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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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, 1997.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number: 0-16787
INTERNATIONAL YOGURT COMPANY
(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
Portland, Oregon 97220
(Address of Principal (Zip Code)
Executive Office)
(Registrant's telephone number, including area code): (503)256-3754
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K, or any
amendment to this Form 10-K. [X ]
The aggregate market value of voting stock held by non-affiliates of the
registrant was approximately $4,556,878 at January 23, 1998, based upon the
average bid and asked prices of the common stock on that date.
At January 23, 1998 there were 2,251,793 shares of the registrant's common
stock outstanding.
Documents incorporated by reference:
Part of Form 10-K into
Document which Incorporated
Portions of Proxy Statement for
1998 Annual Meeting of Shareholders Part III
TABLE OF CONTENTS
PART I Page
Item 1. BUSINESS..........................................4
Item 2. PROPERTIES........................................13
Item 3. LEGAL PROCEEDINGS.................................13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS...........................................14
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDERS MATTERS......................14
Item 6. SELECTED FINANCIAL DATA...........................15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS....................................16
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA..............................................20
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE............20
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT........................................21
Item 11. EXECUTIVE COMPENSATION............................21
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.............................21
Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS......................................21
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K...........................21
SIGNATURES........................................................24
PART I
Item 1: BUSINESS
General
International Yogurt Company (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
its present name. The Company makes, markets and sells frozen yogurt,
sorbet, smoothie, and ice cream products in a variety of premium, low-fat,
and nonfat flavors in either non-organic or organic formulations. The
Company markets and sells these products to and through a variety of
businesses and outlets, including super-markets, grocery stores, convenience
stores, restaurants, hospitals, school district food services, military
installations, yogurt shops, fast food chains, discount club warehouses, and
other types of outlets. The Company's primary product is YO CREAM (R) frozen
yogurt, which is distributed and sold nationwide. The Company also produces
SORBET by YO CREAM, YO CREAM PURE made from 100% organic milk, YO CREAM THE
SMOOTHIE WAY, THE COMPLETE FRUIT SMOOTHIE, and premium, lowfat, or nonfat ice
creams. The Company's general marketing strategy is to offer a broad
selection of its products at a price suitable for the relevant markets.
The Industry
The YO CREAM brand frozen yogurt, smoothies and sorbet products produced
by the Company constitute only a portion of the relevant frozen dessert
industry. The industry produces a diverse range of products, many of which
compete directly with the Company's YO CREAM frozen yogurt, smoothies and
sorbet products.
Many types of retail outlets make available to the public the Company's
Yo Cream frozen yogurt, smoothies and sorbet products as well as other
manufacturer's frozen yogurt products and frozen dessert and snack items,
with many outlets offering competing products of several manufacturers. The
retail consumer may obtain the Company's products or competing products from
narrowly oriented outlets such as small yogurt shops or stands, many of which
provide only a single product, to supermarkets and discount club warehouse
types of facilities, as well as from many medium-sized businesses. Food
service 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. 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 products have gained wider acceptance and identification
by a greater variety of demographic groups than when first introduced into
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
International Yogurt Company operates within the health oriented frozen
dessert, snack, and novelty business. Focus is placed on manufacturing
superior quality soft serve and hardpack products (e.g. frozen yogurt,
organic, sorbet, etc.) for regional, national, and worldwide foodservice and
retail markets. International Yogurt Company's expertise in nationwide
distribution, foodservice sales/marketing, R&D (e.g. new product development)
and manufacturing is enhanced through leveraging strategic alliances and/or
joint ventures (e.g. combined efforts with Norpac's nationwide distribution
system, Cascadian Farm, etc.). These relationships are developed to increase
volume growth and profitability within those markets served by the Company.
International Yogurt Company's foodservice YO CREAM branded presence
receives emphasis in selected geographic areas of the U.S. where sales and
marketing resources are focused on branded product expansion. For companies
for which International Yogurt Company manufactures (e.g.Costco, Cascadian
Farm, Western Family, SYSCO, etc.), International Yogurt Company is committed
to providing outstanding price/value products that meet their stringent
quality standards.
Marketing Strategy
The Company's marketing strategy is to build customer brand awareness
and loyalty, as well as to develop and expand YO CREAM consumer brand
identification, by offering a broad selection of premium frozen yogurt and
sorbet products. The Company believes it can achieve greater brand
identification and loyalty through advertising the features and benefits of
its products, including the successes it has enjoyed in certain competitive
taste tests of its frozen yogurt products. The Company also considers the
broad distribution of its product critical to sales growth, with its products
now available in 49 states. The Company will continue to strive for greater
distribution penetration within each of those states.
On September 8, 1987 the Company entered into a 10-year exclusive
marketing agreement with Norpac Foods, Inc. ("Norpac") based in Stayton,
Oregon. Under this agreement, as amended, Norpac was the Company's exclusive
sales agent, subject to certain exceptions, for the sale of the Company's
frozen yogurt and sorbet products to the restaurant and foodservice
institutional industry. While the Company had the option to continue the
contract for an additional five years, the Company and Norpac mutually and
cooperatively agreed to a termination. A new interim Distribution Agreement
was executed continuing the availability of Norpac's distribution system for
the Company's products for a transitional period. However, the Company's
internal traffic department is now arranging over ninety percent of the
distribution of its products by means of buyer pick up or through
transportation arranged by the company.
By August, 1989, the Company ceased the direct sale of its products
through Company-owned restaurants. The management of the Company decided
that the capital and other resources of the Company should be devoted
exclusively to the manufacturing and wholesale business.
The Company's management also believes that its ability to respond
innovatively to and take advantage of changes in the retail, foodservice, and
packaging industries will permit greater availability and acceptance of its
products. For example, single serving containers are popular with some
consumers and sales channels and currently smoothie products are in demand.
In 1993, the Company began a concerted effort to obtain copacking and
private label business. The Company was successful in obtaining a contract
to copack the organically grown, All Fruit Sorbet produced for Cascadian
Farm, a majority owned subsidiary of Trefoil Natural Foods. In November
1994, Cascadian Farm added to its contract with the Company its organic
frozen yogurt and ice cream lines as well. In September 1996, the Company
entered into a new agreement with Western Family for co-packing Western
Family's own brand of nonfat frozen yogurt hardpack in 1/2 gallon containers.
In January 1996, the Company entered into a signage/sponsorship
agreement with the Oregon Arena Corporation, owner of the Rose Garden Arena
in Portland, Oregon. The Rose Garden is the principal home arena for the
National Basketball Association franchise for the Portland Trail Blazers
professional basketball team. Certain advertising rights are granted under
the agreement as well as exclusivity regarding the sale of frozen yogurt,
sorbet, and soft serve ice creams within the Arena. The Company has
developed a special product called Blazers Swirl, a nonfat combination of
non-dairy sorbet and nonfat frozen yogurt that is being featured in the
Arena.
In 1996, the Company began a nationwide introduction of 4 oz. single
serve cups of nonfat frozen yogurt and non-dairy sorbet products. These
products were introduced under the Company's own brand of "Soft Scoop by Yo
Cream" and under SYSCO's nationwide "Cool N' Classy " brand. The Company is
the only supplier to SYSCO for this product.
As part of the transition from Norpac, the Company has developed its own
marketing, sales, and logistical departments. A Director of Sales &
Marketing teams with Regional Sales Managers, who in turn work with 40
independent foodservice brokers on a nationwide basis. While the Company's
traffic department now arranges over 90% of its product shipments, a
Distribution Agreement signed with Norpac in September 1997 enables the
Company to access Norpac's extensive distribution system as needed.
The results since the Norpac disengagement have included significantly
increased product line focus, improved broker & customer support, and
double-digit sales growth.
In June 1997, the Company announced a marketing agreement with
Pocahontas Foods USA, to jointly sell a branded counter-top freezer concept,
merchandising both SOFT SCOOP and YO CREAM Pure 4 oz. cup products.
