SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended October 31, 2001.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number: 0-16787
YOCREAM INTERNATIONAL, INC.
(Exact name of registrant as
specified in its charter)
Oregon 91-0989395
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5858 N.E. 87th Avenue 97220
Portland, Oregon (Zip Code)
(Address of Principal
Executive Office)
(Registrant's telephone number, including area code): (503)256-3754
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
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. [X ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $4,647,000 at January 14, 2002, based upon the
average bid and asked prices of the common stock on that date.
At January 14, 2002 there were 2,258,398 shares of the registrant's common
stock outstanding.
Documents incorporated by reference:
Part of Form 10-K into
Document which Incorporated
Portions of Proxy Statement for
2002 Annual Meeting of Shareholders Part III
TABLE OF CONTENTS
PART I Page
Item 1. BUSINESS.....................................................4
Item 2. PROPERTIES..................................................13
Item 3. LEGAL PROCEEDINGS...........................................14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........14
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDERS MATTERS................................14
Item 6. SELECTED FINANCIAL DATA.....................................15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS..................................................16
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA........................................................21
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE......................21
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT..................................................21
Item 11. EXECUTIVE COMPENSATION......................................21
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.......................................21
Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS................................................21
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.....................................22
SIGNATURES..............................................................24
PART I
Forward Looking Statements
This report on Form 10K includes forward-looking statements within the meaning
of the "safe-harbor" provisions of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements are based on the beliefs of the
Company's management and on assumptions made by and information currently
available to management. All statements other than statements of historical
fact, regarding the Company's financial position, business strategy and plans
and objectives of management for future operations of the Company are forward-
looking statements. When used herein, the words "anticipate," "believe,"
"estimate," "expect," and "intend" and words or phrases of similar meaning, as
they relate to the Company or management, are intended to identify forward-
looking statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable; it can give no
assurance that such expectations will prove to have been correct. Forward-
looking statements are subject to certain risks and uncertainties, which could
cause actual results to differ materially from those indicated by the forward-
looking statements. These risks and uncertainties include the Company's
ability to maintain or expand its distribution abilities, including the risk of
disruptions in the transportation system and relationships with brokers and
distributors. Further, actual results may be affected by the Company's ability
to compete on price and other factors with other manufacturers and distributors
of frozen dessert products; customer acceptance of new products; general trends
in the food business as they relate to customer preferences for the Company's
products; and the Company's ability to obtain raw materials and produce
finished products in a timely manner, as well as its ability to develop and
maintain its co-packing relationships and strategic alliances. In addition,
there are risks inherent in dependence on key customers, the loss of which
could materially adversely affect the Company's operations. The reader is
advised that this list of risks is not exhaustive and should not be construed
as any prediction by the Company as to which risks would cause actual results
to differ materially from those indicated by the forward-looking statements.
Item 1: BUSINESS
General
YOCREAM INTERNATIONAL, INC. (the "Company") is a corporation organized under
the laws of the state of Oregon in 1977 originally under the name the Yogurt
Stand, Inc. The Company changed its name later that year to International
Yogurt Company, Inc. In 1999, the Company changed its name to its present
name. The Company makes, markets and sells frozen yogurt, sorbet, custard,
smoothie, and ice cream products in a variety of premium, low-fat, and
nonfat flavors in either non-organic or organic formulations. These products
are sold to a variety of businesses and outlets, including convenience stores,
restaurants, hospitals, school districts, food distributors, military installa-
tions, yogurt shops, fast food chains, discount club warehouses, business and
industry locations, and other types of outlets. The Company's primary branded
product is YOCREAM(registered trademark) frozen yogurt, which is distributed and
sold nationwide. The Company also produces YOCREAM BLENDER SMOOTHIES, YOCREAM
FRUIT BLENDER SMOOTHIES and SORBET TOO, YOCREAM DISPENSER SMOOTHIES, and
premium, lowfat, or nonfat ice creams. The Company's general marketing strategy
is to offer a broad selection of its products at a price suitable for the
relevant markets.
The Industry
The YOCREAM brand frozen yogurt and smoothie products produced by the Company
constitute only a portion of the relevant frozen dessert, snack and beverage
industry. The industry produces a diverse range of products, many of which
compete directly with the Company's YOCREAM frozen yogurt and smoothie
products.
Many types of foodservice outlets make available to the public the Company's
YOCREAM frozen yogurt and smoothie products, as well as other manufacturer's
frozen yogurt products and frozen dessert and snack items. Many outlets
offer competing products of several manufacturers. The retail consumer may
obtain the Company's products or competing products from narrowly oriented
outlets such as small yogurt shops or stands, many of which provide only a
single product, to discount club warehouse types of facilities, as well as from
many medium-sized businesses. Foodservice outlets or institutions, such as
restaurants, hospitals and school districts, typically offer frozen desserts
and snacks of one manufacturer. Larger institutional businesses with their own
distribution systems may obtain their products directly from the Company,
whereas most businesses will obtain their products from national or regional
food distributors. Frozen desserts and snacks are often viewed as premium
products, and are somewhat resistant to finely-tuned price competition.
However, larger institutional customers for frozen dessert and snack products
often enter into contracts on the basis of price, distribution capabilities, or
product quality. Smaller businesses such as restaurants and yogurt shops will
often enter into agreements on the basis of brand identification, reputation or
other preferences.
Customers are motivated to purchase frozen desert and snack products on the
basis of taste, reputation, quality and price. Premium products tend to be
less sensitive to price. Some consumers will choose one frozen dessert and
snack product over another for health related reasons such as ingredients,
calories and additives. Manufacturers of frozen dessert and snack products may
make claims relating to the healthfulness of their products, including soy-
based frozen dessert products, as well as other non-fat or synthetic fat
products. Frozen dessert and snack products also compete with many other
varieties of food and dessert items.
Frozen yogurt and smoothie products have gained wider acceptance by a greater
variety of demographic groups than when first introduced to the frozen yogurt
marketplace. The Company believes that frozen dessert and snack products
appeal to and are purchased by persons of all age groups and both sexes. The
claims of certain manufacturers related to the healthfulness of their products
may also increase the acceptance of those frozen dessert and snack products.
The Company
YOCREAM International, Inc. operates within the health oriented frozen dessert,
snack, and novelty segments of the frozen dessert industry. Focus is placed on
manufacturing superior quality products (e.g. frozen yogurt, organic, smoothies,
etc.) for regional, national, and worldwide foodservice and retail markets.
YOCREAM International, Inc.'s expertise in nationwide distribution, foodservice
sales/marketing, R&D (e.g. new product development) and manufacturing is enhanc-
ed through leveraging strategic alliances and/or joint ventures (e.g. the Dannon
Company, Inc. and Cascadian Farm [see Marketing Strategy section below]). These
relationships are developed to increase volume growth and profitability of the
Company. YOCREAM International, Inc.'s foodservice YOCREAM branded presence
receives emphasis in selected geographic areas of the U.S. where sales and
marketing resources are focused on branded product expansion. Companies for
which YOCREAM manufactures private label products are provided outstanding
price/value products that meet their stringent quality standards.
Marketing Strategy
The Company's marketing strategy is designed to build both its YoCream brand,
as well as its private brand and copack manufacturing business. The primary
marketing strategy has been to build YOCREAM brand awareness and consumer
loyalty to its products. The Company offers a broad range of frozen yogurt,
custard, ice cream and smoothies products positioned as premium quality
providing a value to the consumer for healthy desserts and beverages. These
product features and other benefits, including high counts of live active
cultures in its yogurt products, are promoted to customers and consumers through
financially conservative advertising and promotional methods. The Company also
considers the broad distribution of its products critical to sales growth, with
its products available nationwide and in 9 countries. The Company also markets
its private brand and copacking business through developing strategic relation-
ships and promoting its product development expertise, as well as its manufact-
uring flexibility and logistics services. (See Manufacturing Process section
for further details).
In 1989, the Company began a concerted effort to obtain copacking and private
label business, and was successful in becoming the supplier of soft frozen
yogurt to Price Club. See Distribution and Significant Customers section for
additional history with this customer and its successor, Costco Wholesale. In
1993, the Company was also successful in obtaining a contract to co-pack the
organically grown, All Fruit Sorbet produced for Cascadian Farm, currently a
majority owned subsidiary of General Mills. In November 1994, Cascadian Farm
extended its contract with the Company to include organic frozen yogurt and ice
cream lines.
In efforts to increase brand recognition in the Northwest, the Company entered
into a signage/sponsorship agreement with the Oregon Arena Corporation, owner of
the Rose Garden Arena in Portland, Oregon in January 1996. The Rose Garden
Arena is the principal home arena for the National Basketball Association fran-
chise for the Portland Trail Blazers. Certain advertising rights are granted
under the agreement as well as exclusivity regarding the sale of frozen yogurt,
sorbet, and soft serve ice creams and smoothies within the Arena.
In 1996, the Company began a nationwide introduction of four ounce, single-serve
cups of nonfat frozen yogurt and non-dairy sorbet products. These products
were introduced under the Company's own brand of "Soft Scoop by YOCREAM" and
under SYSCO's nationwide "Cool N' Classy" brand. The Company is the only
supplier to SYSCO for this product.
In May 1997, the Company expanded its product line to include YOCREAM BLENDER
SMOOTHIES, which featured dairy and non-dairy base mixes, with recipes for
blender operation. While smoothies have been available for some time, the
market in 1997 exploded. According to an industry report, the number of
juice/smoothie bars increased by 30% in 1997. The trend is being driven by the
American consumer's interest in finding healthy foods that are satisfying and
tasty. Key foodservice operators like Smoothie Island, Burgerville, Coffee
People, and Taco Del Mar became YOCREAM BLENDER SMOOTHIES customers.
In March 1998, the Company added to its smoothie line and introduced YOCREAM
DISPENSER SMOOTHIES, are an all natural complete fruit smoothie mix to be
dispensed from a smoothie machine or beverage dispenser and requiring no
additional fruit, ice, or juice. This smoothie line has been developed for
high-volume operators like concession stands, dining halls, and "all you can
eat" restaurant operators, many of which would have operational difficulties
mixing, chopping, and measuring ingredients prior to blending the final smoothie
product. YOCREAM DISPENSER SMOOTHIES can be dispensed in a few seconds, while
it may take minutes to make a smoothie with a blender. DISPENSER SMOOTHIES are
now available nationwide and in 9 countries.
