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, 2002.
[ ] 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 $10,301,000 at January 15, 2003, based upon the
average bid and asked prices of the common stock on that date.
At January 15, 2003 there were 2,250,178 shares of the registrant's common
stock outstanding.
Documents incorporated by reference:
The Registrant has incorporated into Part III of Form 10-K by reference
portions of its Proxy Statement for its 2003 Annual Meeting of Shareholders.
TABLE OF CONTENTS
PART I Page
Item 1. BUSINESS.....................................................4
Item 2. PROPERTIES..................................................15
Item 3. LEGAL PROCEEDINGS...........................................15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.. ..................................................15
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDERS MATTERS................................16
Item 6. SELECTED FINANCIAL DATA.....................................17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS..................................................18
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA........................................................22
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE......................22
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT..................................................22
Item 11. EXECUTIVE COMPENSATION......................................22
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.......................................22
Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS................................................22
PART IV
Item 14. CONTROLS AND PROCEDURES
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.....................................23
SIGNATURES..............................................................25
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
Companys management and on assumptions made by and information currently
available to management. All statements other than statements of historical
fact, regarding the Companys 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 Companys 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 Companys 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 Companys
products; and the Companys ability to obtain raw materials and produce
finished products in a timely manner, as well as its ability to develop and
maintain its copacking relationships and strategic alliances. In addition,
there are risks inherent in dependence on key customers, the loss of which
could materially adversely affect the Companys 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, frozen
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
installations, yogurt shops, fast food chains, discount club warehouses,
business and industry locations, and other types of outlets. The Companys
primary brand is YOCREAM(registered trademark). YOCREAM branded products
include YOCREAM FROZEN YOGURT, DANNON/YOCREAM FROZEN YOGURT, YOCREAM FROZEN
CUSTARD, YOCREAM BLENDER SMOOTHIES, YOCREAM DISPENSER SMOOTHIES, YOCREAM COFFEE
LATTE FREEZE, SOFT SCOOP BY YOCREAM, AND YOGURT STAND FROZEN YOGURT. The
Companys general marketing strategy is to offer a broad selection of its
products at a price suitable for the relevant markets.
The Industry
The 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 Companys frozen
dessert and frozen beverage products.
Many types of foodservice outlets make available to the public the Companys
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
Companys 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, frozen custard,
smoothies, etc.) for regional, national, and worldwide foodservice and retail
markets. YOCREAM International, Inc.'s expertise in nationwide distribution,
foodservice sales/marketing, research and development (e.g. new product
development) and manufacturing is enhanced through leveraging strategic
alliances and/or joint ventures (e.g. The Dannon Company, Inc. and Small Planet
Foods). (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 Companys marketing strategy is designed to build both its YOCREAM and
DANNON/YOCREAM brands, 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, frozen custard, ice cream and smoothie 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 several foreign countries. The Company also markets its private brand and
copacking business through developing strategic relationships and promoting its
product development expertise, as well as its manufacturing 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 copack the
organically grown, All Fruit Sorbet produced for Cascadian Farm, currently a
majority owned subsidiary of General Mills. In November 1994, Cascadian Farm
(now called Small Planet Foods) 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
franchise 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 Companys 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 introduced YOCREAM DISPENSER SMOOTHIES, as 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
several foreign countries.
In fiscal 1999, the Company developed a dispenser smoothie for Costco
Wholesale. This product has been exceptionally well received and has
significantly contributed to the growth of the Companys sales.
In fiscal 2000, the Company developed a high quality coffee latte freeze for
Costco Wholesale. After undergoing market tests, the roll out began in fiscal
2001. In fiscal 2002, the demand for this product escalated to the point that
the customer requested an aseptic product, which would offer extended shelf
life. The Company worked with suppliers, machine manufacturers and an outside
copacker to provide this product. Sales of the aseptic product began in
September 2002, with complete rollout expected to occur over the next fiscal
year. Management believes that, in addition to the sales from this product,
the Company will see a future benefit from the application of this technology
to the development of additional aseptic products.
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
introducing the Company to Dannons current brokers and distributors. This
alliance has enabled the Company to enter new markets and access national and
international accounts, including military 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.
Continuing to market the Companys manufacturing capabilities, in June 2001, the
Company entered into an agreement to copack for Imagine Foods. Their products
include 16 and 32-ounce organic kosher hardpack frozen soy.
In October 2001, the Company announced that the alliance with Dannon 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 is DANNON/YOCREAM and includes more than forty flavors of soft serve
frozen yogurt. The co-branded line, which utilizes YOCREAM formulas and
includes non-fat, low fat, and no sugar added flavors, was available nationally
by the third quarter of 2002 through traditional food service distributors. The
strength of the Dannon name along with YOCREAMs 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 to operators through distributor programs and to consumers/end-users
through in-store merchandising materials and promotions. Management believes
that the two companies are similar in philosophy, and that the yogurt products
of both companies are known for their high live culture count, with an emphasis
on product quality and appeal to consumers with concerns for health and
nutrition.
In January 2003, the Company announced a further expansion of its business
association with Dannon. In February 2003, the sales teams for both companies
will begin representing their combined cultured dairy and related product lines
to the foodservice (away from home) market. It is expected that the
efficiencies of a unified sales force of yogurt experts will increase presence
in the market, maximizing sales potential.
The Companys sales and marketing organization consists of a Director of Sales
and Marketing who directs the Regional Sales Managers, who in turn work with 18
independent foodservice broker organizations and a network of distributors on a
nationwide basis. The Companys Director of National Accounts and Branding
works with a National Accounts Manager and two specialty brokers. Together
they facilitate expanding the Companys national accounts, including military
and government foodservice sales. The Company also has a Manager of Club Store
and International Sales who works with a specialty broker. International sales
are selectively pursued based on ease of distribution and profitability.
Marketing and sales abroad are currently occurring in Mexico, Puerto Rico,
Taiwan, Korea, Italy, Germany, and to a limited degree, several other
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, non-fat
and sugar-free flavors; smoothies in a variety of flavors; non-dairy sorbet in
a variety of flavors; organic yogurt; organic ice cream; gourmet 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 2002, 2001, and 2000 the soft serve liquid
mix accounted for approximately 47%, 49%, and 49%, respectively of the
Companys 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 2002, 2001, and 2000, the smoothie mixes accounted
for approximately 32%, 39%, and 39%, respectively of the Companys case sales.
The Company also sells hard pack yogurt, sorbet and ice cream products to food-
service customers. In fiscal years 2002, 2001, and 2000 the hard pack products
accounted for approximately 11%, 11%, and 12%, respectively of the Companys
case sales.
The Company sells coffee latte freeze drink mixes to a foodservice customer who
dispenses the product through a frozen dessert machine. In fiscal years 2002
and 2001 the coffee latte freeze drink mixes accounted for approximately 8% and
1%, respectively of the Companys case sales.
The Company sells soft serve custard wet mix and softened gourmet ice cream to
foodservice customers who dispense the product through frozen dessert machines.
In fiscal year 2002 these products, which were introduced in June 2002,
accounted for approximately 2% of the Companys case sales.
All of the YOCREAM and YOGURT STAND products are certified Kosher.
