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, 1998.
[ ] 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 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 $6,696,474 at January 11, 1999, based upon the
average bid and asked prices of the common stock on that date.
At January 11, 1999 there were 2,316,593 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
1999 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.....................................................13
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..................................................20
Item 11. EXECUTIVE COMPENSATION......................................20
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.......................................20
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 YOCREAM(registered trademark) frozen yogurt, which is distributed
and sold nationwide. The Company also produces YOCREAM BLENDER SMOOTHIES,
SORBET BY YOCREAM (now packaged as YOCREAM FRUIT BLENDER SMOOTHIES), YOCREAM
DISPENSER SMOOTHIES, YOCREAM PURE made from 100% organic milk, and premium,
lowfat, or nonfat ice creams. The Company's general marketing strategy is to
offer a broad selection of its products at a price suitable for the relevant
markets.
The Industry
The YOCREAM brand frozen yogurt and smoothie products produced by the Company
constitute only a portion of the relevant frozen dessert, snack and beverage
industry. The industry produces a diverse range of products, many of which
compete directly with the Company's YOCREAM frozen yogurt and smoothie
products.
Many types of retail outlets make available to the public the Company's YOCREAM
frozen yogurt and smoothie products as well as other manufacturer's frozen
yogurt products and frozen dessert and snack items, 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 and smoothie 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
products (e.g. frozen yogurt, organic, smoothies, 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 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 International Yogurt Company manufactures (e.g.Costco, Cascadian Farm,
Honeyhill, SYSCO, etc.), are provided 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 YOCREAM consumer brand
identification, by offering a broad selection of premium frozen yogurt and
smoothie 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. The Company also considers the broad distribution of its product
critical to sales growth, with its products now available in 35 states and 7
countries. The Company will continue to strive for greater distribution within
these markets.
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.
The Company's management also believes that its ability to respond innovatively
to 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 October 1998, the Company entered into an agreement with Greater Pacific
Foods Inc. (owner of Honey Hill Farms products), to produce a line of hard pack
pints under the Honey Hill Farms label. This product is being sold by Greater
Pacific Foods Inc. into domestic and international markets. In August 1998, the
Company also entered into an agreement to copack for Life Source Nutrition
Solutions. Their products include a 16 ounce vitamin fortified smoothie and an
8 ounce vitamin fortified hard pack frozen yogurt cup.
In 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 Arena 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 ounce single serve
cups of nonfat frozen yogurt and non-dairy sorbet products. These products were
introduced under the Company's own brand of "Soft Scoop by YOCREAM" and under
SYSCO's nationwide "Cool N' Classy" brand. The Company is the only supplier to
SYSCO for this product.
As part of the transition from Norpac, the Company has developed its own
marketing, sales and logistical departments. A Director of Sales and 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 and customer support, and a 2% increase in
food service sales during fiscal 1998. Previously the Company experienced a
decline in food service sales.
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 YOCREAM Pure 4 ounce cup products. Pocahontas, a sales and
marketing association of 140 independent foodservice distributors nationwide,
has bundled YOCREAM 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 YOCREAM.
In May 1997, the Company launched YOCREAM, 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.
According to an industry report, the number of juice/smoothie bars increased by
30% in 1997. Food and marketing analysts estimate that the smoothie market
will climb to $300 million by the year 2000. 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 became YOCREAM, THE SMOOTHIE WAY customers.
In October, 1997, the Company successfully test marketed YOCREAM, 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. YOCREAM,
THE COMPLETE FRUIT SMOOTHIE can be dispensed in a few seconds, while it may take
minutes to make a smoothie with a blender.
In June 1998, YOCREAM THE SMOOTHIE WAY became YOCREAM BLENDER SMOOTHIES, and
YOCREAM, THE COMPLETE FRUIT SMOOTHIE became YOCREAM DISPENSER SMOOTHIES. This
move was made to further clarify the Company's smoothie concepts for customers.
The Company has developed an extended shelf life, refrigerated, bottled
smoothie which it plans to test market in 1999. This product will be presented
to the retail grocery market.