Continuing to market the Company's manufacturing capabilities, in August 1998,
the Company entered into an agreement to copack for Life Source Nutrition
Solutions. Their products include a 16-ounce vitamin fortified smoothie and an
8 ounce vitamin fortified hard pack frozen yogurt cup.
In fiscal 1999, the Company developed a dispenser smoothie for Costco Wholesale.
This product has been exceptionally well received and has significantly contri-
buted to the growth of the Company's sales.
In fiscal 1999, the Company began distribution of a high quality line of refrig-
erated, bottled smoothies for the specialty retail grocery market. In fiscal
2000 sales of this product were suspended until such time as the Company
completed its new bottling line. The bottling line was completed in fiscal
2001, and the Company is in the process of evaluating possible bottled products.
In fiscal 2000, the Company developed a high quality coffee latte freeze for
Costco Wholesale. After undergoing market tests in fiscal 2001, this product is
currently in the process of being rolled out. It is expected that this process
will occur over the next two years, and that the impact on the Company's sales
volume could be as much as the dispenser smoothie product that was developed for
Costco in 1999.
Continuing its efforts to increase brand recognition, in October 2000, the
Company entered into a signage/sponsorship agreement with the Jazz Basketball
Investors, Inc (DBA Utah Jazz), owner of the Delta Center in Salt Lake City,
Utah. The Delta Center is the principal home arena for the National Basketball
Association franchise for the Utah Jazz. Certain advertising rights are granted
under the agreement as well as exclusivity regarding the sale of frozen yogurt
within the Center.
In April 2001, the Company entered into an alliance with The Dannon Company,
Inc. to supply soft frozen yogurt to Dannon's foodservice customers. Under the
terms of this alliance, Dannon agreed to endorse YOCREAM and assist in intro-
ducing the Company to the former brokers and distributors. This alliance has
enabled the Company to enter new markets and access national and international
accounts, which the Company had not been able to penetrate in the past. The
Dannon Company, Inc. is a leading national producer of yogurt products in the
United States with corporate headquarters in Tarrytown, NY, and plants in
Minster, OH; Fort Worth, TX; and West Jordan, UT. With a strong commitment to
high-quality, wholesome, nutritious, and innovative products, Dannon produces
about three million cups of yogurt each day in nearly 100 flavors, styles and
sizes.
In October 2001, the Company announced that the alliance with The Dannon
Company, Inc. was expanded, beyond selling frozen yogurt to Dannon foodservice
customers, to include a co-branded line of soft serve frozen yogurt. The top-
quality product line will be Dannon/YoCream and will include more than forty
flavors of soft serve frozen yogurt. The co-branded line, which will utilize
YOCREAM formulas and include non-fat, low fat, no sugar added flavors, is
expected to be available nationally by mid-2002 through traditional food service
distributors. The strength of the Dannon name along with YOCREAM's concentration
on the foodservice or on-premise marketplace is expected to offer significant
opportunities for increased sales and market share. The new brand will be
promoted extensively to consumers /end-users through the introduction of new
merchandising materials and promotions. Management believes that the two
companies are similar in philosophy, and both companies' yogurt products are
known for their high live culture count, with an emphasis on product quality and
appeal to consumers with concerns for health and nutrition.
The Company's sales and marketing organization consists of a Director of Sales
and Marketing who directs the Regional Sales Managers, who in turn work with 22
independent foodservice broker organizations and a network of distributors on a
nationwide basis. The Company's Director of National Accounts and Branding
works with a recently added National Accounts Manager and two specialty brokers.
Together they facilitate expanding the Company's national accounts, including
military and government foodservice sales. The Company also has a Manager of
Club Store and International Sales. International sales are selectively pursued
based on ease of distribution and profitability. Marketing and sales abroad are
currently occurring in Mexico, Italy, Australia, Spain, and to a limited degree,
several other South American Countries.
The Company, through its research and development efforts and its marketing
strategies, will continue to make known its ability to produce and distribute
unique high quality and good-for-you products.
Merchandise
The Company makes, markets and sells frozen yogurt in premium, lowfat, nonfat
and sugar-free flavors; smoothies in a variety of flavors; non-dairy sorbet
in a variety of flavors; organic yogurt; organic ice cream; ice cream; frozen
custard, and other frozen desserts and snacks. These frozen products are
available in liquid mix form, and some are available in hard pack form. The
Company also has the ability to produce bottled smoothie products.
The Company sells the soft serve yogurt liquid mix to food service customers
who dispense it through a soft serve frozen dessert machine. This product is
also available in an unflavored natural form which permits the customer to add
desired flavors. In fiscal years 2001, 2000, and 1999 the soft serve liquid
mix accounted for approximately 50%, 49%, and 51%, respectively of the Company's
case sales.
The Company sells dispenser and blender smoothie liquid mixes to foodservice
customers who dispense the product through either frozen dessert machines or
blenders. In fiscal years 2001, 2000, and 1999, the smoothie mixes accounted
for approximately 40%, 39%, and 32%, respectively of the Company's case sales.
The Company also sells hard pack yogurt, sorbet and ice cream products to food-
service customers. In fiscal years 2001, 2000, and 1999 the hard pack products
accounted for approximately 10%, 12%, and 17%, respectively of the Company's
case sales.
All of the YOCREAM and YOGURT STAND products are certified Kosher.
YOCREAM FROZEN YOGURT is the Company's flagship brand. This premium soft frozen
yogurt is made with the highest quality ingredients, using a special recipe that
produces a smooth and creamy taste. YoCream Frozen Yogurt is crafted with one of
the highest counts of beneficial live active yogurt cultures (Lactobacillus
Bulgaricus, Streptococcus Thermophilus, and Lactobacillus Acidophilus). It is
available in more than 40 flavors in Nonfat, Premium and No Sugar Added
(sweetened with aspartame) varieties.
YOCREAM ICE CREAM is produced by the Company to fill the needs of the tra-
ditional soft serve "Ice Cream" loving consumer. This reduced fat line includes
a 6% vanilla and the three classic flavors, strawberry, chocolate and vanilla,
with a 4.5% butter fat content.
YOCREAM FROZEN CUSTARD is the latest addition to the Company's soft serve line.
Made from rich cream and real eggs, Vanilla Custard Cream and Chocolate Custard
Cream are premium 10% butterfat products. Traditionally, frozen custard requires
the operator to use batch freezers and then hand dip the product from a freezer
case. YoCream Frozen Custard has been specially formulated to dispense from
standard soft serve equipment with a minor temperature adjustment, thereby
saving labor and equipment expense for operators.
YOGURT STAND FROZEN YOGURT is a lower cost line of products designed to compete
in that part of the institutional market where price is the most significant
competitive factor. That line of the Company's products includes four flavors
and a plain mix that can be flavored by the end user. There are also several
special order flavors available.
SORBET by YOCREAM is a product developed by the Company in 1995. It is a high
quality non-dairy product produced in several flavors in hard pack and soft
serve form. It is now marketed and packaged as YOCREAM BLENDER SMOOTHIES AND
SORBET TOO (see below).
SOFT SCOOP by YOCREAM is a product introduced to the marketplace in 1992. This
hard pack frozen yogurt is specially formulated to be stored and distributed at
a higher temperature than standard hard pack frozen desserts. It is currently
being marketed to the food service industry packaged in single serve four ounce
cups.
YOCREAM BLENDER SMOOTHIES were introduced in May 1997. These products are
available in both yogurt and fruit formulations. The base mixes may be poured
into a blender directly from the carton in liquid state, or drawn from a soft
serve machine into the blender. Depending on the recipe, ice, fruit and/or juice
are then blended with the base mix.
YOCREAM DISPENSER SMOOTHIES were introduced to the marketplace in March 1998.
This concept utilizes all natural, nonfat fruit and yogurt mixes designed to be
dispensed from a smoothie machine or frozen beverage dispenser. The product is
ready to shake and pour into the dispenser and does not require the addition of
fruit, ice or juice.
Other products manufactured by the Company include organic sorbets and ice
creams that are packed under a customer's private label brand.
As of January 14, 2002, the Company had available for sale the following
products and flavors under its own YOCREAM or YOGURT STAND brand name:
YOCREAM FROZEN YOGURT YOCREAM YOCREAM
Premium Soft Serve Fruit Blender Soft Scoop - 4 Ounce
Mix Smoothies
(and Sorbet, too) Very Berry Sorbet
Cheesecake Supreme Very Berry Sorbet/Vanilla
Dutch Chocolate Kiwi Strawberry Splash Frozen Yogurt Swirl
French Vanilla Very Berry Vanilla Frozen Yogurt
Milk Chocolate Lemony Lime Chocolate Frozen Yogurt
Peanut Butter Mango Tango Strawberry Frozen Yogurt
Praline 'n Cream Orange Burst
White Vanilla Margarita Mix
YOCREAM FROZEN YOGURT YOCREAM YOCREAM FREE
Nonfat Soft Serve Yogurt Blender No Sugar Added
Mix Smoothies Frozen Yogurt
Chai Blueberry
Alpine Vanilla Coffee Cafe au Lait
Apple Spice Vanilla Chocolate
Blueberry Burst Rasberry
Butter Brickle Strawberry
Cable Car Chocolate Vanilla
Cappuccino YOCREAM YOGURT STAND
Cherry Almond Fruit Dispenser Nonfat Soft Serve
Chocolate Classic Smoothies Frozen Yogurt
Chocolate Cheesecake
Country Vanilla Berry Banana Boysenberry
Egg Nog Cranberry Blueberry Cheesecake
English Toffee Guava Rasberry Chocolate
Fancy French Vanilla Island Breeze French Vanilla
Georgia Peach Mango Sunrise Lemon Merinque
"Holiday" Chocolate Mint Orange Squeeze Milk Chocolate
Irish Mint Tropical Orange Squeeze
Island Banana Plain
Kahlua Strawberry
Luscious Lemon Sweet Peach
Milk Chocolate Vanilla
New York Cheesecake YOCREAM YOCREAM
New York Cheesecake Yogurt Dispenser Ice Cream
Outrageous Orange Smoothies Soft Serve
Peanut Butter
Pecan Praline Chai Chocolate 4.5 % B.F.
Peppermint Stick Chocolate Strawberry 4.5 % B.F.
Pina Colada Coffee Vanilla 4.5 % B.F.
Pistacho French Vanilla Vanilla 6.0 % B.F.