DANNON/YOCREAM FROZEN YOGURT (co-branded as Dannon/Yocream in the third
quarter of fiscal 2002) is the Companys flagship brand of frozen yogurt. This
premium soft frozen product is made with the highest quality ingredients, using
a special recipe that produces a smooth and creamy taste. DANNON/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
traditional soft serve ice cream loving consumer. The gourmet-softened ice
cream comes in a 10% vanilla bean and a coffee variety made with Tullys coffee.
There is also a reduced fat line, which 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 Companys 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 Companys products includes four flavors
and a plain mix that can be flavored by the end user. There are also several
special order flavors available.
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 all natural
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. Blender smoothie mixes can
also be dispensed from soft serve equipment as an outstanding sorbet product.
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.
YOCREAM COFFEE LATTE FREEZE was first introduced in fiscal 2001. In September
2002, the product was modified to be aseptically packaged and offer an extended
shelf life.
Other products manufactured by the Company include organic sorbets and ice
creams that are packed under a customers private label brand.
As of January 15, 2003, the Company had available for sale the following
products and flavors under the DANNON/YOCREAM, YOCREAM or YOGURT STAND brand
names:
DANNON/YOCREAM YOCREAM YOCREAM
FROZEN YOGURT Fruit Blender Soft Scoop - 4 Ounce
Premium Soft Serve Smoothies
Mix (and Sorbet, too) Very Berry Sorbet
Very Berry Sorbet/
Cheesecake Supreme Kiwi Strawberry Splash Vanilla Frozen
Dutch Chocolate VeryBerry Yogurt Swirl
Milk Chocolate Lemony Lime Vanilla Frozen Yogurt
Peanut Butter Mango Tango Chocolate Frozen
YogurtPraline n Cream Orange Burst Strawberry Frozen
Yogurt
Strawberry Margarita Mix
Vanilla Vanilla Frozen Custard
Chocolate Frozen Custard
DANNON/YOCREAM YOCREAM DANNON/YOCREAM
FROZEN YOGURT Yogurt Blender YOCREAM FREE
Nonfat Soft Serve Smoothies No Sugar Added
Mix Frozen Yogurt
Coffee Blueberry
Vanilla Cafe au Lait
Alpine Vanilla Chocolate
Apple spice Raspberry
Blueberry Burst Strawberry
Butter Brickle YOCREAM Vanilla Cable Car
Chocolate Fruit Dispenser
Cappuccino Smoothies YOGURT STAND
Cherry Almond Nonfat Soft Serve
Chocolate Classic Berry Banana Frozen Yogurt
Country Vanilla Cranberry Blueberry
Egg Nog Guava Raspberry Boysenberry
English Toffee Island Breeze Cheesecake
Fancy French Vanilla Mango Sunrise Chocolate
Georgia Peach Orange Squeeze French Vanilla
Holiday Chocolate Mint Tropical Lemon Meringue
Irish Mint Milk Chocolate
Island Banana YOCREAM Orange Squeeze
Luscious Lemon Yogurt Dispenser Plain
New York Cheesecake Smoothies Sweet Peach
Outrageous Orange Vanilla
Peanut Butter Chocolate
Pecan Praline Coffee YOCREAM
Peppermint Stick Soft Serve
Pina Colada Ice Cream
Pistachio
Pumpkin YOCREAM Chocolate 4.5 % B.F.
Root Beer Float Soft Serve Strawberry 4.5 % B.F.
Very Strawberry Frozen Custard Vanilla 4.5 % B.F.
Very Boysenberry Vanilla 6.0% B.F.B.F.
Very Raspberry Chocolate Cream Vanilla 10%
White Chocolate Vanilla Cream
Macadamia Vanilla Shake Base 10%
Manufacturing Process
All of the manufacturing and packaging of the Companys products for both
domestic 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 copacker 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, frozen custard, 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 that 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, frozen custard, 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 inclusions that can be added to the finished products. A third
packaging line handles bag-in-box applications for our dispenser smoothie line.
The Company also has a cold fill plastic bottling line available. Management
estimates that plant utilization is approximately 45%.
In January 2001, the Company completed a major upgrade of its plant facilities,
as part of the Companys commitment to its customers and to the market place.
The project more than doubled the Companys 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, and develop products for new markets.
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 (clean-in-place) 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 assists in the continuing process of reducing
costs and inventories while increasing the Companys efficiencies and assuring
that product quality is consistently maintained.
The manufacture and sale of the Companys products are subject to the
jurisdiction 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.
The Companys Quality Assurance Department is staffed with two full time
microbiologists, a degreed sanitarian and a degreed food scientist. The
Company also maintains comprehensive quality assurance standards including a
strong HACCP (Hazard Analysis Critical Control Point) program, utilization of
GMPs (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 Companys practice to follow a comprehensive inspection program,
modeled after the industry standards for food safety and food security.
The Company believes that it is in compliance with applicable government
regulations, and that the strength of its quality assurance program has been
validated by the high ratings achieved on several independent audits performed
during fiscal 2002.
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
Companys products throughout the United States.
Distribution and Significant Customers
The Companys products are distributed nationwide and in several foreign
countries. Distribution is facilitated by buyer pickup or by transportation
arranged by the Company. The Companys products are generally shipped on
refrigerated trucks to all domestic locations.
While the Company has experienced growth in all customer classifications,
revenues derived from its largest customer, Costco Wholesale, represented 68%,
67%, and 65% of total sales in the years ended October 31, 2002, 2001, and 2000
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 Companys 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. Furthermore, the longevity of this
relationship is due to various factors, including YOCREAMs 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.
Research and Development
The Companys research and development related activities include the
development of new flavors, the improvement of existing flavors, refinement of
manufacturing processes and the development of new products. In addition to
activities related to YoCream products, R&D services are also used to develop
proprietary products for larger customers, or assist with the development of
production formulas for copacking customers. Research and monitoring also
occurs on a regular basis with respect to ingredients such as stabilizers and
emulsifiers. Recent accomplishments include a custom blended coffee smoothie
for a national account, development of soy-based frozen dessert product, and
packaging finalized for an extended shelf life smoothie beverage. The Companys
development activities occur at the Portland, Oregon facility. Total research
and development expenditures for the year ended October 31, 2002, was
approximately $446,000, compared with $269,000, and $454,000 for the years
ended October 31, 2001 and 2000.
Advertising and Promotion
During the year ended October 31, 2002 such expenses totaled approximately
$372,000 representing 1.9% of net sales. These compare to $327,000, or 2.1% of
net sales in 2001; and $294,000, or 2.0% of net sales in 2000.
The Company seeks to increase sales and improve brand recognition through
financially conservative advertising and promotional methods. The Companys
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. Military/government food service
promotional strategy includes targeted trade publication advertising,
participation in buying groups, trade shows, and support of prime vendor
programs. 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 Companys sales and earnings are somewhat seasonal with a greater
percentage 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. Introduction and rollout of new products has tended to level the
seasonal fluctuations.
