented as if the Made In Nature acquisition had been made at the beginning of each period presented. The unaudited pro forma information is not necessarily indicative of either the results of operations that would have occurred had the purchase been made during the periods presented or the future results of the combined operations. 1998 1997 ---------------- --------------- (unaudited) Net sales $ 30,861,000 $ 28,697,000 Net loss (125,000) (767,000) Basic loss per common share $(.08) $(.47) 3. INVENTORIES: Inventories at June 30 consist of the following (LIFO cost for Vacu-dry; FIFO cost for MINCO): 1998 1997 -------------- --------------- Finished good $ 7,014,000 $ 4,208,000 Work in process 470,000 291,000 Raw material and containers 442,000 556,000 -------------- --------------- Total $ 7,926,000 $ 5,055,000 ============== =============== 4. BORROWINGS UNDER LINE OF CREDIT: Borrowings under the line of credit are secured by Vacu-dry's inventory and accounts receivable. Interest accrues monthly at the bank's prime lending rate. 1998 1997 ------------------------- ------------------------- Balance at June 30 $2,297,000 $ 1,354,000 Maximum amount available under the line of credit $4,500,000 $ 3,500,000 Average borrowings $1,078,000 $ 982,000 Maximum borrowings $2,316,000 $ 3,160,000 Interest at Prime Prime Interest rate at June 30 8.50% 8.50% Weighted average interest rate 8.62% 8.32% Expiration date November 1, 1999 November 1, 1997 In accordance with the covenants of the revolving line of credit note with the Company's bank, the Company will not, without prior written consent of the bank, declare or pay any dividend or distribution either in cash, stock, or any other property on the Company's stock now or hereafter outstanding. No dividends were declared in fiscal 1998, 1997, or 1996. Among the restrictions under the line of credit are provisions that require the Company to maintain certain financial ratios. The Company obtained a waiver for the repurchase of stock (see Note 7) and amended a financial covenant during the year to remain in compliance with the agreement.
5. LONG-TERM DEBT: Long-term debt consists of the following: 1998 1997 --------------- --------------- Note payable: five-year consolidation note, interest fixed at 7.83 percent, interest and principal due monthly, maturing in September 1998, secured by accounts receivable, inventory, equipment, and fixtures $ 67,000 $ 267,000 Note payable: seven-year consolidation note, interest fixed at 8.5 percent, interest and principal due monthly, principal due in annual installments of $215,000 in 1999 and 2000, with a final payment of $717,000 due at maturity, maturing in September 2000, secured by accounts receivable, inventory, equipment, and fixtures 1,147,000 1,361,000 Note payable: five-year note, interest at the yield of 30-day commercial paper (5.55 percent at June 30, 1998) plus 2.1 percent, interest and principal due monthly, maturing December 2001, secured by equipment 592,000 737,000 Notes payable: unsecured five-year notes resulting from repurchase of stock, interest at 8.5 percent, interest due monthly, principal due on January 20, 2003 835,000 0 --------------- --------------- Total 2,641,000 2,365,000 Less: Current maturities (438,000) (557,000) --------------- --------------- Long-term debt $ 2,203,000 $ 1,808,000 =============== ===============
Maturities of long-term debt are as follows: Year Ending June 30 ---------------------- 1999 $ 438,000 2000 383,000 2001 898,000 2002 87,000 2003 835,000 -------------- Total $ 2,641,000 ============== 6. INCOME TAXES: The following is a summary of the Company's provision for income taxes: 1998 1997 1996 ------------- ------------- -------------- Current: Federal $ 486,000 $ 257,000 $ 259,000 State 71,000 39,000 44,000 Deferred: Federal 49,000 (50,000) 101,000 State (76,000) (14,000) (187,000) ============= ============= ============== Provision $ 530,000 $ 232,000 $ 217,000 ============= ============= ============== A reconciliation of the income tax provision to the expected provision at the federal statutory income tax rate is as follows: 1998 % 1997 % 1996 % ------------- ------- ------------- ------- ------------- ------- Provision at federal statutory rate $ 486,000 34% $ 253,000 34% $ 221,000 34% State taxes, less federal tax benefit 88,000 6 47,000 6 41,000 6 Tax credits and other (44,000) (3) (68,000) (9) (45,000) (7) ============= ======= ============= ======= ============= ======= Total provision $ 530,000 37% $ 232,000 31% $ 217,000 33% ============= ======= ============= ======= ============= ======= Temporary differences that gave rise to deferred tax assets and liabilities for 1998 and 1997 were as follows: 1998 1997 -------------- ------------- Deferred tax assets: Employee benefit accruals $ 140,000 $ 145,000 Unicap and inventory reserves 246,000 119,000 Tax credit carryforwards 22,000 65,000 State income taxes 13,000 1,000 Other 2,000 25,000 -------------- ------------- Total deferred tax assets 423,000 355,000 -------------- ------------- Deferred tax liabilities: Depreciation (879,000) (892,000) Property taxes (49,000) (50,000) -------------- ------------- Total deferred tax liabilities (928,000) (942,000) -------------- ------------- $ (505,000) $ (587,000) ============== =============
At June 30, 1998, the Company has state alternative minimum tax credit carryforwards of $22,000 to offset future state taxable income. 7. STOCK REPURCHASE: During the year, the Company repurchased 139,100 shares from three existing shareholders in exchange for notes payable in the amount of $835,000. The purchase price was determined based upon the market price at or about the time of the negotiated transaction. 8. STOCK APPRECIATION RIGHTS PLAN: The Company has a stock appreciation rights (SAR) plan as an incentive for key employees. Under the SAR plan, key employees are granted rights entitling them to market price increases in the Company's stock. At June 30, 1998 and 1997, 100,000 SARs were authorized. A summary of the outstanding SARs is as follows: Rights Outstanding at June 30 ------------------------- Price per Right 1998 1997 - --------------------- ------------ ------------ $2.69 4,550 4,950 3.75 1,600 1,600 4.31 1,500 1,500 4.63 6,500 9,900 5.63 200 200 8.88 2,000 4,500 9.63 3,000 3,000 ------------------------- 19,350 25,650 ============ ============ All rights are granted at fair market value at the date of grant. Rights generally vest ratably over a period from the second to the sixth anniversary date of the grant. The SAR liability and expense or credit recorded quarterly is based on the market price of the Company's stock as of the balance sheet date. In 1998, 1997, and 1996, the Company increased (decreased) selling, general, and administrative expenses by $43,000, ($4,000), and ($1,000), respectively, in order to reflect the current SAR liability. 9. EMPLOYEE STOCK PURCHASE PLAN: The Employee Stock Purchase Plan enables substantially all employees to purchase shares of the Company's common stock at 85 percent of the market value on the first or last business day of the quarterly offering period, whichever is lower. A maximum of 100,000 shares is authorized for issuance over the ten-year term of the plan that began on January 1, 1994. The following shares were issued under the terms of the plan: Shares Average Price Issued per Share ---------- ------------------ 1998 7,422 $4.98 1997 9,403 4.26 1996 15,324 4.25 10. EMPLOYEE STOCK OPTION PLAN: During 1996, the Board of Directors (the Board) approved a stock option plan (the Plan) for employees and nonemployee consultants covering 90,000 shares of common stock. In 1998, the Plan was amended to cover 150,000 shares of common stock. The Plan includes incentive stock options (ISOs) and nonqualified stock options (NSOs). Some of the terms and conditions of the Plan are different for ISOs and NSOs. The purchase price of each ISO granted will not be less than the fair market value of the Company's common shares at the date of grant. The purchase price of each NSO granted shall be determined by the Board in its absolute discretion, but in no event shall such price be less than 85 percent of the fair market value at the time of grant. NSO and ISO options granted are exercisable for ten years from the date of grant. The number of shares available for granting future options was 60,526 as of June 30, 1998, and 526 as of June 30, 1997 and 1996. Options for 89,474 shares were granted in 1996 and remain outstanding. These options have an exercise price of $5.00 per share and a remaining life of eight years and vest 25 percent in year one, 50 percent in year two, and 25 percent in year three. At June 30, 1998 and 1997, 67,107 and 22,369 options were exercisable, respectively. The Company accounts for the Plan under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for the Plan been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts: 1998 1997 1996 -------------- ------------- ------------- Net income: As reported $ 899,000 $ 517,000 $ 434,000 Pro forma 854,000 472,000 389,000 Basic earnings per share: As reported 0.57 0.31 0.25 Pro forma 0.54 0.29 0.23 Diluted earnings per share: As reported 0.56 Pro forma 0.53 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, with the following weighted-average assumptions used for the 1996 grant: weighted average risk-free interest rate of 6.61 percent; expected dividend yield of 0 percent; expected life of five years for the Plan options; expected volatility of 37.44 percent. 11. EARNINGS PER SHARE CALCULATION: The Company computes earnings per share in accordance with SFAS No. 128, "Earnings per Share." The following table provides the detail of the basic and diluted earnings per share computations: Year Ended June 30, 1998 ----------------------------- Diluted Basic -------------- -------------- Net income $899,000 $899,000 ============== ============== Weighted average shares outstanding 1,581,014 1,581,014 ============== Effect of dilutive stock options 19,313 ----------- Weighted average shares outstanding 1,600,327 =========== Earnings per common share and common share equivalent $0.56 $0.57 ============== ============== 12. COMMITMENTS: MINCO has purchase agreements with certain growers and processors to provide the Company with products and services to be used in the normal course of operations. The aggregate purchase commitment as of June 30, 1998, under these agreements was approximately $2,165,000. Most of the agreements provide for multiple-year future purchases at fixed prices. The Company leases office space and equipment under leases that expire in 1999. At June 30, 1998, future minimum rental payments are $213,000. Rental expense under these leases was $259,000 in 1998, $244,000 in 1997, and $249,000 in 1996. The Company has been leasing excess warehouse space, generating revenues of $518,000 in 1998, $537,000 in 1997, and $441,000 in 1996. These amounts are classified as other revenue in the statements of earnings. The leases have varying terms, which range from month-to-month to expiration dates through 2007. Future minimum lease income as of June 30, 1998, is as follows: Year Ending June 30 ------------ 1999 $ 701,000 2000 586,000 2001 515,000 2002 515,000 2003 515,000 Thereafter 630,000 ------------- Total $ 3,462,000 ============== In order to resolve Year 2000 issues and to improve system efficiencies and capabilities, the Company is in the process of acquiring and developing a new computer system, including hardware and software packages. Management estimates that the total cost of the system will be approximately $800,000. The expenditures for the new system will primarily occur in fiscal year 1999. 13. RETIREMENT PLANS: The Company has a contributory retirement savings and profit-sharing plan covering nonunion employees. The Company contributes one and one-half times the first 3 percent of employee contributions to the retirement savings plan. Profit-sharing contributions are derived using a specific formula based upon the Company's earnings. Company contributions to the retirement savings and profit sharing plan are funded currently and were approximately $148,000 in 1998 and $79,000 in 1997 and 1996. The employer's contributions for any fiscal year may not exceed the amount lawfully deductible by the Company under the provisions of the Internal Revenue Code. The Company contributes to a defined contribution plan for employees covered by collective bargaining agreements. These contributions, funded currently, were $477,000 in 1998, $335,000 in 1997, and $256,000 in 1996. 14. RESEARCH AND DEVELOPMENT: The Company sponsors research activities relating to the development of new products and the improvement of existing products. The cost of such activities charged to expense was $370,000 in 1998, $321,000 in 1997, and $269,000 in 1996. 15. RELATED-PARTY TRANSACTIONS: A member of the Company's Board is a member of the law firm that serves as the Company's general counsel. During 1998, 1997, and 1996, the Company incurred $168,000, $28,000, and $21,000, respectively, for legal services from this firm. Amounts payable to this firm as of June 30, 1998, totaled $33,000. The Company entered into an agreement with a member of the Board to provide consulting services to the Company during the 1997 fiscal year. The Company recorded an expense of $30,000 in fiscal 1997 related to this agreement.
16. QUARTERLY RESULTS (UNAUDITED): For the Year Ended June 30, 1998 -------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Total ----------------------------------------------------------------------- Net sales $6,208,000 $7,481,000 $6,208,000 $6,197,000 $ 26,094,000 Earnings before income taxes 142,000 945,000 202,000 140,000 1,429,000 Net earnings 95,000 622,000 134,000 48,000 899,000 Earnings per common share: Basic $0.06 $0.38 $0.09 $0.03 $0.57 Diluted $0.06 $0.38 $0.09 $0.03 $0.56 For the Year Ended June 30, 1997 -------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Total ----------------------------------------------------------------------- Net sales $6,043,000 $6,296,000 $5,894,000 $5,565,000 $23,798,000 Earnings (loss) before income taxes 69,000 636,000 51,000 (7,000) 749,000 Net earnings 42,000 382,000 27,000 66,000 517,000 Earnings per common share: Basic $0.03 $0.23 $0.02 $0.03 $0.31 Diluted $0.03 $0.23 $0.02 $0.03 $0.31
Form 10-K Copies of the Company's Form 10-K on file with the Securities and Exchange Commission may be obtained by writing to: Esther K. Castain Vacu-dry Company P.O. Box 2418 Sebastopol, California 95473-2418 EX-10.5 2 AGREEMENT AGREEMENT THIS AGREEMENT (the "Agreement") is made as of June 11, 1998 by and between Global Walk, Inc., a Japanese corporation ("Global"); MIN Acquisition Corp., a California corporation (the "Company"); and Vacu-dry Company, a California corporation ("Vacu-dry"). R E C I T A L S: WHEREAS, Global and Made In Nature Inc. ("Made In Nature") entered into an Amended and Restated Purchase and Prepayment Agreement dated October 17, 1996 (the "Purchase Agreement") pursuant to which Global made certain prepayments to Made In Nature against the future delivery by Made In Nature to Global of frozen organic apple juice and other products; and WHEREAS, as of the date hereof, there is due from Made in Nature to Global pursuant the Purchase Agreement approximately $1,050,000, including principal, interest, and costs; and WHEREAS, to secure its obligations pursuant to the Purchase Agreement, Made In Nature granted to Global a security interest in certain of its assets pursuant to an Amended and Restated Security Agreement dated October 17, 1996 (the "Security Agreement"); and WHEREAS, to further secure Made In Nature's obligations pursuant to the Purchase Agreement, Gerald E. Prolman pledged certain shares of Made In Nature's issued and outstanding common stock pursuant to a Pledge Agreement dated October 17, 1996 (the "Pledge Agreement"); and WHEREAS, pursuant to a Subscription Agreement dated November 17, 1997 (the "Subscription Agreement"), Global purchased $250,000 face value of Made In Nature's 8% Senior Secured Convertible Promissory Note (the "Secured Note"); and WHEREAS, to secure its obligations pursuant to the Secured Note, Made In Nature granted to Global a security interest in certain of its assets pursuant to a Security Agreement dated November 17, 1997 (the "Secured Note Security Agreement") (the Purchase Agreement, the Security Agreement, the Pledge Agreement, the Subscription Agreement, the Secured Note and the Secured Note Security Agreement are hereinafter referred to as the "Loan Agreements"); and WHEREAS, the Company has been organized by Vacu-dry to acquire substantially all of the assets of Made In Nature pursuant to an Asset Purchase Agreement dated as of June 11, 1998 (the "Asset Purchase Agreement"); and WHEREAS, Global desires to acquire certain shares of the Company's common stock on the terms and conditions provided for in this Agreement; and WHEREAS, Vacu-dry is a party to this Agreement for purposes of certain representations, warranties and covenants. NOW, THEREFORE, in consideration of these premises and the mutual covenants and agreements herein contained and other valuable consideration, the receipt and adequacy of which the parties hereto acknowledge, the parties agree as follows: 1. Purchase and Sale of the Shares. Subject to the terms and conditions of this Agreement, Global agrees to purchase at the Closing, and the Company agrees to sell and issue to Global at the Closing, against payment of the purchase price set forth below, 15,000 shares of the Company's common stock (the "Shares"). 2. Purchase Price. The purchase price to be paid by Global for the Shares shall be $1.00. 3. Closing Date; Delivery. The purchase and sale of the Shares shall be held at the offices of Severson & Werson, A Professional Corporation, One Embarcadero Center, 26th Floor, San Francisco, California 94111 immediately prior to the closing of the purchase and sale provided for in the Asset Purchase Agreement or at such other times and places as the parties may agree upon (collectively, the "Closing"). At the Closing, subject to the terms of this Agreement, the Company will deliver to Global a certificate representing the Shares against delivery of the Purchase Price. 4. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, Global that: (a) Organization and Standing; Articles and Bylaws. The Company is a corporation duly organized and existing under, and by virtue of, the laws of the State of California and is in good standing under such laws. The Company has the requisite corporate power to own and operate its properties and assets and to carry on its business as presently conducted and as proposed to be conducted. The Company is qualified, licensed or domesticated as a foreign corporation in all jurisdictions where the nature of its activities or of its properties owned or leased makes such qualification, licensing or domestication necessary at this time. (b) Corporate Power. The Company has now, or will have as of the Closing, all requisite legal and corporate power to enter into this Agreement, to sell the Shares hereunder, and to carry out and perform its obligations under the terms of this Agreement. (c) Capitalization. The authorized capital stock of the Company consists of 1,000,000 shares of Common Stock, no par value, of which 85,000 shares are issued and outstanding and owned by Vacu-dry (the "Vacu-dry shares"). The issued and outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable, and were issued in compliance with all applicable state and federal laws concerning the issuance of securities. There are no outstanding rights, options, warrants, conversion rights, or agreements for the purchase or acquisition from the Company of any shares of its capital stock. (d) Authorization. (i) All corporate action on the part of the Company, its officers, directors, and stockholders necessary for the sale and issuance of the Shares pursuant hereto and the performance of the Company's obligations hereunder, has been taken or will be taken prior to the Closing. This Agreement is a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting enforcement of creditors' rights, and except as limited by application of legal principles affecting the availability of equitable remedies. (ii) The Shares, when issued in compliance with the provisions of this Agreement, will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that such Shares may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein and as may be required by future changes in such laws. (iii) No shareholder of the Company has any right of first refusal or any preemptive rights in connection with the issuance of the Shares or of Common Stock by the Company. (e) Financial Statements. The Company's balance sheet as of June 5, 1998 which has been supplied to Global is true and correct, has been prepared in accordance with generally accepted accounting principles (except that the balance sheet does not contain the footnotes required by generally accepted accounting principles), and fairly presents the financial condition of the Company as of the date thereof. As of the date hereof there are no liabilities of the Company other than liabilities provided for in the balance sheet and other than liabilities pursuant to the Asset Purchase Agreement. (f) Compliance with Other Instruments, None Burdensome, etc. The Company is not in violation of any term of its Articles of Incorporation or Bylaws, or in any material respect of any mortgage, indenture, contract, agreement, instrument, or to the best knowledge of the Company, any judgment, decree, order, statute, rule, or regulation applicable to it. The execution, delivery, and performance by the Company of this Agreement, and the issuance and sale of the Shares pursuant hereto, will not result in any such violation or be in conflict with or constitute a default under any such term, or cause the acceleration of maturity of any loan or material obligation to which the Company is a party or by which it is bound or with respect to which any of them is an obligor or guarantor, or result in the creation or imposition of any material lien, claim, charge, restriction, equity or encumbrance of any kind whatsoever upon, or to the best knowledge of the Company after due inquiry, give to any other person any interest or right (including any right of termination or cancellation) in or with respect to any of the material properties, assets, business or agreements of the Company. (g) Litigation, etc. There are no actions, proceedings or investigations pending (or to the best of the Company's knowledge, any basis therefor), which, either in any case or in the aggregate, might result in any adverse change in the business, prospects, conditions, affairs, or operations of the Company or in any of its properties or assets, or in any impairment of the right or ability of the Company to carry on its business as proposed to be conducted, or in any material liability on the part of the Company, or which question the validity of this Agreement or any action taken or to be taken in connection herewith. (h) Governmental Consent, etc. No consent, approval, or authorization of, or designation, declaration, or filing with, any governmental unit is required on the part of the Company in connection with the valid execution and delivery of this Agreement, or the offer, sale or issuance of the Shares, or the consummation of any other transaction contemplated hereby (except exemption notice filings under the Blue Sky securities laws which filings have been or will be timely made so as to comply with such laws). (i) Offering. The offer, sale and issuance of the Shares in conformity with the terms of this Agreement will not violate the Securities Act of 1933 (the "Securities Act") or any applicable state Blue Sky law. (j) Insurance. The Company has in full force and effect fire, casualty and other insurance policies, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed. (k) The Shares: (i) are free and clear of any security interests, liens, claims, or other encumbrances; (ii) have been duly and validly authorized and issued and are, and as of the Closing Date will be, fully paid and non-assessable; (iii) will not have been, individually and collectively, issued or sold in violation of any pre-emptive or other similar rights of the holders of any securities of the Company; (iv) will not subject the holders thereof to personal liability by reason of being such holders. 5. Representations and Warranties of Global. Global represents and warrants to, and agrees with, the Company as follows: (a) No consent, approval, authorization, or order of any court, governmental agency or body, or arbitrator having jurisdiction over Global is required for execution of this Agreement, including, without limitation, the purchase of the Shares, or the performance of Global's obligations hereunder. (b) Global understands that no federal or state agency has passed on or made any recommendation or endorsement of the Shares. (c) The Company has given Global the opportunity to have answered all of Global's questions concerning the Company and its business and has made available to Global all information requested by Global which is reasonably necessary to verify the accuracy of other information furnished by the Company. Global has received and evaluated all information about the Company and its business which Global deems necessary to formulate an investment decision and does not desire any further information. (d) Global understands that the Shares are being offered and sold to it in reliance on specific exemptions from or non-application of the registration requirements of federal and state securities laws and that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments, and understandings of Global set forth herein in order to determine the applicability of such exemptions or non-applications and the suitability of Global to acquire the Shares. (e) Global is aware that the Shares have not been registered under the Securities Act by reason of their issuance in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act pursuant to Section 4(2) and Regulation D thereof, and that they must be held by Global for an indeterminate period, and Global must therefore bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the Securities Act or is exempt from registration. (f) Each instrument representing the Shares may be endorsed with the following legends: (i) THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT. (ii) Any other legend required by California or other state securities laws. The Company need not register a transfer of legended Shares and may instruct its transfer agent not to register the transfer of the Shares unless one of the conditions specified in the foregoing legends is satisfied. (g) Any legend endorsed on an instrument pursuant to Section 4(f) hereof and the stop transfer instructions with respect to such Shares shall be removed, and the Company shall issue an instrument without such legend to the holder of such Shares if such Shares are registered under the Securities Act and a prospectus meeting the requirements of Section 10 of the Securities Act is available or if such holder provides the Company with an opinion of counsel for such holder of the Shares, reasonably satisfactory to the Company, to the effect that a sale, transfer or assignment of such Shares may be made without registration. (h) Global is acquiring the Shares for Global's own account, for investment, and without any present intention to engage in a distribution thereof. (i) Global has the knowledge and experience in financial and business matters to evaluate the merits and risks of the proposed investment. (j) Global is an "Accredited Investor" as that term is defined under Rule 501 adopted pursuant to the Securities Act. "Accredited Investors" are defined in Rule 501 to include among others: (i) various specified institutional investors (such as banks, savings and loan associations, licensed brokers or dealers, insurance companies, investment companies, small business investment companies, employee benefit plans having assets in excess of $5,000,000, and self-directed plans having investment decisions made solely by persons that are Accredited Investors); (ii) any entity with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered; (iii) any person who had individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level this year; (iv) any person whose individual net worth (or joint net worth with the person's spouse) at the time of purchase exceeds $1,000,000; (v) directors and executive officers of the Company; (vi) trusts with total assets in excess of $5,000,000 not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person prescribed in Rule 506(b)(2)(ii); and (vii) any entity in which all the equity owners are deemed accredited. 