Pumpkin Island Breeze
Root Beer Float Mocha
Very Strawberry
Very Boysenberry YOCREAM YOCREAM
Very Raspberry SOFT SERVE Ice Cream
White Chocolate FROZEN CUSTARD Shake Base
Macadamia
Chocolate Cream Vanilla
Vanilla Cream
In Mid-2002, when the Dannon / Yocream cobrand is introduced, the above YOCREAM
soft serve frozen yogurt (premium and nonfat), and YOCREAM FREE products will be
distributed under the cobrand label.
Manufacturing Process
All of the manufacturing and packaging of the Company's products for both domes-
tic and international sales occurs at its plant in Portland, Oregon. Product
for international markets is containerized for export. Through mid fiscal 2000,
the Company utilized a Canadian dairy as a co-packer for production of its
products for the Canadian market. The Company is not presently copacking in
Canada, but may do so again in the future.
While the manufacturing plant is capable of producing a full range of dairy
products and other fluid items, such as fruit based beverages, it primarily is
utilized to produce frozen yogurt, ice cream, sorbet and smoothies. The
facility is a fully licensed dairy and pasteurizes its products under USDA
certification and inspection. One unique feature of the facility is its ability
to produce under Organic Certification, organic ice creams, yogurts, and
sorbets. Throughout the facility, both organic and non-organic products can be
processed and packaged simultaneously while maintaining separation.
The manufacturing plant has four distinct packaging operations than can be
operated simultaneously based on demand. One operation is for the filling of
half gallon gable top containers for soft serve products. A second line
packages hard packed yogurt, ice cream and sorbet products in quarts, pints and
4 ounce cups. Within these two operations are a multitude of packaging sizes,
styles, and finished casing capabilities along with a full range of condiments
that can be added to the finished products. A third packaging line handles bag-
in-box applications for our dispenser smoothie line. Lastly, the bottling line
can package liquid products in plastic or glass containers ranging from 6 ounce
to 32 ounce bottles. Management estimates that plant utilization is
approximately 42%, after the plant upgrade described below.
In January 2001, the Company completed a major upgrade of its plant facilities,
as part of the Company's commitment to its customers and to the market place.
The project more than doubled the Company's throughput capabilities, automated a
number of production processes, and upgraded bottling and bag-in-box packaging
capabilities. This allows YOCREAM to serve the increasing requirements of its
existing customers, develop products for new markets, and expand the Company's
copacking capabilities to match the development of "virtual" companies that do
not have their own production facilities. The project included expanded R&D
facilities, a "tank farm" on the outside of the plant to store product and to
allow for more efficient use of internal space for larger capacity processing
equipment, and separate production lines which enable the Company to more
efficiently package wet mix, hard pack, bottled, and bag-in-box products. The
project also included a new state-of-the-art CIP sanitation system, to assure
high standards of sanitation and food safety. At the same time, the Company
upgraded its management information system. This included installation of an
MRP (Material Resource Planning) system that will assist in the continuing
process of reducing costs and inventories while increasing the Company's
efficiencies and assuring that product quality is consistently maintained.
The manufacture and sale of the Company's products are subject to the jurisdic-
tion of a variety of regulatory authorities, including, but not limited to
federal, state, county and city agencies administering laws and regulations
relating to health, labor, and the food industry. The Company is also subject
to periodic inspections of its facilities by federal, state and local
governmental agencies, as well as by customers who may request a plant audit
conducted by certified independent companies.
The Company's Quality Assurance Department is staffed with two full time micro-
biologists and a degreed sanitarian. The Company also maintains comprehensive
quality assurance standards including a strong HACCP (Hazard Analysis Critical
Control Point) program, utilization of GMP's (Good Manufacturing Practices), and
an ingredient and finished product tracing system. Quality Assurance insures
that the most stringent levels of regulatory compliance are maintained, meeting
and exceeding all inspection standards including, but not limited to USDA, FDA,
Military Standards, food safety audits, export requirements, and organic
certifications. Additionally it is the Company's practice to follow a
comprehensive inspection program, modeled after the American Institute of Baking
(AIB) standards for dairies.
The Company believes that it is in compliance with applicable government regula-
tions, and that the strength of its quality assurance program has been validated
by the high ratings achieved on several independent audits performed during
fiscal 2001.
Inventory and Backlog
The Company is primarily a make-to-stock operation with a relatively short
cycle time, hence we do not have a significant production backlog. The Company
strives to maintain a low level of raw materials inventory. Inventory of
finished goods is maintained at levels to accommodate wide distribution of the
Company's products throughout the United States. With the implementation of
demand planning and forecasting based on history, it is expected that the
Company will be able to reduce inventories of raw and finished goods.
Distribution and Significant Customers
The Company's products are distributed nationwide and in 9 countries. Distribu-
ion is facilitated by buyer pick up or by transportation arranged by the
Company. The Company's products are generally shipped on refrigerated trucks to
all domestic locations.
While the Company has experienced growth in all customer classifications, reven-
ues derived from its largest customer, Costco Wholesale, represented 64%, 63%,
and 61% of total sales in the years ended October 31, 2001, 2000, and 1999
respectively. In fiscal year 1989, the Company began selling soft serve frozen
yogurt to Price Club. After the merger between Costco and Price Club, Costco
chose the Company's soft serve frozen yogurt, over that of competitors, for its
food courts. During 1998, Costco selected YOCREAM to develop a very berry
smoothie to be offered in its food courts. During 2001, Costco again selected
YOCREAM to develop a coffee latte freeze to be offered in its food courts. Due
to the consistently high-level of quality and customer acceptance of these
products and the efficient operation of Costco's food courts, there has been a
significant increase in its sales. Further-more, the longevity of this
relationship is due to various factors, including YOCREAM's distribution system
and responsiveness to Costco's operational and logistical requirements. Another
significant factor is the field support program that has been implemented in
cooperation with an independent broker. The support program includes an
intensive sampling of yogurt and smoothie products at all new warehouse
openings. Management is determined to maintain the quality of service that
supports the longevity of this relationship and expects that its business with
Costco will continue to grow. In fiscal 2001, sales to Costco grew by 7%, while
sales to the Company's other foodservice customers grew by approximately 9%.
Research and Development
The Company's research and development related activities include the develop-
ment of new flavors, the improvement of existing flavors, refinement of manu-
facturing processes and the development of new products. In addition to
activities related to YoCream products, services are also used to develop
proprietary products for larger customers, or assist with the development of
production formulas for copacking customers. Research also occurs on a regular
basis with respect to ingredients such as stabilizers and emulsifiers.
Furthermore, the Company has conducted activities regarding non-fat and no sugar
added products and various novelty items. The Company has also developed a line
of yogurt beverages including yogurt-juice and yogurt-coffee combinations.
Recent accomplishments include a custom blended coffee smoothie for a national
account, development of soy protein products, and formulas and packaging final-
ized for an extended shelf life smoothie beverage. The Company's development
activities occur at the Portland, Oregon facility. Total research and develop-
ment expenditures for the year ended October 31, 2001, was approximately
$269,000, compared with $454,000, and $326,000 for the years ended October 31,
2000 and 1999.
Advertising and Promotion
During the year ended October 31, 2001 such expenses totaled approximately
$327,000 representing 2.1% of net sales. These compare to $294,000, or 2.0% of
net sales in 2000; and $310,000, or 2.2% of net sales in 1999.
The Company seeks to increase sales and improve brand recognition through
financially conservative advertising and promotional methods. The Company's
promotional strategy for their direct customers, distributors and food service
accounts, includes distributor programs, trade shows, and select media placement
in trade publications. Operator/retailer, promotional strategy also includes
trade publication advertising as well as support of distributor promotions and
Company case stuffers. Consumer/end-user promotional strategy includes in-store
merchandising, or four-walls-marketing. High profile sponsorships also continue
to improve brand recognition with prominent and highly visible affiliations,
such as the NBA Portland Trailblazers and the Utah Jazz.
Seasonality
The Company's sales and earnings are somewhat seasonal with a greater percent-
age occurring in the second and third calendar quarters or spring and summer
months and, to some extent, holiday periods. Management expects that the
seasonality of sales will continue to become less significant as a result of the
copacking and private brand business the Company has obtained and because of
purchases from new customers concentrated in the warmer climate areas.
Suppliers
The primary ingredients in the Company's smoothie and yogurt products are a var-
iety of fruits and raw milk. The Company presently has one primary supplier for
the pasteurized fruit ingredients used in its smoothie products. Other pasteur-
ized fruit ingredients are purchased from a number of companies nationwide based
upon the Company's strict quality standards. Suppliers of the raw milk utilized
by the Company are mostly based in the Pacific Northwest and obtain that raw
milk from dairy farms in northern Oregon and southern Washington. Because
freshness and timeliness of delivery are critical, the Company prefers local
suppliers. After the raw milk is received, it is pasteurized at the Company's
plant before the milk becomes the primary ingredient in the Company's yogurt
products. The Company's largest supplier of raw milk supplied approximately 93%
of the Company's needs in fiscal year 2001 and the second largest supplier
provided approximately 7%. All supplies used by the Company are readily
available from a variety of suppliers. The Company has never experienced any
form of supply shortage.
Competition
The Company's products constitute a portion of a greater market, which includes
all forms of yogurt-based frozen desserts, ice cream products and non-dairy
frozen desserts. The market for the Company's products is very competitive
because of the number of alternative products available and because of the
number of businesses producing competitive products. Competition in the frozen
dessert and ice cream industry has increased over the last several years as a
result of substantial increases in the number and kind of frozen dessert prod-
ucts. Many of the companies that produce products that compete with those
of the Company are substantially larger and have significantly greater resour-
ces. Increased competition from the established manufacturers and distributors
of frozen desserts, snacks and beverages can be expected in the future.
The Company competes against different sets of manufacturers for each product
it markets. The Company's principal competitors for soft serve frozen yogurt
products include Colombo (General Mills), Freshens and Yogen Fruz / Eskimo Pie.
Chief smoothie product competitors include Colombo, Frutazza, Island Oasis, and
Parrot Ice. In addition to the large primary competitors identified, the
Company competes with numerous small local and regional companies.
The Company's products have a history of being recognized in the marketplace for
their high quality. In July 1989, the Chicago Tribune listed YOCREAM as the
best tasting of 13 national brands of frozen yogurt on the basis of a test by
seven independent judges. YOCREAM customers have continued this recognition.