Pocahontas, a sales and marketing association of 140 independent foodservice
distributors nationwide, has bundled YO CREAM as the sole dessert/snack
concept into an innovative branding program. The branded program is designed
to deliver foodservice operators a bundle of interchangeable consumer
recognized branded food concepts, including YO CREAM.
In May 1997, the Company launched YO CREAM, THE SMOOTHIE WAY, a smoothie
line featuring dairy and non-dairy base mixes, with recipes for blender
operation. While smoothies have been available for some time, the market in
1997 exploded. Juice and smoothie bar concepts grew 30% and are expected to
grow at a higher rate in 1998. The trend is being driven by the American
consumer's interest in finding healthy foods that are satisfying and tasty.
Key Northwest-based foodservice operators like Burgerville, Coffee People,
and Taco Del Mar are YO CREAM, THE SMOOTHIE WAY customers. Major national
accounts are currently testing the concept with the prospect of introducing
it sometime during the current year.
In October 1997, the Company successfully test marketed YO CREAM, THE
COMPLETE FRUIT SMOOTHIE, 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. YO CREAM, THE COMPLETE FRUIT SMOOTHIE can be dispensed in
a few seconds, while it may take minutes to make a smoothie with a blender.
The product line is expected to officially introduced to the marketplace in
February, 1998, although it is already being tested in several locations of a
major national chain.
International sales are selectively pursued by the Company on the basis
of ease of distribution and profitability. Marketing and sales abroad are
currently occurring in Canada, Mexico, Italy and the Pacific Rim.
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,
and nonfat flavors, smoothies in a variety of flavors, and non-dairy sorbet
in a variety of flavors, as well as organic yogurt, organic ice cream and
other frozen desserts and snacks. These frozen products are available in
both soft serve liquid mix and hard pack forms.
As of January 23, 1998, the Company had available for sale the following
products and flavors under its own YO CREAM brand name:
YO CREAM YO CREAM PURE - ORGANIC SORBET . . .
Premium Soft Serve Mix Non-fat Soft Serve BY YO CREAM
Cheesecake Supreme Chocolate Sensation Kiwi Strawberry Splash
Dutch Chocolate Strawberry Fields Very Berry
French Vanilla Pure Vanilla Lemony Lime
Milk Chocolate Mango Tango
Peanut Butter SPECIALTY PRODUCTS Orange Burst
Praline 'n Cream
Strawberry Vanilla Shake Base YO CREAM "FREE"
Vanilla SUGAR FREE
YO CREAM PURE - ORGANIC
Low Fat Hard Pack Chocolate
YO CREAM Ice Cream 45/4oz. Strawberry
Nonfat Soft Serve Vanilla
Chocolate Raspberry
Apple Spice Strawberry Blueberry
Blueberry Burst Vanilla Cafe' au Lait
Butter Brickle (also 1 1/2 gallon)
Cable Car Chocolate YO CREAM,
Cappuccino THE SMOOTHIE WAY
Cherry Almond YOGURT STAND
Chocolate Classic Nonfat Soft Serve (Smoothie recipes for
Country Vanilla blender operation
Egg Nog Chocolate utilizing various
Fancy French Vanilla Strawberry YO CREAM dairy and
Georgia Peach Vanilla non-dairy products.)
"Holiday" Chocolate Mint
Irish Mint YO CREAM YO CREAM
Island Banana SOFT SCOOP - 4 Ounce 3 Gal SOFT SCOOP
Kahlua -Premium
Luscious Lemon Chocolate Nonfat (with condiments)
New York Cheesecake Strawberry Nonfat
Outrageous Orange Vanilla Nonfat Chunky Cherry Almond
Peanut Butter Very Berry Sorbet Choc. Chip Chocolate
Pecan Praline Very Berry Sorbet/ Chocolate Java Swirl
Peppermint Stick Nonfat Vanilla Frozen Peaches 'n Cream
Pumpkin Yogurt Swirl Rocky Road
Very Strawberry Pecan Praline
Very Boysenberry
Very Raspberry WESTERN FAMILY
White Chocolate Half gallon YO CREAM
Macadamia 3 Gal SOFT SCOOP
Chocolate - Standard
YO CREAM Non-dairy Vanilla (without condiments)
Nonfat SMOOTHIE Pre-mix Raspberry
(THE COMPLETE FRUIT Cherry Cheesecake Mountain Boysenberry
SMOOTHIE) Strawberry Raspberry Royal
Berry Banana Peach Strawberry Sensation
Island Lime Cappuccino Swiss Chocolate
Mango Sunrise Vanilla/Chocolate Alpine Vanilla
Orange Squeeze Strawberry/Banana
BLAZER SWIRL . . . BY YO CREAM YO CAFFE LATTE
8 ounce cup
Very Berry Sorbet/Vanilla Frozen Yogurt Regular
The Company sells the soft serve liquid mix form to food service
customers who dispense it through a soft serve frozen dessert machine. This
form is also available in an unflavored natural form which permits the
customer to add desired flavors. In fiscal year 1997, the soft serve liquid
mix product accounted for approximately 63% of the Company's case sales.
Hard pack products are available in pint and 1/2 gallon containers to
supermarkets, which price them competitively with ice cream and other related
products. The Company also markets and sells its hard pack frozen dessert
products in 4 oz., 8 oz., and three gallon containers to food service
customers. Such hard pack products are also produced under private label for
Western Family , Cascadian Farm, and Sysco. In fiscal year 1997, hard pack
products of all type containers accounted for approximately 37% of the
Company's case sales.
Two new lines of hard pack frozen yogurt products were introduced in
late 1994, a premium pint line and a half gallon line. Presently, half
gallon hard pack products are being produced for Western Family in a variety
of flavors.
The Company is also selling frozen yogurt products with no sugar added,
which are sweetened with aspartame. This product was introduced to the
market place in the spring of 1991, and in 1997 it accounted for
approximately 3% of total case sales.
The Company has developed a lower cost line of products under the label
YOGURT STAND designed to compete in that part of the institutional market
where price is the most significant competitive factor. That line of the
Company's products includes three flavors and a plain mix that can be
flavored by the end user with flavor packets bearing the YOGURT STAND label.
The Company has also developed a product identified by the trademark
SOFT SCOOP. This product, introduced to the market place in fiscal year
1992, can be stored and distributed at a higher temperature than standard
hard pack frozen desserts. It is currently being marketed to the food
service industry under the brand name SOFT SCOOP by YO CREAM, and it is
packaged in single serve four ounce and three gallon containers.
In May of 1993, the Company introduced a yogurt-coffee beverage called
YO CREAM Caffe' Latte'. It is a ready to serve product that can be poured
over ice and served as a refreshing beverage.
SORBET by YO CREAM is a product developed by the Company in 1995.
It is a high quality non-dairy product produced in several flavors in
hardpack and soft serve form.
YO CREAM PURE is a new product developed and introduced by the company
in 1997. Made from 100% organic milk, all natural ingredients, and
pasteurized, YO CREAM PURE is targeted toward health conscious people who
believe in the benefits of organic foods. The line includes both nonfat soft
serve and lowfat hardpack ice creams which are available in the most popular
flavors.
YO CREAM, THE SMOOTHIE WAY was introduced in May 1997 and is a smoothie
concept utilizing blenders. It consists of recipes designed to use a variety
of YO CREAM mixes. The base mix 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.
YO CREAM (THE COMPLETE FRUIT SMOOTHIE), is expected to be officially
launched in February 1998, is an innovative, all-natural, nonfat and non-
dairy complete fruit smoothie mix designed to be dispensed from a smoothie
machine or frozen beverage dispenser. Available in four all-natural, nonfat,
non-dairy fruit flavors, the product requires no additions of fruit, ice, or
juice to make a smoothie. An operator simply pours it directly into a
smoothie machine or beverage dispenser.
Other products manufactured by the Company include organic sorbets and
ice creams that are packed under a customer's private label brand and a soft
serve lowfat ice cream mix sold to the Rose Garden Arena in Portland, Oregon.
Manufacturing Process
All of the manufacturing and packaging of the Company's products for
domestic sales occurs at its plant in Portland, Oregon. The Company utilizes
a Canadian dairy as a copacker for production of its products for the
Canadian market. All other products for international sales are produced in
Portland and then containerized to be shipped out of the Port of Portland.