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, Australia, 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 11, 1999, the Company had available for sale the following
products and flavors under its own YOCREAM brand name:
YOCREAM YOCREAM YOCREAM
Premium Soft Serve Fruit Blender Soft Scoop - 4 Ounce
Mix Smoothies
(and Sorbet, too) Very Berry Sorbet
Cheesecake Supreme Very Sorbet/Vanilla
Dutch Chocolate Kiwi Strawberry Splash Frozen Yogurt Swirl
French Vanilla Very Berry Vanilla Frozen Yogurt
Milk Chocolate Lemony Lime Chocolate Frozen Yogurt
Peanut Butter Mango Tango Strawberry Frozen Yogurt
Praline 'n Cream Orange Burst
Strawberry
Vanilla YOCREAM FREE
YOCREAM No Sugar Added
Yogurt Blender
YOCREAM Smoothies Blueberry
Nonfat Soft Serve Cafe au Lait
Vanilla Chocolate
Apple Spice Chai Raspberry
Blueberry Burst Coffee Strawberry
Butter Brickle Vanilla
Cable Car Chocolate
Cappuccino YOCREAM
Cherry Almond Fruit Dispenser YOGURT STAND
Chocolate Classic Smoothies Nonfat Soft Serve
Country Vanilla
Egg Nog Berry Banana Chocolate
Fancy French Vanilla Island Lime Strawberry
Georgia Peach Mango Sunrise Vanilla
"Holiday" Chocolate Mint Orange Squeeze
Irish Mint
Island Banana YOCREAM
Kahlua YOCREAM 3-Gallon Soft Scoop
Luscious Lemon Yogurt Dispenser (Premium - with
New York Cheesecake Smoothies condiments)
Outrageous Orange
Peanut Butter Coffee Chunky Cherry Almond
Pecan Praline Chai Chocolate Chip Chocolate
Peppermint Stick Chocolate Java Swirl
Pumpkin YOCREAM PURE - Peaches 'n Cream
Very Strawberry ORGANIC Rocky Road
Very Boysenberry Nonfat Soft Serve Pecan Praline
Very Raspberry
White Chocolate Chocolate Sensation
Macadamia Pure Vanilla YOCREAM
Strawberry Fields (3-Gallon Soft Scoop
Standard - without
BLAZER SWIRL Condiments)
BY YOCREAM YOCREAM PURE
8-Ounce Cup ORGANIC Mountain Boysenberry
Lowfat Hardpack Ice Raspberry Royal
Very Berry Sorbet/ Cream - 4 Ounce Strawberry Sensation
Vanilla Frozen Yogurt Swiss Chocolate
Pure Vanilla Alpine Vanilla
Pure Strawberry
Pure Chocolate
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 1998, the soft serve liquid mix product
accounted for approximately 75% 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 Honey Hill
Farms, Cascadian Farm, and SYSCO. In fiscal year 1998, hard pack products of
all type containers accounted for approximately 25% of the Company's case sales.
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 1998 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 YOCREAM, and it is packaged in a single serve four ounce size, and
in three gallon containers.
SORBET by YOCREAM is a product developed by the Company in 1995. It is a high
quality non-dairy product produced in several flavors in hardpack and soft serve
form. It is now marketed and packaged as YOCREAM FRUIT BLENDER SMOOTHIES (and
SORBET too). (See below.)
YOCREAM PURE is a product that was developed and introduced by the Company in
1997. Made from 100% organic milk, all natural ingredients, and pasteurized,
YOCREAM 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.
YOCREAM BLENDER SMOOTHIES (formerly YOCREAM THE SMOOTHIE WAY), were introduced
in May 1997. These products are in both yogurt and fruit formulations. 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.
YOCREAM DISPENSER SMOOTHIES (formerly THE COMPLETE FRUIT SMOOTHIE), were
introduced in March 1998. This concept utilizes an innovative, all natural,
nonfat smoothie mix designed to be dispensed from a smoothie machine or frozen
beverage dispenser. 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. DISPENSER SMOOTHIES are available in fruit and yogurt
flavors, including two customer favorites, Chai and coffee.
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 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 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 along with a full range of condiments
that can be added to the finished products.
Fiscal 1998 resulted in a leveling out of production fluctuation and an increase
in overall plant utilization. Management estimates that plant utilization has
risen from approximately 45% last year to approximately 65% currently.
Management expects to see plant utilization increase further in the 1999 fiscal
year, primarily from the Company's new 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 35 states and 7 countries.
Distribution is facilitated by buyer pick up or by transportation arranged by
the Company. The Company's products are generally shipped on refrigerated trucks
to all domestic locations.