And on May 11, 2000, the Miami New Times rated YOCREAM as the Best Frozen Yogurt
and commented "Fortunately science finally has come up with YOCREAM. This stuff
is super rich, extra creamy, and (Seinfeld fans take note) fat free!" Through
the Company's national system of brokers and distributors the Company believes
it competes effectively. Price and quality competition, however, has become
intense in certain geographical areas. The Company has responded to price
competition from regional dairies with its lower-priced products under the
Yogurt Stand label and to competition on quality with its YOCREAM brand
products. While the Company has experienced competitive success in the past, no
assurance can be given that the Company will continue to compete successfully
against other available products.
Other than direct competition for specific soft serve or hard pack frozen yogurt
products, the Company's products compete against certain other frozen dessert
items, such as ice cream. Management believes that with the consolidation of
the competition, there is less focus on the soft serve frozen yogurt segment,
thus creating a favorable sales environment for the Company. It should also be
noted that YOCREAM is the only nationally branded frozen yogurt with its own
manufacturing facility.
Trademarks and Trade Names
The Company registered as a trademark the name of its primary product, YOCREAM,
with the United States Patent and Trademark Office. This trademark is renewable
and, therefore, is of an indefinite term. That trademark is also registered in
Canada and may be renewed there upon expiration. Some of the Company's products
use that basic trade name with other words or designations, such as YOCREAM
LITE. In addition, the Company uses the trademarks "JUST SAY YO," "PURE
PLEASURE," "YOGURT STAND," "PURE PLEASURE, PURE FOOD, PURE ENVIRONMENT," "IT'S A
BELIEF, IT'S A LIFESTYLE," "SOFT SCOOP" "YO CAFFE'" "SMOOTH AND TASTY", and
"FRUITQUAKE". The Company has registered or intends to register these trade-
marks in the United States and may register the trademark YOCREAM in other
foreign countries.
Employees
The Company employed 52 persons at October 31, 2001, all of whom were full-time
(35 hours per week or more.) None of the Company's employees are covered by
collective bargaining agreements, and management believes its employee relations
are good. The Company's sales representatives manage a network of national and
regional foodservice brokers. These are independent brokers and paid by commis-
sions on sales. The Company has never experienced a labor strike or work
stoppage.
Item 2: PROPERTIES
The Company is located in a 34,200 square foot facility at 5858 NE 87th Avenue,
Portland, Oregon 97220. Of this total space, the Company uses approximately
8,700 square feet for production, approximately 9,000 square feet for freezer
and refrigeration purposes, and approximately 4,500 for office space. The
Company has designated the remaining 12,000 square feet for warehouse purposes
and expansion of the Company's freezer and production facilities.
The lease of the Company's production and office facilities expired on May 14,
1994 and the Company exercised its option to purchase the property. In order
to preserve capital, the Board of Directors decided that the Corporation should
allow certain of its officers and directors to purchase the property, with the
Corporation then leasing it from them. Thereafter, John N. Hanna, David J.
Hanna and James S. Hanna, together with others, formed Pente Investments for
the purpose of purchasing the property and leasing it to the Corporation. In
fiscal year 1998, Pente Investments agreed to fund a 4,200 square foot facility
to provide for needed office space. The current lease as amended has a remain-
ing term of approximately 11 years and provides for a base rent of $15,600 per
month for the next year and then increasing at approximately 3% per year
thereafter.
During 1999, the Company leased, from an unrelated party, approximately 5,500
square feet of additional dry warehouse space in a nearby facility. This lease
expires in July 2002.
Other materially important property of the Company includes certain equipment
which it utilizes to manufacture and distribute its frozen yogurt products,
including standard dairy equipment, holding tanks and refrigeration units. In
addition, the Company leases other equipment under capital and operating
leases.
Item 3: LEGAL PROCEEDINGS
As of the date of this Annual Report on Form 10-K, the Company had no material
litigation pending against it.
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders during the
final quarter of fiscal year 2001.
PART II
Item 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS.
The common stock of the Company is traded in the over-the-counter market and is
quoted on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ") under the symbol YOCM. As of January 14, 2002, there were
2,258,398 shares of the common stock outstanding and there were 158 shareholders
of record estimated to represent approximately 900 beneficial holders based on
the number of individual participants in security position listings. On January
14, 2002 the closing bid and asked prices were $3.83 and $4.08, respectively.
The following table sets forth the high and low closing prices for quarterly
periods in the two twelve month periods ended October 31, 2001 and October 31,
2000, as reported by Nasdaq Stock Market:
Twelve months Ended October 31, 2001 High Low
August 1, 2001 - October 31, 2001 $4.00 $3.00
May 1, 2001 - July 31, 2001 3.93 3.20
February 1, 2001 - April 30, 2001 3.97 3.13
November 1, 2000 - January 31, 2001 3.88 3.25
Twelve months Ended October 31, 2000 High Low
August 1, 2000 - October 31, 2000 $4.00 $3.00
May 1, 2000 - July 31, 2000 4.06 3.06
February 1, 2000 - April 30, 2000 4.75 3.50
November 1, 1999 - January 31, 2000 6.00 3.63
The Company has not paid dividends on its common stock since the stock began
public trading on November 17, 1987. The Company does not expect to pay cash
dividends on its common stock in the foreseeable future. The Company intends
to invest funds otherwise available for dividends, if any, on improving the
Company's capital assets.
Item 6: SELECTED FINANCIAL DATA.
The following selected financial data set forth below as of October 31, 2001,
2000 and for each of the three years in the period ended October 31, 2001 are
derived from the audited financial statements included elsewhere in this report
and are qualified by reference to such financial statements. The selected
financial data as of October 31, 1999, 1998, and 1997 and for each the two
years in the period ended October 31, 1998, are derived from financial
statements not included herein.
October 31
Balance Sheets 2001 2000 1999 1998 1997
Total Current Assets $4,930,738 $4,372,804 $4,637,304 $3,356,445 $3,380,607
Total Assets 9,589,769 7,426,575 7,356,915 6,555,657 5,810,593
Long-Term Debt 1,037,024 125,073 201,238 162,605 222,975
Shareholders' Equity 6,818,348 6,130,492 5,351,730 4,451,320 3,185,918
For the Years Ended October 31,
Statements of Income 2001 2000 1999 1998 1997
Sales (1) $15,882,540 $15,088,532 $14,259,358 $10,206,524 $8,677,547
Income from
Operations 1,125,081 1,542,737 1,468,445 616,079 386,318
Income before Taxes 1,021,193 1,572,918 1,424,066 502,703 274,546
Income Tax Provision
(Benefit) (2) (3) 268,000 548,000 406,000 (200,000) (159,000)
Net Income 753,193 1,024,918 1,018,066 702,703 433,546
Earnings per Common
Share-Basic .33 .45 .44 .31 .20
Earnings per Common
Share-Diluted .33 .45 .43 .30 .19
(1) As a result of EITF 00-14, "Accounting for Sales Incentives", and EITF 00-
25 Vendor Income Statement Characterization of Consideration Paid to a Reseller
of the Vendor's Products, the cost of sales incentive programs presently
classified as sales and marketing expenses, will be reclassified as a reduction
of sales beginning in the first quarter of 2002. This reclassification will
have no effect on net income as previously reported.
(2) Income tax benefit in fiscal years 1998 and 1997 related to reevaluations
of the benefit of net operating loss carryforwards. As of fiscal 2000, the
Company has fully utilized all of the net operating loss carryforwards.
(3) The effective tax rate of 26.3% in fiscal 2001 is less than a normal rate
of approximately 38% due to realizing the benefit of research and development
tax credits relating to several prior years.
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
Sales
The Company's sales were $15,882,540, $15,088,532, and $14,259,358, for the
years ended October 31, 2001, 2000, and 1999, respectively, and represented
increases of 5.3% in 2001 and 5.8% in 2000. The increases in 2001 were approx-
imately evenly split between volume related increases in the sales of yogurt
and smoothie products, with a slight decrease in copacking revenues. The
breakdown of revenues is approximately 56% yogurt products, 43% smoothie
products, and 1% copacking.
Although fiscal 2001 sales were impacted by the downturn in the economy, food-
service sales in the last half of the year were up 18%, which resulted in this
group's sales for the year increasing approximately 9%. This outpaced the
results for the industry, primarily as a result of the Company's strategic
alliance with the Dannon Company, Inc., which began in July 2001, and the
expansion of the Company's field sales personnel. The Dannon alliance provided
the Company with several new brokers and distributors in previously untapped
markets. It also facilitated accessing national and international accounts
that had not been penetrated in the past. The upgrade of the Company's plant
was also a factor in bringing about the alliance, and supporting the growth in
sales for the year.
In October 2001, the Company announced that the alliance with the Dannon Company
was expanded, beyond selling yogurt to Dannon's foodservice customers, to
include a co-branded line of soft serve frozen yogurt. The top-quality product
line will be Dannon / YoCream and will include more than forty flavors of soft
serve frozen yogurt. The co-branded line, which will utilize YoCream formulas
and include non-fat, low fat, and no sugar added flavors, is expected to be
available nationally by mid-2002 through traditional food service distributors.
The strength of the Dannon name along with YoCream's concentration on the
foodservice or on-premise marketplace is expected to offer significant oppor-
tunities for increased sales and market share. Management believes that the two
companies are similar in philosophy, and both company's yogurt products are
known for their high live culture count, with an emphasis on product quality and
appeal to consumers with concerns for health and nutrition.
Sales to Costco Wholesale (domestic) increased approximately 7% as a result of
new store openings, innovative programs and the roll out of a high quality new
coffee latte freeze product. Sales were impacted by a decrease in prices.
Based on initial results, the new coffee latte is expected to be as significant
as the original berry smoothie, with complete rollout expected to spread over
two years. International sales were down for the year.
The favorable sale trend from the fourth quarter, with sales up 16.4%, has
continued into the new year with sales for the first two months up 30% over the
same period in the prior year. This is exceptional performance during what
would normally be the slowest season of the year. It is also exceptional
considering the special challenges created by the tragedy of September 11 and
the general downturn in the economy.
The Company is also in the process of aggressively pursuing additional copacking
business, and evaluating the market for another bottle smoothie product.
Cost of Sales
The cost of sales, as a percentage of revenues, were 68.9%, 67.6%, and 68.8%
in 2001, 2000, and 1999 respectively. Costs increased in 2001 as a result of
increases in ingredients, transportation, and utility costs, as well as by
increases in depreciation and lease payments related to the plant upgrade
project completed in January 2001. Costs decreased in 2000, primarily due to
improvements in supply chain management, production efficiencies, and from
increased volume.