Suppliers
The primary ingredients in the Companys smoothie and yogurt products are a
variety of fruits and raw milk. The Company presently has one primary supplier
for the pasteurized fruit ingredients used in its smoothie products. Other
pasteurized fruit ingredients are purchased from a number of companies
nationwide based upon the Companys strict quality standards. Suppliers of the
raw milk utilized by the Company are mostly based in the Pacific Northwest and
obtain 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
Companys plant before the milk becomes the primary ingredient in the Companys
yogurt products. The Companys largest supplier of raw milk supplied
approximately 91% of the Companys needs in fiscal year 2002 and the second
largest supplier provided approximately 9%. 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 Companys 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 Companys 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
products. Some of the companies that produce products that compete with those
of the Company are substantially larger and have significantly greater
resources. 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 Companys principal competitors for soft serve frozen yogurt
products include Colombo (General Mills), Freshens and Eskimo Pie. Smoothie
product competitors include Island Oasis, Frutazza, Parrot Ice and Artic Ice.
In addition to the large primary competitors identified, The Company competes
with numerous small local and regional companies.
The Companys 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. 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 Companys 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 success-
fully against other available products.
Other than direct competition for specific soft serve or hard pack frozen
yogurt products, the Companys 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
Companys 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," "ITS A BELIEF, IT'S A LIFESTYLE," "SOFT SCOOP" "YO CAFFE"
"SMOOTH AND TASTY", and FRUITQUAKE. The Company has registered or intends to
register these trademarks in the United States and may register the trademark
YOCREAM in other foreign countries.
Employees
The Company employed 55 persons at October 31, 2002, all of who were full-time
(35 hours per week or more.) None of the Companys employees are covered by
collective bargaining agreements, and management believes its employee
relations are good. The Companys sales representatives manage a network of
national and regional foodservice brokers. These are independent brokers and
are paid by commissions 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 Companys freezer and production facilities.
In May 1994, when the lease of the Companys production and office facilities
expired, the Board of Directors decided that in order to preserve capital 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 needed office space. The current lease as
amended has a remaining term of approximately 10 years and provides for a base
rent of $15,950 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.
Other materially important property of the Company includes certain equipment,
which it utilizes to manufacture and distribute its products, including
standard dairy equipment, holding tanks and refrigeration units. In addition,
the Company leases other equipment under 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 2002.
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 15, 2003, there were
2,250,178 shares of the common stock outstanding and there were 149
shareholders of record estimated to represent approximately 900 beneficial
holders based on the number of individual participants in security position
listings. On January 15, 2003 the closing bid and asked prices were $7.43 and
$8.09, respectively.
The following table sets forth the high and low closing prices for quarterly
periods in the two twelve month periods ended October 31, 2002 and October 31,
2001, as reported by Nasdaq Stock Market:
Twelve months Ended October 31, 2002 High Low
August 1, 2002 - October 31, 2002 $8.76 $6.37
May 1, 2002 - July 31, 2002 9.75 5.26
February 1, 2002 - April 30, 2002 6.20 3.45
November 1, 2001 - January 31, 2002 4.13 3.26
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
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
Companys capital assets.
Item 6: SELECTED FINANCIAL DATA.
The following selected financial data set forth below as of October 31, 2002,
2001 and for each of the three years in the period ended October 31, 2002 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, 2000, 1999, and 1998 and for each the two
years in the period ended October 31, 1999, are derived from financial
statements not included herein.
October 31,
Balance Sheets 2002 2001 2000 1999
1998
Total Current Assets $5,430,073 $4,992,797 $4,372,804 $4,637,304
$3,356,445
Total Assets 10,224,937 9,651,561 7,426,575 7,356,915
6,555,657
Long-Term Debt 858,167 1,037,024 125,073 201,238
162,605
Shareholders' Equity 7,503,195 6,818,348 6,130,492 5,351,730
4,451,320
For the Years Ended October 31,
Statements of Income 2002 2001 2000 1999
1998
Sales (1) $19,438,892 $15,616,943 $14,943,886 $14,064,992
$10,052,445
Income from
Operations 1,549,234 1,125,081 1,542,737 1,468,445
616,079
Income before Taxes 1,368,070 1,021,193 1,572,918 1,424,066
502,703
Income Tax Provision
(Benefit) (3) 512,000 268,000 548,000 406,000
(200,000)
Net Income (2) 856,070 753,193 1,024,918 1,018,066
702,703
Earnings per Common
Share-Basic (2) .38 .33 .45 .44
..31
Earnings per Common
Share-Diluted (2) .38 .33 .45 .43
..30
(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 Vendors Products, the cost of sales incentive programs
previously classified as sales and marketing expenses, has been reported as a
reduction of sales beginning in the first quarter of 2002. For fiscal years
2001, 2000, 1999 and 1998 the Company retroactively reclassified expenses of
$266,000, $145,000, $194,000 and $154,000, respectively. This reclassification
had no effect on net income as previously reported.
(2) Fiscal year 2002 results were impacted by a one-time unusual expense of
$147,000 in the fourth quarter. This represented settlement of a freight
charge claim to a customer for shipments in 1999 and 2000. Were it not for the
one-time charge related to prior years, earnings per share for 2002 would have
been $0.42.
(3) The effective tax rates for fiscal years 2002, 2001, 2000, 1999 and 1998
are 37.4%, 26.3%, 34.8%, 28.5% and 39.8%. The fiscal year 2001 rate is lower
than the other years because of the deduction of research and development
credits relating to several years.
(4) Income tax benefit in fiscal year 1998 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.
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
General
YoCreams primary focus is on the manufacture, marketing and sales of superior
quality frozen yogurt, frozen custard, sorbet, smoothie, coffee latte and ice
cream products in a variety of premium, low-fat, and nonfat flavors in either
non-organic or organic formulations. The Company also copacks similar products
for other companies. Due to the nature of these products, sales are subject to
seasonal fluctuations, with the summer months normally being the busiest
season. The introduction and roll out of new products has tended to level the
seasonal fluctuations.
In fiscal 2002, the Company achieved a 24.5% increase in sales, a 37.7%
increase in income from operations, and a 13.7% increase in net income.
Dannon Alliance
Following the expansion of the Companys field sales personnel, and the
completion of a major upgrade of its plant facility in January 2001, the
Company successfully entered into a strategic alliance with The Dannon Company
in April 2001. The purpose of the alliance was for Yocream to supply soft serve
frozen yogurt to Dannons foodservice customers. By July 2001 the alliance had
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, including military
installations and governmental agencies.
In October 2001, the Company announced that the alliance with The Dannon
Company was expanded, beyond selling yogurt to Dannons foodservice customers,
to include a co-branded line of soft serve frozen yogurt. The top-quality
product line is Dannon/YoCream and includes more than forty flavors of soft
serve frozen yogurt. The co-branded line utilizes YoCream formulas and includes
nonfat, low fat, and no-sugar-added flavors. Under the terms of the alliance
agreement, Dannon currently receives a royalty from the sales of DANNON/YOCREAM
product.
In January 2003, the Company announced a further expansion of its business
association with Dannon. In February 2003, the sales teams for both companies
will begin representing the combined cultured dairy and related product lines
to the foodservice (away from home) market. It is expected that the
efficiencies of a unified sales force of yogurt experts will increase presence
in the market, maximizing sales potential.
The strength of the Dannon name along with YoCreams concentration on the
foodservice or on-premise marketplace is expected to offer significant
opportunities for increased sales and market share. 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.
Sales
The Companys sales were $19,439,000, $15,617,000, and $14,944,000, for the
years ended October 31, 2002, 2001, and 2000, respectively, and represented
increases of 24.5% in 2002 and 4.5% in 2001.