While the manufacturing plant is capable of producing a full range of
dairy products and other fluid items, it primarily is utilized to produce
yogurt, ice cream, sorbet and smoothies. The facility is a fully licensed
dairy and pasteurizes its products under U.S.D.A. 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 two distinct packaging operations that are
operated simultaneously. One operation is for the filling of packages for
soft serve products and the other operation is for the production of ready to
serve frozen products. Within these two operations are a multitude of
packaging sizes, styles, and finished casing capabilities in addition to a
full range of condiments that can be added to the finished products.
Fiscal 1997 has seen both a leveling out of production fluctuation and
an increase in overall plant utilization. Plant utilization has risen from
approximately 30% to approximately 45%. Management expects to see plant
utilization increase further in the 1998 fiscal year, primarily from the
Company's specialty products and through copacking and private label
business.
Inventory and Backlog
The Company does not have a significant production backlog. Because of
the relatively short time period required to produce a finished product from
the receipt of an order by the Company, the Company strives to maintain a low
level of raw materials and work-in-process inventory. Inventory of finished
goods is maintained at levels to accommodate wide distribution of the
Company's products throughout the United States. Although the Company tries
to estimate demand and production schedules for its products, its customers
generally place orders when they require the Company's products, and
customers expect delivery within a short period of time.
Distribution and Significant Customers
The Company's products are distributed in 49 states. Distribution is
facilitated by buyer pick up or by transportation arranged by the Company.
The Company's products are generally shipped domestically on refrigerated
trucks to all domestic locations. The Company has also entered into a
Distribution Agreement with Norpac Foods, Inc. that enables the distribution
of the Company's products on trucks pooled with Norpac products.
The portion of the Company's sales to U.S. Government agencies or
institutions, such as sales to the Army, would not be material to the Company
in the event of a cancellation of those contracts.
During the year ended October 31, 1997 case volume to the Company's two
largest customers were 30.1% (Costco) and 29.7% (Cascadian Farm) of total
case volume for the year.
Research and Development
The Company's 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. This process
has also occurred on a regular basis with respect to ingredients such as
stabilizers and emulsifiers. Furthermore, the Company has conducted
activities regarding non-fat and no sugar added frozen products and various
novelty items. The Company has also developed a line of yogurt beverages
including yogurt-juice and yogurt-coffee combinations. The most recent
development of new products is a line of smoothie products for blending or
automated operation. The Company's development activities occur at the
Portland, Oregon facility. Although a precise separation of accounts is not
available, the Company estimates total research and development expenditures
for the year ended October 31, 1997, to have been $134,000, compared with
$104,000 and $82,000 for the years ended October 31, 1996 and 1995.
Advertising and Promotion
During the year ended October 31, 1997 such expenses totalled
approximately $492,000 representing 5.7% of net sales. This compares to
$452,000, or 5.7% of net sales for the year ended in October 1996 and
$231,000, or 3.1% of net sales in the year ended October 31, 1995.
Seasonality
The Company's 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.
Suppliers
Suppliers of the primary ingredient of the Company's products, raw milk,
are mostly based in the Pacific Northwest and obtain that raw milk from dairy
farms in northern Oregon and southern Washington. Because freshness and
timeliness of delivery are critical to the Company's products, the Company
prefers local suppliers. The Company's largest supplier of raw milk
supplied approximately 89.2% of the Company's needs in fiscal year 1997 and
the second largest supplier provided approximately 10.8%. All supplies used
by the Company are readily available from a variety of suppliers. The
Company has never experienced any form of supply shortage.
Competition
The Company's products constitute a portion of a greater market which
includes all forms of yogurt-based frozen desserts, ice cream products and
non-dairy frozen desserts. The market for the Company's products is very
competitive both 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. Many of the companies that produce products
which compete with those of the Company are substantially larger and have
significantly greater resources. In addition, increased competition from the
established manufacturers and distributors of frozen desserts and ice cream
products can be expected in the future as a result of their increased
involvement in the frozen yogurt, sorbet, and smoothie business.
The Company competes against different sets of manufacturers for each
product it markets. The Company's principal competitors for soft serve
products include Colombo (General Mills), Dannon, Eskimo Pie, and Honey Hill
Farms (Greater Pacific Food Holdings). Key competitors for the Company's
hard pack frozen yogurt products include Ben and Jerry's, Dryers, Haagen
Dazs, and Wells Blue Bunny. Chief smoothie product competitors include
Colombo, Freshens, Miss Karen's, and Skigo (Quaker Oats). In addition to the
large primary competitors identified, the Company competes against numerous
small local and regional competitors.
The Company's products are recognized in the marketplace for their high
quality and have competed well in this regard. For example, on July 27,
1989, the Chicago Tribune listed YO CREAM as the best tasting of 13 national
brands of frozen yogurt on the basis of a test by seven independent judges.
Through the Company's national system of brokers and distributors the
Company believes it can compete effectively from the standpoint of service.
Price competition, however, has become intense in certain geographical areas
as regional dairies endeavor to introduce a limited line of frozen yogurt.
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 YO CREAM brand products. While the company has experienced
competitive success in the past, no assurance can be given that the Company
will continue to compete successfully against other available products.
Other than direct competition for specific soft serve or hard pack
frozen yogurt products, the Company's products compete against certain other
frozen dessert items, such as ice cream. Specific competition comes from
premium ice cream makers such as Haagen-Dazs, Ben and Jerry's Homemade, Inc.,
Steve's Ice Cream and other national and regional ice cream brands.
Trademarks and Trade Names
The Company registered as a trademark the name of its primary product,
YO CREAM, with the United States Patent and Trademark Office. This trademark
is renewable and, therefore, is of an indefinite term. That trademark is
also registered in Canada and may be renewed there upon expiration. Some of
the Company's products use that basic trade name with other words or
designations, such as YO CREAM LITE. In addition, the Company uses the
trademarks "JUST SAY YO," "PURE PLEASURE," "YOGURT STAND," "PURE PLEASURE,
PURE FOOD, PURE ENVIRONMENT," "IT'S A BELIEF, IT'S A LIFESTYLE," "SOFT SCOOP"
and "YO CAFFE'". The Company has registered or intends to register these
trademarks in the United States and may register the trademark YO CREAM in
other foreign countries.
Employees
The Company employed 42 persons at October 31, 1997, all of whom were
full-time (35 hours per week or more.) None of the Company's employees are
covered by collective bargaining agreements, and management believes its
employee relations are good. The Company's sales representatives of
approximately 250 persons are mostly independent and 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 30,000 square foot facility at 5858 NE 87th
Avenue, Portland, Oregon 97220. Of this total space, the Company uses
approximately 6,800 square feet for production, approximately 9,000 square
feet for freezer and refrigeration purposes, and approximately 2,300 for
office space. The Company has designated the remaining 11,900 square feet
for warehouse purposes and expansion of the Company's freezer and production
facilities.
The lease of the Company's production and office facilities expired on May
14, 1994 and the Company exercised its option to purchase the property. In
order to preserve capital, the Board of Directors decided that the
Corporation should allow certain of its officers and directors to purchase
the property, with the Corporation then leasing it from them. Thereafter,
John N. Hanna, David J. Hanna and James S. Hanna, together with others,
formed Pente Investments for the purpose of purchasing the property and
leasing it to the Corporation. The facility lease has 12 years remaining and
provides for a base rent of $9,600 per month for the next three years and
then increases approximately 3% per year thereafter.
Other materially important property of the Company includes certain
equipment which it utilizes to manufacture and distribute its frozen yogurt
products, including standard dairy equipment, holding tanks and refrigeration
units. In addition, the company leases other equipment under capital and
operating leases.
Item 3: LEGAL PROCEEDINGS
As of the date of this Annual Report on Form 10-K, the Company had no
material litigation pending against it.
Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders
during the final quarter of fiscal year 1997.