Ingredients used in the Company's products are agricultural products subject to
price risk. The Company attempts to minimize this risk by entering into con-
tracts to cover its annual production requirements. During 2001 when certain
contracts matured, the Company experienced significant increases in the costs of
vanilla, cocoa, and liquid sugar. Competitive conditions limit the ability to
pass on these cost increases. However, management is aggressively pursuing
alternatives to significantly reduce logistic costs. Furthermore, the Company's
research and development department is studying alternatives to high cost
ingredients while maintaining its strict commitment to quality. The Company
also expects economies of scale to accompany sales increases.
In fiscal 2002, management is currently in the process of studying alternatives
for reducing logistics costs.
Gross Profit
Gross profit margins were 31.1%, 32.4%, and 31.2% in 2001, 2000, and 1999.
Margins decreased in 2001 as a result of the pressure on sales prices, and the
increase in cost of sales. Margins increased in 2000 as a result of the
improvement in costs described above.
Selling and Marketing Expenses
Selling and marketing expenses, as a percentage of revenues, for the years
ended October 31, 2001, 2000, and 1999 were 12.6%, 11.1%, and 11.8%, respec-
tively. Such expenses are generally related to the level of revenues and
marketing activities. The increase in 2001 relates to the addition of regional
sales personnel and related expenses, expenses related to acquiring the Dannon
business, royalty payments to Dannon, and by increases in rebates and promo-
tional expenses. The expenses for the two prior years were level, as a
percentage of sales, primarily due to the stability of expenses for the
Company's in-house sales and marketing staff.
Since the end of fiscal 2001, the Company has added a national accounts manager
to facilitate expansion of its military and government business obtained through
the initial agreement with Dannon, and the development of other national account
business that is expected as a result of the Dannon / Yocream co-brand
agreement.
General and Administrative Expenses
General and administrative expenses for the years ended October 31, 2001, 2000,
and 1999, as a percentage of revenues, were 11.5%, 11.1%, and 9.1%, respec-
tively. Overall general and administrative expenses have increased over the
three-year period, primarily due to increases in personnel costs, professional
fees, and various other administrative expenses.
Income from Operations
Income from operations for the years ended October 31, 2001, 2000, and 1999
was $1,125,081, $1,542,737, and $1,468,445, respectively. As a percentage of
revenues, income from operations was 7.1%, 10.2%, and 10.3%, respectively. The
results for 2001 were impacted by the Company's commitment to expand its sales
organization and intensify its marketing programs. Management believes,
however, that such expenditures have contributed to the growth in foodservice
sales, and were it not for the downturn in the economy, sales and income from
operations would have been higher. The results were also affected by the
increase in cost of sales described above. The results for 2000 were level with
1999, even though sales and gross margins increased, because of the increase in
administrative expenses described above.
Other Income (Expense)
Interest expense increased in 2001 as a result of the term loan in June 2001
associated with the plant upgrade project. Over the last two years construction
interest capitalized amounted to $5,300 in 2001, and $20,600 in 2000.
Other expense of $71,470 in fiscal 2001, primarily represents a provision for
loss on disposition of surplus equipment.
Income before Income Taxes
Income before taxes for the years ended October 31, 2001, 2000, and 1999 was
$1,021,193, $1,572,918, and $1,424,066, respectively. In comparison to the
prior year, income before income taxes was down 35.1% in 2001 and up 10.5% in
2000, for the reasons described above.
Provision for Income Taxes
In 1999, as a result of the substantial increase in operating results, the
Company recognized the remaining benefit of the net operating losses, which
occurred prior to 1995, in the amount of $106,000 and recorded a tax provision
of $406,000, net of the above benefit. The tax provision primarily represented
a reduction in the deferred tax asset for the NOL's that have been utilized to
offset taxes that would otherwise be payable.
In 2000, the Company utilized the remaining federal and state net operating loss
carryforwards aggregating approximately $1,116,000 and $321,000, respectively to
reduce taxes payable, and recorded a tax provision of $548,000. The tax provis-
ion primarily represents a reduction in the deferred tax asset.
In 2001, the tax provision was reduced by research and development tax credits
of approximately $145,000 relating to several years.
The effective tax rate was 26.3%, 34.8% and 28.5% in 2001, 2000 and 1999,
respectively. The effective rates are less than the expected rate of 38.4%
primarily due to the recognition of the remaining NOL benefit described above
and federal tax credits. In the future, the Company expects that its provision
for income taxes will be at or near the applicable federal and state statutory
rates.
Net Income
Net income for the years ended October 31, 2001, 2000, and 1999 was $753,193,
$1,024,918, and $1,018,066, respectively. Net income, as a percentage of sales,
was 4.7%, 6.8%, and 7.1% in each of the three years. In addition to the factors
described above, management believes that operating results would have been even
greater for the last two years were it not for the diversion of the major
capital project, and the focus on establishing the strategic alliance with the
Dannon Company, Inc., and the general downturn in the economy.
Liquidity and Capital Resources
In recent years, the Company has financed its operations and expansion from bank
loans, operating leases, capital leases, stock sales, and internally generated
funds.
During the three years ended October 31, 2001, the Company entered into oper-
ating leases relating to certain assets utilized in its production process.
(See Note M of the Notes to Financial Statements for a description of these off-
balance sheet lease commitments.)
As a result of the significant increase in sales and operating results over the
last three years, the Company has experienced a corresponding increase in cash
flow. EBITD (earnings before interest, taxes and depreciation) was approx-
imately $1,665,000, $1,954,000, and $1,833,000 in 2001, 2000, and 1999, respec-
tively. As a result the Company was able to payoff its bank line of credit in
mid-1999, finance approximately 50% of the plant upgrade expenditures in 2001
and 2000, and increase cash and cash equivalents.
At October 31, 2001, the Company has an unused bank line of credit of
$2,000,000. The current agreement matures in July 2003, and provides for
interest rate at prime, with the option to lock in sub-prime rates on blocks of
funds up to 90 days.
At October 31, 2001, the Company also has a $1,307,000 term loan, which was
arranged to partially finance the plant upgrade project. The facility provides
for payments over five years with interest at 30-day LIBOR plus 200 basis
points, with the option to fix the rate during the term. The facility is
subject to the same debt covenants as the revolving line of credit, and is
collateralized by the plant project assets and other existing equipment and
fixtures as of June 30, 2001. The lender has agreed to release its security
interest in the other equipment and fixtures after the outstanding balance is
reduced to $700,000, provided that the ratio of the loan to appraised value of
the collateral is equal to or less than .70 to 1.00.
Accounts receivable at October 31, 2001 and 2000 were approximately $1,039,000,
and $997,000, respectively. This increase is primarily attributable to the
increase in sales compared to the fourth quarter of last year.
Inventories at October 31, 2001 and 2000 were approximately $2,474,000, and
$2,497,000, respectively.
Working capital at October 31, 2001 and 2000 was approximately $3,196,000, and
$3,202,000, respectively.
The Company leases its offices and production facilities. The lease has a
remaining term of approximately 11 years with renewal provisions and provides
for a base rent of $187,000 annually for the next year and then increases at
approximately 3% per year thereafter. (See Note M of Notes to Financial
Statements for a description of the terms).
The Company's capital expenditures for the years ended October 31, 2001, 2000,
and 1999 were approximately $2,245,000, $1,090,000, and $216,000, respectively.
Expenditures in the last two years include approximately $2,833,000 relating to
the plant upgrade project.
The Company is in the process of evaluating its capital expenditure plans for
fiscal 2002, which are not expected to exceed $800,000. The Company believes
that adequate financing can be arranged, including an equipment financing
facility with its primary lender.
During the three years ended October 31, 2001, 2000, and 1999 the Company
repurchased 45,592, 98,710, and 72,800 shares, respectively of its common stock.
It has been the Company's practice to purchase shares of its stock from time to
time, and the Company expects to continue this practice in fiscal 2002,
pursuant to a board approved plan. The Company also purchases stock for its
required contributions to the Company's 401(k) Employee Savings Plan and Trust.
(See Note G of Notes to Financial Statements for a further explanation).
The Company believes its existing assets, bank lines, and cash flow from oper-
ations will be sufficient to fund the Company's operations for at least the next
twelve months.
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item 8 is submitted as Appendix A to this report.
Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The response to this item is incorporated herein by reference from the
sections entitled "ELECTION OF DIRECTORS" and "INFORMATION REGARDING MANAGEMENT
AND DIRECTORS" in the Company's Proxy Statement for its 2002 Annual Meeting of
Shareholders.
Item 11: EXECUTIVE COMPENSATION.
The response to this item is incorporated herein by reference from the
section entitled "EXECUTIVE COMPENSATION" in the Company's Proxy Statement for
its 2002 Annual Meeting of Shareholders.
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The response to this item is incorporated herein by reference from the
section entitled "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" in the Company's Proxy Statement for its 2002 Annual Meeting of
Shareholders.
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The response to this item is incorporated herein by reference from the
section entitled "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in the
Company's Proxy Statement for its 2002 Annual Meeting of Shareholders.
PART IV
Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements. The response to this portion of Item 14 is
submitted as Appendix A to this report.
(a) (2) Financial Statement Schedules. The response to this portion of
Item 14 is submitted as Appendix A to this report.
(a) (3) Exhibits. The following exhibits are filed as part of this
annual Report on Form 10-K and this list constitutes the Exhibit
Index.
Exhibit Filing
Number Exhibit Reference
3.1 Restated Articles of Incorporation i
of the Company.
3.2A Articles of Amendment, dated ii
October 29, 1991.
3.2B Articles of Amendment, dated viii
March 24, 1999, changing name
to YOCREAM International, Inc.
3.3 Amended Bylaws of Company. i
3.4 Amendment to Amended Bylaws, dated iii
March 14, 1990.
3.5 Amendment to Amended Bylaws, dated iii
April 10, 1991.
10.1 1990 Non-Discretionary Stock Option iv
Plan for Non-Employee Directors.