6. Conditions Precedent to Global's Obligations. The obligations of Global hereunder are subject to the performance by the Company of its obligations hereunder and to the satisfaction of the following additional conditions precedent on or before the Closing Date: (a) The representations and warranties made by the Company in this Agreement shall, unless waived by Global, be true and correct as of the date hereof and as of the Closing, with the same force and effect as if they had been made on and as of the Closing; (b) After the date hereof and until the Closing Date, there shall not have occurred: (i) any change, or any development involving a prospective change, in either the condition, financial or otherwise, or in the earnings, business or operations, or in or affecting the properties of the Company [or the financial or market conditions or circumstances in the United States, in either case which, in Global's judgment, is material and adverse and makes it impractical or inadvisable to proceed with the offering, sale, or delivery of the Shares]; (ii) an imposition of a new legal or regulatory restriction notin effect on the date hereof, or any change in the interpretation of existing legal or regulatory restrictions, that materially and adversely affects the offering, sale, or delivery of the Shares; (c) Vacu-dry shall have entered into a Co-Sale Agreement with Global in the form of Exhibit A hereto. (d) Vacu-dry shall have agreed to contribute as capital to the Company without additional consider cash up to approximately $2,700,000 (depending upon the final outcome of negotiations with Made In Nature's creditors) and common stock warrants necessary to consummate the transactions provided for in the Asset Purchase Agreement. 7. Conditions Precedent to the Company's Obligations. The obligations of the Company under this Agreement are subject to the performance by Global of its obligations hereunder and to the satisfaction of the following additional conditions precedent on or before the Closing: (a) The representations and warranties made by Global in this Agreement shall, unless waived by the Company, be true and correct at the Closing, with the same force and effect as if they had been made on, and as of, the Closing; (b) Global shall have canceled all obligations of Made in Nature and Gerald E. Prolman pursuant to the Loan Agreements and shall have released all security interests granted and held pursuant thereto in form and substance satisfactory to the Company. 8. Affirmative Covenants. The Company covenants and agrees as follows: (a) Books of Account. The Company will keep books of record and account in which full, true and correct entries are made of all of its and their respective dealings, business and affairs in accordance with generally accepted accounting principles. The Company will employ certified public accountants selected by the Board of Directors of the Company who are "independent" within the meaning of the accounting regulations of the Securities and Exchange Commission and have annual audits made by such independent public accountants in the course of which such accountants shall make such examinations, in accordance with generally accepted auditing standards. (b) Furnishing of Financial Statements and Information. The Company will deliver to Global: (i) as soon as practicable, but in any event within 90 days after the end of each fiscal year, a consolidated balance sheet of the Company and its Subsidiaries, as of the end of such fiscal year, together with the related consolidated statements of operations, shareholders' equity and cash flow for such fiscal year, setting forth in comparative form figures for the previous fiscal year, all in reasonable detail and duly certified by the Company's independent public accountants, which accountants shall have given the Company an opinion, unqualified as to the scope of the audit, regarding such statements; (ii) with reasonable promptness, such other financial data relating to the business, affairs and financial condition of the Company and any Subsidiaries as is available to the Company and as from time to time Global may reasonably request; and (iii) at least 20 days prior to the earlier of (i) the execution of any agreement relating to any merger or consolidation of the Company with another corporation, or a plan of exchange involving the outstanding capital stock of the Company, or the sale, transfer or other disposition of all or substantially all of the property, assets or business of the Company to another corporation, or (ii) the holding of any meeting of the shareholders of the Company for the purpose of approving such action, written notice of the terms and conditions of such proposed merger, consolidation, plan of exchange, sale, transfer or other disposition. (c) Inspection. The Company will permit Global and any of its officers or employees, or any outside representatives designated by Global and reasonably satisfactory to the Company, to visit and inspect at Global's expense any of the properties of the Company, including its books and records (and to make photocopies thereof or make extracts therefrom), and to discuss its affairs, finances, and accounts with their officers, lawyers and accountants, except with respect to trade secrets and similar confidential information, all to such reasonable extent and at such reasonable times and intervals as Global may reasonably request. Except as otherwise required by laws or regulations applicable to Global, Global shall maintain, and shall require its representatives to maintain, all information obtained pursuant to Section 8 hereof on a confidential basis. (d) Election of Director. Vacu-dry and the Company covenant, so long as Global and its affiliates shall own at least 10,000 shares of Common Stock, to cause Mr. Nobuyoshi Takanashi to be elected a director of the Company. (e) Right of Participation. The Company hereby grants to Global the right of participation to purchase, pro rata, all or any part of New Securities (as defined in Section 8(e)(i) which the Company may, from time to time, propose to sell and issue. A pro rata share, for purposes of this right of participation, is the quotient obtained by dividing the aggregate number of shares of Common Stock held by the Global by the sum of (x) the total number of outstanding shares of Common Stock plus (y) the total number of shares of Common Stock issuable upon conversion of all outstanding capital stock convertible into Common Stock or upon the exercise of all options and warrants to purchase the Company's Common Stock. (i) Except as set forth below, "New Securities" shall mean any shares of capital stock of the Company, including Common Stock and preferred stock, whether now authorized or not, and rights, options or warrants to purchase said shares of capital stock and securities of any type whatsoever that are, or may become, convertible into said shares of capital stock. Notwithstanding the foregoing, "New Securities" does not include (i) securities offered to the public generally pursuant to an underwritten registration statement under the Securities Act, (ii) securities issued pursuant to the acquisition of another corporation by the Company by merger, purchase of substantially all of the assets, or other reorganization whereby the Company or its shareholders own not less than fifty-one percent (51%) of the voting power of the surviving or successor corporation, (iii) shares of the Company's Common Stock or options exercisable for the purchase of Common Stock issued to employees, officers and directors of, and consultants and franchisees to the Company pursuant to any incentive program approved by the Board of Directors of the Company, or (iv) stock issued in connection with any stock split, stock dividend or recapitalization by the Company. (ii) In the event that the Company proposes to undertake an issuance of New Securities, it shall first make an offering of such new securities to Global by giving Global written notice of its intention, describing the type of New Securities, and the price and terms upon which the Company proposes to issue the same. The Global shall have fifteen (15) business days from the date of receipt of any such notice to agree to purchase up to its pro rata share of such New Securities for the price and upon the terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. If Global does not elect to purchase the New Securities as provided herein, the Company shall have sixty (60) days thereafter to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within thirty (30) days from the date of said agreement) to sell the New Securities not elected to be purchased by Global at the price and upon terms no more favorable than specified in the Company's notice. In the event the Company has not sold the New Securities or entered into an agreement to sell the New Securities within said sixty (60) day period (or sold and issued New Securities in accordance with the foregoing within thirty (30) days from the date of said agreement), the Company shall not thereafter issue or sell any New Securities without first offering such securities in the manner provided above. (iii) The right of participation hereunder is not assignable, in whole or in part, except (A) from Global to an entity controlling, controlled by, or under common control with Global and (B) from Global to a transferee of the Shares so long as such transferee acquires not less than 10,000 shares of Common Stock (appropriately adjusted for any stock split, stock dividend or similar capital reorganization). (f) Termination. The obligations of the Company and Vacu-dry pursuant to this Section 8 shall terminate on the earlier of (i) the date of closing of an initial underwritten public offering by the Company of its Common Stock pursuant to an effective registration statement, (ii) a sale of all or substantially all of the assets of the Company, (iii) a sale of all or substantially all of the outstanding common stock of the Company, or (iv) a merger of the Company following which the shareholders of the Company own together with their affiliates less than 50% of the voting stock of the survivor. 9. Put and Call Rights. (a) Grant of Put. Subject to the terms hereof, the Company hereby irrevocably grants and issues to Global the right and option to sell to the Company (hereinafter referred to as the "Put") all or any portion of the Shares at a purchase price equal to the fair market value of such shares as hereinafter determined (the "Purchase Price"). Subject to the provisions of Sections 9(e) below, Global may exercise the Put and sell to the Company, and the Company agrees to purchase from Global, all or any portion of the Shares. Global's right to exercise the Put shall commence on July 1, 2001. Global shall have thirty (30) days from commencement of the exercise period in which to exercise the Put by notice to the Company specifying the number of Shares as to which the Put is exercised. (b) Grant of Call. Subject to the terms hereof, Global irrevocably grants and issues to Global the right and option to purchase from Global (hereinafter referred to as the "Call") all or any portion of the Shares at a purchase price equal to the fair market value of such shares as hereinafter determined (the "Purchase Price"). Subject to the provisions of Section 9(e) below, the Company may exercise the Call and purchase from Global, and Global agrees to sell to the Company, all or any portion of the Shares. The Company's right to exercise the Call shall commence on July 1, 2001. The Company shall have thirty (30) days from the commencement of the exercise period in which to exercise the Call by notice to Global specifying the number of Shares as to which the Call is exercised. (c) Determination of Fair Market Value. The fair market value of the Shares shall be determined by appraisal pursuant to the process described herein. Upon the providing of a notice of Put or a notice of Call, the Shares shall be appraised by a mutually agreed upon appraiser. If the parties cannot agree upon a single appraiser within seven (7) days following the date of delivery of a notice of Put or a notice of Call, the Shares shall be appraised by two appraisers, one appointed by each party. Each party shall have twenty-one (21) days following the date of the delivery of the notice of Put or notice of Call to select its appraiser. Each appraiser shall be fully qualified to appraise the ownership interests in privately held companies and shall be independent of the appointing party. Each appraiser shall be instructed: (i) to appraise the Shares as if they were to be sold to a single purchaser for their fair market value in a transaction where a willing seller sells and a willing buyer purchases, each acting without duress or urgency; (ii) not to apply a discount for lack of marketability; and (iii) to complete such appraisal no later than thirty (30) days following such appraiser's appointment. If the difference between the values of the two appraisals does not exceed fifteen percent (15%) of the value determined by the higher appraisal, the average of the two appraisals shall establish the fair market value of the Shares. If the difference between the values of the two appraisals exceeds fifteen percent (15%) of the value determined by the higher appraisal, a third appraiser shall be selected by the two appraisers within fourteen (14) days following completion of the last of the two appraisals, and such third appraiser shall review and enhance the work and conclusions of the initial two appraisers, and based on such review and enhancement, issue a determination as to the fair market value of the Shares within thirty (30) days thereafter, which determination shall state a value neither higher than the higher nor lower than the lower of the two previously issued values of the Shares and shall establish the fair market value for the Shares. Copies of all final appraisals of all appraisers shall be delivered to each party immediately after their completion. The cost of each party's appraiser shall be borne by such party and the cost of the third appraiser, if any, shall be borne by the parties equally. (d) Payment and Delivery of Shares. (i) Subject to Section 9(c)(ii) below, the Company shall, within twenty days of the determination of the Purchase Price as provided in Section 9(c) above, pay to Global the Purchase Price as follows: (A) if the Purchase Price is to be paid pursuant to an exercise of the Call provided in Section 9(b), in a single lump sum payment in cash; or (B) if the Purchase Price is to be paid pursuant to an exercise of the Put provided for in Section 9(a), at the Company's sole option, in either of the following ways: (z) a single lump sum payment in cash; or (y) an initial payment of twenty percent (20%) of the Purchase Price, with the principal balance to be paid, at the Company's option, in four (4) equal installments on the four succeeding anniversary dates of the Exercise Date. If the Company selects the installment form of payment, the unpaid balance shall bear simple interest on the balance at the rate equal to the Prime Rate as published in The Wall Street Journal. Such rate, at the option of the Company exercisable at the time the Company elects the installment form of payment, shall be fixed as of such date or shall change from time to time. The Company may prepay any portion of the unpaid balance without penalty. Such payments shall be made in exchange for the delivery, upon payment of the initial payment, to the Company of a stock certificate or certificates representing the total number of Shares being put and purchased duly endorsed in blank by Global or having attached thereto a stock power duly executed by Global in proper form for transfer. Any unpaid amounts shall become immediately due and payable on the earlier of (i) the date of closing of an initial underwritten public offering by the Company of its Common Stock pursuant to an effective registration statement, (ii) a sale of all or substantially all of the assets of the Company, (iii) a sale of all or substantially all of the outstanding common stock of the Company, or (iv) a merger of the Company following which the shareholders of the Company together with their affiliates own less than 50% of the voting stock of the survivor (ii) In the event that any payment to be made by the Company is prohibited by applicable provisions of California Corporations Code Section 500 et seq. or by any other applicable law, then such payment shall be immediately made by the Company at the next earliest time together with simple interest on the balance at the rate equal to the Prime Rate as published in The Wall Street Journal plus 2%, and to the extent possible, when compliance with said law may be effected, and the Company agrees that it will execute all such documents and take all such other steps as may be necessary to expedite and effectuate to the extent possible such compliance. (e) Termination. The Put and Call shall terminate, whether or not either has then become exercisable, on the earlier of (i) the date of closing of an initial underwritten public offering by the Company of its Common Stock pursuant to an effective registration statement, (ii) a sale of all or substantially all of the assets of the Company, (iii) a sale of all or substantially all of the outstanding common stock of the Company, or (iv) a merger of the Company following which the shareholders of the Company together with their affiliates own less than 50% of the voting stock of the survivor. 10. Right of First Refusal. Each time Global proposes to transfer, assign, convey, sell, encumber or in any way alienate all or any part of its Shares (or is required by operation of law or other involuntary transfer to do so) Global shall first offer such Shares to the Company. Global shall deliver a written notice to the Company stating (i) Global's bona fide intention to transfer such Shares, (ii) the name and address of the proposed transferee, (iii) the Shares to be transferred, and (iv) the purchase price and terms of payment for which Global proposes to transfer such Shares. Within thirty (30) days after receipt of the notice, the Company shall have the first right to purchase or obtain such Shares upon the price and terms of payment designated in such notice. If such notice provides for the payment of non-cash consideration, the Company may elect to pay the consideration in cash equal to the good faith estimate of the present fair market value of the noncash consideration offered as determined by the Company. If the Company elects not to purchase or obtain all of the Shares designated in such notice, then Global may transfer the remainder of the Shares described in the notice to the proposed transferee, providing such transfer (i) is completed within thirty (30) days after the expiration of the Company's right to purchase such Shares, and (ii) is made on terms no less favorable to Global than as designated in the notice. If such Shares are not so transferred, Global must give notice in accordance with this Section prior to any other or subsequent transfer of such Shares. The right of first refusal provided herein shall terminate, whether or not it has then become exercisable, on the earlier of (i) the date of closing of an initial underwritten public offering by the Company of its Common Stock pursuant to an effective registration statement, (ii) a sale of all or substantially all of the assets of the Company, (iii) a sale of all or substantially all of the outstanding common stock of the Company, or (iv) a merger of the Company following which the shareholders of the Company together with their affiliates own less than 50% of the voting stock of the survivor. Notwithstanding the foregoing, Global may transfer some or all of its Shares to its affiliates or to members of the Takanashi family without such transfers being subject to the right of first refusal provided herein, provided that such transferees agree in writing to be bound by the provision of this Agreement. 11. Fees and Expenses. Other than as stated in this Agreement, Global and the Company agrees to pay their own expenses incident to the performance of their obligations hereunder. 12. Survival of the Representations, Warranties, etc. The respective agreements, representations, warranties, indemnities, and other statements made by or on behalf of the Company and Global pursuant to this Agreement shall remain in full force and effect, regardless of any investigation made by or on behalf of the other party to this Agreement or any officer, director, or employee of, or person controlling or under common control with, such party, and will survive delivery of any payment of the Shares. 13. Dispute Resolution. (a) Arbitration. All disputes between the parties arising in connection with this Agreement shall be finally settled under the Commercial Arbitration Rules of the American Arbitration Association then in effect (as modified by this section). The arbitration panel shall be composed of three arbitrators appointed in accordance with this section. The arbitration shall be held in San Francisco, California, and it shall be conducted in the English language. The law governing the procedures and substance of the arbitration will be that of the State of California. The arbitration proceedings and all documents and testimony, written or oral, produced in connection therewith shall be kept confidential. The arbitration panel may determine all questions of law and jurisdiction (including questions as to whether the dispute is arbitrable) and has the right to grant legal and equitable relief (including injunctive and other interim relief and the right to grant permanent and interim injunctive relief), and shall apportion all costs between Licensee and Licensor taking into consideration, among other factors, the percentage of the total amount in dispute that is represented by the amount of claims asserted by a party but rejected by the arbitrators, including reasonable legal fees, interest and costs of the arbitration, provided that nothing herein shall prevent the parties hereto from seeking interim injunctive relief in a court of competent jurisdiction pending resolution of the dispute in accordance with this section. The arbitrators may not amend or otherwise alter the terms and conditions of this Agreement. (b) Selection of Arbitrators. The parties shall have fifteen (15) days to agree upon the qualifications of the arbitrators (the "Qualifications") commencing on the day on which notice is given by the party initiating the arbitration. Upon the expiration of the fifteen day period and regardless of an agreement being reached as to the Qualifications, either or both of the parties shall apply to any court having jurisdiction over the parties or their assets in accordance with Section 15(c) to appoint the three arbitrators. The court shall appoint the arbitrators within 30 days after such request (on the basis of the Qualifications if agreed but otherwise in its discretion) and shall notify the parties of the appointment. (c) Award Binding. The arbitral award shall state the reasons for the award, and the relief granted shall be final and binding on the parties to the arbitration. Any award rendered may be confirmed; judgment upon any award rendered may be entered; such award or the judgment thereon may be enforced; and any interim or supplemental relief may be sought in any court having jurisdiction over the parties or their assets in accordance with Section 15(a) hereof. Any monetary award shall be payable in U.S. dollars, free of any tax or any other deduction, other than taxes in the nature of income taxes imposed by the country, province or political subdivision in which the recipient is organized or is otherwise subject to such taxes. Such award shall bear interest from the date of the award at a variable rate equal to the rate publicly announced from time to time by Wells Fargo Bank, N.A. at its principal office in San Francisco, California as its "prime rate". (d) Discovery. The parties shall make available to the arbitrators all information requested by them in accordance with the applicable rules of arbitration, including production of all relevant records and documents. All notices and other communications required to be delivered pursuant to the applicable rules of arbitration shall be delivered to the address specified in this Agreement. (e) Certain Disputes. In the event that the parties disagree as to whether any issue or issues are to be submitted to arbitration under the terms of this Agreement or either party asserts that the other is refusing to arbitrate either overtly or by delay, the parties agree that any such action, lawsuit or proceeding over such dispute or assertion shall be brought in accordance within the provisions of Section 15(a) hereof. (f) Attorneys' Fees. If any party hereto must institute arbitration to collect any payments due hereunder, the party liable therefor shall reimburse the other party for reasonable attorneys' fees and other costs incurred in connection with such arbitration. 