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 23, 1998,
there were 2,251,793 shares of the common stock outstanding and there were
199 shareholders of record estimated to represent approximately 900
beneficial holders based on the number of individual participants in security
position listings. On January 23, 1998 the closing bid and asked prices were
$3-1/4 and $3-1/2, respectively.
The following table sets forth the high and low closing bid quotations
for quarterly periods in the two twelve month periods ended October 31, 1997
and October 31, 1996. Such over-the-counter market quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not necessarily represent actual transactions.
Twelve months Ended October 31, 1997 High Low
August 1, 1997 - October 31, 1997 $ 2 7/16 $1 29/32
May 1, 1997 - July 31, 1997 2 3/16 2
February 1, 1997 - April 30, 1997 2 31/64 2 3/16
November 1, 1996 - January 31, 1997 3 1/8 2 17/32
Twelve months Ended October 31, 1996 High Low
August 1, 1996 - October 31, 1996 $ 2 1/4 $ 2
May 1, 1996 - July 31, 1996 2 1/4 2
February 1, 1996 - April 30, 1996 2 15/16 1 9/16
November 1, 1995 - January 31, 1996 2 1 3/8
The Company has not paid dividends on its common stock since the stock
began public trading on November 17, 1987. The Company does not expect to
pay cash dividends on its common stock in the foreseeable future. The
Company intends to invest funds otherwise available for dividends, if any, on
improving the Company's capital resources.
Item 6: SELECTED FINANCIAL DATA.
The following selected financial data set forth below as of, and for the
fiscal years ended October 31, 1997, 1996 and 1995 are derived from the
audited financial statements included elsewhere in this report and are
qualified by reference to such financial statements. The balance sheet data
as of October 31, 1995, 1994, and 1993 as well as the Statement of Operations
data for the fiscal years ended October 31, 1994 and 1993, are derived from
financial statements not included herein.
October 31
Balance Sheets 1997 1996 1995 1994
1993
Total Current Assets $3,380,607 $3,067,744 $2,876,583 $2,924,075
$2,333,968
Total Assets 5,810,593 5,353,622 5,036,716 4,953,187
4,076,507
Long-term Debt 222,975 286,481 278,498 294,822
273,466
Shareholder's Equity 3,185,918 2,758,972 2,679,443 2,315,075
1,882,739
Statements of For the Years Ended October 31,
Earnings
1997 1996 1995 1994
1993
Revenues $8,677,547 $7,922,144 7,348,531 $6,911,252
$6,387,989
Income from
Operations (1) 386,318 104,729 312,820 187,952
292,718
Net Income 433,546 6,773 304,884 61,888
175,101
Net Income per
Share .19 .00 .14 .03
.07
(1) Income from operations in 1996 is after deduction of unusual expenses
amounting to $143,527.
Item 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations.
The following discussion includes forward-looking statements within the
meaning of the "safe-harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are based on the beliefs
of the Company's management and on assumptions made by and information
currently available to management. All statements other than statements of
historical fact, regarding the Company's financial position, business
strategy and plans and objectives of management for future operations of the
Company are forward-looking statements. When used herein, the words
"anticipate," "believe," "estimate," "expect," and "intend" and words or
phrases of similar meaning, as they relate to the Company or management, are
intended to identify forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that such expectations will prove to
have been correct. Forward-looking statements are subject to certain risks
and uncertainties, which could cause actual results to differ materially from
those indicated by the forward-looking statements. These risks and
uncertainties include the Company's ability to maintain or expand its
distribution abilities, including the risk of disruptions in the
transportation system and relationships with brokers and distributors.
Further, actual results may be affected by the Company's ability to compete
on price and other factors with other manufacturers and distributors of
frozen dessert products; customer acceptance of new products; general trends
in the food business as they relate to customer preferences for the Company's
products; and the Company's ability to obtain raw materials and produce
finished products in a timely manner, as well as its ability to develop and
maintain its co-packing relationships and strategic alliances. In addition,
there are risks inherent in dependence on key customers, the loss of which
could materially adversely affect the Company's operations. The reader is
advised that this list of risks is not exhaustive and should not be construed
as any prediction by the Company as to which risks would cause actual results
to differ materially from those indicated by the forward-looking statements.
The Company's revenues were $8,677,547, $7,922,144, and $7,348,531
for the years ended October 31, 1997, 1996 and 1995, respectively. Revenues
increased 9.5% in 1997 primarily as the result of sales gains in warehouse
clubs and international segments, as well as the introduction of new
products.
The revenue gains of 9.5% in 1997, 7.8% in 1996, and 6.3% in 1995 over
the prior year are reflective of the Company's basic strategy. Fundamental to
this strategy is the competitive success of the Company's products and the
introduction of cutting edge new products. The successes are also due to an
established national distribution system including a network of brokers and
distributors, expanded direct sales activity, and alliances with other
national companies. Management expects this trend to continue as it executes
its aggressive growth plan, which includes expanded alliances with other
national companies, intensified direct sales activity, and the introduction
of new products.
The new products introduced in the last two years include Soft Scoop
by YO CREAM which is a 4 oz single serve cup of frozen yogurt or sorbet
specifically developed in 1996 to facilitate national distribution. This
product can be distributed at zero degrees compared to minus twenty degrees
for most frozen dairy dessert products. At the National Restaurant
Association Food Show in May 1997, the Company introduced YO CREAM PURE.
This is the Company's new line of nonfat soft serve frozen yogurt and low fat
ice cream cups made from 100% organic milk. The product was developed in
response to today's increasingly health and environmentally conscious
consumer. The Company has also developed a new line of nonfat and nondairy
YO CREAM SMOOOTHIES which include ready-to-serve products (THE COMPLETE FRUIT
SMOOTHIE)and premixes for blender operation (YO CREAM, THE SMOOTHIE WAY).
The response to these products has been exceptional, opening a new vista of
opportunity for branded and private branded sales. Near the end of the fiscal
year the YO CREAM branded smoothies were introduced into the Burgerville and
Taco Del Mar restaurant chains. Subsequent to the end of the fiscal year,
Costco selected the Company's Smoothies for introduction into its Food
Courts. Other significant contracts are pending.
Food service sales, which represent approximately 46% of sales, showed
substantial improvement over the prior year, and would have contributed to a
significant increase in overall sales had it not been for the loss of one
major, low margin account. This lost account was replaced with higher margin
business. Management believes that the improvement in this segment is
primarily due to the program of establishing its own regional sales managers
and product specialists.(See ANNUAL REPORT, "Marketing Strategy.")
Management also believes that the results will continue to improve in the
future as the regional sales managers are able to work closely with the
national network of brokers and distributors.
Two new international markets were obtained in late fiscal 1997, Mexico
and Indonesia. The Company expects to expand sales into these markets in the
future. Shipments to Panama and the Philippines are expected during the
first quarter of fiscal 1998.
The Company is also in the process of developing other strategic
alliances with national companies that are expected to increase both branded
and private branded sales.
The cost of sales, as a percentage of revenues, were 69.3%, 71.1%, and
69.3% in 1997, 1996 and 1995 respectively, with corresponding gross profit
margins of 30.7%, 28.9%, and 30.7% for the same periods. During fiscal 1997
margins improved due to increased sales activity, and price increases which
were implemented earlier in the year. During fiscal 1996 margins decreased
as a result of aggressive pricing earlier in the year to gain market share,
and additional costs associated with business expansion. Increases were also
experienced in the cost of ingredients, transportation, and warehousing.
However, as a result of the Company's analysis of both market conditions and
its costs, the Company increased prices during the fourth quarter in the food
service and certain other segments of its business. The increase in the
gross margin for 1995, as compared to 1994, was primarily the result of
increased production efficiencies.
Production has increased, but is below plant capacity. Therefore, in
the absence of increases in direct costs, management believes that the
economies of scale from increased sales and production could result in
improvements in gross profit margin and net income in the future.