10.2 1990 Non-Qualified Employee Stock iv
Option Plan
10.3 1994 Combined Incentive and Non-qualified vi
Stock Option Plan
10.4 Commercial lease and by and between v
John N. Hanna, David J. Hanna,
James S. Hanna, Harry M. Hanna
and Joseph J. Hanna Jr; landlord and
YOCREAM International, Inc., dated
July 5, 1994. Assignment of the lease
To Pente Investments L.L.C.,
dated July 5, 1994
10.5 Amendment No.1 to commercial lease vii
between Pente Investments L.L.C. and
YOCREAM International, Inc., dated
June 4, 1998.
10.6 2000 Stock Option Plan ix
23.1 Consent of Independent Accountants
filed herewith
i Incorporated herein by reference from the
Company's Registration Statement on Form
S-18, dated November 17, 1987.
ii Incorporated herein by reference from the Company's
Annual Report on Form 10-K for fiscal year ended
October 31, 1991.
iii Incorporated herein by reference from the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1990.
iv Incorporated herein by reference from the Company's
Report on Form 8-K, dated as of December 6, 1990.
v Incorporated herein by reference from the Company's
Quarterly report form 10-Q for the quarter ended
July 31, 1994.
vi Incorporated by reference from the Company's Registration
statement on Form S-8, dated August 7, 1996
vii Incorporated herein by reference from the Company's
Annual Report form 10-K for the fiscal year ended
October 31, 1998.
viii Incorporated herein by reference from the Company's
Quarterly report form 10-Q for the quarter ended
April 30, 1999.
ix Incorporated by reference from the Company's
Quarterly report from 10-Q for the quarter ended
April 30, 2000.
(b) Reports on Form 8-K:
None
(c) See (a)(3) above for all exhibits filed herewith and
the Exhibit Index above.
(d) No financial statements required by Regulation S-X
were excluded from materials delivered to shareholder.
SIGNATURES
Pursuant to the requirements of Section 13 or 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.
YOCREAM INTERNATIONAL, INC. Dated: January 29, 2002
By: /s/ John N. Hanna
John N. Hanna
Chief Executive Officer and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ John N. Hanna Dated: January 29, 2002
John N. Hanna
Chief Executive Officer and
Chairman of the Board of Directors
By: /s/ David J. Hanna Dated: January 29, 2002
David J. Hanna
President and Director
By: /s/ James S. Hanna Dated: January 29, 2002
James S. Hanna
Director
By: /s/Carl G. Behnke Dated: January 29, 2002
Carl G. Behnke
Director
By: /s/ Joseph Hanna Dated: January 29, 2002
Joseph Hanna
Director
By: /s/ Craig Tall Dated: January 29, 2002
Craig Tall
Director
By: /s/ William J. Rush Dated: January 29, 2002
William J. Rush
Director
By: /s/ W. Douglas Caudell Dated: January 29, 2002
W. Douglas Caudell
Chief Financial Officer
No annual report or proxy material has been sent to security holders as of
the date hereof. Such annual report and proxy material will be furnished to
security holders subsequent to the filing of this report on Form 10-K. Copies
of the definitive version of such materials shall be furnished to the
Commission when they are sent to security holders.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Registrant's articles of incorporation, or
otherwise, the Registrant has been advised that in opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) as asserted by such director, officer or
controlling person in connection with securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1993 and will be governed by the final
adjudication of such issue.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We have issued our report dated December 20, 2001, accompanying the consolidated
financial statements included in the annual report of YoCream International,
Inc. on Form 10-K for the year ended October 31, 2001. We hereby consent to
the incorporation by reference of said report in the Registration Statements of
YoCream International, Inc. on Forms S-8 (File No. 333-09695, effective August
26, 1996, and File No. 333-59960, effective May 1, 2001).
\s\ GRANT THORNTON LLP
Portland, Oregon
January 28, 2002
C O N T E N T S
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENTS
BALANCE SHEETS 2
STATEMENTS OF INCOME 3
STATEMENT OF SHAREHOLDERS' EQUITY 4
STATEMENTS OF CASH FLOWS 5
NOTES TO FINANCIAL STATEMENTS 6
Report of Independent Certified Public Accountants
Board of Directors and Shareholders
YOCREAM International, Inc.
We have audited the balance sheets of YOCREAM International, Inc. as of October
31, 2001 and 2000, and the related statements of income, shareholders' equity
and cash flows for each of the three years in the period ended October 31, 2001.
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 auditing standards generally accepted
in the United States. 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 YOCREAM International, Inc. as
of October 31, 2001 and 2000, and the results of its operations and its cash
flows for each of the three years in the period ended October 31, 2001, in
conformity with accounting principles generally accepted in the United States.
\s\ GRANT THORNTON LLP
Portland, Oregon
December 20, 2001
YOCREAM International, Inc.
BALANCE SHEETS
October 31,
2001 2000
ASSETS
Current assets
Cash and cash equivalents $ 1,161,661 $ 719,139
Trade accounts receivable, net of allowance
for doubtful accounts of $28,500 in 2001
and $20,586 in 2000 1,039,003 997,076
Inventories 2,473,538 2,497,413
Other current assets 256,536 159,176
Total current assets 4,930,738 4,372,804
Fixed assets, net 4,344,981 2,706,420
Deferred income taxes 5,000 54,000
Intangible and other long-term assets, net 309,050 293,351
$ 9,589,769 $ 7,426,575
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 344,676 $ 106,675
Accounts payable 1,142,398 880,882
Income taxes payable 122,175 68,996
Other accrued liabilities 125,148 114,457
Total current liabilities 1,734,397 1,171,010
Long-term debt, less current portion 1,037,024 125,073
Total liabilities 2,771,421 1,296,083
Shareholders' equity
Preferred stock, no par value, 5,000,000
shares authorized, none issued or outstanding - -
Common stock, no par value,
30,000,000 shares authorized 4,797,204 4,862,541
Retained earnings 2,021,144 1,267,951
Total shareholders' equity 6,818,348 6,130,492
$ 9,589,769 $ 7,426,575
The accompanying notes are an integral part of these statements.
YOCREAM International, Inc.
STATEMENTS OF INCOME
For the year ended October 31,
2001 2000 1999
Sales $ 15,882,540 $ 15,088,532 $ 14,259,358
Cost of goods sold 10,943,022 10,196,307 9,814,338
Gross profit 4,939,518 4,892,225 4,445,020
Selling and marketing expenses 1,994,780 1,680,963 1,677,435
General and administrative expenses 1,819,657 1,668,525 1,299,140
Income from operations 1,125,081 1,542,737 1,468,445
Other income (expense)
Interest income 22,806 34,477 9,795
Interest expense (55,224) (4,296) (70,375)
Other, net (71,470) - 16,201
Income before income taxes 1,021,193 1,572,918 1,424,066
Income tax provision 268,000 548,000 406,000
NET INCOME $ 753,193 $ 1,024,918 $ 1,018,066
Earnings per common share - basic $ 0.33 $ 0.45 $ 0.44
Earnings per common share - diluted $ 0.33 $ 0.45 $ 0.43
Shares used in basic earnings
per share 2,262,657 2,282,180 2,314,861
Shares used in diluted earnings
per share 2,271,186 2,303,639 2,371,351
The accompanying notes are an integral part of these statements.
YOCREAM International, Inc.
STATEMENT OF SHAREHOLDERS' EQUITY
Total
Common Stock Retained Earnings Shareholders'
Shares Amounts (Deficit) Equity
Balance, October 31, 1998 2,321,593 $5,226,353 $ (775,033) $4,451,320
Net income - - 1,018,066 1,018,066
Stock options exercised 60,500 221,750 - 221,750
Repurchase of common stock (72,800) (370,830) - (370,830)
Tax benefit of options exercised - 31,424 - 31,424
Balance, October 31, 1999 2,309,293 5,108,697 243,033 5,351,730
Net income - - 1,024,918 1,024,918
Stock options exercised 52,000 112,350 - 112,350
Repurchase of common stock (98,710) (396,606) - (396,606)
Tax benefit of options exercised - 38,100 - 38,100
Balance, October 31, 2000 2,262,583 4,862,541 1,267,951 6,130,492
Net income - - 753,193 753,193
Stock options exercised 43,000 84,350 - 84,350
Repurchase of common stock (45,592) (173,092) - (173,092)
Tax benefit of options exercised - 23,405 - 23,405
Balance, October 31, 2001 2,259,991 $4,797,204 $2,021,144 $6,818,348
The accompanying notes are an integral part of these statements.
YOCREAM International, Inc.
STATEMENTS OF CASH FLOWS
For the year ended October 31,
2001 2000 1999
Cash flows from operating activities
Net income $ 753,193 $1,024,918 $1,018,066
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 588,996 377,298 338,739
Loss (Gain) on disposal of equipment 72,302 - (16,201)
Deferred income taxes 49,000 413,000 351,000
Change in assets and liabilities
Accounts receivable (41,927) 64,542 (153,869)
Inventories 23,875 128,749 (709,037)
Other assets (135,388) 17,995 11,727
Accounts payable 228,518 (648,850) 595,906
Other accrued liabilities 63,869 21,848 65,897
Net cash provided by operating
Activities 1,602,438 1,399,500 1,502,228
Cash flows from investing activities
Proceeds from disposal of equipment - - 52,116
Expenditures for fixed assets (2,244,531) (1,089,513) (215,571)
Net cash used in investing
Activities (2,244,531) (1,089,513) (163,455)
Cash flows from financing activities
Net decrease in note payable to bank - - (782,800)
Proceeds from issuance of long-term debt 1,400,000 - 150,000
Principal payments on long-term debt (250,048) (82,100) (96,731)
Repurchase of common stock (173,092) (396,606) (370,830)
Proceeds from exercise of stock options 107,755 150,450 221,750
Net cash provided by (used in)
financing activities 1,084,615 (328,256) (878,611)
Net increase (decrease) in
cash and cash equivalents 442,522 (18,269) 460,162
Cash and cash equivalents, beginning of year 719,139 737,408 277,246
Cash and cash equivalents, end of year $1,161,661 $ 719,139 $ 737,408
The accompanying notes are an integral part of these statements.
YOCREAM International, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE A - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
YOCREAM International, Inc. (the Company) was incorporated on January 14, 1977
in the state of Oregon. The Company manufactures and wholesales frozen yogurt
deserts, snacks and beverages primarily, under the name "YO CREAM". Sales are
made primarily throughout the United States to and through a variety of outlets,
including distributors, discount club warehouses, supermarkets, grocery stores,
convenience stores, restaurants, hospitals, schools, military installations,
yogurt shops and fast food chains.