The increase in fiscal 2002 sales primarily related to increases in yogurt
sales and from the sale of new products (coffee latte freeze, soft frozen
custard and gourmet-softened ice cream). Fiscal 2001 sales were impacted by
the downturn in the economy during the first half of the year, but increased
approximately 12.7% in the last half. The improved results in the last half of
the year was in part due the Companys strategic alliance with The Dannon
Company, Inc., which began in July 2001, and the expansion of the Companys
field sales personnel.
For the years 2002, 2001 and 2000, the breakdown of sales by product are as
follows:
% % %
Category 2002 Total 2001 Total 2000 Total
Yogurt $10,108,000 52.0% $8,544,000 54.7% $8,247,000 55.2%
Smoothies 6,921,000 35.6% 6,675,000 42.8% 6,417,000 42.9%
Coffee Latte 1,418,000 7.3% 129,000 0.8% - -
Custard and
Ice Cream 727,000 3.7% 83,000 0.5% - -
Copacking 265,000 1.4% 186,000 1.2% 280,000 1.9%
$19,439,000 100.0% $15,617,000 100.0% $14,944,000 100.0%
Yogurt Sales: The 18.3% increase in yogurt sales in 2002 was due to
increases in sales to both Costco Wholesale and other foodservice distributors.
Sales to Costco have increased due to the opening of new stores, and other
innovative programs, which have increased same store sales of the Companys
yogurt products. Yogurt sales to other foodservice distributors have increased
primarily as a result of sales to military customers, which followed the
Companys strategic alliance with The Dannon Company, Inc., and the efforts of
the Companys foodservice sales staff.
The Companys expanded sales to the military segment is growing steadily. The
Company participates in all of the DSCP (Defense Supply Center of Philadelphia)
programs and selectively advertises in government food service publications.
The Companys marketing efforts are expanding brand awareness throughout the
military as indicated by invitations to participate in menu board meetings
domestically and internationally. Internationally, our European, Asian and
Middle Eastern business is expanding in all segments of the military, and we
expect this segment to increase in 2003. The Company added 10 new prime vendors
(military distributors) to its customer list in 2002. In addition to selling
Dannon/YoCream Frozen Yogurt, in June the Company received approval and new
NAPA (National Allowance Pricing Agreement) numbers to sell YoCream soft serve
frozen custard and 4 ounce novelty frozen custard cups. Novelty items are in
demand, because they do not require special equipment, and they fulfill food
service needs in channels such as commissary, dining hall, and MWR (Morale,
Welfare, and Recreation) facilities. The custard cups provide an opportunity to
gain sales in an area where the Company has not had a presence. As troop morale
is a priority for 2003, the Company prepared a program specially designed for
MWR and has been approved to begin presenting to individual installations in
2003.
Smoothie Sales: The 3.7% increase in smoothie sales in 2002 primarily
relates to dispenser smoothie sales as a result of new store openings by Costco
Wholesale, the primary customer for this product line. However, the Company
recently entered into a three-year branded program with Garden Ridge
Corporation to sell YoCream Dispenser Smoothies to its stores. Garden Ridge,
the home decor and craft marketplace, is a Texas-based chain with 43 stores
in thirteen states. YoCream smoothies are being served in the Cafe, an in-store
food service area providing refreshments for shoppers, in 13 stores. The
program is expected to increase YoCream brand exposure in the Southwest and
Southeast, and broaden smoothie distribution in these markets.
Coffee Latte Sales: The significant increase in coffee latte sales
relates to the early stages of the rollout of this product to Costco
Wholesale. The process first began in 2001 with a frozen product. The demand
for this product has been so great that it became necessary to move to the
development of an aseptically packaged 3-gallon bag of fresh, rather than
frozen product. The Company has completed plans with suppliers, machine
manufacturers and an outside copacker to develop the most effective
processing and packaging for this product and began shipments in September
2002. Currently this product is being supplied to fifty-two stores. It is
expected that this product will be rolled out to additional stores in fiscal
2003.
Custard and Ice Cream Sales: The significant increase in custard and ice
cream sales is primarily due to the sale of soft serve frozen custard to
Runza Restaurants, a 64-unit chain based in Lincoln, Nebraska. On June 11,
2002, the Company announced that it had signed a two-year contract and began
supplying truckload quantities of its soft serve frozen custard to the Runza
chain. Also included in this category is a new line of gourmet-softened ice
cream developed for Tullys Coffee Corporation, a leading specialty coffee
retailer, wholesaler and roaster with 100 specialty retail stores in
Washington, Oregon, California and Idaho.
The Company is currently in the process of finalizing development of a new
product category scheduled for release in the first half of fiscal 2003. The
R&D department is instrumental in supporting the sales and marketing efforts of
the Company through continually formulating new flavors and flavor
modifications.
Cost of Sales
The cost of sales, as a percentage of revenues, were 71.7%, 70.6%, and 68.2%,
in 2002, 2001, and 2000 respectively. Costs increased in 2002 as a result of
the manufacture of coffee latte freeze, which contain more expensive ingredient
costs than the Companys other product lines. In addition, the increased sales
volume in 2002 reduced the overhead cost per case of all manufactured products.
In fiscal 2001, cost increases were experienced in ingredients, transpor-
tation, and utility costs. Ingredients used in the Companys products are
agricultural products subject to price risk. The Company attempts to
minimize this risk by entering into contracts 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 costs.
Depreciation and lease payments also increased due to the plant upgrade project
completed in January 2001.
Gross Profit
Gross profit margins were 28.3%, 29.4%, and 31.8%, in 2002, 2001, and 2000.
Margins decreased in 2002 and 2001 primarily as a result of the change in sales
mix, including the introduction of the new coffee latte product. The related
decrease in average sale price per case and the increase in cost of sales were
also factors.
Management is aggressively pursuing alternatives to significantly reduce
ingredient, manufacturing and logistic costs and expects to realize benefits
from this intense effort during fiscal 2003. Furthermore, the Companys
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.
Selling and Marketing Expenses
Selling and marketing expenses, as a percentage of revenues, for the years
ended October 31, 2002, 2001, and 2000 were 10.4%, 11.0%, and 10.3%,
respectively. Such expenses are generally related to the level of revenues and
marketing activities. Sales and marketing expenses in total have increased in
2002 and 2001 due to promotional expenses, Dannon royalty payments, an increase
in field staff, and travel expenses related to supporting the sales expansion.
Management believes that the opportunities merit the intensified sales and
marketing activities
General and Administrative Expenses
General and administrative expenses for the years ended October 31, 2002, 2001,
and 2000, as a percentage of revenues, were 9.9%, 11.2%, and 11.2%,
respectively. 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, 2002, 2001, and 2000 was
$1,549,000, $1,125,000, and $1,543,000 respectively. The significant increase
of 37.7% in income from operations in 2002 resulted primarily from the 24.5%
increase in sales.
The results for 2001 were impacted by the Companys 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. The results were also affected by the increase in cost of sales
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.
Unusual expense in 2002 consists of a one-time charge of $147,000. This
represents the settlement of a freight charge claim to a customer for
shipments in 1999 and 2000.