Selling and marketing expenses, as a percentage of revenues, for the
years ended October 31, 1997, 1996 and 1995 were 14.8%, 14.1%, and 12.4%
respectively. While such expenses are a direct function of sales and will
vary in dollar amount in relation to the level of sales, management has
exercised care in controlling these costs. The increase in such expenses in
1997 primarily relates to payroll and travel costs related to the addition of
regional sales managers/product specialists, and increased sales activity.
The increase in 1996 also reflects the Company's expanded marketing and sales
activity.
The development of its own regional sales managers/product specialists
has given the Company an increased level of direct contact with brokers and
distributors, and enabled the Company to effectively assume the role
previously performed by Norpac. For the ten-year period up to September
1987, Norpac was the exclusive sales agent, subject to certain exceptions,
for the sale of the Company's products to the foodservice institutional
industry. Under the terms of a Distribution Agreement executed in September
1997, Norpac will continue to make its distribution system available through
December 1998. However, less than 10% of the Company's sales are presently
facilitated through the Norpac system and management believes that these can
be handled adequately through the Company's expanded traffic facilities at
the appropriate time.
General and administrative expenses for the years ended October 31,
1997, 1996 and 1995, as a percentage of revenues, were 11.4%, 11.6%, and
14.0% respectively. Management has exercised careful control over these
costs. Furthermore, management believes that the relatively fixed nature of
these costs are such that net income will be favorably effected as expected
higher sales levels are achieved.
During 1996, the Company made a provision for certain unusual expenses
aggregating $143,527. The provision was primarily for a reserve against
receivables recognized in prior years for recovery of certain marketing
costs, and a reserve for disputed packaging and freight costs related to
prior years. The provision has been reported separately in order to readily
identify amounts. The provision reduced net earnings by $143,527, or $.07
per share in 1996.
Income from operations for the years ended October 31, 1997, 1996 and
1995 was $386,318, $104,729, and $312,820 respectively. As a percentage of
revenues, income from operations was 4.5%, 1.3%, and 4.3% respectively. The
results for 1997 improved as a result of the improvement in gross profit, and
the lack of provision for unusual expenses. The results for 1996 decreased
in comparison to 1995 primarily due to the decrease in gross profit, and the
provision for unusual expenses described above. Were it not for the
provision for unusual expenses, the income from operations in 1996 would have
been 3.1%.
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 - Accounting for Income Taxes (FAS
109). This standard requires, among other things, the recognition of future
tax benefits for net operating loss carryforwards (NOL's), to the extent that
realization of such benefits is more likely than not. As a result of an
evaluation of the future benefit of the Company's NOL's, the Company
increased the carrying value of its net noncurrent deferred tax asset by
$159,000 in 1997, and $125,000 in 1995, which resulted in a corresponding
increase in net income. At October 31, 1997, the Company had federal and
state NOL's aggregating approximately $3,100,000 and $2,100,000,respectively,
which may be used to offset taxable income, if any, in future years. The
Company has not recognized the full expected benefit of these NOL's. In
future years, as earnings are realized, the Company will be recognizing the
remaining tax benefit of such NOL's.
Net income for the years ended October 31, 1997, 1995 and 1994 was
$433,546, $6,773, and $304,884 respectively. Net income for 1997 was up over
1996 due to improved margins, the tax benefit of the NOL's recognized in
1997, and the provision for unusual expenses in 1996. Net income for 1996
was less than 1995 due to the provision for unusual expenses in 1996, as well
as the decrease in gross profit margin and increase in selling and marketing
expenses in 1996, and the tax benefit of NOL's recognized in 1995.
Capital Resources and Liquidity
During the past three years, the Company has financed its operations and
expansion with stock sales, bank loans, capital leases, operating leases, and
internally generated funds.
During 1996, the Company received $105,500 from subscriptions for 52,750
shares of unregistered common stock through a private placement. The related
expenses were $11,526.
During 1997, the Company entered into an operating lease relating to
certain assets utilized in its production process. (See footnote N of the
Financial Statements for a description of this lease.)
At October 31, 1997, the Company's total borrowings under its bank line
of credit were $1,337,000, while the total amount available under the line
was $1,540,154. Interest is at 1 percent over that bank's basic commercial
lending rate. Total borrowings under this line are payable upon demand and
limited to 65 percent of eligible accounts receivable and 30 percent of
eligible inventory, plus loan insurance provided by a governmental agency, up
to an aggregate maximum of $1,700,000. The line of credit is subject to
renewal by March 1, 1998. Although management expects the bank to renew its
line of credit, there can be no guarantee of that renewal.
Accounts receivable at October 31, 1997 and 1996 were $828,860 and
$748,683, respectively, which management considers to be in the normal course
of business.
Inventories at October 31, 1997 and 1996 were $1,808,201 and $1,569,273,
respectively. The increase in 1997 is primarily due to a higher level of
finished goods inventory.
At October 31, 1997, the Company had working capital of $978,907. The
Company believes its existing assets, bank lines of credit, along with
revenues from operations, will be sufficient to fund the Company's operations
through the end of fiscal year 1997. The Company believes that the impact of
inflation on net income has been minimal for fiscal years 1997, 1996 and
1995.
The Company leases its offices and production facilities. The lease has
a remaining term of 12 years with renewal provisions and provides for a base
rent of $9,600 per month for the next three years and then increasing at
approximately 3% per year thereafter.
The Company is in the process of evaluating its capital expenditure
plans for fiscal 1998, which are not expected to exceed approximately
$300,000. Financing for the capital expenditures are available under
an existing equipment financing facility with its lender.
During 1997, as part of the planning for the transition from Norpac, the
Company evaluated its computer system requirements and tested its systems for
year 2000 compliance. As a result of this evaluation, the Company upgraded a
portion of its computer systems which are now all in compliance. The cost of
this change was not material.
Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this Item 8 is submitted as Appendix A to this report.
Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The response to this item is incorporated herein by reference from the
sections entitled "ELECTION OF DIRECTORS" and "INFORMATION REGARDING
MANAGEMENT AND DIRECTORS" in the Company's Proxy Statement for its 1998
Annual Meeting of Shareholders.
Item 11: EXECUTIVE COMPENSATION.
The response to this item is incorporated herein by reference from the
section entitled "EXECUTIVE COMPENSATION" in the Company's Proxy Statement
for its 1998 Annual Meeting of Shareholders.
Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The response to this item is incorporated herein by reference from the
section entitled "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT" in the Company's Proxy Statement for its 1998 Annual Meeting of
Shareholders.
Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The response to this item is incorporated herein by reference from the
section entitled "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS" in the
Company's Proxy Statement for its 1998 Annual Meeting of Shareholders.
PART IV
Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements. The response to this portion of Item 14
is submitted as Appendix A to this report.
(a) (2) Financial Statement Schedules. The response to this portion of
Item 14 is submitted as Appendix A to this report.
(a) (3) Exhibits. The following exhibits are filed as part of this
annual Report on Form 10-K and this list constitutes the Exhibit Index.
Exhibit
Number Exhibit Page
3.1 Restated Articles of Incorporation i
of the Company.
3.2 Articles of Amendment, dated ii
October 29, 1991.
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 Agreement, dated as of September 8, 1987, i
between the Company, Norpac Foods,
Inc., and Robert Arneson, Sales
Agent, Inc., dba Norpac Food Sales
and related Stock purchase Agreements.
10.20 1990 Non-Discretionary Stock Option iv
Plan for Non-Employee Directors.
10.21 Agreement, dated as of April 1, 1991, iii
by and between Norpac Foods, Inc. and
International Yogurt Company, Inc.
10.22 Amendment to Marketing Agreement, iii
dated as of April 1, 1991, by and
among the company, Norpac foods, Inc.
and Robert Arneson, Sales Agent Inc.,
dba Norpac Foods Sales.
10.23 Commercial lease and assignment lease v
by and between John N. Hanna, David J.
Hanna, James S. Hanna, Harry M. Hanna
and Joseph J. Hanna Jr; landlord and
International Yogurt.