14. Notices. Any notice to any party hereto given pursuant to this Agreement shall be in writing addressed as follows: if to Global Walk, Inc. Global Walk, Inc. c/o Takanashi Milk Products Co., Ltd. Nisseki Yokahama Bl.8F 1-1-8 Sakuragi-cho Naka-ku Yokohama-shi 281, Japan Attention: Nobuyoshi Takanashi Telecopier: (011)(81) 4 5633-5254 with a copy to: Farella, Braun & Martel LLP 235 Montgomery Street, 30th Floor San Francisco, California 940104 Attention: Daniel E. Cohn, Esq. Telecopier: (415) 954-4480 if to the Company or Vacu-dry: Vacu-dry Company 7765 Healdsburg Avenue Sebastopol, California 95437 Attn: Gary L. Hess, President Telecopier: (707) 829-4610 with a copy to: Severson & Werson One Embarcadero Center, 26th Floor San Francisco, California 94111 Attn: Roger S. Mertz, Esq. 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 and answerback are transmitted, (ii) if delivered personally, when received, or (iii) if mailed by registered or certified mail, postage prepaid, return receipt requested, when received. 15. Miscellaneous (a) This Agreement may be executed in one or more counterparts and it is not necessary that signature of all parties appear on the same counterpart, but such counterparts together shall constitute one and the same agreement. (b) This Agreement shall inure to the benefit of and be binding upon the parties hereto, their respective successors, and no other person shall have any right or obligation hereunder. (c) This Agreement shall be governed by, and construed in accordance with, the laws of the State of California. The parties hereby irrevocably attorn to the exclusive jurisdiction of the courts of the State of California in respect of the subject matter of this Agreement and irrevocably agree to be bound by any judgment rendered thereby in connection with this Agreement, subject in each case to all rights to appeal such decisions to the extent available to such parties. Each party waives personal service of process and consents that service of process upon it may be made by delivery in accordance with the provisions of this Agreement. Nothing shall affect the right to serve process in any other manner permitted by applicable law. (d) The headings of the sections of this document have been inserted for convenience of reference only and shall not be deemed to be a part of this Agreement. IN WITNESS HEREOF, the parties have duly executed and delivered this Agreement, all as of the day and year first above written. COMPANY: MIN ACQUISITION CORP. By: /s/ Gary L. Hess -------------------------------------------- Its: President -------------------------------------------- By: /s/ Roger S. Mertz -------------------------------------------- Its: Assistant Secretary -------------------------------------------- GLOBAL WALK, INC. By: /s/ Nobuyoshi Takanashi ------------------------------------------- Its: President ------------------------------------------- By: ------------------------------------------- Its: ------------------------------------------- VACU-DRY COMPANY By: /s/ Gary L. Hess -------------------------------------------- Its: President -------------------------------------------- EX-10.6 3 CO-SALE AGREEMENT CO-SALE AGREEMENT THIS CO-SALE AGREEMENT (this "Agreement") is made this 11th day of June, 1998, by and between Vacu-dry Company, a California corporation ("Vacu-dry") and Global Walk, Inc., a Japanese corporation ("Global"). RECITALS: WHEREAS, Global desires to acquire from MIN Acquisition Corp., a California corporation (the "Company") shares of its common stock (the "Common Stock"); and WHEREAS, Vacu-dry is presently the record and beneficial owner of 85,000 shares of the outstanding Common Stock; and WHEREAS, Vacu-dry has agreed to grant Global the opportunity to participate, upon the terms and conditions set forth in this Agreement, in subsequent sales of the Common Stock of the Company made by Vacu-dry to induce Global to make the proposed investment. NOW, THEREFORE, in consideration of these premises and the mutual covenants and agreements herein contained and other valuable consideration, the receipt and adequacy of which the parties hereto acknowledge, the parties agree as follows 1. Sales by Vacu-dry. (a) Notice of Purchase Offers. Should Vacu-dry propose to accept one or more bona fide offers (collectively the "Purchase Offer") from any persons to purchase shares of Common Stock from Vacu-dry, then Vacu-dry shall promptly notify Global of the terms and conditions of such Purchase Offer. (b) Right to Participate. Global shall have the right, exercisable upon written notice to Vacu-dry within 15 business days after receipt of the notice of the Purchase Offer, to participate in Vacu-dry's sale of Common Stock on the same terms and conditions. To the extent Global exercises such right of participation, the number of shares of Common Stock which Vacu-dry may sell pursuant to such Purchase Offer shall be correspondingly reduced. The right of participation of Global shall be subject to the following terms and conditions: (i) Global may sell all or any part of that number of shares of Common Stock of the Company equal to the product obtained by multiplying (x) the aggregate number of shares of Common Stock covered by the Purchase Offer by (y) a fraction the numerator of which is the number of shares of Common Stock the time owned by Global and the denominator of which is the combined number of shares of Common Stock at the time owned by Vacu-dry and Global. (ii) Global may participate in the sale by delivering to Vacu-dry for transfer to the purchase offeror one or more certificates, properly endorsed for transfer, which represent the number of shares of Common Stock which Global elects to sell pursuant to this Section 1(b). (c) Consummation of Sale. The stock certificate or certificates which Global delivers to Vacu-dry pursuant to Section 1(b) shall be transferred by Vacu-dry to the purchase offeror in consummation of the sale of the Common Stock pursuant to the terms and conditions specified in the Section 1(b) notice to Global, and Vacu-dry shall promptly thereafter remit to Global that portion of the sale proceeds to which Global is entitled by reason of its participation in the sale. (d) Ongoing Rights. The exercise or non-exerciseof the rights of Global to participate in one or more sales of Common Stock made by Vacu-dry shall not adversely affect its rights to participate in subsequent Common Stock sales by Vacu-dry pursuant to Section 1. (e) Permitted Exemptions. The participation rights of Global shall not apply to any pledge of Common Stock made by Vacu-dry pursuant to a bona fide loan transaction which creates a mere security interest. 2. Legend. (a) Each certificate representing shares of the Common Stock of the Company now or hereafter owned by Vacu-dry or issued to any permitted transferee pursuant to Section 1(e) shall be endorsed with the following legend: "THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN CO-SALE AGREEMENT BY AND BETWEEN THE SHARE-HOLDER, THE CORPORATION AND CERTAIN HOLDERS OF COMMON STOCK OF THE CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION." (b) Legend Removal. The Section 2(a) legend shall be removed upon termination of this Agreement in accordance with the provisions of Section 3(a). 3. Miscellaneous Provisions. (a) Termination of Co-Sale Rights. The rights of Global under this Agreement and the obligations of Vacu-dry with respect to Global shall terminate at such time as Global shall no longer be the owners of any Common Stock. Unless sooner terminated in accordance with the preceding sentence, this Agreement shall terminate upon the consummation of an underwritten public offering of Common Stock registered under the Securities Act of 1933 (b) Successors and Assigns. This Agreement and the rights and obligations of the parties hereunder shall inure to the benefit of, and be binding upon, their respective successors, assigns and legal representatives. The participation rights of Global hereunder may not be assigned without the prior written consent of Vacu-dry other than to Takanashi Milk Products Co., Ltd. or members of the Takanashi family and who shall agree to be bound by the terms hereof. (c) Severability. In the event one or more of the provisions of this Agreement should, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement, and this Agreement shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. (d) Amendments. Any amendment or modification of this Agreement shall be effective only if evidenced by a written instrument executed by duly authorized representatives of the parties hereto. Any waiver by a party of its rights under this Agreement shall be effective only if evidenced by a written instrument executed by a duly authorized representative of such party. (e) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of California. The parties hereby irrevocably attorn to the exclusive jurisdiction of the courts of the State of California in respect of the subject matter of this Agreement and irrevocably agree to be bound by any judgment rendered thereby in connection with this Agreement, subject to each case to all rights to appeal such decisions to the extent available to such parties. Each party waives personal service of process and consents that service of process upon it may be made by delivery in accordance with the provisions of this Agreement. Nothing shall affect the right to serve process in any other manner permitted by applicable law. (f) Notices. Any notice to any party hereto given pursuant to this Agreement shall be in writing addressed as follows: if to Global Walk, Inc.: Global Walk, Inc. c/o Takanashi Milk Products Co., Ltd. Nisseki Yokahama Bl.8F 1-1-8 Sakuragi-cho Naka-ku Yokohama-shi 281, Japan Attention: Nobuyoshi Takanashi Telecopier: (011)(81) 4 5633-5254 with a copy to: Farella, Braun & Martel LLP 235 Montgomery Street, 30th Floor San Francisco, California 940104 Attention: Daniel E. Cohn, Esq. Telecopier: (415) 954-4480 if to Vacu-dry: Vacu-dry Company 7765 Healdsburg Avenue Sebastopol, California 95437 Attn: Gary L. Hess, President Telecopier: (707) 829-4610 with a copy to: Severson & Werson One Embarcadero Center, 26th Floor San Francisco, California 94111 Attn: Roger S. Mertz, Esq. 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 and answerback are transmitted, (ii) if delivered personally, when received, or (iii) if mailed by registered or certified mail, postage prepaid, return receipt requested, when received. 4. Dispute Resolution. (a) Arbitration. All disputes between the parties arising in connection with this Agreement shall be finally settled under the Commercial Arbitration Rules of the American Arbitration Association then in effect (as modified by this section). The arbitration panel shall be composed of three arbitrators appointed in accordance with this section. The arbitration shall be held in San Francisco, California, and it shall be conducted in the English language. The law governing the procedures and substance of the arbitration will be that of the State of California. The arbitration proceedings and all documents and testimony, written or oral, produced in connection therewith shall be kept confidential. The arbitration panel may determine all questions of law and jurisdiction (including questions as to whether the dispute is arbitrable) and has the right to grant legal and equitable relief (including injunctive and other interim relief and the right to grant permanent and interim injunctive relief), and shall apportion all costs between Licensee and Licensor taking into consideration, among other factors, the percentage of the total amount in dispute that is represented by the amount of claims asserted by a party but rejected by the arbitrators, including reasonable legal fees, interest and costs of the arbitration, provided that nothing herein shall prevent the parties hereto from seeking interim injunctive relief in a court of competent jurisdiction pending resolution of the dispute in accordance with this section. The arbitrators may not amend or otherwise alter the terms and conditions of this Agreement. (b) Selection of Arbitrators. The parties shall have fifteen (15) days to agree upon the qualifications of the arbitrators (the "Qualifications") commencing on the day on which notice is given by the party initiating the arbitration. Upon the expiration of the fifteen day period and regardless of an agreement being reached as to the Qualifications, either or both of the parties shall apply to any court having jurisdiction over the parties or their assets in accordance with Section 3(e) to appoint the three arbitrators. The court shall appoint the arbitrators within 30 days after such request (on the basis of the Qualifications if agreed but otherwise in its discretion) and shall notify the parties of the appointment. (c) Award Binding. The arbitral award shall state the reasons for the award, and the relief granted shall be final and binding on the parties to the arbitration. Any award rendered may be confirmed; judgment upon any award rendered may be entered; such award or the judgment thereon may be enforced; and any interim or supplemental relief may be sought in any court having jurisdiction over the parties or their assets in accordance with Section 3(e) hereof. Any monetary award shall be payable in U.S. dollars, free of any tax or any other deduction, other than taxes in the nature of income taxes imposed by the country, province or political subdivision in which the recipient is organized or is otherwise subject to such taxes. Such award shall bear interest from the date of the award at a variable rate equal to the rate publicly announced from time to time by Wells Fargo Bank, N.A. at its principal office in San Francisco, California as its "prime rate". (d) Discovery. The parties shall make available to the arbitrators all information requested by them in accordance with the applicable rules of arbitration, including production of all relevant records and documents. All notices and other communications required to be delivered pursuant to the applicable rules of arbitration shall be delivered to the address specified in this Agreement. (e) Certain Disputes. In the event that the parties disagree as to whether any issue or issues are to be submitted to arbitration under the terms of this Agreement or either party asserts that the other is refusing to arbitrate either overtly or by delay, the parties agree that any such action, lawsuit or proceeding over such dispute or assertion shall be brought in accordance within the provisions of Section 3(e) hereof. (f) Attorneys' Fees. If any party hereto must institute arbitration to collect any payments due hereunder, the party liable therefor shall reimburse the other party for reasonable attorneys' fees and other costs incurred in connection with such arbitration. IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year indicated above. VACU-DRY COMPANY By: /s/ Gary L. Hess ------------------------------------- Its: President ------------------------------------- By: /s/ Tom Eakin ------------------------------------- Its: VP Finance ------------------------------------- GLOBAL WALK, INC. By: /s/ Nobuyoshi Takanashi ------------------------------------- Its: President ------------------------------------- By: ------------------------------------- Its: ------------------------------------- EX-10.7 4 ASSET PURCHASE AGREEMENT ASSET PURCHASE AGREEMENT between VACU-DRY COMPANY, MIN ACQUISITION CORP., MADE IN NATURE, INC. and GERALD E. PROLMAN June 11, 1998 TABLE OF CONTENTS Page ARTICLE 1 PURCHASE AND SALE OF ASSETS........................................1 1.1 Transferred Assets.....................................................1 1.2 Retained Assets........................................................2 1.3 Title..................................................................3 ARTICLE 2 PURCHASE PRICE.....................................................3 2.1 Purchase Price.........................................................3 2.2 Cash Purchase Price....................................................3 2.3 Limited Assumption of Liabilities......................................3 2.4 Common Stock Purchase Warrants.........................................4 2.5 Liabilities Not Assumed................................................4 2.6 Allocation of Purchase Price...........................................5 2.7 Transfer Taxes.........................................................5 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE SELLER.......................5 3.1 Organization; Books and Records........................................5 3.2 Qualifications, etc....................................................5 3.3 Non-Contravention......................................................6 3.4 Regulatory Approvals...................................................6 3.5 Capitalization of the Seller...........................................6 3.6 Subsidiaries and Equity Interests; Transactions with Affiliates........7 3.7 Financial Statements...................................................7 3.8 Absence of Certain Changes or Events...................................7 3.9 Assets Other than Real Property Interests..............................8 3.10 Real Property Owned and Leased........................................8 3.11 Patents, Trademarks, etc..............................................9 3.12 Insurance............................................................10 3.13 Commitments..........................................................10 3.14 Legal Proceedings....................................................12 3.15 Taxes................................................................13 3.16 Compliance with Laws.................................................14 3.17 Environment..........................................................14 3.18 Employee Benefit Plans: Termination and Severance Agreements.........16 3.19 Employee and Labor Matters...........................................18 3.20 Capital Expenditures.................................................19 3.21 Powers of Attorney...................................................19 3.22 Customer Accounts Receivable; Inventories............................19 3.23 No Material Misstatement or Omission.................................20 3.24 No Undisclosed Material Liabilities..................................20 3.25 Authorization........................................................20 3.26 Title to Assets......................................................21 3.27 Condition of Assets..................................................21 3.28 Investment Representations..........................................22 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER...................23 4.1 Corporate Organization................................................23 4.2 Authorization.........................................................23 4.3 Brokers...............................................................23 4.4 Litigation............................................................23 4.5 Conflicts With Other Agreements.......................................23 4.6 Consents..............................................................24 ARTICLE 5 SELLER'S AND PURCHASER'S OBLIGATIONS PRIOR TO THE CLOSING.........24 5.1 Conduct of Business...................................................24 5.2 Breach of Representations and Warranties..............................25 5.3 Exclusive Dealing.....................................................25 5.4 Access................................................................25 5.5 Violations of Law.....................................................26 5.6 Public Announcements..................................................26 ARTICLE 6 CONDITIONS PRECEDENT TO CLOSING BY THE PURCHASER..................26 6.1 Accuracy of Representations and Warranties............................26 6.2 Performance Agreements................................................26 6.3 Authorization.........................................................27 6.4 No Material Adverse Change............................................27 6.5 Restructuring of Debt.................................................27 6.6 Bill of Sale..........................................................27 6.7 Employment Agreement..................................................27 6.8 Pledge and Security Agreement.........................................27 6.9 Opinion of Counsel....................................................27 6.10 Third Party Consents and Governmental Authorizations.................28 6.11 Compliance with Bulk Sales Law.......................................28 6.12 Release of Lien......................................................28 6.13 Certificates; Assignments............................................28 6.14 Other Matters........................................................28 ARTICLE 7 CONDITIONS PRECEDENT TO CLOSING BY THE SELLER.....................28 7.1 Accuracy of Representations and Warranties............................29 7.2 Performance of Agreements.............................................29 7.3 Employment Agreement..................................................29 7.4 Opinion of Counsel....................................................29 7.5 Authorization.........................................................29 7.6 Other Matters.........................................................29 ARTICLE 8 FURTHER ASSURANCES................................................30 8.1 Execution of Other Instruments........................................30 8.2 Assignment of Contracts...............................................30 8.3 Power of Attorney.....................................................30 ARTICLE 9 EMPLOYEE RELATIONS AND BENEFITS...................................31 9.1 Offer of Employment...................................................31 9.2 Benefits..............................................................31 ARTICLE 10 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION......31 10.1 Survival of Representations and Warranties...........................31 10.2 Obligation of the Seller to Indemnify................................32 10.3 Obligation of the Purchaser to Indemnify.............................32 10.4 Procedure for Indemnification........................................33 10.5 Other Rights.........................................................33 ARTICLE 11 TERMINATION......................................................33 ARTICLE 12 CLOSING..........................................................34 12.1 Closing Date.........................................................34 12.2 Possession...........................................................34 ARTICLE 13 REMEDIES.........................................................34 13.1 Remedies.............................................................34 ARTICLE 14 COVENANTS OF THE SELLER AND THE PURCHASER AFTER THE CLOSING......35 14.1 Payment of Obligations...............................................35 14.2 Non-Competition......................................................35 14.3 Change of Name.......................................................35 14.4 Payment by the Purchaser of Current Liabilities......................36 14.5 Uniform Tax Treatment................................................36 ARTICLE 15 RIGHT OF SET-OFF.................................................36 15.1 Right of Set-Off.....................................................36 ARTICLE 16 EXPENSES OF THE PARTIES..........................................36 16.1 Expenses of the Parties..............................................36 ARTICLE 17 NOTICES..........................................................37 17.1 Notices..............................................................37 ARTICLE 18 DISPUTE RESOLUTION...............................................38 18.1 Mandatory Arbitration................................................38 18.2 Provisional Remedies and Self Help...................................38 ARTICLE 19 MISCELLANEOUS....................................................39 19.1 Entire Agreement; Waivers............................................39 19.2 Attorneys Fees.......................................................39 19.3 Governing Law........................................................39 19.4 Successors and Assigns...............................................39 19.5 Captions.............................................................39 19.6 Counterparts.........................................................39 19.7 Severability.........................................................39 SIGNATURE PAGE...............................................................40 LIST OF SCHEDULES AND EXHIBITS...............................................41 ASSET PURCHASE AGREEMENT THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made as of June 11, 1998 by and between Vacu-dry Company, a California corporation ("Parent"), MIN Acquisition Corp., a California corporation (the "Purchaser"); Made In Nature, Inc., a California corporation (the "Seller"); and Gerald E. Prolman ("Shareholder"). R E C I T A L S: WHEREAS, Seller is engaged in the business of developing and marketing of organic foods and beverages; and WHEREAS, Seller desires to sell, and the Purchaser, a wholly-owned subsidiary of Parent, desires to buy, on the terms and conditions set forth in this Agreement, certain of Seller's assets as set forth herein; and WHEREAS, Seller desires to assign, and the Purchaser is willing to assume, on the terms and conditions set forth in this Agreement, certain of the liabilities of the Seller as set forth herein; and WHEREAS, Parent is a party to this Agreement for the purpose of certain covenants; and WHEREAS, Shareholder is a party to this Agreement for the purpose of making certain representations, warranties and covenants. 