Other expense of $71,000 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, 2002, 2001, and 2000 was
$1,368,000, $1,021,000, and $1,573,000, respectively. In comparison to the
prior year, income before income taxes was up 34.0% in 2002 as a result of the
24.5% increase in sales. Income before taxes was down in 2001, compared to
2000, due to certain cost increases, the plant expansion, and the expanded
sales organization as explained above.
Provision for Income Taxes
The effective tax rate was 37.4%, 26.2% and 34.8% in 2002, 2001 and 2000,
respectively. The effective rates are less than the expected rate of 38.4%
primarily due to the recognition of the remaining NOL benefit in 2000, and
realization of federal tax credits in 2002 and 2001. In the future, the
Company expects that its provision for income taxes will be at or near the
applicable federal and state statutory rates.
In 2001, the tax provision was reduced by research and development tax credits
of approximately $145,000 relating to several years.
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 provision primarily represented a reduction in the deferred tax asset.
Net Income
Net income for the years ended October 31, 2002, 2001, and 2000 was $856,000,
$753,000, and $1,025,000, respectively. Net income, as a percentage of sales,
was 4.4%, 4.8%, and 6.9% in each of the three years. In addition to the
factors described above, management believes that operating results would have
been greater for the last two years were it not for the diversion of the major
plant expansion project, the focus on establishing the strategic alliance with
the Dannon Company, Inc., and the general downturn in the economy. Further-
more, net income for 2002 was impacted by the one-time unusual expense of
$147,000 and the overhead related reduction in inventory valuation, as
explained above. Nevertheless, the Company achieved an increase of 13.7% in
2002 net income compared to 2001.
New Accounting Pronouncements
See Note B of Notes to Financial Statements for a discussion of the adoption
of new accounting pronouncements.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the appropriate application of certain
accounting policies, many of which require management to make estimates and
assumptions about future events and their impact on amounts reported in the
Companys financial statements and related notes. On an ongoing basis,
management evaluates these estimates, including those related to inventory
reserves and allowance for doubtful accounts. Management bases these
estimates on historical experience and on various other assumptions. Actual
results may differ from these estimates if conditions turn out differently
from the assumptions.
The Companys accounting policies are more fully described in Note A of Notes
to Financial Statements. The critical accounting policies are as follows:
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. The realizability of raw material and finished goods
inventories is regularly evaluated based on a combination of factors
including the following: historical usage rates, forecasted sales or usage,
historical spoilage rates and other factors, and reserves established as
necessary.
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.
Revenue from the sale of products is generally recognized at the time of
shipment to the customer. Pursuant to EITF 00-14 Accounting for Certain
Sales Incentives, certain coupons, rebate offers and free products offered
concurrently with a single exchange transaction are recognized at the later
of when revenue is recognized or when the sales incentive is offered, and
reported as a reduction in revenue. In addition, pursuant to EITF 00-25
Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendors Products, certain promotional costs paid to a
retailer or wholesaler by a vendor in connection with the sale of the
vendors or promotion of sales of the vendors products by the retailer or
wholesaler are recognized when incurred and reported as a reduction of
revenue. See Note B of Notes to Financial Statements for a discussion of
the adoption of EITF 00-14 and EITF 00-25.
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.
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, 2002, the Company entered into
operating leases relating to certain assets utilized in its production process.
(See Note N of the Notes to Financial Statements for a description of these
off-balance sheet lease commitments.)
As a result of the increase in sales and operating results over the last three
years, the Company has experienced a corresponding increase in cash flow.
EBITDA (earnings before interest, taxes, depreciation and amortization) was
approximately $2,029,000, $1,665,000, and $1,954,000 in 2002, 2001, and 2000,
respectively. As a result the Company was able to finance approximately 50% of
the plant upgrade expenditures in 2001 and 2000, and increase cash and cash
equivalents in 2002 and 2001.
At October 31, 2002, the Company has a bank line of credit of $2,000,000, which
has been unused since mid-1999. The current agreement matures in July 2003,
and provides for an interest rate at prime, with the option to lock in sub-
prime rates on blocks of funds up to 90 days.
At October 31, 2002, the Company also has a $1,027,000 term loan, which was
arranged to finance the portion of the plant upgrade project, which was not
financed by cash flow. 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 owned by the Company 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.
As of October 31, 2002, the Company has arranged a term loan with its bank,
which permits borrowings of up to $350,000 to finance equipment. The agreement
provides for payments over five years with interest at 30 day LIBOR plus 200
basis points. The agreement also provides the option to fix the rate during
the term. At October 31, 2002, long-term debt includes $181,500 of
obligations, which the Company intends to finance under this loan agreement.
The Company leases its offices and production facilities. The lease has a
remaining term of approximately 10 years with renewal provisions and provides
for a base rent of $191,400 annually for the next year and then increases at
approximately 3% per year thereafter. (See Note N of Notes to Financial
Statements for a description of the terms).
The Companys capital expenditures for the years ended October 31, 2002, 2001,
and 2000 were approximately $642,000, $2,245,000, and $1,090,000, respectively.
Expenditures in 2001 and 2000 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 2003, which could be as much as $2,300,000 to include the cost of a
high-acid aseptic packaging system for the smoothie product that the Company is
currently producing for Costco Wholesale, and other production equipment
purchases. This expansion is being evaluated to accommodate the customers
request for an aseptic extended shelf life product. The Company believes that
adequate financing can be arranged.
During the three years ended October 31, 2002, 2001, and 2000 the Company
repurchased 71,713, 45,592, and 98,710 shares, respectively of its common
stock. It has been the Companys practice to purchase shares of its stock from
time to time, pursuant to board approved plans. The Company also purchases
stock for its required contributions to the Companys 401(k) Employee Savings
Plan and Trust. (See Note H 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 Companys operations for at least the
next twelve months.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Ingredients used in the Companys products are agricultural products subject
to price risk. The Company attempts to minimize this risk by entering into
contracts 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 costs.
At October 31, 2002, borrowings outstanding under a secured term loan facility
with its bank amounted to approximately $1,027,000. The facility bears
interest at 30 day LIBOR plus 200 basis points (3.74% at October 31, 2002),
with the option to fix the rate during the term. A hypothetical increase of 200
basis points in the interest rate would increase interest expense by
approximately $17,000 in the next fiscal year, if the rate were not fixed by
entering into an interest rate swap.
The Company does not currently utilize derivative securities.
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 Companys Proxy Statement for its 2003 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 Companys Proxy Statement for its 2003
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 Companys Proxy Statement for its 2003 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 Companys
Proxy Statement for its 2003 Annual Meeting of Shareholders.
PART IV
Item 14. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Management of the Company, including the Chief Executive Officer and the Chief
Financial Officer, have conducted an evaluation of the effectiveness of the
Company's disclosure controls and procedures in accordance with Rule 13a-14
under the Securities Exchange Act of 1934 as of a date (the "evaluation date")
within 90 days prior to the filing date of this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that, as of the evaluation date, the Company's disclosure controls
and procedures were effective in ensuring that all material information
relating to the Company required to be filed in this annual report has been
made known to them in a timely manner.
(b) Changes in Internal Controls.
Since the evaluation date, there have been no changes to the Company's internal
controls or in other factors that could significantly affect those controls.
Item 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements. The response to this portion of Item 15 is
submitted as Appendix A to this report.