10.24 Distribution Agreement, dated as of vi
September 1, 1997, between the Company,
Norpac Foods, Inc., and Robert Arneson,
Sales Agent, Inc., dba Norpac Food Sales
27.1 Financial Data Schedule is filed herewith
____________________________________________
i Incorporated herein by reference from the
Company's Registration Statement on Form
S-18, dated November 17, 1987.
ii Incorporated herein by reference from the Company's
Annual Report on Form 10-K for fiscal year ended
October 31, 1991.
iii Incorporated herein by reference from the Company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1990.
iv Incorporated herein by reference from the Company's
Report on Form 8-K, dated as of December 6, 1990.
v Incorporated herein by reference from the Company's
Quarterly report form 10-Q for the quarter ended
July 31, 1994.
vi Incorporated herein by reference from the Company's
Quarterly report form 10-Q for the quarter ended
July 31, 1997.
(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.
INTERNATIONAL YOGURT COMPANY Dated: January 29, 1998
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, 1998
John N. Hanna
Chief Executive Officer and
Chairman of the Board of Directors
By: /s/ David J. Hanna Dated: January 29, 1998
David J. Hanna
Director
By: /s/ James S. Hanna Dated: January 29, 1998
James S. Hanna
Director
By: /s/Carl G. Behnke Dated: January 29, 1998
Carl G. Behnke
Director
By: /s/ William J. Rush Dated: January 29, 1998
William J. Rush
Director
By: /s/ W. Douglas Caudell Dated: January 29, 1998
W. Douglas Caudell
Chief Financial Officer
No annual report or proxy material has been sent to security holders as
of the date hereof. Such annual report and proxy material will be furnished
to security holders subsequent to the filing of this report on Form 10-K.
Copies of the definitive version of such materials shall be furnished to the
Commission when they are sent to security holders.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the Registrant's articles of incorporation, or
otherwise, the Registrant has been advised that in opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) as asserted by such director,
officer or controlling person in connection with securities being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act of 1993 and will be governed
by the final adjudication of such issue.
International Yogurt Company
APPENDIX A
INDEX TO FINANCIAL STATEMENTS
The following financial statements of International Yogurt Company and
related reports of independent accountants are included as Item 8 and Item
14(a)(1):
Page
Report of Independent Accountants - Grant Thornton LLP A-1
Balance Sheets at October 31, 1997 and 1996 A-2
Statements of Earnings for the years ended October 31, 1997,
1996 and 1995 A-3
Statement of Shareholders' Equity for the years ended October 31,
1997, 1996 and 1995 A-4
Statements of Cash Flows for the years ended October 31, 1997,
1996 and 1995 A-5
Notes to the Financial Statements A-6 - A-16
No financial statement schedules are included in Item 14(a)(2) as no required
schedules are applicable to International Yogurt Company for the years ended
October 31, 1997, 1996 and 1995.
Report of Independent Certified Public Accountants
Board of Directors and Shareholders
International Yogurt Company
We have audited the balance sheets of International Yogurt Company as of
October 31, 1997 and 1996, and the related statements of earnings,
shareholders' equity and cash flows for each of the three years in the period
ended October 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Yogurt Company
as of October 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended October 31, 1997,
in conformity with generally accepted accounting principles.
Grant Thornton LLP
Portland, Oregon
January 9, 1998
International Yogurt Company
BALANCE SHEETS
October 31,
1997 1996
ASSETS
Current assets
Cash and cash equivalents $ 414,194 $ 511,787
Trade accounts receivable,
net of allowance for doubtful accounts
of $14,584 in 1997 and $106,238 in 1996 828,860 748,683
Inventories 1,808,201 1,569,273
Equipment held for resale 23,083 28,083
Other current assets 306,269 209,918
Total current assets 3,380,607 3,067,744
Fixed assets, net 1,918,956 1,970,558
Deferred income taxes 284,000 125,000
Intangible and other long-term assets, net 227,030 190,320
$5,810,593 $5,353,622
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Note payable to bank $1,337,000 $939,000
Current portion of long-term debt 38,329 108,717
Current obligations under capital leases 36,862 33,825
Accounts payable 928,942 1,095,399
Other accrued liabilities 60,567 131,228
Total current liabilities 2,401,700 2,308,169
Long-term debt, less current portion 159,549 186,104
Long-term obligations under capital leases,
less current portion 63,426 100,377
Total liabilities 2,624,675 2,594,650
Commitments - -
Shareholders' equity
Preferred stock, no par value,
5,000,000 shares authorized,
none issued and outstanding - -
Common stock, no par value,
30,000,000 shares authorized 4,710,850 4,695,450
Accumulated deficit (1,477,736) (1,911,282)
3,233,114 2,784,168
Less common stock in treasury - at cost (47,196) (25,196)
Net shareholders' equity 3,185,918 2,758,972
$5,810,593 $5,353,622
The accompanying notes are an integral part of these statements.
International Yogurt Company
STATEMENTS OF EARNINGS
For the year ended October 31,
1997 1996 1995
Revenue $8,677,547 $7,922,144 $7,348,531
Cost of goods sold 6,016,891 5,630,037 5,095,080
Gross profit 2,660,656 2,292,107 2,253,451
Selling and marketing expenses 1,284,587 1,120,942 913,873
General and
administrative expenses 989,751 922,909 1,026,758
Unusual expenses - 143,527 -
Income from operations 386,318 104,729 312,820
Other income (expense)
Interest income 16,499 12,605 8,769
Interest expense (147,955) (131,573) (134,724)
Other, net 19,684 21,012 (3,747)
Income before income taxes 274,546 6,733 183,118
Provision for income taxes
Current expense - - (3,234)
Deferred benefit 159,000 - 125,000
159,000 - 121,766
Net income $433,546 $ 6,773 $304,884
Net income per share $.19 $.00 $.14
Weighted average number
of shares outstanding 2,233,793 2,194,681 2,177,349
The accompanying notes are an integral part of these statements.
International Yogurt Company
STATEMENT OF SHAREHOLDERS' EQUITY
Common Stock Accumulated Treasury
Stock Net Shareholders'
Shares Amount Deficit Shares
Amount Equity
Balance, October 31, 1994 2,170,043 $4,541,992 $(2,222,939) 3,000
$ (3,978) $2,315,075
Net Income - - 304,884 -
- 304,884
Stock options exercised 25,000 59,484 - -
- 59,484
Balance, October 31, 1995 2,195,043 4,601,476 (1,918,055) 3,000
(3,978) 2,679,443
Net income - - 6,773 -
- 6,773
Stock Sold 52,750 93,974 - -
- 93,974
Treasury stock purchased - - - 11,000
(21,218) (21,218)
Balance, October 31, 1996 2,247,793 4,695,450 (1,911,282) 14,000
(25,196) 2,758,972
Net income - - 433,546 -
- 433,546
Stock options exercised 10,000 15,400 - -
- 15,400
Treasury stock purchased - - - 8,000
(22,000) (22,000)
Balance, October 31, 1997 2,257,793 $4,710,850 $(1,477,736) 22,000
$(47,196) $3,185,918
The accompanying notes are an integral part of these statements.
International Yogurt Company
STATEMENTS OF CASH FLOWS
For the year ended October 31,
1997 1996 1995
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net income $433,546 $ 6,773 $304,884
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation and amortization 307,703 262,405 246,382
Loss (gain) on disposal of equipment (19,684) - 3,747
Deferred income taxes (159,000) - (125,000)
Change in assets and liabilities
Accounts receivable (80,177) 124,508 35,112
Inventories (238,928) (14,648) (120,291)
Other assets (143,571) (113,141) 96,692
Accounts payable (166,457) 282,090 (120,730)
Other accrued liabilities (70,661) 55,276 (43,778)
Net cash provided by (used in)
operating activities (137,229) 603,263 277,018
Cash flows from investing activities
Proceeds from disposal of equipment 29,000 - 1,530
Expenditures for fixed assets (249,907) (382,780) (175,310)
Net cash used in (220,907) (382,780) (173,780)
investing activities
Cash flows from financing activities
Net increase (decrease) in note
payable to bank 398,000 (150,920) (56,617)
Proceeds from issuance of long-term debt 15,175 152,529 -
Principal payments on long-term debt
and capital lease obligations (146,032) (101,596) (121,230)
Treasury stock purchased (22,000) (21,218) -
Proceeds from issuance of stock 15,400 93,974 56,250
Net cash provided by (used in)
financing activities 260,543 (27,231) (121,597)
Net increase (decrease) in
cash and cash equivalents (97,593) 193,252 (18,359)
Cash and cash equivalents, beginning of year 511,787 318,535 336,894
Cash and cash equivalents, end of year $414,194 $511,787 $318,535
The accompanying notes are an integral part of these statements.