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, the Seller agrees to sell, assign, transfer, convey and deliver to the Purchaser free and clear of all liabilities and encumbrances except as hereinafter set forth, and the Purchaser agrees to purchase from the Seller on the Closing Date (as defined in Section 12.1) those certain assets, properties, and business of Seller described below (all of which are sometimes collectively referred to as the "Transferred Assets"), including, without limitation, all assets and property of Seller reflected on its balance sheet as of April 17, 1998 (the Balance Sheet") referred to in Section 3.7, and all assets and property thereafter acquired by Seller before the Closing Date and not disposed of in the ordinary course of business consistent with prior practice, including without limitation to, the following: (a) All cash on hand and in bank as of the Closing Date; (b) All tangible personal property and assets (except as hereinafter expressly provided otherwise), including, but not limited to, the inventory, accounts receivable and other assets set forth on Schedule 1.1(b) hereto; (c) All United States and foreign patents, registered and common law trademarks and service marks, tradenames, copyrights, logos, slogans, and permissions for the use of copyrighted materials owned by others owned by the Seller (and all licenses with respect thereto), including but not limited to, those which are listed on Schedule 1.1(c) hereto; (d) All of Seller's claims and rights against third parties relating to the Transferred Assets including, without limitation, insurance claims, rights under vendors' warranties, rights of recovery, set-offs and credits; (e) All contracts, including without limitation, manufacturing, licensing, distribution, purchase or sale orders, leases and other executory agreements, whether oral or written, of the Seller related to or useful in the Seller's business, including but not limited to, those which are listed on Schedule 1.1(e) hereto; (f) All customer lists, supplier lists, mailing lists, advertising promotional materials, catalogs, price and product lists, sales record and files, papers, software, correspondence and computerized reports; (g) All trade secrets, know-how, procedures, software files, market surveys and marketing know-how; (h) All accounts receivable, prepayments, deferred expenses, notes receivable, rights to advances and deposits; (i) Seller's goodwill; (j) All of the insurance policies set forth in Schedule 1.2(e) hereto to the extent such policies relate to liabilities assumed by Purchaser pursuant to this Agreement; and (k) All other tangible and intangible assets. 1.2 Retained Assets. Notwithstanding anything to the contrary herein, the Seller shall retain and not sell, assign, transfer, convey or deliver to the Purchaser any of the following (hereinafter referred to as the "Retained Assets"): (a) Seller's corporate books and records containing the minutes of meetings of directors and stockholders; (b) All federal, state, county and local income, excise, franchise, property and other tax returns, reports and declarations of the Seller; (c) All tax refunds due and owing to the Seller in respect of all periods up to the Closing Date other than tax refunds reflected on the Effective Date Balance Sheet; (d) All amounts due or to become due under any insurance policies covering the Seller or any of its business, properties or assets other than pertaining to damage or loss to the Transferred Assets or pertaining to a liability being assumed by the Purchaser hereunder; and (e) All of the insurance policies set forth in Schedule 1.2(e) hereto other than those policies covering liabilities assumed by Purchaser pursuant to this Agreement. 1.3 Title. Title and risk of loss to the Transferred Assets shall pass to the Purchaser at the Closing and the Transferred Assets shall be deemed delivered to the Purchaser at their respective locations. ARTICLE 2 PURCHASE PRICE 2.1 Purchase Price. The purchase price to be paid by Purchaser to Seller for the Transferred Assets shall consist of (i) cash as set forth in Section 2.2 below, (ii) the assumption of certain liabilities as provided in Section 2.3 below, and (iii) the issuance and delivery of Parent's Common Stock Warrant as set forth in Section 2.4 below. 2.2 Cash Purchase Price. At the Closing, the Purchaser shall deliver to Seller's designated account or accounts by wire transfer in immediately available funds Three Hundred Thirty-six Thousand Dollars ($336,000.00) 2.3 Limited Assumption of Liabilities. At the Closing, the Purchaser shall assume only the following obligations and liabilities of the Seller and no others (the "Assumed Liabilities"): (a) The liabilities of the Seller reflected on Schedule 2.3(a)hereto that are outstanding on the Closing Date; (b) The obligations and liabilities of the Seller under the contracts and agreements listed on Schedule 1.1(e). 2.4 Common Stock Warrant. At the Closing and subject to the provisions of Article 6, the Purchaser shall deliver to Seller Parent's Common Stock Warrant (the "Warrants") in the form of Exhibit A hereto entitling Seller to purchase 100,000 shares of Parent's common stock ("Parent's Common Stock"). 2.5 Liabilities Not Assumed. (a) Notwithstanding the foregoing, neither the Purchaser nor any Affiliate (as defined below) assumes any obligation or liability resulting from or arising out of the existence of which constitutes (i) any breach by the Seller of its obligations under any contract or agreement referred to in Schedule 1.1(e), or (ii) any breach of any representation, warranty or agreement of the Seller contained in this Agreement. As used in this Agreement, an "Affiliate" shall mean with respect to any person (A) a person directly or indirectly controlling, controlled by or under control with such person; (B) a person owning or controlling 10% or more of the outstanding voting securities of such person; or (C) an officer, director or partner of such person. When the Affiliate is an officer, director or partner of such person, any other person for which the Affiliate acts in that capacity shall also be considered an Affiliate. For these purposes, control means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether by the ownership of voting securities, by contract or otherwise. (b) Neither the Purchaser nor any Affiliate undertakes any liability of the Seller not expressly assumed including, without limitation, liability with respect to environmental claims and suits; liability for the payment of the Seller's outstanding loans and credit lines except as provided in this Agreement; any liability for making payments of any kind (including, as a result of the transactions contemplated hereby, for the termination of employment by the Seller of employees, or as a result of union contracts, if any, grievances, or other labor claims, or otherwise) to employees of the Seller; liability for pensions or other benefits to employees of the Seller; liability for making payments of any kind as a result of the termination of any agency; liability for making payments of any kind pursuant to any agreements, arrangements or understandings with employees or other 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 transfer, income, franchise or similar taxes, sales and use taxes or fees resulting from this agreement or the transactions contemplated hereby; for any fees or expenses incurred by the Seller in connection with the transaction contemplated by the Agreement, including but not limited to those referred to in Article 16; and any obligations, charges or liabilities of the Seller, the existence of which constitute a breach of any representation, warranty or agreement of the Seller contained in this Agreement. 2.6 Allocation of Purchase Price. The Purchase Price of the Transferred Assets shall be allocated as set forth in Exhibit B hereto. 2.7 Transfer Taxes. The Seller shall pay all income, franchise, or any similar tax resulting from the transfer of the Transferred Assets or the transactions contemplated hereby except any liability being (for so long as being) contested in good faith. The Purchaser shall be responsible for all sales, use and transfer tax resulting from the transfer of the Transferred Assets, provided, however, that the Purchaser shall not be responsible for any business, occupation, withholding, or similar tax, or any taxes of any kind related to any period before the Closing Date except as disclosed in Schedule 2.3(c) and incurred in the ordinary course of business between the Effective Date and the Closing Date. The Seller agrees to furnish at the Closing any resale certificate or other documents reasonably requested by the Purchaser to comply with the provisions of the sales and use tax laws of the State of California. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE SELLER The Seller and the Shareholder hereby jointly and severally represent and warrant to Purchaser as follows: 3.1 Organization; Books and Records. The 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 to own, lease and operate its properties in the places where it maintains offices and where its properties are owned, leased or operated. Copies of the Articles of Incorporation and Bylaws, corporate minute books, stock certificate books and stock transfer books of the Seller have heretofore been delivered to Purchaser and are true, correct and complete as of the date hereof. 3.2 Qualifications, etc. Schedule 3.2 attached hereto sets forth (a) each jurisdiction in which the Seller is duly qualified to do business and in good standing, and (b) each jurisdiction in which the Seller is duly licensed, authorized or registered to conduct such business or businesses as are conducted by it and the type of business or businesses for which it is so licensed, authorized or registered. Each such qualification, license, authorization and registration (collectively, "Qualification") is validly issued and is in full force and effect and neither the character of the properties owned or held under lease or license by the Seller nor the nature of the business conducted by the Seller requires any additional Qualification in any such jurisdiction or any Qualification in any other jurisdiction, except any such jurisdiction wherein the failure to be so qualified, licensed, authorized or registered would not result in a material adverse change in the business or financial condition of the Seller ("Material Adverse Change"). No approval, consent or notification in connection with any Qualification is necessary in connection with the transactions contemplated by this Agreement to prevent the termination or withdrawal of any such Qualification as a result of such transactions. 3.3 Non-Contravention. Except as set forth in Schedule 3.3 attached hereto, the execution, delivery and performance of this Agreement by Sellers 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 the Seller or any covenant, agreement or understanding to which the Seller is a party or any order, ruling, decree, judgment, arbitration award, law, rule, regulation or stipulation to which the Seller is subject or constitute a default thereunder or result in the creation of any lien, charge or encumbrance upon any of the properties or assets of the Seller. 3.4 Regulatory Approvals. Except as set forth in Schedule 3.4 attached hereto, the Seller is not required to file, seek or obtain any governmental 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 Sellers or in order to prevent termination of any material right, privilege, license or agreement of the Seller. 3.5 Capitalization of the Seller. The Seller's authorized capital stock consists of 2,000,000 shares of Preferred Stock of which no shares are issued and outstanding (the "Preferred Stock") and 15,000,000 shares of common stock, without par value, of which 1,000 shares are issued and outstanding (the "Common Stock"). The Preferred Stock and the Common Stock are referred to as the "Capital Stock". All the issued and outstanding shares of Capital Stock are duly authorized, validly issued, fully paid and nonassessable, and the issued and outstanding shares of Capital Stock are held of record by the respective shareholders and in the amounts as set forth in Schedule 3.5 hereto. Except as set forth in Schedule 3.5 hereto, there are no outstanding options, warrants or other rights to purchase, obtain or acquire, or any outstanding securities or obligations convertible into or exchangeable for, or any voting agreements with respect to, any shares of capital stock of the Seller or any other securities of the Seller and the Seller is not obligated, now or in the future, continently or otherwise, to issue, purchase or redeem capital stock of the Seller or any other securities of the Seller to or from any person. 3.6 Subsidiaries and Equity Interests; Transactions with Affiliates. (a) Except as set forth in Schedule 3.6, the Seller owns no capital stock of or other equity interest in, or has any obligation to form or participate in, any corporation, partnership or other person, or is a member of or participant in any partnership, joint venture or similar person. (b) Except as set forth in Schedule 3.6, there is no lease, sublease, indebtedness, contract, agreement, commitment, understanding, or other arrangement of any kind entered into by the Seller with respect to the Seller with any officer, director, or shareholder of the Seller or any "affiliate" or "associate" of any of them (as those terms are defined in the Securities Exchange Act of 1934, as amended), except, in each case, for management fees and other compensation paid to officers consistent with previously established policies (including normal merit increases in such compensation in the ordinary course of business), reimbursements of ordinary and necessary expenses incurred in connection with their employment, and amounts paid pursuant to existing employee benefit plans listed on Schedule 3.18. 3.7 Financial Statements. The Seller has heretofore furnished to Purchaser unaudited financial statements for the Seller consisting of (a) balance sheets at April 17, 1998 and for years ended December 31, 1997, 1996 and 1995 and (b) statements of income, retained earnings and cash flows for the period ended ___________1998 and for fiscal years ended December 31, 1997 and 1996 (the foregoing consolidated financial statements, reports and notes thereto are hereinafter collectively referred to as the "Financial Statements"). The Financial Statements present fairly the financial position of the Seller at the dates thereof and the results of operations and cash flows of the Seller for the periods then ended. Except as and to the extent reflected or reserved against in the unaudited consolidated balance sheet of the Seller at April 17, 1998 (the "Balance Sheet") or otherwise set forth on Schedule 3.7 attached hereto, the Seller had no material liability or obligation (whether absolute or contingent, or accrued or unaccrued) required to be disclosed in the Financial Statements, or in the notes thereto. The books of account and financial records of the Seller have been prepared and are maintained in accordance with good accounting practice. 3.8 Absence of Certain Changes or Events. Except as set forth in Schedule 3.8 attached hereto, since April 17, 1998 there has not been, with respect to the Seller or its businesses or properties: (a) any Material Adverse Change; (b) any material obligations or liabilities incurred, except trade and other obligations or liabilities in usual amounts and on terms consistent with past practices incurred by the Seller in the ordinary course of business; (c) any indebtedness for borrowed money incurred by the Seller, except indebtedness under existing facilities incurred in the ordinary course of business; (d) any destruction, damage by fire, accident or other casualty or act of God of or to any of the material properties or assets of the Seller, whether or not covered by insurance; or (e) any action that, if taken after the date hereof, would constitute a breach of any of the covenants set forth in Section 5.1 of this Agreement. 3.9 Assets Other than Real Property Interests. (a) The Seller has good and valid title to the Transferred Assets free and clear of all mortgages, liens, security interests, pledges, encumbrances, charges, agreements, claims, restrictions and defects of title of any kind except (i) as are set forth in Schedule 3.9, (ii) mechanics, carriers', workmen's, repairmen's or other like liens arising or incurred in the ordinary course of business and liens for Taxes (as defined in Section 3.15) which are not due and payable or being contested in good faith by appropriate proceedings, or (iii) other imperfections of title or encumbrances, if any, which mortgages, liens, security interests and encumbrances do not, individually or in the aggregate, materially impair the continued use and operation of the assets to which they relate in the business of the Seller as presently conducted. (b) All the tangible personal property of the Seller has been maintained in all material respects in accordance with the past practice of the Seller and generally accepted industry practice. Each item of tangible personal property of the Seller is in all material respects in good operating condition and repair, ordinary wear and tear excepted. All leased personal property of the Seller is in all material respects in the condition required of such property by the terms of the lease applicable thereto during the term of the lease and upon the expiration thereof. (c) There are no developments affecting such property or assets pending, or to the knowledge of the Seller, threatened, which might materially detract from the value, materially interfere with any present or intended use, or materially adversely affect the marketability of any such property or assets. This Section 3.9 does not relate to real property or interests in real property, such items being the subject of Section 3.10 below. 3.10 Real Property Owned and Leased. Schedule 3.10 attached hereto contains a complete and accurate list and full description of all real property (including without limitation plants, warehouses, interests in real property, distribution centers, structures and other buildings) owned or leased by the Seller (the "Real Property"). The Seller has good and valid title to the leasehold estates in all real property and interests in real property leased by it, in each case, free and clear of all mortgages, liens, security interests, pledges, leases, subleases, encumbrances, charges, assignments, easements, claims or other restrictions and defects of title, except (i) as are set forth in Schedule 3.10, (ii) liens for Taxes not yet due and payable or being contested in good faith by appropriate proceedings, and (iii) which do not impair the current or intended use or diminish the value of the property affected to any material extent. All plants, warehouses, interests in real property, distribution centers, structures and other buildings of the Seller are currently used in the operation of the business of the Seller and are adequately maintained and are in good operating condition and repair for the requirements of the business as presently conducted by the Seller. 3.11 Patents, Trademarks, etc. (a) Schedule 3.11 attached hereto sets forth a complete and accurate listing of all United States and foreign patents, trademarks, trade names, service marks and copyrights (collectively, the "Intellectual Property") owned, licensed, used or held for use in the conduct of the businesses of the Seller, whether registered or unregistered, and any applications or registrations therefor. Except as set forth in Schedule 3.11, the Seller solely owns and has the exclusive right to use, free and clear of any payments or encumbrances which in the aggregate are material to the conduct of the business of the Seller, all such Intellectual Property. Except as set forth in Schedule 3.11, there is no claim or demand of any person pertaining to, or any proceedings which are pending or, to the knowledge of the Seller, threatened, which challenge the exclusive rights of the Seller in respect of any Intellectual Property whether registered or unregistered. Except as set forth in Schedule 3.11, no Intellectual Property is subject to any agreement restricting the use thereof or any outstanding order, ruling, decree, judgment or stipulation by or with any court, arbitrator or administrative agency, and none of the Intellectual Property infringes the intellectual property rights of others or, to the knowledge of the Seller, is being infringed by others or is used by others (whether or not such use constitutes infringement). There are no agreements or licenses between the Seller and any other person or entity which may have been terminated or expired prior to the date hereof and under which the Seller has granted rights or licenses in the Intellectual Property to such other persons or entities or granted an option to acquire such rights or licenses, which rights or licenses or the option to acquire the same survived such termination or expiration. Except as set forth in Schedule 3.11, no person or entity has any licenses under any of the Intellectual Property. Notwithstanding the foregoing, the Seller makes no representation or warranty as to the registrability or enforceability of any Intellectual Property for which registration has not been sought or for which registration has not been granted, or which is not presently being used by the Seller in conducting its business. Moreover, the Seller makes no representation or warranty with regard to the use of the Intellectual Property with goods and services not presently provided by or not presently proposed to be provided by the Seller in its business as it is now conducted. (b) The Seller owns and has the unlimited right to use, execute, reproduce, display, perform, modify, enhance, distribute, prepare derivative works of or sublicense any of the Business know-how (as defined below) possessed by Seller or its affiliates relating to goods and services presently provided by or presently proposed to be provided by the Seller. The Seller has not granted any licenses or otherwise disclosed nor has it agreed to disclose any of its Business know-how except as set forth in Schedule 3.11. As used in this paragraph, "Business know-how" shall mean all trade secrets and confidential business and technical information, including ideas, skills, methods, experience, research and development, know-how, formulas, manuscripts, artwork, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, engineering notebooks, industrial models, software and specifications. 3.12 Insurance. Schedule 3.12 attached hereto sets forth a complete and accurate list of all casualty, directors and officers liability, general liability (including product liability) and all other types of insurance maintained by the Seller, together with the carriers and liability limits for each such policy. Each policy is duly in force, and no notice has been received by the Seller from any insurance carrier purporting to cancel or reduce coverage under any such policy. The Seller is current in all premiums or other payments due thereunder. Schedule 3.12 identifies which insurance policies are "occurrence" or "claims made." All insurance coverage held for the benefit of the Seller is in such amounts, with such deductibles and against such risks and losses as are reasonable for the business and assets of the Seller. The activities and operations of the Seller have been conducted in a manner so as to conform in all material respects to all applicable provisions of such insurance policies. 3.13 Commitments. (a) Except as set forth in Schedule 3.13, the Seller is not a party to or bound by any: (i) employment agreement or employment contract; (ii) employee collective bargaining agreement or other contract with any labor union; (iii) covenant of the Seller not to compete or other covenant of the Seller restricting the development, manufacture, marketing or distribution of the products and services of the Seller; (iv) agreement, contract or other arrangement with (A) Seller or any affiliate of Seller or (B) any current or former officer, director, employee or independent contractor of the Seller (other than employment agreements covered by clause (i) above); (v) lease, sublease or similar agreement with any person under which the Seller is a lessor or sublessor of, or makes available for use to any person (other than the Seller), (A) any Real Property or (B) any portion of any premises otherwise occupied by the Seller; (vi) lease or similar agreement with any other person underwhich (A) the Seller is lessee of, or holds or uses, any machinery, equipment, vehicle or other tangible personal property owned by any person or (B) the Seller is a lessor or sublessor of, or makes available for use by any person, any tangible personal property owned or leased by the Seller, in any such case which has an aggregate future liability or receivable, as the case may be, in excess of $5,000; (vii) (A) continuing agreement or contract for the future purchase of materials, supplies or equipment (other than purchase contracts and orders for inventory in the ordinary course of business consistent with past practice; provided that any such contract or order, when taken together with all other purchase contracts and orders for inventory relating to the ordered item, would not require the Seller to acquire a quantity of such item that could not reasonably be expected to be used in the ordinary course of business of the Seller within six months after the date of execution or entry of purchase contract or order for inventory) or (B) service, consulting, management or other similar type of agreement or contract, in either such case which has an aggregate future liability in excess of $5,000; (viii) continuing agreement or contract for the distribution of any products manufactured by the Seller, including by franchise arrangement; (ix) continuing agreement or contract for the purchase of any products manufactured by parties other than the Seller; (x) continuing agreement or contract for products manufactured by the Seller on behalf of parties other than the Seller; (xi) agreement, contract or arrangement for the placement of advertising or other promotional activities which has an aggregate future liability in excess of $25,000; (xii) except as set forth in Schedule 3.11, any material license, option or other agreement relating in whole or in part to the Intellectual Property set forth in Schedule 3.11 (including any license or other agreement under which the Seller is licensee or licensor of any such Intellectual Property) or to trade secrets, confidential information or proprietary rights and processes of the Seller or any other person; (xiii) agreement, contract or other instrument under which the Seller has borrowed any money from, or issued any note, bond, debenture or other evidence of indebtedness to, any person or any other note, bond, debenture or other evidence of indebtedness issued to any person; (xiv) agreement, contract or other instrument (including so-called take-or-pay or keepwell agreements) under which (A) any person has directly or indirectly guaranteed indebtedness, liabilities or obligations of the Seller or (B) the Seller has directly or indirectly guaranteed indebtedness, liabilities or obligations of any person (in each case other than endorsements for the purpose of collection in the ordinary course of business); (xv) agreement, contract or other instrument under which the Seller has, directly or indirectly, made any advance, loan, extension of credit or capital contribution to, or other investment in, any person; (xvi) mortgage, pledge, security agreement, deed of trust or other instrument granting a lien or other encumbrance upon any Real Property, which lien or other encumbrance is not set forth in Schedule 3.10; (xvii) agreement, contract or instrument providing for indemnification of any person with respect to liabilities relating to any current or former business of the Seller, or any predecessor person; or (xviii) other agreement, contract, lease, license, commitment or instrument to which the Seller is a party or by or to which it or any of its assets or business is bound or subject which has an aggregate future liability to any person in excess of $5,000. (b) Except as set forth in Schedule 3.13, all agreements, contracts, leases, licenses, commitments or instruments of the Seller listed in the Schedules hereto (collectively, the "Contracts") are valid and binding, in full force and effect and are enforceable by the Seller in accordance with their respective terms, other than such failures to be so valid and binding, in full force and effect or enforceable which would not, either individually or in the aggregate, result in a Material Adverse Change. Except as set forth in Schedule 3.13, the Seller has performed all material obligations required to be performed by it to date under the Contracts and it is not (with or without the lapse of time or the giving of notice, or both) in breach or default in any material respect thereunder. The Seller has provided to Purchaser a true and correct copy of each of the Contracts. 