1. Cash and cash equivalents
Cash and cash equivalents include money market and other short-term investments
with a remaining maturity of three months or less when purchased.
2. Inventories
Inventories are stated at the lower of cost or market. The Company determines
cost based on the first-in, first-out (FIFO) method for raw materials, packaging
materials and supplies, and based on standard costs for
finished goods.
3. Fixed Assets
Fixed assets are stated at cost. Expenditures for replacements and improvements
are capitalized, and expenditures for repairs and maintenance and routine
replacements are charged to operating expense as incurred. When assets are sold
or otherwise disposed of, the cost and related accumulated depreciation are
eliminated from the accounts and any resulting gain or loss is included in
operations. Depreciation is provided for on a straight-line basis in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives. Leasehold improvements are amortized over the life of
the lease or the service life of the improvement, whichever is shorter. The
estimated lives used in calculating depreciation and amortization are:
Plant equipment 10-25 years
Office equipment and furnishings 3-10 years
Leasehold improvements 5-14 years
4. Supplemental Cash Flow Information
The Company made cash interest payments of $60,570, $24,897 and $76,761 for the
years ended October 31, 2001, 2000, and 1999, respectively. Income taxes paid
for the years ended October 31, 2001 and 2000 totaled $142,415 and $24,860,
respectively. There were no income taxes due or paid during the year ended
October 31, 1999.
5. Significant Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
YOCREAM International, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE A - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
6. Financial Instruments
The carrying values of the Company's financial instruments consisting of cash
and cash equivalents, accounts receivable and payable, approximate fair value
because of the relatively short maturity of these instruments. The carrying
value of notes payable and long-term debt approximate fair values based upon
the interest rates available to the Company for similar instruments.
7. Earnings Per Share (EPS)
Basic EPS is computed using the weighted average number of shares of common
stock outstanding for the period. Diluted EPS is computed using the weighted
average number of shares of common stock and dilutive common stock equivalents
outstanding during the period. Common equivalent shares from stock options are
excluded from the computation when their effect is antidilutive.
8. Shipping and Handling Costs
Shipping and handling costs are classified as part of cost of sales.
9. Recent Accounting Pronouncements
On July 20, 2001 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." These statements make
significant changes to the accounting for business combinations, goodwill,
and intangible assets.
SFAS No. 141 establishes new standards for accounting and reporting requirements
for business combinations and will require that the purchase method of account-
ing be used for all business combinations initiated after June 30, 2001. Use of
the pooling-of-interests method will be prohibited. The Company believes the
adoption of SFAS 141 will have no impact on its financial statements.
SFAS No. 142 establishes new standards of accounting for goodwill and other
intangible assets and, eliminates amortization of goodwill and instead sets
forth methods to periodically evaluate goodwill for impairment. Intangible
assets with a determinable useful life will be continue to be amortized over
that period. The Company expects to adopt SFAS 142 for the first quarter ending
January 31, 2002. The Company believes the adoption of SFAS 142 will have no
impact on its financial statements.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations." This statement addresses the
financial accounting and reporting for the retirement of tangible long-lived
assets and the associated asset retirement costs. The Company believes the
adoption of SFAS 143 will have no significant impact on its financial
statements.
YOCREAM International, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE A - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
In August 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." This statement
addresses the financial accounting and reporting for the impairment or disposal
of long-lived assets. The Company believes the adoption of SFAS 144 will have
no significant impact on its financial statements.
In May 2000, the Emerging Issues Task Force ("EITF"), a subcommittee of the
Financial Accounting Standards Board, issued EITF No. 00-14 "Accounting for
Certain Sales Incentives." The EITF subsequently amended the transition
provisions of EITF 00-14 in November 2000 and in April 2001. EITF 00-14
prescribes guidance regarding timing of recognition and income statement
classification of costs incurred for certain sales incentive programs. This
guidance requires certain coupons, rebate offers and free products offered
concurrently with a single exchange transaction to be recognized at the later of
when the revenue is recognized or when the sales incentive is offered, and
reported as a reduction of revenue. The Company is required to adopt EITF 00-14
in the first quarter of fiscal 2002. Upon application of EITF 00-14, comparative
financial statements for prior periods will be reclassified to comply with the
classification guidelines of EITF 00-14. While it is expected that EITF 00-14
will have an impact on the Company's financial statements, the impact is
expected to be limited to the classification of revenue and expense items within
the statements of operations. Currently, given the guidance of EITF 00-14, the
Company anticipates reclassifying certain of its sales incentives, primarily
consisting of rebates, as a reduction of sales rather than as a sales and
marketing expense.
In April 2001, the EITF issued EITF No. 00-25 "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products."
EITF No. 00-25 addresses the timing, recognition and classification in the
income statement of certain promotional costs paid to a retailer or wholesaler
by a vendor in connection with the sale of the vendor's products or promotion
of sales of the vendor's products by the retailer or wholesaler. This guidance
generally requires these costs to be recognized when incurred and reported as a
reduction of revenue. The Company is required to adopt EITF 00-25 in the first
quarter of fiscal 2002. Upon application of EITF 00-25, comparative financial
statements for prior periods will be reclassified to comply with the
classification guidelines of EITF 00-25. While it is expected that EITF 00-25
will have an impact on the Company's financial statements, the impact is
expected to be limited to the classification of revenue and expense items
within the statements of operations. Currently, given the guidance of EITF 00-
25, the Company anticipates reclassifying third party rebates as a reduction of
sales rather than as a sales and marketing expense.
The Company believes the adoption of EITF No. 00-14 and EITF No. 00-25 will
result in a reclassification that will decrease previously reported net sales
and previously reported sales and marketing expense by approximately $264,000
in 2001 and $147,000 in 2000. The Company does not believe that the adoption of
EITF No. 00-14 and EITF No. 00-25 will have a material effect on net income of
the Company.
YOCREAM International, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE B - INVENTORIES
Inventories consist of the following at October 31,:
2001 2000
Finished goods $ 1,931,184 $ 1,462,374
Raw materials 329,512 814,735
Packaging material and supplies 212,842 220,304
$ 2,473,538 $ 2,497,413
NOTE C - FIXED ASSETS
Fixed assets consist of the following at October 31,:
2001 2000
Machinery and equipment $ 5,795,983 $ 3,068,437
Office equipment and furnishings 218,947 126,687
Leasehold improvements 1,154,415 832,268
Construction in process 80,201 1,101,766
7,249,546 5,129,158
Less accumulated depreciation
and amortization (2,904,565) (2,422,738)
$ 4,344,981 $ 2,706,420
Depreciation and amortization expense related to the Company's fixed assets
aggregated $567,759, $366,763 and $326,594, for the years ended October 31,
2001, 2000, and 1999.
During the year ended October 31, 2000, the Company began a major renovation of
its production facilities. Through October 31, 2000 the project has been
financed with cash flows from operations, a term loan facility, and operating
leases. The plant upgrade project was completed in January 2001.
During the year ended October 31, 2001, the Company borrowed $1,400,000 under a
secured term loan facility with its bank to finance approximately 50% of the
project. The facility provides for payments over five years with interest at
30 day LIBOR plus 200 basis points, with the option to fix the rate during the
term. The facility is subject to the same debt covenants as the revolving line
of credit (see Note E), and is collateralized by the plant upgrade project
assets and other existing equipment and fixtures as of June 30, 2001. The
lender has agreed to release its security interest in the other equipment and
fixtures after the outstanding balance is reduced to $700,000, provided that
the ratio of the loan to appraised value of the collateral is equal to or less
than .70 to 1.00.
At October 31, 2001, the Company had a commitment to acquire $400,000 of
production equipment with bank financing arranged with terms similar to the
secured term loan facility.
YOCREAM International, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE D - INTANGIBLE AND OTHER LONG-TERM ASSETS
Intangible assets consist of trademarks, principally "YoCream" with a cost basis
of $258,318. Accumulated amortization associated with intangible assets totaled
$150,828 and $139,582 at October 31, 2001 and 2000, respectively.
As of October 31, 2001 and 2000, the Company had made deposits totaling $62,021
and $62,021 related to the leases of various equipment and its produc-tion and
office facility and had investments in insurance policies of $136,003 and
$109,058, respectively. These items are included in intangible and other long-
term assets in the accompanying balance sheet.
NOTE E - NOTE PAYABLE TO BANK
The Company has an uncollaterialized bank line of credit which permits borrowing
of up to $2,000,000. The line bears interest at the bank's commercial lending
rate, 5.5% at October 31, 2001. The line is subject to renewal by July 2003.
There were no amounts drawn on this line at October 31, 2001 or October 31,
2000.
The line of credit contains certain financial covenants including covenants
related to the ratio of senior liability (as defined) to adjusted tangible
capital, current ratio and operating cash flow to fixed charge as well as limits
the amount of common stock which can be repurchased by the Company. At October
31, 2001, the Company was in compliance with all of these ratios and covenants.
NOTE F - LONG-TERM DEBT
Long-term debt consists of the following at October 31,:
2001 2000
Industrial development loan,
payable in monthly installments
of $1,202 through April 2002,
including interest at 8%,
collateralized by certain equipment $ - $ 22,179
Note payable in monthly installments of $943
through October 2003, including interest at
6.6%, without collateral 20,058 104,547
Note payable to a bank in monthly installments
of $4,709 through October 2002, including
interest at prime less .25% (5.25% at
October 31, 2001) without collateral. 54,976 105,022
Note payable to a bank in monthly installments
of $23,333 through June 2006, plus interest
at 30-day LIBOR plus 2%(4.64% at October 31,
2001), collateralized by plant project assets
and other existing equipment. 1,306,666 -
$1,381,700 231,748
Less portion due within one year (344,676) (106,675)
$1,037,024 $ 125,073
YOCREAM International, Inc.
NOTES TO FINANCIAL STATEMENTS
The principal portion of long-term debt is payable as follows:
Year ending
October 31,
2002 $ 344,676
2003 290,357
2004 280,000
2005 280,000
Thereafter 186,667
$ 1,381,700
NOTE G - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Employee Savings Plan and Trust (the Plan) which
requires the Company to make contributions to the Plan in the amount of 3% of
eligible employee compensation. The Plan allows that the required contributions
may be invested in common stock of the Company. The Company made Contributions
to the Plan of approximately $51,000 and $50,200 during the years ended October
31, 2001 and 2000, respectively. The Company's required contributions to the
Plan were approximately $36,000 for the year ended October 31, 1999. During
1999, the Company made additional discretionary contributions in the amount of
$22,000.