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS
NOTE A - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
International Yogurt Company (the Company) was incorporated on January 14,
1977 in the state of Oregon. The Company produces frozen yogurt products and
markets them primarily under the name "YO CREAM". Sales are made throughout
the United States to and through a variety of outlets, including
distributors, discount club warehouses, supermarkets, grocery stores,
convenience stores, restaurants, hospitals, schools, military installations,
yogurt shops and fast food chains.
1. Cash and Cash Equivalents
Cash and cash equivalents include short-term investments with an original
maturity of less than ninety days.
2. Inventories
Inventories are stated at the lower of cost or market. The Company
determines cost based on the first-in, first-out (FIFO) method for raw
materials, packaging materials and supplies, and based on standard costs for
finished goods.
3. Fixed Assets
Fixed assets are stated at cost. Expenditures for replacements and
improvements are capitalized, and expenditures for repairs and maintenance
and routine replacements are charged to operating expense as incurred. When
assets are sold or otherwise disposed of, the cost and related accumulated
depreciation are eliminated from the accounts and any resulting gain or loss
is included in operations. Depreciation is provided for in amounts to relate
the cost of depreciable assets to operations over their estimated service
lives, principally on a straight-line basis. Leasehold improvements are
amortized over the life of the lease or the service life of the improvement,
whichever is shorter. The estimated lives used in calculating depreciation
and amortization are:
Plant equipment 25 years
Office equipment and furnishings 10 years
Leasehold improvements 5-10 years
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS
NOTE A - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
Continued
4. Statement of Cash Flows
The Company made cash interest payments of $154,418, $125,025, and $124,802
for the years ended October 31, 1997, 1996 and 1995, respectively. No income
taxes have been paid during these periods.
In 1995, the Company acquired $61,516, of plant and improvements by entering
into capital lease obligations. This noncash transactions has been excluded
from the accompanying statement of cash flows.
5. Significant Estimates
In preparing financial statements in conformity with Generally Accepted
Accounting Principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
6. Net Income Per Share
Net income per share is computed based on the weighted average number of
shares of common stock outstanding, including common stock equivalents,
during the period of computation.
NOTE B - INVENTORIES
Inventories consist of the following at October 31,:
1997 1996
Finished goods $1,451,729 $1,175,303
Raw materials 171,893 168,334
Packaging materials and supplies 184,579 225,636
$1,808,201 $1,569,273
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS
NOTE C - FIXED ASSETS
Fixed assets consist of the following at October 31,:
1996 1996
Machinery and equipment $2,693,749 $2,604,238
Office equipment and furnishings 151,134 138,217
Leasehold improvements 609,763 609,763
Construction in process 149,980 39,211
3,604,626 3,391,429
Less accumulated depreciation
and amortization (1,685,670) (1,420,871)
$1,918,956 $1,970,558
Fixed assets at October 31, 1997 and 1996 include assets held under capital
leases aggregating approximately $168,000, with related accumulated
amortization of approximately $50,200 and $37,000, respectively.
Depreciation and amortization of the Company's fixed assets aggregated
$292,193, $252,081, and $200,991, for the years ended October 31, 1997, 1996,
and 1995.
NOTE D - INTANGIBLE AND OTHER LONG-TERM ASSETS
Intangible assets consist of the following at October 31,:
Period of
Amortization 1997 1996
Trademarks (principally "YO CREAM") 25 years $257,774 $255,397
Less accumulated amortization (108,187) (97,677)
$149,587 $157,720
As of October 31, 1997 and 1996, the Company had made a $49,221 and $32,600
deposit respectively, related to the leases of various equipment and its
production and office facility and had investments in insurance policies of
$28,222 and $0, respectively. These items are included in intangibles and
other long-term assets in the accompanying balance sheet.
NOTE E - NOTE PAYABLE TO BANK
The Company has a demand bank line of credit which permits borrowing of up to
$1,700,000, subject to collateral limitations and third party loan insurance.
Borrowings are collateralized by qualified accounts receivable, inventories,
and the loan insurance provided by the Oregon Economic Development
Department(OEDD). The OEDD has guaranteed, through loan insurance, 33% of
the outstanding balance up to a maximum of $500,000. At October 31, 1997,
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS
the maximum available was $1,540,154 based upon collateral limitations and
the loan insurance. The line bears interest at the bank's commercial lending
rate plus 1% (9.50% at October 31, 1997 and 9.25% at October 31, 1996).
The line is subject to renewal by March 1, 1998.
Under the terms of the line of credit, the Company is required to maintain
certain financial parameters including minimum working capital, minimum
tangible net worth and minimum debt-to-worth ratio. In addition, the Company
is required to retain 40% of net earnings after tax from inception of loan,
which approximates $326,000 at October 31, 1997.
NOTE F - LONG-TERM DEBT
Long-term debt consists of the following at October 31,:
1997 1996
Note payable to Norpac, payable in monthly
installments with the balance due
August 1997 $ - $ 80,000
Industrial development loan, payable in
monthly installments of $1,202 through
April 2002, including interest at 8%,
collateralized by certain equipment 54,768 64,385
Notes payable to a bank in monthly
installments of $1,461 through
September 2003, including interest at
8.5%, collateralized by certain equipment 79,690 89,874
Notes payable to a bank in monthly
installments of $1,272 through November 2001,
including interest at a U.S. Treasury index
plus 3% (9.31% at October 31, 1997),
collateralized by certain equipment 51,676 60,562
Note payable to a bank in monthly installments
of $483 through January 2000, including
interest at 9.0%, collateralized by certain
equipment 11,744 -
197,878 294,821
Less portion due within one year (38,329) (108,717)
$159,549 $186,104
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS
NOTE F - LONG-TERM DEBT - Continued
The principal portion of long-term debt is payable as follows:
Year ending
October 31,
1998 $ 38,329
1999 40,889
2000 40,059
2001 42,161
2002 23,183
Thereafter 13,257
$197,878
NOTE G - CAPITAL LEASE OBLIGATIONS
The Company leases various equipment under capital lease agreements.
Future minimum lease payments are as follows:
Year ending
October 31,
1998 $ 44,980
1999 52,204
2000 15,873
Total minimum lease payments 113,057
Less amount representing interest (12,769)
Present value of minimum lease payments 100,288
Less current portion (36,862)
Long-term portion $63,426
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS
NOTE H - EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Employee Savings Plan and Trust which allows the
Company to make contributions to the Plan on behalf of eligible employees.
The Company's contributions to the Plan were approximately $24,800, $8,500,
and $7,500 during the years ended October 31, 1997, 1996 and 1995,
respectively. 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
The Company has adopted only the disclosure provisions of Financial
Accounting Standard No. 123, Accounting for Stock-Based Compensation (FAS
123). It applies APB Opinion No.25, Accounting for Stock Issued to
Employees, in accounting for its Plans. Had the Company elected to recognize
compensation expense based upon the fair value at the grant date for awards
under these Plans consistent with the methodology prescribed by FAS 123, the
effect on the Company s pro forma net income and net income per share would
have been immaterial.
The Company reserved 400,000 shares of its common stock pursuant to a
nonqualified Stock Option Plan (the Plan) for key employees. The Plan
provides for the granting of options to purchase shares of common stock at a
price not less than 85% or more than 100% of the fair market value per share
as of the date of the grant. Options are exercisable in such amounts and at
such times as authorized by a Stock Option Agreement applicable to each
option. Options expire no later than five years from the date of grant
unless employment is terminated prior to that time. In the case of
termination of employment for any reason other than death or disability, the
option must be exercised within 90 days of termination or be forfeited.