Revenues derived from the Company's largest customer represents 50%, 41%, and
35% of total revenues in the years ended October 31, 1998, 1997 and 1996.
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. Research also
occurs on a regular basis with respect to ingredients such as stabilizers and
emulsifiers. Furthermore, the Company has conducted activities regarding non-
fat and no sugar added products and various novelty items. The Company has also
developed a line of yogurt beverages including yogurt-juice and yogurt-coffee
combinations. New products include a line of smoothie products for blending or
automated operation. The most recent development of a new product is an all
natural, ready to serve bottled fruit smoothie with an extended shelf life. 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, 1998, to have been $160,000, compared with $134,000 and $104,000 for the
years ended October 31, 1997 and 1996.
Advertising and Promotion
During the year ended October 31, 1998 such expenses totaled approximately
$559,000 representing 5.5% of net sales. This compares to $492,000, or 5.7% of
net sales for the year ended in October 1997 and $452,000, or 5.7% of net sales
in the year ended October 31, 1996.
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
95.8% of the Company's needs in fiscal year 1998 and the second largest supplier
provided approximately 4.2%. All supplies used by the Company are readily
available from a variety of suppliers. The Company has never experienced any
form of supply shortage.
Competition
The Company's products constitute a portion of a greater market which includes
all forms of yogurt-based frozen desserts, ice cream products and non-dairy
frozen desserts. The market for the Company's products is very competitive
because of the number of alternative products available and because of the
number of businesses producing competitive products. Competition in the frozen
dessert and ice cream industry has increased over the last several years as a
result of substantial increases in the number and kind of frozen dessert
products. Many of the companies that produce products which 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 Company's principal competitors for soft serve products include
Colombo (General Mills), Dannon, Eskimo Pie, and Honey Hill Farms (Greater
Pacific Foods, Inc.). 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 with numerous small local and regional companies.
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 YOCREAM 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 YOCREAM brand
products. While the Company has experienced competitive success in the past, no
assurance can be given that the Company will continue to compete successfully
against other available products.
Other than direct competition for specific soft serve or hard pack frozen yogurt
products, the Company's products compete against certain other frozen dessert
items, such as ice cream. 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, YOCREAM,
with the United States Patent and Trademark Office. This trademark is renewable
and, therefore, is of an indefinite term. That trademark is also registered in
Canada and may be renewed there upon expiration. Some of the Company's products
use that basic trade name with other words or designations, such as YOCREAM
LITE. In addition, the Company uses the trademarks "JUST SAY YO," "PURE
PLEASURE," "YOGURT STAND," "PURE PLEASURE, PURE FOOD, PURE ENVIRONMENT," "IT'S A
BELIEF, IT'S A LIFESTYLE," "SOFT SCOOP" and "YO CAFFE'". 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 50 persons at October 31, 1998, 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 34,200 square foot facility at 5858 NE 87th Avenue,
Portland, Oregon 97220. Of this total space, the Company uses approximately
8,700 square feet for production, approximately 9,000 square feet for freezer
and refrigeration purposes, and approximately 4,500 for office space. The
Company has designated the remaining 12,000 square feet for warehouse purposes
and expansion of the Company's freezer and production facilities.
The lease of the Company's production and office facilities expired on May 14,
1994 and the Company exercised its option to purchase the property. In order to
preserve capital, the Board of Directors decided that the Corporation should
allow certain of its officers and directors to purchase the property, with the
Corporation then leasing it from them. Thereafter, John N. Hanna, David J.
Hanna and James S. Hanna, together with others, formed Pente Investments for the
purpose of purchasing the property and leasing it to the Corporation. In fiscal
year 1998, Pente Investments agreed to fund a 4,200 square foot facility to
provide for needed office space. The current lease as amended has a remaining
term of approximately 13 years and provides for a base rent of $14,335 per month
for the next two years and then increasing at 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 1998.
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 11, 1999, there were
2,316,593 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
11, 1998 the closing bid and asked prices were $4-5/8 and $5, 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, 1998 and
October 31, 1997. Such over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, markdown or commission and may not necessarily
represent actual transactions.