Additionally, the Company has a profit-sharing plan for eligible employees.
Under the provisions of the Plan, the Company may, at its discretion, make
contributions of a sum not in excess of the amount permitted under the Internal
Revenue Code as a deductible expense. The Company has not made any contri-
butions to this Plan.
NOTE H - STOCK OPTION PLANS
In September 1987, the Company established a nonqualified Stock Option Plan (the
Plan) for key employees. The Plan provided for the granting of options to
purchase shares of common stock at a price not less then 85% or more than 100%
of the fair market value per share as of the date of the grant. Options
were exercisable in such amounts and at such times as authorized by a Stock
Option Agreement applicable to each option. All options have been granted with
an exercise price equal to the fair market value of the Company's common stock
on the grant date. This plan terminated prior to the October 31, 1998.
A summary of option transactions relating to the Stock Option Plan for key
employees is as follows:
Shares Weighted
Under Average
Option Exercise Price
Balance, October 31, 1998 37,500 $ 4.00
Exercised (37,500) 4.00
Balance, October 31, 1999 -
YOCREAM International, Inc.
NOTES TO FINANCIAL STATEMENTS
In October 1990, the Company's Board of Directors adopted a nonqualified Stock
Option Plan for nonemployee directors. Based on the terms of the Plan, options
are to be granted to each director at the fair market value of common stock on
the grant date in October of each year. Options are exercisable in such
amounts and at such times as authorized by a Stock Option Agreement applicable
to each option. All options have been granted with an exercise price equal to
the fair market value of the Company's common stock on the grant date. This
plan terminated prior to October 31, 1998.
NOTE H - STOCK OPTION PLANS - Continued
A summary of option transactions relating to the Stock Option Plan for
nonemployee directors is as follows:
Shares Weighted
Under Average
Option Exercise Price
Balance, October 31, 1998 45,000 $ 2.65
Exercised (15,000) 3.75
Balance, October 31, 1999 30,000 2.09
Exercised (15,000) 2.31
Balance, October 31, 2000 15,000 1.87
Exercised (15,000) 1.87
Balance, October 31, 2001 -
In January 1994, the Company's Board of Directors adopted a Combined Incentive
and Nonqualified Stock Option Plan and reserved 200,000 shares of common stock
for issuance pursuant to this Plan. At October 31, 2001, there were no shares
available under the plan for future grants. Options are exercisable in such
amounts and at such times as authorized by a Stock Option Agreement applicable
to each option. At October 31, 2001 these options had exercise prices ranging
from $2.12 to $4.00 and a weighted average remaining contractual life of
approximately 2 years.
A summary of option transactions relating to the Combined Incentive and
Nonqualified Stock Option Plan is as follows:
Shares Weighted
Under Average
Option Exercise Price
Balance, October 31, 1998 129,000 $ 2.79
Exercised (8,000) 1.94
Balance, October 31, 1999 121,000 2.84
Granted 53,000 4.00
Exercised (37,000) 2.10
Expired (7,000) 2.12
Balance, October 31, 2000 130,000 3.54
Granted -
Exercised (23,000) 1.75
Expired -
Balance, October 31, 2001 107,000 3.93
YOCREAM International, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE H - STOCK OPTION PLANS - Continued
In March 2000, the shareholders approved the 2000 Stock Option Plan. The Plan
provides for the grant of options to directors, key employees including
employees who are directors and other persons who provide services to the
Company. The Plan authorizes the issuance of 100,000 shares of unissued common
stock upon exercise of options granted under the Plan. Options granted under
the plan are exercisable at a per share price not less than 100% of the fair
market value of the underlying common stock on the date of the grant. Incentive
stock options granted to any person with beneficial ownership of 10% or more of
the outstanding shares of common stock must be exercisable at a per share price
not less than 110% of the fair market value of the stock on the date of the
grant. The plan will terminate January 25, 2010.
A summary of option transactions relating to the 2000 Stock Option Plan is as
follows:
Shares Weighted
Under Average
Option Exercise Price
Balance, October 31, 2000 -
Granted 70,000 $3.21
Exercised (5,000) 3.21
Balance, October 31, 2001 65,000 3.21
At October 31, 2001, there were 202,000 shares of common stock reserved for
issuance under the Company's stock option plans.
The Company has adopted the disclosure only provisions of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). It
applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," in
accounting for its Plans.
Had the Company used the fair value methodology of SFAS 123 for determining
compensation expense, the Company's net income and net income per share would
approximate the pro forma amounts below:
2001 2000 1999
Net income, as reported $ 753,193 $1,024,918 $1,018,066
Net income, pro forma $ 671,743 $ 917,962 $ 967,466
Diluted net income per common
share, as reported $ 0.33 $ 0.45 $ 0.43
Diluted net income per common
share, pro forma $ 0.30 $ 0.40 $ 0.41
The weighted-average fair value of options granted during the years ended
October 31, 2001 and 2000 were $1.35 and $2.56, respectively. There were no
options issued during 1999. The fair value of each option grant is estimated on
the date of grant using the Black-Scholes options-pricing model with the
following weighted-average assumptions in 2001 and 2000, respectively: no
dividends; expected volatility of 42% and 73%; risk-free interest rate of 3.91%
and 5.03%, and an expected life of 5 years.
YOCREAM International, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE I - EARNINGS PER SHARE
The following table is a reconciliation of the numerators and denominators of
the basic and diluted per share computations for each of the three years ended
October 31,:
Weighted
Average Per-Share
Income Shares Amount
(Numerator) (Denominator)
1999
Basic earnings per share
Income available to
common stockholders $1,018,066 2,314,861 $0.44
Effect of dilutive securities - 56,490
Stock options
Diluted earnings per share
Income available to
common stockholders $1,018,066 2,371,351 $0.43
2000
Basic earnings per share
Income available to
common stockholders $1,024,918 2,282,180 $0.45
Effect of dilutive securities
Stock options - 21,459
Diluted earnings per share
Income available to
common stockholders $1,024,918 2,303,639 $0.45
2001
Basic earnings per share
Income available to
common stockholders $ 753,193 2,262,657 $0.33
Effect of dilutive securities
Stock options - 8,529
Diluted earnings per share
Income available to
common stockholders $ 753,193 2,271,186 $0.33
YOCREAM International, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE J- MAJOR CUSTOMERS
Revenues derived from the Company's largest customer represents 64%, 63% and 61%
of total revenues in the years ended October 31, 2001, 2000 and 1999.
NOTE K - ADVERTISING COSTS
Advertising costs are charged to operations in the year incurred. For the years
ended October 31, 2001, 2000 and 1999 advertising costs aggregated approximately
$327,000, $294,000 and $310,000, respectively.
NOTE L - INCOME TAXES
The provision for income taxes for the years ended October 31, consists of the
following:
2001 2000 1999
Current $ 219,000 $ 135,000 $ 55,000
Deferred 49,000 413,000 351,000
$ 268,000 $ 548,000 $ 406,000
The effective tax rate differed from the statutory federal tax rate due to the
following:
Year ended October 31,
2001 2000 1999
Statutory federal tax rate (graduated) 34.0% 34.0% 34.0%
State taxes, net of federal benefit 3.8 3.7 3.8
Change in valuation allowance - - (9.3)
Tax credits (10.5) - -
Other ( 1.0) (2.9) -
26.3% 34.8% 28.5%
YOCREAM International, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE L - INCOME TAXES - Continued
Deferred tax assets (liabilities) consist of the following at October 31,:
2001 2000
Net operating loss carryforwards $ - $ -
Accrued expenses 18,800 10,200
Allowance for doubtful accounts 10,900 8,000
Inventory 22,100 15,000
Federal tax credits - 17,000
Fixed assets and other (46,800) 3,800
Net deferred tax asset 5,000 54,000
Deferred tax liabilities - -
Net noncurrent deferred tax asset $ 5,000 $ 54,000
Management evaluates on a quarterly basis the recoverability of the deferred tax
assets and the level of the valuation allowance. As of October 31, 2001 and
2000, the Company has not recorded an allowance against deferred tax assets.
NOTE M - OPERATING LEASE COMMITMENTS INCLUDING THOSE WITH RELATED PARTIES
The Company leases its production and office facilities under an operating lease
agreement. The building is owned by a company whose owners are the Company's
chief executive officer and its president (both of whom are also shareholders of
the Company) and certain other shareholders of the Company.
In addition, the Company leases equipment under noncancelable operating leases
with unrelated third parties.
Minimum lease payments required under these operating leases are as follows:
Year ending
October 31,
2002 $ 451,707
2003 423,571
2004 421,961
2005 356,639
2006 310,114
Thereafter 1,361,384
$3,325,376
YOCREAM International, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE M - OPERATING LEASE COMMITMENTS INCLUDING THOSE WITH RELATED PARTIES -
Continued
Operating lease expense under the related party lease for the years ended
October 31, 2001, 2000, and 1999 approximated $187,000, $177,000 and $172,000,
respectively. Lease expense, exclusive of related parties, was approximately
$321,000, $232,000 and $83,000 for the years ended October 31, 2001, 2000, and
1999. Operating lease expenses are allocated between manufacturing costs and
general and administrative expenses in the accompanying statements of income.
NOTE N- QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the two years ending October 31, 2001 is as
follows:
Basic Diluted
Gross Net Earnings Earnings
2001 Sales Profit Income Per Share Per Share
1st quarter $ 2,774,158 $ 899,797 $ 69,958 $ 0.03 $ 0.03
2nd quarter 3,589,884 1,062,726 93,129 0.04 0.04
3rd quarter 5,094,099 1,585,718 405,947 0.18 0.18
4th quarter 4,424,399 1,391,277 184,159 0.08 0.08
$15,882,540 $ 4,939,518 $ 753,193 $ 0.33 $ 0.33
Basic Diluted
Gross Net Earnings Earnings
2000 Sales Profit Income Per Share Per Share
1st quarter $ 2,838,025 $ 872,264 $ 76,023 $ 0.03 $ 0.03
2nd quarter 3,736,716 1,196,960 237,015 0.10 0.10
3rd quarter 4,714,157 1,542,611 449,259 0.20 0.20
4th quarter 3,799,634 1,280,390 262,621 0.12 0.12
$15,088,532 $ 4,892,225 $ 1,024,918 $ 0.45 $ 0.45