3.14 Legal Proceedings. Except as set forth in Schedule 3.14, the Seller is not engaged in or a party to, or, to the knowledge of the Seller, threatened with, any suit, investigation, legal action or other proceeding before any court, administrative agency, arbitration panel or other similar authority which (a) involves (individually, or in the aggregate for cases arising out of the same or substantially similar facts or circumstances) the possibility of liability of the Seller (whether or not covered by insurance), (b) seeks injunctive relief or (c) relates to the transactions contemplated by this Agreement, and the Seller knows of no basis for any such suit, investigation, legal action or proceeding. There are no outstanding orders, rulings, decrees, judgments or stipulations by or with any court, administrative agency, arbitration panel or other similar authority which are applicable to the properties, assets, operations or business of the Seller or which challenge or otherwise relate to the transactions contemplated by this Agreement. Except as set forth in Schedule 3.14, there is no lawsuit or claim by the Seller pending, or which the Seller intends to initiate, against any other person. 3.15 Taxes. Except as set forth in Schedule 3.15, all federal, state and local and all foreign tax Returns (as defined below), required to be filed by or with respect to the Seller and any predecessor corporations in respect of Taxes (as defined below) have been filed with the appropriate tax authorities and each such Return is true, accurate and complete. The Seller has delivered to Purchaser correct and complete copies of all material Returns of the Seller that have been filed for taxable periods ending within the past five years. Except as and to the extent reflected or reserved against in the Balance Sheet or as described in the notes thereto, as of the date hereof, the Seller had no liability for Taxes. All Taxes for periods after the date of the Balance Sheet that should be reserved on the books of the Seller in accordance with the Seller's past practice have been so reserved, and all estimated tax payments required to be made have been made. Except as set forth in Schedule 3.15, there have been no audits or examinations by any taxing authority relating to Taxes of the Seller during the past six years, no taxing authority has given notice that it will commence any such audit or examination and no taxing authority is asserting (either orally or in writing) or, to the knowledge of the Seller, threatening to assert any deficiency or claim relating to Taxes of the Seller, and no liens for Taxes have been filed and are currently outstanding with respect to any of the assets or properties of the Seller. There is no agreement or waiver currently in effect extending the period for assessment or collection of any Taxes. The Seller is not a party to any agreement which would require it to make any payment which would constitute a "parachute payment" for purposes of Section 280G of the United States Internal Revenue Code of 1986, as amended (the "Code"). The Seller has complied with all information reporting and backup withholding requirements, including maintenance of required records with respect thereto, in connection with amounts paid to any employee, independent contractor, creditor, or other third party. None of the assets of the Seller are treated as "tax exempt use property" within the meaning of Section 168(h) of the Code. The Seller is not, nor has it ever been, a party to a tax sharing, tax indemnity or tax allocation agreement, and the Seller has not assumed the tax liability of any other person under contract. The Seller is not, nor has it ever been, a member of an affiliated group filing a consolidated federal income tax Return, and the Seller has no any liability for the Taxes of any individual or entity under section 1.1502-6 of the Treasury regulations (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise. As used herein, (A) "Taxes" shall mean all federal, state, county, local, municipal, foreign and other taxes, assessments, duties or similar charges of any kind whatsoever, including all corporate franchise, income, sales, use, ad valorem, receipts, value added, profits, license, withholding, payroll, employment, excise, premium, property, customs, net worth, capital gains, transfer, stamp, documentary, social security, payroll, environmental, alternative minimum, occupation, recapture and other taxes, and including any interest, penalties and additions imposed with respect to such amounts, and (B) "Return" or "Returns" shall mean all returns, declarations of estimated tax payments, reports, estimates, information returns and statements, including any related or supporting information with respect to any of the foregoing, filed or to be filed with the United States or any state, county, local, foreign or other governmental authority or subdivision or agency thereof in connection with the determination, assessment, collection or administration of any Taxes. 3.16 Compliance with Laws. Except as set forth in Schedule 3.16 attached hereto (a) the Seller has complied, and is now in compliance, with all federal, state, local and foreign laws, ordinances and regulations (including, without limitation, those relating to employment and employment practices, and occupational safety and health) applicable to the Seller, except where noncompliance would not have a material adverse effect; (b) no claims or complaints from any governmental authorities or other parties have been asserted or received by the Seller which are still pending or outstanding and, to the knowledge of the Seller, none is threatened, that the Seller is in material violation of any applicable building, zoning, occupational safety and health, or similar law, ordinance or regulation in relation to its plants, warehouses, distribution centers, structures or other buildings or equipment, or the operation thereof, or of any applicable fair employment, equal opportunity or similar law, ordinance or regulation; and (c) the Seller has not received notice from any governmental authorities of any pending proceedings to take all or any part of the properties of the Seller (whether leased or owned) by condemnation or right of eminent domain and, to the knowledge of the Seller, no such proceedings are threatened. Schedule 3.16 sets forth all governmental permits, licenses and authorizations necessary or desirable for the operation or occupancy of the properties and the conduct of the business of the Seller as presently conducted. All such licenses, permits and authorizations are validly held by the Seller, the Seller has complied in all material respects with all terms and conditions thereof and the same will not be subject to suspension, modification, revocation or nonrenewal as a result of the execution and delivery of this Agreement or the consummation of the transactions contemplated thereby. All such licenses, permits and authorizations which are held in the name of any employee, officer, director, stockholder, agent or otherwise on behalf of the Seller shall be deemed included under this warranty. 3.17 Environment. Except as set forth in Schedule 3.17 attached hereto, (a) no Hazardous Material (as defined below) is located on, at, in, under or about any real property, including any buildings, structures, fixtures, improvements, interests, privileges, easements and appurtenances related thereto, owned, leased or operated by the Seller ("Premises") in a manner which violates any Environmental Requirement (as defined below), or for which clean-up or corrective action of any kind could be required or is otherwise authorized under any Environmental Requirement; (b) no risk to human health or the environment exists as a result of any Hazardous Material previously or currently located on, at, in, under or about the Premises; (c) no releasing, emitting, discharging, leaching, dumping, disposing of any Hazardous Material from the Premises onto or into any other property or from any other property onto or into the Premises has occurred or is occurring in violation of any Environmental Requirement, or for which clean-up or corrective action of any kind could be required or is otherwise authorized under any Environmental Requirement, or which could pose a risk to human health or the environment; (d) no notice of violation, lien, complaint, suit, order or other notice with respect to the environmental condition of the Premises or regarding the disposal or release of Hazardous Materials from the Premises onto any other property is outstanding, threatened or otherwise anticipated, nor has any such notice been issued which has not been fully satisfied and complied with in a timely manner so as to bring the Premises into full compliance with every Environmental Requirement; (e) the Seller does not currently own or operate, nor in the past has owned or operated, any property that is on the "National Priorities List" or the CERCLA list of the U.S. Environmental Protection Agency ("EPA"), or any similar state list, or is the subject of any federal, state or local investigation evaluating whether any remedial action is needed to respond to a release of any Hazardous Material into the environment; (f) the Seller or any of its predecessors has filed or otherwise provided any notice under any federal, state or local law indicating past or present treatment, storage or disposal of a Hazardous Material into the environment; (g) the Seller has no contingent liability in connection with the generation, treatment, storage, disposal or any release of any Hazardous Material into the environment; (h) none of the operations of the Seller involves or has ever involved the treatment, storage or disposal of a Hazardous Material; (i) neither the Seller, nor any lessee, prior owner or other person, has disposed of or arranged for the disposal of any Hazardous Material on any premises which are currently or have in the past been owned, leased or operated by the Seller; (j) the Seller has not disposed of, or arranged for the disposal of, any Hazardous Material on any premises not owned by the Seller that is on EPA's National Priorities List or the CERCLA list or any similar state list, or which is or reasonably could be the subject of any clean-up action by a federal or state agency, or by a third party who could seek reimbursement of clean-up expenses from the Seller under federal or state law; (k) no underground storage tanks or surface impoundments are on any Premises; (l) no information exists indicating that any person (including past or present employees) may have his health impaired as a result of exposure to any Hazardous Materials located on, at, in, under or about the Premises; and (m) the Seller and all third parties, with respect to any conduct of such parties that might result in liability to the Seller, are currently and have at all times in the past been in full compliance with all applicable Environmental Requirements. For the purpose hereof, the following terms shall have the following meanings: (A) The term "Hazardous Materials" means any material, substance or constituent, including any PCBs, pollutants, solid wastes, explosive or regulated radioactive materials or substances, hazardous or toxic materials, substances, wastes or chemicals, petroleum (including crude oil or any fraction thereof) or petroleum distillates, asbestos or asbestos containing materials, materials listed in 49 C.F.R. Section 172.101 and materials defined as hazardous substances pursuant to Section 101(14) of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C. ss.ss. 9601 et seq.), as amended ("CERCLA"), that, whether by its nature or its use, is subject to regulation under, or forms the basis for liability under, any Environmental Requirement. (B) The term "Environmental Requirement" means current or future obligations, duties or requirements arising out of or related to any laws, ordinances, statutes, codes, rules, regulations, orders, judicial decisions, judgments, decrees, governmental restrictions, directives, policies, guidelines, permits or licenses addressing environmental, health or safety issues or requirements of or by any federal, state or local government agency, including but not limited to, CERCLA, the Hazardous Materials Transportation Act (49 U.S.C. ss.ss. 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. ss.ss. 6901 et seq.), the Toxic Substances Control Act (15 U.S.C. Sss. 2601 et she.) the Clean Air Act (42 U.S.C. ss.ss. 7401 et seq.), the Federal Water Pollution Control Act (32 U.S.C. ss.ss. 1251 et seq.) and the Safe Drinking Water Act (32 U.S.C. ss.ss. 300f et seq.), in each care as may be amended from time to time, any regulation pursuant to any of the above laws, and including, but not limited to, any obligations, duties or requirements arising out of or related to Hazardous Materials under common law or foreign law. 3.18 Employee Benefit Plans: Termination and Severance Agreements. (a) (i) Schedule 3.18 attached hereto sets forth a complete and accurate list of each pension, retirement, savings, profit sharing, deferred compensation, medical, dental or health plan, or life insurance plan, bonus, incentive and special compensation or other plan or other employee benefit plan, program, contract, arrangement, agreement or understanding (hereinafter referred to individually as a "Plan" and collectively as the "Plans") to which the Seller is required to contribute, or which the Seller sponsors or which is otherwise applicable to employees or retirees or categories of employees or retirees of the Seller generally; (ii) Schedule 3.18 correctly identifies each Plan that is an "employee benefit plan" ("ERISA Plan") as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") and categorizes each ERISA Plan as an "employee welfare benefit plan" ("ERISA Welfare Plan") as defined in Section 3(1) of ERISA or an "employee pension benefit plan" ("ERISA Pension Plan") as defined in Section 3(2) of ERISA; (iii) except as otherwise described in Schedule 3.18, no "prohibited transaction" within the meaning of Section 406 of BRISA or Section 4975 of the Code has occurred with respect to any Plan sponsored or administered by the Seller; (iv) all ERISA Plans sponsored or administered by the Seller comply currently, and have complied in the past in form and in operation, with the provisions of ERISA, the Code, the rules and regulations promulgated under these statutes, all other applicable federal, state or local laws and with their respective plans of benefits and trust agreements; (a) there are no actions, suits or claims pending (other than routine claims for benefits) or any actions, suits or claims (other than routine claims For benefits) which could reasonably be expected to be asserted, against any Plan or the assets or fiduciaries of any Plan sponsored or maintained by the Seller or any ERISA Plan established or maintained by (A) a corporation which is a member of a controlled group of corporations with the Seller within the meaning of Section 414(b) of the Code, (B) a trade or business (including a sole proprietorship which is under common control with the Seller within the meaning of Section 414(c) (C) a member of an affiliated service group with the Seller within the meaning of Section 414(m) of the Code, or (D) an entity or arrangement described in Section 414(o) of the Code (each entity described in (A), (B), (C)) and (D) is referred to as an "ERISA Affiliate"), which would have a material adverse effect on the Seller or any of its or their assets; (vi) no civil or criminal action under Title I, Subtitle B. Part 5 of ERISA is pending or threatened against any fiduciary of any Plan sponsored or maintained by the Seller; (vii) no Plan nor any fiduciary of a Plan sponsored or maintained by the Seller has been the direct or indirect subject of an audit, investigation or examination by any governmental or quasi-governmental agency; (viii) each ERISA Pension Plan and its respective trust sponsored or maintained by the Seller which is intended to be a qualified plan and an exempt trust under the Code and any applicable regulations has received a current determination letter from the IRS indicating that such plan and trust are so qualified and exempt, in form, under the Code, and nothing has occurred since the date of such determination letter that would affect adversely such qualification or exemption and the IRS has not taken any action to revoke any favorable determination with respect to the qualified status of each such ERISA Pension Plan; (ix) neither the Seller nor any ERISA Affiliate has maintained or contributed to (or had an obligation to maintain or contribute to) any ERISA Pension Plan that is a "defined benefit pension plan" within the meaning of Section 3(35) of ERISA, and with respect to which the Seller has no liability, whether direct or indirect, current or contingent; (x) neither the Seller nor any ERISA Affiliate has participated in, made contributions to, or has had an obligation to contribute to, a "multiemployer plan" within the meaning of Section 3(37) or 4001 of ERISA; (xi) Schedule 3.18 lists and categorizes every ERISA Pension Plan terminated by the Seller within the six years immediately before the date of this agreement and each such ERISA Pension Plan so listed and categorized was terminated in compliance with the Internal Revenue Code of 1954 as amended (if applicable), the Code (if applicable), and ERISA, (xii) except for ERISA Pension Plans listed and categorized in Schedule 3.18 as having been merged, no ERISA Pension Plan of the Seller or any ERISA Affiliate has been merged during the six years immediately before the date of this Agreement; (xiii) each ERISA Pension Plan listed and categorized in Schedule 3.18 was merged in compliance with the Internal Revenue Code of 1954, as amended (if applicable), the Code (if applicable) and ERISA; (xiv) every ERISA Welfare Plan of the Seller or any ERISA Affiliate that is a "group health plan" within the meaning of Section 4980B(g)(2) of the Code has been administered in accordance with Title I, Subtitle B. Part 6 of ERISA and has met the requirements of Section 4980B of the Code; and (xv) apart from benefits from ERISA Pension Plans, benefits described under Section 4980B of the Code and health benefits provided to retirees under ERISA Welfare Plans listed and categorized in Schedule 3.18 as plans providing retiree health benefits, the Seller has no any obligation to provide benefits under any Plan except to its active employees. (b) Schedule 3.18 also accurately lists each employment, termination and severance agreement, contract, arrangement and understanding (whether written or oral) with employees of the Seller. Except as set forth in Schedule 3.18, the Seller is not a party to any employment, termination or severance agreement, contract, arrangement or understanding with any employee or former employee of the Seller that is not terminable by its terms at will by the applicable employer without cost or penalty. Except as set forth in Schedule 3.18, the Closing will not result in any obligation to pay any employee of the Seller severance pay or termination benefits so long as such employee remains employed by the Seller or Purchaser after the Closing. (c) The Seller has heretofore delivered to Purchaser correct and complete copies of each of the following: (i) All written, and descriptions of all oral, employment, termination and severance agreements,contracts, arrangements and understandings listed in Schedule 3.18. (ii) Each Plan and all amendments thereto; the trust instrument and/or insurance contracts, if any, forming a part of such Plan and all amendments thereto; and the resolutions and agreements, if any, by which the Seller adopted such Plan. (iii) The most recent IRS Form 5500 and all schedules thereto, if any. (iv) The most recent determination letter issued by the IRS regarding the qualified status of each such Plan that it is an ERISA Pension Plan. (v) The most recent accountant's report, if any. (vi) The most recent summary plan description, if any. (vii) The bond required by Section 412 of ERISA, if any. 3.19 Employee and Labor Matters. (a) Except as set forth in Schedule 3.19 attached hereto, the Seller is not a party to any collective bargaining agreement or other contract with or commitment to any labor union or association representing any employee of the Seller, nor does any labor union or collective bargaining agent represent any employees of the Seller. No such agreement, contract or other commitment has been requested by, or is under discussion by management of the Seller (or any management group or association of which the Seller is a member or otherwise a participant) with, any group of employees or others, nor are there any other current activities known to the Seller to organize any employees of the Seller into a collective bargaining unit. There are no pending, or to the knowledge of the Seller, threatened, union grievances against the Seller as to which there is a reasonable possibility of a material adverse determination. The Seller is not engaged in any unfair labor practice. There is no unfair labor practice complaint pending or, to the knowledge of the Seller, threatened against the Seller. Except as disclosed in Schedule 3.19, there is, and during the past two years there has been, no labor strike, dispute, slow-down or work stoppage pending, or, to the knowledge of the Seller, threatened against the Seller. Except as set forth in Schedule 3.19, there are no pending, or, to the knowledge of the Seller, threatened, charges against the Seller, or any current or former employee, officer or director of the Seller before the Equal Employment Opportunity Commission or any state or local agency responsible for the prevention of unlawful employment practices. (b) All employees working in the United States hired by the Seller on or after November 7, 1986 are authorized for employment by the Seller in the United States in accordance with the Immigration and Naturalization Act, as amended, and regulations promulgated under that statute. No allegations of immigration-related unfair employment practices have been made with the Equal Employment Opportunity Commission or the Special Counsel for Immigration-Related Unfair Employment Practices. The Seller has completed and retained in accordance with the Immigration and Naturalization Service regulations a Form I-9 for all employees working in the United States hired on or after November 7, 1986, except those employees whose employment terminated on or before June 1, 1987. None of the employees currently employed by the Seller is authorized for employment in the United States pursuant to a nonimmigrant visa which authorizes the employee to be employed by the Seller. (c) Schedule 3.19 sets forth a complete list of all the Seller's officers, directors and employees together with the monthly salary of each. 3.20 Capital Expenditures. The aggregate contractual commitments of the Seller for new capital expenditures shall not exceed $2,500 on the Closing Date. 3.21 Powers of Attorney. Schedule 3.21 attached hereto contains a complete and accurate list of all outstanding powers of attorney or similar authorizations given by the Seller. 3.22 Customer Accounts Receivable; Inventories. (a) All customer accounts receivable of the Seller, whether reflected on the Balance Sheet or subsequently created, have arisen from bona fide transactions in the ordinary course of business and are good and collectible upon the terms agreed upon at delivery of the goods and at the aggregate recorded amounts thereof, net of any applicable reserves or allowances for doubtful accounts which are reflected on the Balance Sheet or accrued after the date of the Balance Sheet in the ordinary course of business consistent with past practice. Except as set forth in Schedule 3.22, the Seller has good and marketable title to its accounts receivable, free and clear of all liens. During the two year period prior to the date hereof, the Seller has not sold, pledged or otherwise disposed of any of its accounts receivable in connection with any receivable-type financing or factoring-type financing or similar transaction. (b) The inventories of the Seller, whether reflected on the Balance Sheet or subsequently acquired and except for any reserves for obsolete inventory which are reflected on the Balance Sheet or accrued after the date of the Balance Sheet in the ordinary course of business consistent with past practice, are not obsolete and are of a quality and quantity usable and/or salable at customary gross margins in the ordinary course of business. The inventories of the Seller are reflected on the Balance Sheet and in its books and records applied on a basis consistent with past practice (except as described in the notes to the Balance Sheet). Except as set forth in Schedule 3.22, the Seller has good and valid title to its inventories, free and clear of all liens. (c) Schedule 3.23 accurately identifies all consigned inventory of the Seller and the consignee thereof. To the knowledge of the Seller, each consignee maintains adequate insurance coverage against losses with respect to the consigned inventory of the Seller. 