(a) (2) Financial Statement Schedules. The response to this portion of
Item 15 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 vii
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 1994 Combined Incentive and Non-qualified v
Stock Option Plan
10.2 Commercial lease and by and between iv
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
10.3 Amendment No.1 to commercial lease vi
between Pente Investments L.L.C. and
YOCREAM International, Inc., dated
June 4, 1998.
10.4 2000 Stock Option Plan viii
10.5 Cobrand License agreement between The Dannon Company,Inc.
And YOCREAM International, Inc., dated September 6, 2001
filed herewith.
19.1 Certification of John N. Hanna Pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 filed herewith.
19.2 Certification of W. Douglas Caudell Pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 filed herewith.
23.1 Consent of Independent Accountants
filed herewith.
i Incorporated herein by reference from the
Companys Registration Statement on Form
S-18, dated November 17, 1987.
ii Incorporated herein by reference from the Companys
Annual Report on Form 10-K for fiscal year ended
October 31, 1991.
iii Incorporated herein by reference from the Companys
Annual Report on Form 10-K for the fiscal year ended
December 31, 1990.
iv Incorporated herein by reference from the Companys
Quarterly report form 10-Q for the quarter ended
July 31, 1994.
v Incorporated by reference from the Companys Registration
statement on Form S-8, dated August 7, 1996.
vi Incorporated herein by reference from the Companys
Annual Report form 10-K for the fiscal year ended
October 31, 1998.
vii Incorporated herein by reference from the Companys
Quarterly report form 10-Q for the quarter ended
April 30, 1999.
viii Incorporated by reference from the Companys
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, 2003
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, 2003
John N. Hanna
Chief Executive Officer and
Chairman of the Board of Directors
By: /s/ David J. Hanna Dated: January 29, 2003
David J. Hanna
President and Director
By: /s/ James S. Hanna Dated: January 29, 2003
James S. Hanna
Director
By: /s/ Carl G. Behnke Dated: January 29, 2003
Carl G. Behnke
Director
By: /s/ Joseph J. Hanna Dated: January 29, 2003
Joseph J. Hanna
Director
By: /s/ William J. Rush Dated: January 29, 2003
William J. Rush
Director
By: /s/ Craig E. Tall Dated: January 29, 2003
Craig E. Tall
Director
By: /s/ W. Douglas Caudell Dated: January 29, 2003
W. Douglas Caudell
Chief Financial Officer
CERTIFICATION
I, John N. Hanna certify that:
1. I have reviewed this annual report on Form 10-K of YoCream International,
Inc. (the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ John N. Hanna Dated: January 29, 2003
John N. Hanna, Chief Executive Officer
CERTIFICATION
I, W. Douglas Caudell certify that:
1. I have reviewed this annual report on Form 10-K of YoCream International,
Inc. (the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ W. Douglas Caudell Dated: January 29, 2003
W. Douglas Caudell, Chief Financial Officer
FINANCIAL STATEMENTS AND REPORT
OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
YOCREAM INTERNATIONAL, INC.
OCTOBER 31, 2002 AND 2001
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, 2002 and 2001, and the related statements of income, shareholders equity
and cash flows for each of the three years in the period ended October 31,
2002. These financial statements are the responsibility of the Companys
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, 2002 and 2001, and the results of its operations and its cash
flows for each of the three years in the period ended October 31, 2002, in
conformity with accounting principles generally accepted in the United States.
/s/ GRANT THORNTON LLP
Portland, Oregon
December 20, 2002
YOCREAM International, Inc.
BALANCE SHEETS
October 31,
2002 2001
ASSETS
Current assets
Cash and cash equivalents $ 1,528,818 $ 1,161,661
Trade accounts receivable, net of
allowance for doubtful accounts of
$18,000 in 2002 and $28,500 in 2001 900,996 1,039,003
Inventories 2,654,432 2,473,538
Other current assets 311,227 266,795
Deferred tax assets 34,600 51,800
Total current assets 5,430,073 4,992,797
Fixed assets, net 4,385,900 4,344,981
Intangible and other long-term assets, net 408,964 313,783
$10,224,937 $ 9,651,561
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities
Current portion of long-term debt $ 360,358 $ 344,676
Accounts payable 1,083,954 1,142,398
Income taxes payable 31,709 122,175
Other accrued liabilities 143,754 140,140
Total current liabilities 1,619,775 1,749,389
Long-term debt, less current portion 858,167 1,037,024
Deferred tax liabilities 243,800 46,800
Total liabilities 2,721,742 2,833,213
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 4,625,981 4,797,204
Retained earnings 2,877,214 2,021,144
Total shareholders equity 7,503,195 6,818,348
$10,224,937 $ 9,651,561
The accompanying notes are an integral part of these statements
YOCREAM International, Inc.
STATEMENTS OF INCOME
For the year ended October 31,
2002 2001 2000
Sales $19,438,892 $15,616,943 $14,943,886
Cost of goods sold 13,947,245 11,024,318 10,196,307
Gross profit 5,491,647 4,592,625 4,747,579
Selling and marketing expenses 2,023,469 1,723,884 1,536,317
General and administrative expenses 1,918,944 1,743,660 1,668,525
Income from operations 1,549,234 1,125,081 1,542,737
Other income (expense)
Interest income 14,743 22,806 34,477
Interest expense (48,420) (55,224) (4,296)
Unusual expenses (147,487) - -
Other, net - (71,470) -
Income before income taxes 1,368,070 1,021,193 1,572,918
Income tax provision 512,000 268,000 548,000
NET INCOME $ 856,070 $ 753,193 $ 1,024,918
Earnings per common share - basic $ 0.38 $ 0.33 $ 0.45
Earnings per common share - diluted $ 0.38 $ 0.33 $ 0.45
Shares used in basic
earnings per share 2,253,248 2,262,657 2,282,180
Shares used in diluted
earnings per share 2,272,986 2,271,186 2,303,639
The accompanying notes are an integral part of these statements
YOCREAM International, Inc.
STATEMENT OF SHAREHOLDERS EQUITY
Retained
Total
Common Stock Earnings
Shareholders
Shares Amounts (Deficit)
Equity
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
Net income - - 856,070
856,070
Stock options exercised 61,900 216,380 -
216,380
Repurchase of common stock (71,713) (461,403) -
(461,403)
Tax benefit of options exercised - 73,800 -
73,800
Balance, October 31, 2002 2,250,178 4,625,981 2,877,214
$7,503,195
The accompanying notes are an integral part of these statements
YOCREAM International, Inc.