All options have been granted with an exercise price equal to the fair market
value of the Company's common stock on the effective grant date. At October
31, 1997 these options had exercise prices ranging from $2.50 to $4.44 and a
weighted average remaining contractual life of approximately ten months.
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS
NOTE I - STOCK OPTION PLANS - Continued
A summary of option transactions relating to the Stock Option Plan for key
employees follows:
Weighted
Shares Average
under Exercise
option Price
Balance, October 31, 1994 212,300 $3.35
Exercised (5,000) 2.25
Expired (34,500) 2.25
Balance, October 31, 1995 172,800 3.60
Exercised - -
Expired - -
Balance, October 31, 1996 172,800 3.60
Exercised - -
Expired (12,000) 3.37
Balance, October 31, 1997 (exercisable) 160,800 3.61
In October 1990, the Company's Board of Directors adopted a nonqualified
Stock Option Plan for directors who are nonemployees and reserved 150,000
shares of common stock for issuance pursuant to this Plan. 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. At October 31, 1997 these
options had exercise prices ranging from $1.88 to $8.00 and a weighted
average remaining contractual life of approximately 2.6 years.
A summary of option transactions relating to the Stock Option Plan for
directors who are nonemployees follows:
Weighted
Shares Average
under Exercise
option Price
Balance, October 31, 1994 80,000 $4.16
Granted 15,000 2.31
Exercised (20,000) 2.25
Balance, October 31, 1995 75,000 4.30
Granted 15,000 1.88
Expired (25,000) 5.45
Balance, October 31, 1996 65,000 3.30
Exercised (10,000) 1.54
Balance, October 31, 1997 (exercisable) 55,000 3.62
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS
NOTE I - STOCK OPTION PLANS - Continued
In January 1994, the Company's Board of Directors adopted a Combined
Incentive and Nonqualified Stock Option Plan and reserved 200,000 shares of
common stock for issuance pursuant to this Plan. Options are exercisable in
such amounts and at such times as authorized by a Stock Option Agreement
applicable to each option. At October 31, 1997 these options had exercise
prices ranging from $1.75 to $8.12 and a weighted average contractual life of
approximately 2.7 years.
A summary of option transactions relating to the Combined Incentive and
Nonqualified Stock Option Plan is as follows:
Weighted
Shares Average
under Exercise
option Price
Balance, October 31, 1994 30,000 $8.12
Granted 61,000 2.12
Balance, October 31, 1995 91,000 4.10
Granted 42,000 1.75
Balance, October 31, 1996 133,000 3.36
Granted 4,000 2.13
Expired (21,000) 6.41
Balance, October 31, 1997 (exercisable) 116,000 2.76
The weighted-average fair value of options granted during the years ended
October 31, 1997, 1996 and 1995 were $1.36, $1.14 and $1.37, 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: no dividends; expected volatility of 73%; risk-free interest
rate of 5.6%; and expected lives of 5 years.
NOTE J - FINANCIAL INSTRUMENTS
The carrying values of the Company's financial instruments consisting of
cash, accounts receivable and payable, notes payable and long-term debt
approximate fair values.
NOTE K - UNUSUAL EXPENSES
During 1996, the Company made a provision for certain unusual expenses. The
provision was primarily for a reserve against receivables recognized in prior
years for recovery of certain marketing costs, and a reserve for disputed
packaging and freight costs related to prior years. The provision has been
reported separately in order to readily identify the amount. The provision
reduced net earnings by $143,527, or $.07 per share in fiscal 1996.
NOTE L - ADVERTISING
Advertising costs are charged to operations in the year incurred, and for the
years ended October 31, 1997, 1996 and 1995 aggregated approximately
$491,500, $452,000, and $231,000, respectively.
NOTE M - INCOME TAXES
Under the provisions of FAS 109, the utilization of the Company's net
operating loss carryforwards substantially eliminated the provision for
income taxes for the years ended October 31, 1997, 1996 and 1995.
The effective tax rate differed from the statutory federal tax rate due to
the following:
Year ended October 31,
1997 1996 1995
Statutory federal tax rate (graduated) 32.9% 15.0% 29.9%
State taxes, net of federal benefit 4.4 5.6 4.6
Change in valuation allowance (95.2) (20.6) (101.0)
(57.9)% 0.0% (66.5)%
Deferred tax assets (liabilities) consist of the following at October 31,:
1997 1996
Allowance for doubtful accounts $ 5,000 $ 35,000
Inventory 15,000 22,000
Net operating loss carryforwards 1,090,000 1,024,000
Gross deferred tax assets 1,110,000 1,081,000
Deferred tax asset valuation allowance (765,000) (864,000)
Net deferred tax asset 345,000 217,000
Property, plant and equipment (61,000) (92,000)
Gross deferred tax liabilities (61,000) (92,000)
Net noncurrent deferred tax asset $ 284,000 $ 125,000
At October 31, 1997, the Company had federal and state net operating loss
carryforwards aggregating approximately $3,100,000 and $2,100,000
respectively, which may be used to offset taxable income, if any, in future
years. The net operating loss carryforwards expire from 2001 through 2008.
The annual utilization of these carryforwards may be limited if the Company
undergoes an ownership change as defined by the Internal Revenue Code.
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS
NOTE M - INCOME TAXES - Continued
The net operating loss carryforwards include deductions aggregating
approximately $690,000 resulting from the exercise of certain employee stock
options. For financial reporting purposes, any future reduction in income
tax obligations realized from utilizing these deductions will be credited to
common stock.
NOTE N - OPERATING LEASE COMMITMENTS INCLUDING THOSE WITH RELATED PARTIES
During fiscal 1994, the Company entered into a 15 year operating lease
agreement for its production and office facilities with a company owned by
the Company's chief operating officer and its president (both of whom are
also shareholders of the Company) and other shareholders of the Company.
During 1997, the Company entered into an operating lease to finance certain
production equipment.
Minimum lease payments required under the operating leases are as follows:
Year ending
October 31,
1998 $ 168,860
1999 166,880
2000 166,920
2001 174,920
2002 174,920
Thereafter 1,043,323
$ 1,895,823
Operating lease expense under the related party lease for the years ended
October 31, 1997, 1996 and 1995 approximated $109,000, $103,000, and
$103,000, respectively. Lease expense, exclusive of related parties, was
approximately $13,600, $34,700, and $21,000 for the years ended October 31,
1997, 1996, and 1995. Operating lease expenses are allocated between
manufacturing costs and general and administrative expenses in the
accompanying statement of operations.
NOTE O - COMMITMENTS AND RELATED PARTY TRANSACTIONS
During 1996 and 1995, the Company was operating under a marketing agreement
with Norpac Foods, Inc. (Norpac). The agreement allowed Norpac to act as the
Company's broker and exclusive sales agent to the restaurant and foodservice
institutional industry. During 1997, the agreement expired and a new short-
term interim distribution agreement was executed. The new agreement
substantially reduced the Company's marketing and distribution reliance upon
Norpac. For the years ended October 31, 1997, 1996 and 1995, amounts paid
to Norpac for brokerage, commission and advertising expenses approximated
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS
$498,000, $518,000 and $609,000, respectively. At October 31, 1997 and 1996,
Norpac held approximately 3% of the Company's outstanding shares of common
stock.
NOTE P - MAJOR CUSTOMERS
Revenues derived from the Company's two largest customers are presented as
percentages of total annual revenues as follows:
Year ended October 31,
1997 1996 1995
Customer A 41% 35% 32%
Customer B 5 10 10
46% 45% 42%
NOTE Q - FOURTH QUARTER ADJUSTMENT
During the fourth quarter of 1997, the Company recognized a deferred tax
benefit of $159,000 as a result of anticipated future profitability and its
impact on the deferred tax valuation allowance.
NOTE R - RECENT ACCOUNTING STANDARDS
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, 130, and 131, Earnings per
Share, "Reporting Comprehensive Income," and "Disclosures about Segments of
an Enterprise and Related Information." Management does not expect future
adoption of these standards to materially affect the Company s financial
statements.