3.23 No Material Misstatement or Omission. No representation or warranty of the Seller in this Asset Purchase Agreement nor any information contained in any Schedule, certificate or other writing delivered pursuant to this Agreement or at the Closing, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary to make the statements contained herein or therein not misleading. There is no fact relating to the Seller which the Seller has not disclosed to Purchaser in writing which has resulted in, or would reasonably be expected to result in, a Material Adverse Change. 3.24 No Undisclosed Material Liabilities. There are no liabilities of the Seller of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, and there is no existing condition, situation or set of circumstances which could reasonably be expected to result in such liability, other than: (a) liabilities provided for in the Balance Sheet or disclosed in the notes thereto; (b) liabilities disclosed on Schedule 3.24 attached hereto; and (c) other undisclosed liabilities which, individually or in the aggregate, are not material to the Seller. 3.25 Authorization. The execution and delivery by the Seller of this Agreement, the Bill of Sale (defined in Section 6.6), and the Pledge and Security Agreement (defined in Section 6.8) (the Bill of Sale and the Pledge and Security Agreement are hereinafter sometimes collectively referred to as the "Related Agreements"), and the consummation of the transaction contemplated hereby and thereby, will, on the Closing Date, have been, duly and validly authorized by all necessary corporate action on the Seller's part, and this Agreement and the Related Agreements and all other such instruments and agreements delivered or to be delivered by the Seller and the Shareholder in connection herewith will be, on the closing Date, the valid and binding obligations of the Seller and the Shareholder, enforceable against it or him in accordance with their respective terms. 3.26 Title to Assets. Except as set forth in Schedule 3.9, Seller has good and marketable title to all the Transferred Assets. All these assets are free and clear of restrictions on or conditions to transfer or assignment, and free and clear of mortgages, liens, pledges, charges, encumbrances, equities, claims, covenants, conditions, or restrictions, except for (i) the disclosures contained in the Schedules hereto; and (ii) possible minor matters that, in the aggregate, are not substantial in amount and do not materially detract from or interfere with the present or intended use of any of these assets or materially impair business operations. The Seller is not in default or in arrears in any material respect under any lease. 3.27 Condition of Assets. The Transferred Assets have been properly maintained and are in good operating condition and there exists no outstanding notice of any violation of any statute or regulation relating to the Transferred Assets. Except with respect to the Retained Assets, the Transferred Assets include all assets and properties and all rights reasonably necessary to permit the Purchaser to carry on the Seller's business as presently conducted by the Seller. 3.28 Investment Representations. (a) Purchaser and Parent have given Seller and Shareholder the opportunity to have answered all of Seller's and Shareholder's questions concerning Parent and its business and has made available to Seller and Shareholder all information requested by Seller and Shareholder which is reasonably necessary to verify the accuracy of other information furnished by Purchaser and Parent. Seller and Shareholder have received and evaluated all information about Parent and its business which Seller and Shareholder deem necessary to formulate an investment decision and do not desire any further information. Seller and Shareholder understand that no federal or state agency has passed on or made any recommendation or endorsement of the Warrants or the shares of Parent's Common Stock issuable upon exercise or exchange. Seller and Shareholder have the knowledge and experience in financial and business matters to evaluate the merits and risks of the proposed investment. (b) Seller and Shareholder understand that the Warrants are being offered and sold to it in reliance on specific exemptions from or non-application of the registration requirements of federal and state securities laws and that the Company is relying upon the truth and accuracy of the representations, warranties, agreements, acknowledgments, and understandings of Seller and Shareholder set forth herein in order to determine the applicability of such exemptions or non-applications and the suitability of Seller and Shareholder to acquire the Warrants. (c) Seller and Shareholder are aware that the Warrants have not been registered under the Securities Act by reason of their issuance in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act pursuant to Section 4(2) and Regulation D thereof, and that they must be held by Seller and Shareholder for an indeterminate period and Seller and Shareholder must therefore bear the economic risk of such investment indefinitely, unless a subsequent disposition thereof is registered under the Securities Act or is exempt from registration. (d) Each instrument representing the Warrants may be endorsed with the following legends: (i) THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT. (ii) Any other legend required by California or other state securities laws. (e) The Company need not register a transfer of legended Warrants and may instruct its transfer agent not to register the transfer of the Warrants, unless one of the conditions specified in the foregoing legends is satisfied. (f) Any legend endorsed on an instrument pursuant to Section 3.28(f) hereof and the stop transfer instructions with respect to such Warrants shall be removed, and the Company shall issue an instrument without such legend to the holder of such Warrants if such Warrants are registered under the Securities Act and a prospectus meeting the requirements of Section 10 of the Securities Act is available or if such holder provides the Company with an opinion of counsel for such holder of the Warrants, reasonably satisfactory to the Company, to the effect that a sale, transfer or assignment of such Warrants may be made without registration. (g) Seller and Shareholder is acquiring the Warrants for Seller and Shareholder's own account, for investment, and without any present intention to engage in a distribution thereof, except that Parent understands that Seller intends to wind up and dissolve and distribute the Warrants to its shareholders each of whom will execute, as a condition to the transfer of the Warrants, an investment representation in substantially the form of this Section 3.28. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser represents and warrants to the Seller as follows: 4.1 Corporate Organization. The Purchaser 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 consummate the transactions contemplated hereby. 4.2 Authorization. The execution and delivery by the Purchaser of this Agreement and each of the other instruments and agreements of the Purchaser 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 the Purchaser and this Agreement, and any other instruments and agreements delivered to or to be delivered in connection herewith are or will be the valid and binding obligations of the Purchaser enforceable against it in accordance with their respective terms. 4.3 Brokers. No agent, broker, person or firm acting on behalf of the Purchaser or under its authority is or will be entitled to a financial advisory fee, brokerage commission, finder's fee or like payment in connection with any of the transactions contemplated hereby. 4.4 Litigation. There are no suits, actions, or administrative, arbitration or other proceedings or governmental investigations pending or, to the knowledge of the Purchaser, threatened against the Purchaser with respect to any of the transactions contemplated hereby. 4.5 Conflicts With Other Agreements. The execution and delivery by the Purchaser of this Agreement and each of the Related Agreements to which the Purchaser is a party and the performance by the Purchaser of its respective obligations hereunder or thereunder will not, or with the giving of notice or the lapse of time or both, would not (a) conflict with or result in a breach of or constitute a default under any provision of the Articles of Incorporation or By-laws of the Purchaser or any contract, indenture, lease, sublease, loan agreement, restriction, lien, encumbrance or other obligation or liability to which the Purchaser is a party or by which it is affected or bound or result in or create in any party the right to accelerate, terminate, modify or cancel any contract, license, indenture, lease, sublease or loan agreement to which the Purchaser is a party or by which it is affected or bound; or (b) violate any order, writ, injunction, decree, law, statute, rule or regulation applicable to the Purchaser. 4.6 Consents. No consent, approval or agreement of any person, party, court, government or entity is required to be obtained by the Purchaser in connection with the execution and delivery of this Agreement or the Related Agreements, or the consummation of the transactions contemplated hereby and thereby. ARTICLE 5 SELLER'S AND PURCHASER'S OBLIGATIONS PRIOR TO THE CLOSING The Seller covenants and agrees with the Purchaser and the Purchaser covenants and agrees with the Seller, as follows: 5.1 Conduct of Business. From the date hereof until the Closing Date, except as the Purchaser may otherwise consent in writing, the Seller shall conduct the Seller's business only in the ordinary and usual course, and use all reasonable efforts to preserve intact the Seller's business organization and good will, including, without limitation, the following: (a) using all reasonable efforts to retain the services of its management and employees; (b) using all reasonable efforts to maintain its relationships with its suppliers and others having business relationships with it; (c) paying when due all taxes, assessments, fees or charges applicable to it except if being diligently contested in good faith by appropriate proceedings; (d) not purchasing, selling or disposing of any of the Transferred Assets other than in the ordinary course of business or mortgaging, pledging, subjecting of a lien or security interest or otherwise encumbering any of the Transferred Assets; (e) not incurring any indebtedness or liability, contingent or otherwise, other than in the ordinary course of business consistent with past practice; (f) except as may be required under any employment or other agreements currently in effect, all of which are listed on Schedule 3.18, not changing the compensation payable or to become payable to any of its officers, employees or agents or entering into any new employment contract with respect to the Seller's business unless it is terminable at will and without penalty; (g) not modifying or terminating any contract or agreement listed on Schedule 1.1(e) or entering into any other contract or agreement or modifying or terminating any such contract or agreement, other than in the ordinary course of business; and (h) maintaining at all times the insurance listed on Schedule 1.2(e) hereto, or equivalent insurance with substitute insurers reasonably satisfactory to the Purchaser. 5.2 Breach of Representations and Warranties. From the date hereof until the Closing Date, promptly upon either party becoming aware of the occurrence of, or the impending or threatened occurrence of, any event which would cause or constitute a breach, or would have caused or constituted a breach had such event occurred or been known to such party prior to the date hereof, of any of the representations and warranties of such party contained in this Agreement or in any schedule attached hereto, such party shall give the other party notice thereof in reasonable detail and such party shall use its best efforts to prevent or promptly remedy the same. 5.3 Exclusive Dealing. From the date hereof until the Closing Date, the Seller shall not, directly or indirectly, encourage or initiate discussions or negotiations with, or provide any information to or cooperate with, or participate in any discussions or negotiations relating to any offers by, any corporation, partnership, person, or other entity or group, other than the Purchaser, concerning the purchase of all or substantially all of the assets of, or similar transaction involving, the Seller's business or the sale of all or substantially all of the capital stock of the Seller, or any merger or other business combination of the Seller with any such other entity or group. 5.4 Access. Purchaser or Affiliates and its employees, agents, attorneys, accountants and other representatives have been given full access to the Seller's properties, assets, facilities, and books and records and have been furnished with such additional information with respect to the business and properties of the Sellers business or the Seller as the Purchaser or such representative has requested. The Seller shall provide to the Purchaser such additional information with respect to the Transferred Assets between the date hereof and the Closing Date as the Purchaser or its representatives may reasonably request. The Purchaser and Parent 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 Seller or the Seller's business, except that the Purchaser may disclose such information (i) to employees, representatives, attorneys or accountants in order to complete the Purchaser's due diligence investigation, (ii) if such information is in the public domain, or comes into the public domain through no fault of the Purchaser or its representatives, or (iii) if such information is required to be disclosed by the Purchaser in order to comply with law, but only upon prior notice to the Seller. In the event of termination of this Agreement, the Purchaser, Parent and their representatives shall return to the 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 the Purchaser, Parent or their representatives based thereon. 5.5 Violations of Law. If, prior to the Closing Date, the Seller receives an administrative or other order relating to any violation of any law, rule or regulation of any federal, state, local or other regulatory or administrative body, including rules regarding the employment of labor and equal employment opportunity, the Seller may elect to remove or correct all such violations and to be responsible for the costs of removing or correcting the same, including the payment of any fines or back pay that may be assessed for any such violation. 5.6 Public Announcements. 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 without the prior approval of the other parties hereto, which approval shall not be unreasonably withheld. ARTICLE 6 CONDITIONS PRECEDENT TO CLOSING BY THE PURCHASER The obligation of the Purchaser to purchase the Transferred Assets and to consummate the transactions contemplated hereby, is subject to the fulfillment and satisfaction by the Seller or waiver in writing by the Purchaser prior to or at the Closing Date of each of the following conditions: 6.1 Accuracy of Representations and Warranties. The representations and warranties of the 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 the Purchaser shall have received a certificate, executed by the President and the Secretary of the Seller, dated the closing Date, to such effect. 6.2 Performance Agreements. Each and all of the agreements of the 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 the Purchaser shall have received a certificate, executed by the President and the Secretary of the Seller, dated the Closing Date, to such effect. 6.3 Authorization. All corporate and shareholder action necessary to authorize the execution, delivery and performance by the Seller of this Agreement and the transactions contemplated hereby shall have been duly and validly taken. 6.4 No Material Adverse Change. There shall not have occurred any Material Adverse Change taken as a whole since the date of this Agreement. 6.5 Restructuring of Debt. Effective upon the Closing under the Asset Purchase Agreement, the Seller shall have restructured its long and short term obligations, including but not limited to those obligations to Dole Food Company, Inc. and Global Walk, Inc. (Takanashi)) on terms and conditions acceptable to the Purchaser in its sole discretion. 6.6 Bill of Sale. The Seller shall have executed and delivered to the Purchaser a bill of sale conveying to the Purchaser all of the tangible and intangible personal assets to be acquired by the Purchaser, substantially in the form attached hereto as Exhibit C (the "Bill of Sale"). 6.7 Employment Agreement. The Shareholder shall have executed and delivered to the Purchaser an Employment Agreement, substantially in the form attached hereto as Exhibit D (the "Employment Agreement"). 6.8 Pledge and Security Agreement. The Seller shall have executed and delivered to the Purchaser a Pledge and Security Agreement, substantially in the form attached hereto as Exhibit E (the "Pledge and Security Agreement"). 6.9 Opinion of Counsel. The Purchaser shall have received opinions from Morrison & Foerster LLP, counsel to the Seller dated the Closing Date, substantially in the form attached hereto as Exhibit F. 6.10 Third Party Consents and Governmental Authorizations. All consents and approvals of third parties required to permit the Seller to consummate the transactions contemplated hereby, shall have been obtained by the Seller. 6.11 Compliance with Bulk Sales Law. The parties shall have complied with all requirements of the California Bulk Sales Law (Commercial Code ss.ss.6000 et seq.). 6.12 Release of Lien. Any lien upon the Transferred Assets, including but not limited to the liens securing the Seller's obligations under its existing credit agreements, shall have been released. 6.13 Certificates; Assignments. (a) The Purchaser shall have received from the Seller certificates, (i) as of the most recent practicable date, as to the legal existence of the Seller issued by the Secretary of State of the State of California and the tax status of the Seller issued by the California Franchise Tax Board and (ii) dated the Closing Date by the Secretary of the Seller, as to the incumbency and signatures of those officers of the Seller authorized to execute this Agreement and the Related Agreements and resolutions of the Board of Directors and Shareholders of the Seller authorizing this Agreement and the transactions contemplated hereby. (b) The Purchaser shall have received written certificates of assignment, notarized and otherwise in form and content acceptable to the Purchaser, confirming the assignment to the Purchaser of the copyrights and trademarks which are included within the Transferred Assets. 6.14 Other Matters. All proceedings to be taken in connection with the transactions contemplated by this Agreement and all documents incident thereto shall be reasonably satisfactory in form and substance to the Purchaser and its counsel, and the Purchaser shall have received copies of all such documents and other evidences as it or its counsel may reasonably request. ARTICLE 7 CONDITIONS PRECEDENT TO CLOSING BY THE SELLER The obligation of the Seller to sell the Transferred Assets and to consummate the transactions contemplated hereby, is subject to the fulfillment and satisfaction by the Purchaser or waiver in writing by the Seller 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 the Purchaser 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 the Seller shall have received a certificate, executed by an Executive Officer of the Purchaser, dated the Closing Date to such effect. 7.2 Performance of Agreements. Each and all of the agreements of the Purchaser to be performed on or before the Closing Date pursuant to the terms hereof shall have been duly performed in all material respects, and the Seller shall have received a certificate, executed by an Executive Officer of the Purchaser, dated the Closing Date, to such effect. 7.3 Employment Agreement. The Purchaser shall have executed and delivered to the Shareholder the Employment Agreement. 7.4 Opinion of Counsel. The Seller shall have received an opinion from Severson & Werson, a Professional Corporation, counsel to the Purchaser, dated the Closing Date, addressed to the Seller, substantially in the form attached hereto as Exhibit G. 7.5 Authorization. All corporate and shareholder action necessary to authorize the execution, delivery and performance by the Purchaser 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 the Purchaser, dated the Closing Date, to such effect. 7.6 Other Matters. All proceedings to be taken in connection with the transactions by this Agreement and all documents incident thereto shall be reasonably satisfactory in form and substance to the Seller and its counsel, and the Seller shall have received copies of all such documents and other evidences as it or its counsel may reasonably request. ARTICLE 8 FURTHER ASSURANCES 8.1 Execution of Other Instruments. From time to time after the Closing, at the Purchaser's request and without further consideration or additional cost to Seller, the Seller will execute and deliver such other and further instruments of conveyance, assignment, transfer and consent, and take such other action, as the Purchaser may reasonably request for the more effective conveyance and transfer of ownership of the Transferred Assets. 8.2 Assignment of Contracts. Notwithstanding anything in this agreement to the contrary, if the Closing occurs, no properties, assets or rights, including without limitation, any contract, lease, license or commitment, shall be transferred or assigned hereby if any attempt to transfer or make an assignment thereof without the consent of a third party would constitute a breach thereof or in any way adversely affect the rights of the Purchaser thereunder and the consent of such third party has not been obtained, or if any attempt to transfer or make an assignment would be ineffective or would affect any of the Seller's rights thereunder so that the Purchaser would not in fact receive the same. The Seller, at its reasonable expense, will use its best efforts and take any and all action the Purchaser deems reasonably necessary to make any non-assignable property assignable or otherwise to provide the Purchaser with the benefits thereof. Notwithstanding such efforts, the Seller covenants and agrees that in any such case where a consent has not been obtained or a transfer would be ineffective or affect the Seller's rights, the Seller will, at the Purchaser's option, hold the same in trust for the Purchaser in all respects subject to the Purchaser's direction and control and will transfer and assign the same to the Purchaser or the Purchaser's designee only on demand by the Purchaser. 8.3 Power of Attorney. The Seller hereby appoints the Purchaser, effective upon the Closing, its agent and attorney to receive, collect, enforce and sue for any and all the Transferred Assets and to endorse any check or other instrument payable to the Seller or to the order of the Seller received in payment therefor, either in the name of the Purchaser or in the name of the Seller in connection with the Transferred Assets, all as the Seller's agent and attorney thereunto duly authorized, but, in any event, for the use and benefit of the Purchaser, the powers set forth herein being irrevocable and powers given for security. The foregoing powers are coupled with an interest and are and shall be irrevocable whether by the Seller or by reason of the Seller's dissolution or in any manner or for any reason whatsoever. Subsequent to the Closing, Seller will not use any of the Transferred Assets for its own use or benefit or that of anyone else or make any effort to receive, collect, enforce or sue for any of the Transferred Assets at any time after the Closing, other than for the benefit of the Purchaser. If any proceeds of any of the Transferred Assets or any payments thereon are for any reason received by the Seller subsequent to the Closing, the Seller will remit the same to the Purchaser immediately and in the form in which received together with all necessary assignments and endorsements. ARTICLE 9 EMPLOYEE RELATIONS AND BENEFITS 9.1 Offer of Employment. Purchaser will offer employment, commencing on the Closing Date, at such salary levels as are in effect on the Closing Date, to all salaried and hourly employees who are employed by Seller on the last business day preceding the Closing Date except as set forth on Schedule 9.1 hereto. Those employees to whom offers of employment are made shall be collectively referred to as the "Transferred Employees". 9.2 Benefits. From and after the Closing, the Purchaser shall offer each Transferred Employee the same benefits as from time to time are made available to the Purchaser's United States employees generally, subject to the Purchaser's right at any time or from time to time to alter the terms of or terminate the provision of such benefits in whole or in part. 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 for those claims that do not involve third parties of which the survival period shall be six (6) months; provided, however, that all such representations and warranties shall survive after the applicable survival period with respect to any claim made by Purchaser or Affiliates 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 liability of Shareholder is limited to the value of the collateral pledged pursuant to the Pledge and Security Agreement defined in Section 6.8. 