STATEMENTS OF CASH FLOWS
For the year ended October 31,
2002 2001 2000
Cash flows from operating activities
Net income $ 856,070 $ 753,193 $1,024,918
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation and amortization 612,376 588,996 377,298
Loss on disposal of equipment - 72,302 -
Deferred income taxes 214,200 49,000 413,000
Change in assets and liabilities
Accounts receivable 138,007 (41,927) 64,542
Inventories (180,894) 23,875 128,749
Other assets (150,759) (150,379) 17,995
Accounts payable (58,444) 228,518 (648,850)
Income taxes payable (90,466) 53,179 68,996
Other accrued liabilities 3,614 25,681 (47,148)
Net cash provided by
operating activities 1,343,704 1,602,438 1,399,500
Cash flows from investing activities
Expenditures for fixed assets (642,149) (2,244,531) (1,089,513)
Net cash used in
investing activities (642,149) (2,244,531) (1,089,513)
Cash flows from financing activities
Proceeds from issuance of long-term debt 181,500 1,400,000 -
Principal payments on long-term debt (344,675) (250,048) (82,100)
Repurchase of common stock (461,403) (173,092) (396,606)
Proceeds from exercise of stock options 290,180 107,755 150,450
Net cash provided by (used in)
financing activities (334,398) 1,084,615 (328,256)
Net increase (decrease) in
cash and cash equivalents 367,157 442,522 (18,269)
Cash and cash equivalents,
beginning of year 1,161,661 719,139 737,408
Cash and cash equivalents,
end of year $1,528,818 $1,161,661 $ 719,139
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,
custard, ice cream and snacks, in addition to fruit and coffee smoothie
beverages, primarily under the name YO CREAM or DANNON YOCREAM.
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. 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.
2. 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.
3. 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.
4. 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 as follows:
Plant equipment 10-25 years
Office equipment and furnishings 3-10 years
Leasehold improvements 5-14 years
5. Financial Instruments
The carrying values 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.
6. Revenue Recognition and Sales Incentives
Revenue from the sale of products is generally recognized at the time of
shipment to the customer. Pursuant to EITF 00-14 Accounting for Certain Sales
Incentives, certain coupons, rebate offers and free products offered
concurrently with a single exchange transaction are recognized at the later of
when revenue is recognized or when the sales incentive is offered, and reported
as a reduction in revenue. In addition, pursuant to EITF 00-25 Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendors
Products, certain promotional costs paid to a retailer or wholesaler by a
vendor in connection with the sale of the vendors or promotion of sales of the
vendors products by the retailer or wholesaler are recognized when incurred
and reported as a reduction of revenue. See Note B for a discussion of the
adoption of EITF 00-14 and EITF 00-25.
7. Shipping and Handling Costs
Shipping and handling costs are classified as part of cost of sales.
8. Research and Development Costs
Research and development costs are expensed as incurred. For the
years ended October 31, 2002, 2001 and 2000 such costs aggregated
approximately $446,000, $269,000 and $454,000, respectively.
9. 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.
10. Supplemental Cash Flow Information
The Company made cash interest payments of $48,000, $61,000 and $25,000 for the
years ended October 31, 2002, 2001 and 2000, respectively. Income taxes paid
for the years ended October 31, 2002, 2001, and 2000 totaled $315,000, $142,000
and $25,000, respectively.
11. Reclassifications
Certain amounts previously reported as general and administrative expense in
the prior year have been reclassified to cost of goods sold to conform to the
current years presentation. Certain balance sheet items at October 31, 2001
have also been reclassified to conform to the current years presentation.
12. 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 accounting 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 is required to adopt SFAS 142 for the first quarter
ending January 31, 2003. The Company believes the adoption of SFAS 142 will
have no significant 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.
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.
NOTE B - ADOPTION OF ACCOUNTING PRONOUNCEMENTS
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.
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 adopted EITF 00-14 and EITF 00-25 in the first quarter of fiscal
2002. Comparative financial statements for prior periods have been reclassified
to comply with the classification guidelines of EITF 00-14 and EITF 00-25.
The Company also adopted EITF 01-09 Accounting for Consideration Given by a
Vendor to a Customer or a Reseller of the Vendors Products in the first
quarter of fiscal 2002, which consolidates and clarifies guidance given under
EITF 00-14 and EITF 00-25, but does not change the accounting prescribed above
for the Company. For the years ended October 31, 2001 and 2000 the Company
retroactively reclassified expenses of $266,000 and $145,000, respectively.
The retroactive reclassification of these expenses resulted in a decrease in
total sales and gross profit, along with a corresponding decrease in selling
and marketing expenses, with no effect on net income as previously reported.
For the year ended October 31, 2002, the Company presented these expenses as a
reduction in net sales in accordance with this pronouncement. For the three
years ended October 31, 2002, 2001 and 2000 the total of rebates and promo-
tional costs charged against sales amounted to $599,000, $569,000, and
$390,000, respectively.
NOTE C - INVENTORIES
Inventories consist of the following at October 31,:
2002 2001
Finished goods $ 1,996,415 $ 1,931,184
Raw materials 412,345 329,512
Packaging material and supplies 245,672 212,842
$ 2,654,432 $ 2,473,538
NOTE D - FIXED ASSETS
Fixed assets consist of the following at October 31,:
2002 2001
Machinery and equipment $ 6,258,923 $ 5,795,983
Office equipment and furnishings 245,305 218,947
Leasehold improvements 1,182,210 1,154,415
Construction in process 93,360 80,201
7,779,798 7,249,546
Less accumulated depreciation
and amortization (3,393,898) (2,904,565)
$ 4,385,900 $ 4,344,981
Depreciation and amortization expense related to the Companys fixed assets
aggregated $602,000, $568,000 and $367,000, for the years ended October 31,
2002, 2001 and 2000.
During the year ended October 31, 2000, the Company began a major renovation of
its production facilities. Through October 31, 2000 the project was 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 F), and is collateralized by the plant upgrade project
assets and other existing equipment and fixtures owned by the Company 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.
NOTE D - FIXED ASSETS - Continued
During the year ended October 31, 2002, the Company acquired certain production
equipment and arranged a bank financing commitment of $350,000 with terms
similar to the secured term loan facility.
NOTE E - INTANGIBLE AND OTHER LONG-TERM ASSETS
Intangible assets consist of trademarks, principally YoCream with a cost
basis of $257,000. Accumulated amortization associated with intangible assets
totaled $161,000 and $151,000 at October 31, 2002 and 2001, respectively. In
accordance with the provisions of SFAS No. 142, the amortization of trademarks
will cease, beginning November 1, 2002.
As of October 31, 2002 and 2001, the Company had made deposits totaling
$101,000 and $66,000 related to the leases of various equipment and its
production and office facility and had investments in insurance policies of
$163,000 and $136,000, respectively. As of October 31, 2002 and 2001, the
Company also had other long-term assets of $48,000 and $5,000, respectively.
These items are included in intangible and other long-term assets in the
accompanying balance sheet.
NOTE F - 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 banks
commercial lending rate, 4.75% at October 31, 2002. The line is subject to
renewal by July 2003. There were no amounts drawn on this line at October 31,
2002 or October 31, 2001.
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, 2002, the Company was in compliance with all of these ratios and
covenants.
NOTE G - LONG-TERM DEBT
Long-term debt consists of the following at October 31,:
2002 2001
Note payable to a bank in monthly installments
of $4,709 through October 2002, including
interest at prime less .25%, without collateral. $ - $ 54,976
Note payable to a bank in monthly installments
of $5,833 through December 2007, plus interest
at 30-day LIBOR plus 2% (3.74% at October 31,
2002), collateralized by certain equipment. 181,500 -
Note payable in monthly installments
of $943 through October 2003,including
interest at 6.6%, without collateral 10,358 20,058
Note payable to a bank in monthly installments
of $23,333 through June 2006, plus interest
at 30-day LIBOR plus 2% (3.74% at October 31,
2002), collateralized by certain equipment. 1,026,667 1,306,666
1,218,525 1,381,700
Less portion due within one year (360,358) (344,676)
$ 858,167 $1,037,024
The principal portion of long-term debt is payable as follows:
Year ending
October 31,
2003 $ 360,358
2004 350,000
2005 321,500
2006 186,667
$1,218,525
NOTE H - 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 $56,000, $51,000 and $50,200 during
the years ended October 31, 2002, 2001 and 2000, respectively. All such
contributions have been made in the form of common stock of the Company which
has been purchased on the open market.