10.2 Obligation of the Seller to Indemnify. The Seller will indemnify and hold the Purchaser and Affiliates harmless from and against any liability, loss, cost, damage or expense sustained by the Purchaser or an Affiliate 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: (a) any misrepresentation, breach of warranty or non-fulfillment of any agreement on the part of the 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 the Purchaser hereunder or thereunder; (b) liabilities of the Seller not specifically assumed by the Purchaser, including, without limiting the foregoing, any claim for payment of any kind from an employee of the Seller made as a result of or in connection with the transactions contemplated herein; (c) any bodily injury or property damage or other damages resulting from the production, sale or use of products of the Seller shipped by or on behalf of the Seller prior to the Closing Date or that are not covered by the Seller's insurance; and (d) 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 the Purchaser to Indemnify. The Purchaser will indemnify and hold the Seller and the Shareholder harmless from and against any liability, loss, cost, damage or expense sustained by the Seller based upon, arising out of, or resulting from any of the following: (a) any misrepresentation, breach of warranty or non-fulfillment of any agreement on the part of the Purchaser 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 the Seller specifically assumed by the Purchaser in connection with the transactions contemplated herein; (c) any bodily injury or property damage or other damages resulting from the production, sale or use of products of the Seller included as part of, or produced from inventory forming a portion of, the Transferred Assets shipped by or on behalf of the Purchaser on or after the Closing Date; and (d) any and all actions, suits, proceedings, claims, demands, assessments, judgments, costs and expenses, including attorneys' fees, incident to any of the foregoing. 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 the Seller and the Purchaser; (b) by the Purchaser if any of the conditions set forth in Article 6 hereof shall have become impossible of fulfillment and shall not have been waived by the Purchaser; (c) by the Seller if any of the conditions set forth in Article 7 hereof shall have become impossible of fulfillment and shall not have been waived by the Seller; (d) by either the Seller or the Purchaser if any action, suit or proceeding before any court or other governmental body or agency shall have been instituted to restrain, modify or prohibit the transactions contemplated hereby, unless contested in good faith or unless the party against whom the action, suit or proceeding is commenced agrees to indemnify the other party against all liability arising therefrom, and the other party agrees to accept such indemnification; and (e) by either the Purchaser or the Seller if the transactions contemplated hereby are not consummated on or before June 30, 1998 for any reason other than the failure of the party seeking termination to fulfill the conditions set forth in Article 6 hereof, if the Seller, or Article 7 hereof, if the Purchaser. 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 6 and 7 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 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 June 11, 1998 (the "Anticipated Closing Date") or at such other time and place as shall be mutually agreed upon by the Purchaser and the Seller. Provided such party is not in default of any of its obligations pursuant to this Agreement, either party upon notice to the other party given in the manner provided for herein may extend the closing for a period or for periods up to and including June 30, 1998. 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". 12.2 Possession. Simultaneously with the consummation of the transfer, Seller, through its officers, agents, and employees, will put Purchaser into full possession and enjoyment of all properties and assets to be conveyed and transferred by this Agreement. ARTICLE 13 REMEDIES 13.1 Remedies. The Seller agrees that the Transferred Assets are unique and that the Purchaser 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 the Seller to perform its obligations under this Agreement. Therefore, the Seller hereby acknowledges that, in the event that the Purchaser shall institute any action to enforce the provisions of this Agreement, the Purchaser will not have an adequate remedy at law and that injunctive or other equitable relief will not constitute any hardship upon the Seller. ARTICLE 14 COVENANTS OF THE SELLER AND THE PURCHASER AFTER THE CLOSING The Seller covenants and agrees with the Purchaser and the Purchaser covenants and agrees with the Seller provided the Closing occurs hereunder: 14.1 Payment of Obligations. On the Closing Date and thereafter, as promptly after becoming due as practicable, the Seller will pay and discharge all debts, liabilities and obligations not expressly assumed hereby by the Purchaser except any liability being (for so long as being) contested in good faith. 14.2 Non-Competition. For a period ending five (5) years after the Closing Date, the Seller will 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 competes in, or is connected with, the business of developing and marketing of organic foods and beverages, (ii) induce or attempt to induce any customer of the Purchaser or the Seller's business to reduce such customer's purchases of products from the Purchaser or the Seller's business, (iii) 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 persons, natural or corporate, or (iv) solicit any employee or sales representative of the Purchaser or the Seller's business to leave the employ of the Purchaser. The obligations of the Seller under this Section 14.2 shall extend to those countries of the world, states of the United States and those counties in the State of California set forth in Exhibit H hereto (the "Territory"). After the Closing Date, the Seller shall refer to the Purchaser all inquiries which it may receive, whether from customers or otherwise, relating to Seller's business and shall forward to the Purchaser any written orders which it may receive for Seller's products. For a period ending three (3) years after the Closing Date, the Shareholder shall be bound by the non-competition provisions of that that certain Employment Agreement defined in Section 6.7, which provisions are herein incorporated by reference. 14.3 Change of Name. The Seller agrees that on or before the Closing Date it will take such action and sign, seal, acknowledge, deliver, file and record such instruments as shall be necessary to change its name to a name not including the words "Made In Nature" or any variation or derivative thereof or any name confusingly similar thereto. 14.4 Payment by the Purchaser of Current Liabilities. Within ninety (90) days after becoming due, the Purchaser shall satisfy in full all of the Assumed Liabilities of the Seller assumed by it hereunder except any liability being (for so long as being) contested in good faith. 14.5 Uniform Tax Treatment. The parties agree that the allocation of consideration set forth herein shall be used by them for all federal and state income tax purposes, including, but not limited to, reporting pursuant to Section 1060 of the Internal Revenue Code of 1986, as amended. In preparing and filing IRS Form 8594 ("Asset Acquisition Statement Under Section 1060"), the parties shall report that the allocation of consideration set forth herein and the fair market value of the assets to which such consideration is allocated is the same. Prior to filing Form 8594 with respect to the transactions described herein, the parties shall provide to each other a true and correct copy of the Form 8594 which each intends to file with respect to these transactions. ARTICLE 15 RIGHT OF SET-OFF 15.1 Right of Set-Off. Subject to the limitations on Seller's liability as set forth in Section 10.2 above, with respect to any amounts that may be due to any party from any other party hereunder or otherwise, such party shall have the right to set-off such amounts against and to apply them to any amount otherwise payable by such party to the other party pursuant to this Agreement or otherwise. The right of set-off provided for in this Section shall be in addition to any other rights or remedies that may be otherwise available to such party and the exercise of such right of set-off shall not operate as a waiver of any such other rights. ARTICLE 16 EXPENSES OF THE PARTIES 16.1 Expenses of the Parties. Each party will pay its respective expenses incurred in connection with the negotiation, execution and performance of this Agreement, and in the case of the Seller, such expenses shall be paid out of the proceeds of the Purchase Price paid hereunder. ARTICLE 17 NOTICES 17.1 Notices. Any notice to any party hereto given pursuant to this Agreement shall be in writing addressed as follows: if to the Seller and Shareholder: Made In Nature, Inc. 4340 Redwood Highway San Rafael, California 94903 Attn: Gerald E. Prolman, President Telephone: (415) 499-3309 Telecopier: (415) 499-3347 with a copy to: Morrison & Foerster LLP 425 Market Street San Francisco, California 94105 Attn: John W. Campbell, III, Esq. Telephone: (415) 268-7000 Telecopier: (415) 268-7522 if to the Purchaser and Parent: Vacu-dry Company 7765 Healdsburg Avenue Sebastopol, California 95437 Attn: Gary L. Hess, President Telephone: (707) 829-4600 Telecopier: (707) 829-4610 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 and answerback are transmitted, (ii) if delivered personally, when received, or (iii) if mailed by registered or certified mail, postage prepaid, return receipt requested, when received. ARTICLE 18 DISPUTE RESOLUTION 18.1 Mandatory Arbitration. Any controversy or claim between or among the parties, their agents, employees and affiliates, including but not limited to those 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 18.1. 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 the Purchaser and the 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 the Purchaser and the 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. 18.2 Provisional Remedies and Self Help. No provision of, or the exercise of any rights under, Section 18.1 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. ARTICLE 19 MISCELLANEOUS 19.1 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. 19.2 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. 19.3 Governing Law. This Agreement is made and shall be construed in accordance with the laws of the State of California. 19.4 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. 19.5 Captions. Captions are supplied herein for convenience only and shall not be deemed a part of this Agreement for any purpose. 19.6 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original for all purposes. 19.7 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 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. Seller: MADE IN NATURE, INC. By: /S/ Gerald E. Prolman ---------------------------------- Gerald E. Prolman, President Attest: /s/ Demetrios Koston - ------------------------------- - ------------------------, Secretary Shareholder: GERALD E. PROLMAN /s/ Gerald E. Prolman -------------------------------------- Gerald E. Prolman Purchaser: MIN ACQUISITION CORP. By: /s/ Gary L. Hess ------------------------------------ Gary L. Hess, President Attest: /s/ Roger S. Mertz - --------------------------------- Assistant Secretary LIST OF SCHEDULES AND EXHIBITS SCHEDULES Schedule 1.1(b) Tangible Personal Property and Assets Schedule 1.1(c) Patents, Trademarks, Tradenames, Etc. Schedule 1.1(e) Contracts Schedule 1.2(e) Insurance Policies Schedule 2.3(a) Seller's Liabilities to be Assumed Schedule 3.2 Qualifications, etc. Schedule 3.3 Non-Contravention Schedule 3.6 Transactions with Affiliates Schedule 3.7 Financial Statements Schedule 3.8 Absence of Changes - Exceptions Schedule 3.9 Liens and Encumbrances Schedule 3.10 Real Property Schedule 3.11 Patents, Trademarks, etc. Schedule 3.12 Insurance Schedule 3.13 Commitments Schedule 3.14 Legal Proceedings Schedule 3.15 Taxes Schedule 3.16 Compliance with Laws - Exceptions Schedule 3.17 Environmental Matters Schedule 3.18 Employee Benefit Plans, etc. Schedule 3.19 Employee and Labor Matters; Directors, Officers and Employees Schedule 3.21 Powers of Attorney Schedule 3.22 Accounts Receivable and Accounts Payable - Exceptions Schedule 3.23 Permits, Licenses, etc. Schedule 3.25 Other Liabilities Schedule 9.1 Offer of Employment EXHIBITS Exhibit A Common Stock Warrant Exhibit B Allocation of Purchase Price Exhibit C Bill of Sale Exhibit D Employment Agreement Exhibit E Pledge and Security Agreement Exhibit F Form of Opinion of Seller's and Shareholder's Counsel Exhibit G Form of Opinion of Purchaser's Counsel Exhibit H Territory EX-10.8 5 WARRANT THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. VACU-DRY COMPANY WARRANT TO PURCHASE COMMON STOCK This Warrant Expires June 11, 2003 Warrant No.: 98-1 Date of Issuance: June 11, 1998 Number of Shares: 100,000 Vacu-Dry Company, a California corporation (the "Company"), hereby certifies that, for value received, Made In Nature, Inc., the registered holder hereof or its assigns, is entitled, subject to the terms set forth below, to purchase from the Company upon surrender of this Warrant, at any time or times on or after the date hereof, but not after 5:00 P.M. Pacific Standard Time on the Expiration Date (as defined herein) fully paid nonassessable shares of Common Stock (as defined herein) of the Company (the "Warrant Shares") at the purchase price per share provided in Section 1(b) below (the "Warrant Exercise Price"). Section 1. Definitions. (a) Securities Purchase Agreement. This Warrant is one of the warrants (the "Warrants") issued pursuant to that certain Asset Purchase Agreement dated as of June 11, 1998, among the Company, MIN Acquisition Corp., Made In Nature, Inc. and Gerald E. Prolman. (b) Definitions. The following words and terms as used in this Warrant shall have the following meanings: "Common Stock" means (i) the Company's common stock, no par value, and (ii) any capital stock into which such Common Stock shall have been changed or any capital stock resulting from a reclassification of such Common Stock. "Expiration Date" means the date five (5) years from the date of this Warrant or, if such date falls on a Saturday, Sunday or other day on which banks are required or authorized to be closed in the State of California (a "Holiday"), the next preceding date that is not a Holiday. "Person" means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "Securities Act" means the Securities Act of 1933, as amended. "Warrant" shall mean this warrant and all warrants issued in exchange, transfer or replacement of any thereof. "Warrant Exercise Price" shall be equal to $8.00 per share, subject to adjustment as hereinafter provided. (c) Other Definitions. (i) Except as otherwise specified herein, (A) all references to the Company shall be deemed to include the Company's successors, and (B) all references to any applicable law defined or referred to herein shall be deemed references to such applicable law as the same may have been or may be amended or supplemented from time to time. (ii) When used in this Warrant, the words "herein," "hereof," and "hereunder," and words of similar import, shall refer to this Warrant as a whole and not to any provision of this Warrant, and the words "Section," "Schedule," and "Exhibit" shall refer to Sections of, and Schedules and Exhibits to, this Warrant unless otherwise specified. (iii) Whenever the context so requires, the neuter gender includes the masculine or feminine, and the singular number includes the plural, and vice versa. Section 2. Exercise of Warrant. (a) Subject to the terms and conditions hereof, this Warrant may be exercised by the holder hereof then registered on the books of the Company as follows: 33,333 shares at any time after the Date of Issuance and before the Expiration Date; 33,333 shares at any time after one year from the Date of Issuance and before the Expiration Date; and 33,334 shares at any time after two years from the Date of Issuance and before the Expiration Date. Subject to the foregoing, the Warrant may be exercised, in whole or in part, at any time during normal business hours on any business day on or after the opening of business on the date hereof and prior to 5:00 P.M. Pacific Time on the Expiration Date by (i) delivery of a written notice, in the form of the subscription notice attached as Exhibit A hereto, of such holder's election to exercise this Warrant, which notice shall specify the number of Warrant Shares to be purchased, (ii) payment to the Company of an amount equal to the Warrant Exercise Price multiplied by the number of Warrant Shares as to which the Warrant is being exercised (plus any applicable issue or transfer taxes) (the "Aggregate Exercise Price") in cash or by check or wire transfer, and (iii) the surrender of this Warrant, at the principal office of the Company; provided, that if such Warrant Shares are to be issued in any name other than that of the registered holder of this Warrant, such issuance shall be deemed a transfer and the provisions of Section 7 shall be applicable. In the event of any exercise of the rights represented by this Warrant in compliance with this Section 2(a), a certificate or certificates for the Warrant Shares so purchased, in such denominations as may be requested by the holder hereof and registered in the name of, or as directed by, the holder, shall be delivered at the Company's expense to, or as directed by, such holder as soon as practicable after such rights shall have been so exercised, and in any event no later than fifteen (15) business days after such exercise. (b) In addition to and without limiting the rights of the holder hereof under the terms hereof, this Warrant may be exercised by being exchanged in whole or in part and, subject to the vesting provisions of Section 2(a) above, at any time or from time to time prior to its expiration, for a number of shares of Common Stock having an aggregate fair market value on the date of such exercise equal to the difference between (x) the fair market value of the number of shares of Common Stock subject to this Warrant designated by the holder hereof on the date of the exercise and (y) the aggregate Warrant Price as adjusted by Section 8 for such number of designated shares. Upon any such exercise, the number of shares of Common Stock purchasable upon exercise of this Warrant shall be reduced by such designated number of shares of Common Stock and, if a balance of purchasable shares of Common Stock remains after such exercise, whether or not it is exercisable as to such shares the Company shall execute and deliver to the holder hereof a new Warrant for such balance of shares of Common Stock. No payment of any cash or other consideration shall be required from the holder of this Warrant in connection with any exercise of this Warrant by exchange pursuant to this section. Such exchange shall be effective upon the date of receipt by the Company of the original Warrant surrendered for cancellation and a written request from the holder hereof that the exchange pursuant to this section be made, or at such later date as may be specified in such request. Any tax liability related to such transaction that is attributable to the holder shall be paid by the holder. For the purposes of this Section, the "fair market value" of any number of shares of Common Stock shall be calculated on the basis of (i) if the Common Stock is then traded on a securities exchange, the average of the closing prices of the Common Stock on such exchange over the 30-day period ending three (3) days prior to the date of exercise, (ii) if the Common Stock is then actively traded over the counter, the average of the closing bid or sale prices (whichever is applicable) of the Common Stock over the 30-day period ending three (3) days prior to the date of exercise, and (iii) if there is no active public market for the Common Stock, the fair market value thereof as determined in good faith by the Board of Directors of the Company. (c) Unless the rights represented by this Warrant shall have expired or shall have been fully exercised, the Company shall, as soon as practicable and in any event no later than five (5) business days after any exercise and at its own expense, issue a new Warrant identical in all respects to the Warrant exercised except (i) it shall represent rights to purchase the number of Warrant Shares purchasable immediately prior to such exercise under the Warrant exercised, less the number of Warrant Shares with respect to which such Warrant is exercised, and (ii) the holder thereof shall be deemed for all corporate purposes to have become the holder of record of such Warrant Shares immediately prior to the close of business on the date on which the Warrant is surrendered and payment of the amount due in respect of such exercise and any applicable taxes is made, irrespective of the date of delivery of certificates evidencing such Warrant Shares, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are properly closed, such person shall be deemed to have become the holder of such Warrant Shares at the opening of business on the next succeeding date on which the stock transfer books are open. (d) No fractional shares of Common Stock are to be issued upon the exercise of this Warrant, but rather the number of shares of Common Stock issued upon exercise of this Warrant shall be rounded up or down to the nearest whole number. Section 3. Covenants as to Common Stock. The Company hereby covenants and agrees as follows: (a) This Warrant is, and any Warrants issued in substitution for or replacement of this Warrant will upon issuance be, duly authorized and validly issued. (b) All Warrant Shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof. (c) During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved at least the number of shares of Common Stock needed to provide for the exercise of the rights then represented by this Warrant. (d) The Company will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the holder of this Warrant in order to protect the exercise privilege of the holder of this Warrant against dilution or other impairment, consistent with the tenor and purpose of this Warrant. Without limiting the generality of the foregoing, the Company will take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant. Section 4. Taxes. The Company shall not be required to pay any tax or taxes attributable to the initial issuance of the Warrant Shares or any permitted transfer involved in the issue or delivery of any certificates for Warrant Shares in a name other than that of the registered holder hereof or upon any permitted transfer of this Warrant. Section 5. Warrant Holder Not Deemed a Stockholder. Except as otherwise specifically provided herein, no holder, as such, of this Warrant shall be entitled to vote or receive dividends or be deemed the holder of shares of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the holder of this Warrant of the Warrant Shares which he or she is then entitled to receive upon the due exercise of this Warrant. In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on such holder to purchase any securities or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company. Section 6. Representations of Holder. The holder of this Warrant, by the acceptance hereof, represents that it is acquiring this Warrant and the Warrant Shares for its own account for investment and not with a view to, or for sale in connection with, any distribution hereof or of any of the shares of Common Stock or other securities issuable upon the exercise thereof, and not with any present intention of distributing any of the same. Upon exercise of this Warrant, the holder shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the Warrant Shares so purchased are being acquired solely for the holder's own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale. If such holder cannot make such representations because they would be factually incorrect, it shall be a condition to such holder's exercise of the Warrant that the Company receive such other representations as the Company considers reasonably necessary to assure the Company that the issuance of its securities upon exercise of the Warrant shall not violate any United States or state securities laws. Section 7. Ownership and Transfer. (a) The Company shall maintain at its principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee. The Company may treat the person in whose name any Warrant is registered on the register as the owner and holder thereof for all purposes, notwithstanding any notice to the contrary, but in all events recognizing any transfers made in accordance with the terms of this Warrant. (b) This Warrant and the rights granted to the holder hereof are transferable, in whole or in part, upon surrender of this Warrant, together with a properly executed warrant power in the form of Exhibit B attached hereto; provided, however, that any transfer or assignment shall be subject to the conditions set forth in Section 7(c) below. (c) The holder of this Warrant understands that this Warrant has not been and is not expected to be, registered under the Securities Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (i) subsequently registered thereunder, or (ii) such holder shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company, to the effect that the securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration; (d) any sale of such securities made in reliance on Rule 144 promulgated under the Securities Act may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any resale of such securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the Securities Act) may require compliance with some other exemption under the Securities Act or the rules and regulations of the Securities and Exchange Commission thereunder; and (e) neither the Company nor any other person is under any obligation to register the Warrants under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. Section 8. Adjustment of Warrant Exercise Price. In order to prevent dilution of the rights granted under this Warrant, the Warrant Exercise Price shall be adjusted from time to time as follows: (a) Adjustment of Warrant Exercise Price upon Subdivision or Combination of Common Stock. If the Company at any time after the date of issuance of this Warrant subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Warrant Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately increased. If the Company at any time after the date of issuance of this Warrant combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Warrant Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately decreased. (b) Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets to another Person (as defined below) or other similar transaction which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as "Organic Change." Prior to the consummation of any Organic Change, the Company will make appropriate provision to insure that each of the holders of the Warrants will thereafter have the right to acquire and receive in lieu of or in addition to (as the case may be) the shares of Common Stock immediately theretofore acquirable and receivable upon the exercise of such holder's Warrants, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore acquirable and receivable upon the exercise of such holder's Warrants had such Organic Change not taken place. (c) Notices. (i) Immediately upon any adjustment of the Warrant Exercise Price, the Company will give written notice thereof to the holder of this Warrant, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Company will give written notice to the holder of this Warrant at least twenty (20) days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Organic Change, dissolution or liquidation, except that in no event shall such notice be provided to such holder prior to such information being made known to the public. (iii) The Company will also give written notice to the holder of this Warrant at least twenty (20) days prior to the date on which any Organic Change, dissolution or liquidation will take place. Section 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost, stolen, mutilated or destroyed, the Company shall, on receipt of an indemnification undertaking, issue a new Warrant of like denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed. Section 11. Notice. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Warrant must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy is mailed by U.S. certified mail, return receipt requested; (iii) three (3) days after being sent by U.S. certified mail, return receipt requested; or (iv) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Vacu-Dry Company 7765 Healdsburg Avenue Sebastopol, California 95472 Attention: President If to a holder of this Warrant, to it at the address set forth below such holder's signature on the signature page hereof. Each party shall provide five (5) days' prior written notice to the other party of any change in address or facsimile number. Section 12. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged, or terminated only by an instrument in writing signed by the party or holder hereof against which enforcement of such change, waiver, discharge or termination is sought. The headings in this Warrant are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement shall be governed by and interpreted in accordance with the laws of the State of California without regard to the principles of conflict of laws. Section 13. Date. The date of this Warrant is June 11, 1998. This Warrant, in all events, shall be wholly void and of no effect after the close of business on the Expiration Date, except that notwithstanding any other provisions hereof, the provisions of Section 7 shall continue in full force and effect after such date as to any Warrant Shares or other securities issued upon the exercise of this Warrant. VACU-DRY COMPANY By: /S/ Gary L. Hess -------------------------------------- Its: President By: /s/ Tom Eakin -------------------------------------- Its: VP Finance ACCEPTED: Made In Nature, Inc. By: /s/ Gerald E. Prolman -------------------------------- Name: GERALD E. PROLMAN Title: President Address:4340 Redwood Highway San Rafael, California 94903 EXHIBIT A TO WARRANT SUBSCRIPTION FORM TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT VACU-DRY COMPANY The undersigned hereby exercises the right to purchase the number of Warrant Shares covered by this Warrant specified below according to the conditions thereof and herewith makes payment therefor in the amount of $____________________, the Aggregate Exercise Price of such Warrant Shares in full, and requests that such Warrant Shares be issued in the name of: Made In Nature, Inc Dated: --------------------- By: -------------------------------------- Name: --------------------------------- Title: --------------------------------- Number of Warrant Shares Being Purchased: ----------------------- EXHIBIT B TO WARRANT FORM OF WARRANT POWER FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to - ---------------------, Federal Identification No. -------------------------, a warrant to purchase ------------ shares of the capital stock of VACU-DRY COMPANY, a California corporation, represented by warrant certificate No. - ------, standing in the name of the undersigned on the books of said corporation. The undersigned does hereby irrevocably constitute and appoint - ------------------------------------------, attorney to transfer the warrants of said corporation, with full power of substitution in the premises. Dated: ------------------- MADE IN NATURE By: /S/ Gerald E. Prolman --------------------------------------- Its: President --------------------------------------- EX-10.9 6 WARRANT THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN FORM, SUBSTANCE AND SCOPE REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. VACU-DRY COMPANY WARRANT TO PURCHASE COMMON STOCK This Warrant Expires June 11, 2003 Warrant No.: 98-2 Date of Issuance: June 11, 1998 Number of Shares: 12,000 Vacu-Dry Company, a California corporation (the "Company"), hereby certifies that, for value received, Gerald E. Prolman., the registered holder hereof or its assigns, is entitled, subject to the terms set forth below, to purchase from the Company upon surrender of this Warrant, at any time or times on or after the date hereof, but not after 5:00 P.M. Pacific Standard Time on the Expiration Date (as defined herein) fully paid nonassessable shares of Common Stock (as defined herein) of the Company (the "Warrant Shares") at the purchase price per share provided in Section 1(b) below (the "Warrant Exercise Price"). Section 1. Definitions. (a) Securities Purchase Agreement. This Warrant is one of the warrants (the "Warrants") issued pursuant to that certain Asset Purchase Agreement dated as of June 11, 1998, among the Company, MIN Acquisition Corp., Made In Nature, Inc. and Gerald E. Prolman. (b) Definitions. The following words and terms as used in this Warrant shall have the following meanings: "Common Stock" means (i) the Company's common stock, no par value, and (ii) any capital stock into which such Common Stock shall have been changed or any capital stock resulting from a reclassification of such Common Stock. "Expiration Date" means the date five (5) years from the date of this Warrant or, if such date falls on a Saturday, Sunday or other day on which banks are required or authorized to be closed in the State of California (a "Holiday"), the next preceding date that is not a Holiday. "Person" means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof. "Securities Act" means the Securities Act of 1933, as amended. "Warrant" shall mean this warrant and all warrants issued in exchange, transfer or replacement of any thereof. "Warrant Exercise Price" shall be equal to $8.00 per share, subject to adjustment as hereinafter provided. (c) Other Definitions. (i) Except as otherwise specified herein, (A) all references to the Company shall be deemed to include the Company's successors, and (B) all references to any applicable law defined or referred to herein shall be deemed references to such applicable law as the same may have been or may be amended or supplemented from time to time. (ii) When used in this Warrant, the words "herein," "hereof," and "hereunder," and words of similar import, shall refer to this Warrant as a whole and not to any provision of this Warrant, and the words "Section," "Schedule," and "Exhibit" shall refer to Sections of, and Schedules and Exhibits to, this Warrant unless otherwise specified. (iii) Whenever the context so requires, the neuter gender includes the masculine or feminine, and the singular number includes the plura and vice versa. Section 2. Exercise of Warrant. (a) Subject to the terms and conditions hereof, this Warrant may be exercised by the holder hereof then registered on the books of the Company as follows: 4,000 shares at any time after the Date of Issuance and before the Expiration Date; 4,000 shares at any time after one year from the Date of Issuance and before the Expiration Date; and 4,000 shares at any time after two years from the Date of Issuance and before the Expiration Date. Subject to the foregoing, the Warrant may be exercised, in whole or in part, at any time during normal business hours on any business day on or after the opening of business on the date hereof and prior to 5:00 P.M. Pacific Time on the Expiration Date by (i) delivery of a written notice, in the form of the subscription notice attached as Exhibit A hereto, of such holder's election to exercise this Warrant, which notice shall specify the number of Warrant Shares to be purchased, (ii) payment to the Company of an amount equal to the Warrant Exercise Price multiplied by the number of Warrant Shares as to which the Warrant is being exercised (plus any applicable issue or transfer taxes) (the "Aggregate Exercise Price") in cash or by check or wire transfer, and (iii) the surrender of this Warrant, at the principal office of the Company; provided, that if such Warrant Shares are to be issued in any name other than that of the registered holder of this Warrant, such issuance shall be deemed a transfer and the provisions of Section 7 shall be applicable. In the event of any exercise of the rights represented by this Warrant in compliance with this Section 2(a), a certificate or certificates for the Warrant Shares so purchased, in such denominations as may be requested by the holder hereof and registered in the name of, or as directed by, the holder, shall be delivered at the Company's expense to, or as directed by, such holder as soon as practicable after such rights shall have been so exercised, and in any event no later than fifteen (15) business days after such exercise. (b) In addition to and without limiting the rights of the holder hereof under the terms hereof, this Warrant may be exercised by being exchanged in whole or in part and, subject to the vesting provisions of Section 2(a) above, at any time or from time to time prior to its expiration, for a number of shares of Common Stock having an aggregate fair market value on the date of such exercise equal to the difference between (x) the fair market value of the number of shares of Common Stock subject to this Warrant designated by the holder hereof on the date of the exercise and (y) the aggregate Warrant Price as adjusted by Section 8 for such number of designated shares. Upon any such exercise, the number of shares of Common Stock purchasable upon exercise of this Warrant shall be reduced by such designated number of shares of Common Stock and, if a balance of purchasable shares of Common Stock remains after such exercise, whether or not it is exercisable as to such shares the Company shall execute and deliver to the holder hereof a new Warrant for such balance of shares of Common Stock. No payment of any cash or other consideration shall be required from the holder of this Warrant in connection with any exercise of this Warrant by exchange pursuant to this section. Such exchange shall be effective upon the date of receipt by the Company of the original Warrant surrendered for cancellation and a written request from the holder hereof that the exchange pursuant to this section be made, or at such later date as may be specified in such request. Any tax liability related to such transaction that is attributable to the holder shall be paid by the holder. For the purposes of this Section, the "fair market value" of any number of shares of Common Stock shall be calculated on the basis of (i) if the Common Stock is then traded on a securities exchange, the average of the closing prices of the Common Stock on such exchange over the 30-day period ending three (3) days prior to the date of exercise, (ii) if the Common Stock is then actively traded over the counter, the average of the closing bid or sale prices (whichever is applicable) of the Common Stock over the 30-day period ending three (3) days prior to the date of exercise, and (iii) if there is no active public market for the Common Stock, the fair market value thereof as determined in good faith by the Board of Directors of the Company. (c) Unless the rights represented by this Warrant shall have expired or shall have been fully exercised, the Company shall, as soon as practicable and in any event no later than five (5) business days after any exercise and at its own expense, issue a new Warrant identical in all respects to the Warrant exercised except (i) it shall represent rights to purchase the number of Warrant Shares purchasable immediately prior to such exercise under the Warrant exercised, less the number of Warrant Shares with respect to which such Warrant is exercised, and (ii) the holder thereof shall be deemed for all corporate purposes to have become the holder of record of such Warrant Shares immediately prior to the close of business on the date on which the Warrant is surrendered and payment of the amount due in respect of such exercise and any applicable taxes is made, irrespective of the date of delivery of certificates evidencing such Warrant Shares, except that, if the date of such surrender and payment is a date when the stock transfer books of the Company are properly closed, such person shall be deemed to have become the holder of such Warrant Shares at the opening of business on the next succeeding date on which the stock transfer books are open. (d) No fractional shares of Common Stock are to be issued upon the exercise of this Warrant, but rather the number of shares of Common Stock issued upon exercise of this Warrant shall be rounded up or down to the nearest whole number. Section 3. Covenants as to Common Stock. The Company hereby covenants and agrees as follows: (a) This Warrant is, and any Warrants issued in substitution for or replacement of this Warrant will upon issuance be, duly authorized and validly issued. (b) All Warrant Shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issue thereof. (c) During the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved at least the number of shares of Common Stock needed to provide for the exercise of the rights then represented by this Warrant. (d) The Company will not, by amendment of its Articles of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the holder of this Warrant in order to protect the exercise privilege of the holder of this Warrant against dilution or other impairment, consistent with the tenor and purpose of this Warrant. Without limiting the generality of the foregoing, the Company will take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant. Section 4. Taxes. The Company shall not be required to pay any tax or taxes attributable to the initial issuance of the Warrant Shares or any permitted transfer involved in the issue or delivery of any certificates for Warrant Shares in a name other than that of the registered holder hereof or upon any permitted transfer of this Warrant. Section 5. Warrant Holder Not Deemed a Stockholder. Except as otherwise specifically provided herein, no holder, as such, of this Warrant shall be entitled to vote or receive dividends or be deemed the holder of shares of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to the issuance to the holder of this Warrant of the Warrant Shares which he or she is then entitled to receive upon the due exercise of this Warrant. In addition, nothing contained in this Warrant shall be construed as imposing any liabilities on such holder to purchase any securities or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors of the Company. Section 6. Representations of Holder. The holder of this Warrant, by the acceptance hereof, represents that he is acquiring this Warrant and the Warrant Shares for his own account for investment and not with a view to, or for sale in connection with, any distribution hereof or of any of the shares of Common Stock or other securities issuable upon the exercise thereof, and not with any present intention of distributing any of the same. Upon exercise of this Warrant, the holder shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the Warrant Shares so purchased are being acquired solely for the holder's own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale. If such holder cannot make such representations because they would be factually incorrect, it shall be a condition to such holder's exercise of the Warrant that the Company receive such other representations as the Company considers reasonably necessary to assure the Company that the issuance of its securities upon exercise of the Warrant shall not violate any United States or state securities laws. Section 7. Ownership and Transfer. (a) The Company shall maintain at its principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee. The Company may treat the person in whose name any Warrant is registered on the register as the owner and holder thereof for all purposes, notwithstanding any notice to the contrary, but in all events recognizing any transfers made in accordance with the terms of this Warrant. (b) This Warrant and the rights granted to the holder hereof are transferable, in whole or in part, upon surrender of this Warrant, together with a properly executed warrant power in the form of Exhibit B attached hereto; provided, however, that any transfer or assignment shall be subject to the conditions set forth in Section 7(c) below. (c) The holder of this Warrant understands that this Warrant has not been and is not expected to be, registered under the Securities Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (i) subsequently registered thereunder, or (ii) such holder shall have delivered to the Company an opinion of counsel, reasonably satisfactory in form, scope and substance to the Company, to the effect that the securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration; (d) any sale of such securities made in reliance on Rule 144 promulgated under the Securities Act may be made only in accordance with the terms of said Rule and further, if said Rule is not applicable, any resale of such securities under circumstances in which the seller (or the person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the Securities Act) may require compliance with some other exemption under the Securities Act or the rules and regulations of the Securities and Exchange Commission thereunder; and (e) neither the Company nor any other person is under any obligation to register the Warrants under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder. Section 8. Adjustment of Warrant Exercise Price. In order to prevent dilution of the rights granted under this Warrant, the Warrant Exercise Price shall be adjusted from time to time as follows: (a) Adjustment of Warrant Exercise Price upon Subdivision or Combination of Common Stock. If the Company at any time after the date of issuance of this Warrant subdivides (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Warrant Exercise Price in effect immediately prior to such subdivision will be proportionately reduced and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately increased. If the Company at any time after the date of issuance of this Warrant combines (by combination, reverse stock split or otherwise) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Warrant Exercise Price in effect immediately prior to such combination will be proportionately increased and the number of shares of Common Stock obtainable upon exercise of this Warrant will be proportionately decreased. (b) Reorganization, Reclassification, Consolidation, Merger or Sale. Any recapitalization, reorganization, reclassification, consolidation, merger, sale of all or substantially all of the Company's assets to another Person (as defined below) or other similar transaction which is effected in such a way that holders of Common Stock are entitled to receive (either directly or upon subsequent liquidation) stock, securities or assets with respect to or in exchange for Common Stock is referred to herein as "Organic Change." Prior to the consummation of any Organic Change, the Company will make appropriate provision to insure that each of the holders of the Warrants will thereafter have the right to acquire and receive in lieu of or in addition to (as the case may be) the shares of Common Stock immediately theretofore acquirable and receivable upon the exercise of such holder's Warrants, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore acquirable and receivable upon the exercise of such holder's Warrants had such Organic Change not taken place. (c) Notices. (i) Immediately upon any adjustment of the Warrant Exercise Price, the Company will give written notice thereof to the holder of this Warrant, setting forth in reasonable detail and certifying the calculation of such adjustment. (ii) The Company will give written notice to the holder of this Warrant at least twenty (20) days prior to the date on which the Company closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any pro rata subscription offer to holders of Common Stock or (C) for determining rights to vote with respect to any Organic Change, dissolution or liquidation, except that in no event shall such notice be provided to such holder prior to such information being made known to the public. (iii) The Company will also give written notice to the holder of this Warrant at least twenty (20) days prior to the date on which any Organic Change, dissolution or liquidation will take place. Section 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost, stolen, mutilated or destroyed, the Company shall, on receipt of an indemnification undertaking, issue a new Warrant of like denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed. Section 11. Notice. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Warrant must be in writing and will be deemed to have been delivered (a) upon receipt, when delivered personally; (b) upon receipt, when sent by facsimile, provided a copy is mailed by U.S. certified mail, return receipt requested; (c) three (3) days after being sent by U.S. certified mail, return receipt requested; or (d) one (1) day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be: If to the Company: Vacu-Dry Company 7765 Healdsburg Avenue Sebastopol, California 95472 Attention: President If to a holder of this Warrant, to it at the address set forth below such holder's signature on the signature page hereof. Each party shall provide five (5) days' prior written notice to the other party of any change in address or facsimile number. Section 12. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged, or terminated only by an instrument in writing signed by the party or holder hereof against which enforcement of such change, waiver, discharge or termination is sought. The headings in this Warrant are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement shall be governed by and interpreted in accordance with the laws of the State of California without regard to the principles of conflict of laws. Section 13. Date. The date of this Warrant is June 11, 1998. This Warrant, in all events, shall be wholly void and of no effect after the close of business on the Expiration Date, except that notwithstanding any other provisions hereof, the provisions of Section 7 shall continue in full force and effect after such date as to any Warrant Shares or other securities issued upon the exercise of this Warrant. VACU-DRY COMPANY By:/s/ Gary L. Hess --------------------------------- Its: President By:/s/ Tom Eakin --------------------------------- Its: VP Finance ACCEPTED: /s/ Gerald E. Prolman - ---------------------------------- Gerald E. Prolman Address: 4 Quail Court San Rafael, California 94903 EXHIBIT A TO WARRANT SUBSCRIPTION FORM TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT VACU-DRY COMPANY The undersigned hereby exercises the right to purchase the number of Warrant Shares covered by this Warrant specified below according to the conditions thereof and herewith makes payment therefor in the amount of $_________________, the Aggregate Exercise Price of such Warrant Shares in full, and requests that such Warrant Shares be issued in the name of: Dated: ________________ __________________________ Gerald E. Prolman Number of Warrant Shares Being Purchased: ____________ EXHIBIT B TO WARRANT FORM OF WARRANT POWER FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to ______________________________, Federal Identification No. __________________, a warrant to purchase ______________ shares of the capital stock of VACU-DRY COMPANY, a California corporation, represented by warrant certificate No. ________, standing in the name of the undersigned on the books of said corporation. The undersigned does hereby irrevocably constitute and appoint ______________________________________________, attorney to transfer the warrants of said corporation, with full power of substitution in the premises. Dated: ___________________ __________________________________ By:_______________________________ Its:______________________________ EX-11 7 STATEMENT VACU-DRY COMPANY COMMISSION FILE NUMBER 01912 EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED JUNE 30, 1998 1997 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA) PRIMARY EARNINGS PER SHARE: NET EARNINGS APPLICABLE TO COMMON STOCK $899 $517 $434 === === === AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING: AVERAGE COMMON SHARES OUTSTANDING 1,581 1,648 1,704 DILUTIVE EFFECT OF STOCK OPTIONS 19 0 0 ----- ----- ----- 1,600 1,648 1,704 ===== ===== ===== EARNINGS PER COMMON SHARE Basic $.57 $.31 $.25 ===== ===== ===== Diluted $.56 -- -- ===== ===== =====
EX-23 8 CONSENT OF INDPENDENT PUBLIC ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File No. 33-70870. ARTHUR ANDERSEN LLP /s/ Arthur Andersen LLP - --------------------------------- San Francisco, California September 24, 1998 EX-27 9 1998 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 10-K FOR THE YEAR ENDED JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUN-30-1998 JUN-30-1998 385,000 0 2,356,000 58,000 7,926,000 11,430,000 18,587,000 11,803,000 20,776,000 5,516,000 0 0 0 2,837,000 6,093,000 20,776,000 26,094,000 26,680,000 21,565,000 21,565,000 0 0 310,000 1,421,000 530,000 899,000 0 0 0 899,000 .57 .56 NET OF LIFO RESERVE OF $1,114,000 RETAINED EARNINGS 1,511,079 TOTAL COMMON SHARES OUTSTANDING BEFORE MINORITY INTEREST OF $8,000
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