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
contributions to this plan.
NOTE I - STOCK OPTION PLANS
In October 1990, the Companys 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 Companys common stock on the grant date. This
plan terminated prior to October 31, 1998.
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, 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 Companys 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. Options are exercisable in such amounts
and at such times as authorized by a Stock Option Agreement applicable to each
option. At October 31, 2002, these options had an exercise price of $4.00 and
a weighted average remaining contractual life of approximately 1 year.
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, 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
Granted -
Exercised (31,900) 3.76
Expired -
Balance, October 31, 2002 75,100 4.00
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. Initially the plan authorized the issuance of 100,000 shares of
common stock upon exercise of options granted under the plan. In April 2002,
the shareholders approved an amendment to the plan to increase the number of
shares authorized for grants under the plan to 200,000. 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
Granted 65,000 5.26
Exercised (30,000) 3.21
Expired (5,000) 3.21
Balance, October 31, 2002 95,000 4.50
At October 31, 2002, there were 240,100 shares of common stock reserved
for issuance under the Companys 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 Companys net income and net income per share would
approximate the pro forma amounts below:
2002 2001 2000
Net income, as reported $ 859,070 $ 753,193 $1,024,918
Net income, pro forma $ 859,070 $ 671,743 $ 917,962
Diluted net income per common
share, as reported $ 0.38 $ 0.33 $ 0.45
Diluted net income per common
share, pro forma $ 0.38 $ 0.30 $ 0.40
The weighted-average fair value of options granted during the years ended
October 31, 2002, 2001 and 2000 were $2.17, $1.35 and $2.56, respectively. 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 2002, 2001 and 2000, respectively: no dividends; expected
volatility of 43%, 42% and 73%; risk-free interest rate of 2.95%, 3.91% and
5.85%, and an expected life of 5 years.
NOTE J - 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)
2000
Basic earnings per share
Income available to
common shareholders $ 1,024,918 2,282,180 $ 0.45
Effect of dilutive securities
Stock options - 21,459
Diluted earnings per share
Income available to
common shareholders $ 1,024,918 2,303,639 $ 0.45
2001
Basic earnings per share
Income available to
common shareholders $ 753,193 2,262,657 $ 0.33
Effect of dilutive securities
Stock options - 8,529
Diluted earnings per share
Income available to
common shareholders $ 753,193 2,271,186 $ 0.33
2002
Basic earnings per share
Income available to
common shareholders $ 856,070 2,253,248 $ 0.38
Effect of dilutive securities
Stock options - 19,738
Diluted earnings per share
Income available to
common shareholders $ 856,070 2,272,986 $ 0.38
NOTE K - MAJOR CUSTOMERS
Revenues derived from the Companys largest customer represents 68%, 67%
and 65% of total revenues in the years ended October 31, 2002, 2001 and 2000.
NOTE L - ADVERTISING COSTS
Advertising costs are charged to operations in the year incurred. For the
years ended October 31, 2002, 2001 and 2000 advertising costs aggregated
approximately $372,000, $327,000 and $294,000, respectively.
NOTE M - INCOME TAXES
The provision for income taxes for the years ended October 31, consists
of the following:
2002 2001 2000
Current $ 297,800 $ 219,000 $ 135,000
Deferred 214,200 49,000 413,000
$ 512,000 $ 268,000 $ 548,000
The effective tax rate differed from the statutory federal tax rate due
to the following:
Year ended October 31,
2002 2001 2000
Statutory federal tax rate (graduated) 34.0% 34.0% 34.0%
State taxes, net of federal benefit 4.1 3.8 3.7
Tax credits (2.1) (10.5) -
Other 1.4 (1.0) (2.9)
37.4% 26.3% 34.8%
Deferred tax assets (liabilities) consist of the following at October 31,:
2002 2001
Deferred tax assets
Accrued expenses $ 9,600 $ 18,800
Allowance for doubtful accounts 6,900 10,900
Inventory - 22,100
Other 18,100 -
Deferred tax assets $ 34,600 $ 51,800
Deferred tax liabilities
Fixed assets $ (243,800) $ (46,800)
Management evaluates on a quarterly basis the recoverability of the deferred
tax assets and the level of the valuation allowance. As of October 31, 2002
and 2001, the Company has not recorded an allowance against deferred tax
assets.
NOTE N - 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
Companys 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.
NOTE N - OPERATING LEASE COMMITMENTS INCLUDING THOSE
WITH RELATED PARTIES - Continued
Minimum lease payments required under these operating leases are as follows:
Year ending
October 31,
2003 $ 424,000
2004 422,000
2005 357,000
2006 310,000
2007 259,000
Thereafter 1,103,000
$2,875,000
Operating lease expense under the related party lease for the years ended
October 31, 2002, 2001 and 2000 approximated $187,000, $187,000 and $177,000,
respectively. Lease expense, exclusive of related parties, was approximately
$318,000, $321,000 and $232,000 for the years ended October 31, 2002, 2001 and
2000. Operating lease expenses are allocated between manufacturing costs and
general and administrative expenses in the accompanying statements of income.
NOTE O - QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the two years ending October 31, 2002 is as
follows:
Basic Diluted
Gross Net Earnings Earnings
2002 Sales Profit Income Per Share Per Share
1st quarter $ 3,361,716 $ 1,017,012 $ 103,501 $ 0.05 $ 0.05
2nd quarter 4,593,568 1,327,212 224,242 0.10 0.10
3rd quarter 6,289,553 1,811,877 469,976 0.21 0.21
4th quarter 5,194,055 1,335,546 58,351 0.03 0.03
$19,438,892 $ 5,491,647 $ 856,070 $ 0.38 $ 0.38
See NOTE P regarding the impact of unusual expenses in the fourth
quarter.
Basic Diluted
Gross Net Earnings Earnings
2001 Sales Profit Income Per Share Per Share
1st quarter $ 2,743,186 $ 846,612 $ 69,958 $ 0.03 $ 0.03
2nd quarter 3,534,343 980,323 93,129 0.04 0.04
3rd quarter 5,024,496 1,496,842 405,947 0.18 0.18
4th quarter 4,314,918 1,268,848 184,159 0.08 0.08
$15,616,943 $4,592,625 $ 753,193 $ 0.33 $ 0.33
Net sales and gross margin differ from amounts previously reported for
all four quarters of fiscal 2001 due to the reclassification of costs
incurred for certain sales incentive programs and promotional costs as
a reduction of revenue rather than as sales and marketing expense. See
Note B.
NOTE P - UNUSUAL EXPENSES
Subsequent to July 31, 2002, the Company received notification from a third
party freight auditor representing a customer of the Company. The notification
implied that the customer might be entitled to additional freight charge
reimbursements for shipments that occurred in 1999 and 2000. This matter was
resolved in the fourth quarter 2002 and the Company agreed to a settlement of
approximately $147,000.