Twelve months Ended October 31, 1998 High Low
August 1, 1998 - October 31, 1998 $ 5 1/2 $3 3/4
May 1, 1998 - July 31, 1998 6 5/8 5 1/2
February 1, 1998 - April 30, 1998 5 7/8 4
November 1, 1997 - January 31, 1998 3 3/8 2 3/4
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
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 October 31, 1998,
1997 and for each of the three years in the period ended October 31, 1998 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, 1996, 1995, and 1994 and for each the two years
in the period ended October 31, 1995, are derived from financial statements not
included herein.
October 31
Balance Sheets 1998 1997 1996 1995 1994
Total Current Assets $3,356,445 $3,380,607 $3,067,744 $2,876,583 $2,924,075
Total Assets 6,555,657 5,810,593 5,353,622 5,036,716 4,953,187
Long-Term Debt 162,605 222,975 286,481 278,498 294,822
Shareholders' Equity 4,451,320 3,185,918 2,758,972 2,679,443 2,315,075
For the Years Ended October 31,
Statements of Income 1998 1997 1996 1995 1994
Revenues $10,206,524 $8,677,547 $7,922,144 $7,348,531 $6,911,252
Income from Operations(1) 616,079 386,318 104,729 312,820 187,952
Net Income 702,703 433,546 6,773 304,884 61,888
Earnings per Common
Share-Basic .31 .20 .00 .14 .03
Earnings per Common
Share-Diluted .30 .19 .00 .14 .03
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.
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 transpor-
tation 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.
Results of Operations.
Revenue
The Company's revenues were $10,206,524, $8,677,547, and $7,922,144, for
the years ended October 31, 1998, 1997 and 1996, respectively. Over the last
three years revenues have increased 17.6% in 1998, 9.5% in 1997, and 7.8% in
1996. This continuing trend of year to year revenue gains is primarily due to
the competitive success of the Company's products and the introduction of
cutting edge new products, which includes smoothies introduced in 1998. The
successes are also due to long-term customer alliances, an established national
distribution system including a network of brokers and distributors, and
expanded direct sales activity. Management expects this trend to continue due
to the success of its products, expanded alliances with other national
companies, intensified direct sales activity, and the introduction of new
products.
The Company has a history of being a leading innovator of frozen dessert,
snack and beverage products. According to industry experts, the hottest
category in foodservice today is smoothies. In response to this trend, the
Company has developed two lines of superior smoothie products that are adaptable
to both blender or dispenser operation. Since the first announcement in April
1998, several chains have begun serving these products. The most significant of
which is Costco; a long-term customer of the Company's yogurt products. In
response to exceptional customer demand, Costco is continuing to expand the
number of smoothie machines throughout its domestic operations.
The exceptional trend is continuing into the first quarter of the new year
where revenues for the first two months have increased over 35%, compared with
the same period last year. The Company is currently in the process of working
with other chains and marketing companies to expand the distribution of its
products, and develop other innovative smoothie products.
Cost of Sales
The cost of sales, as a percentage of revenues, were 69.8%, 69.3%, and
71.1% in 1998, 1997, and 1996 respectively, with corresponding gross profit
margins of 30.2%, 30.7%, and 28.9% for the same periods. During fiscal 1998
margins decreased slightly due to a change in product mix. Margins in fiscal
1997 improved due to increased sales activity, and price increases which were
implemented earlier in the year. Fiscal 1996 margins were lower than normal as
a result of aggressive pricing earlier in the year to gain market share, and
additional costs associated with business expansion.
Selling and Marketing Expenses
Selling and marketing expenses, as a percentage of revenues, for the years
ended October 31, 1998, 1997, and 1996 were 12.9%, 14.8%, and 14.1%,
respectively. Such expenses are generally related to the level of revenues,
and marketing activities. The decrease in expenses in 1998, as a percentage of
revenues, was due to savings associated with the Company assuming
responsibility, in the fourth quarter of last year, for certain food service
selling and marketing functions, as described below, which were 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 March 1999. 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. In 1997, to
prepare for this transition, the Company added its own regional sales managers
and sales service personnel. Beginning in October 1997, the Company assumed
full responsibility for all credit, collections, sales service, transportation
coordination, and selling and marketing activities.
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.
The increase in selling and marketing 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.
General and Administrative Expenses
General and administrative expenses for the years ended October 31, 1998,
1997, and 1996, as a percentage of revenues, were 11.3%, 11.4%, and 11.6%
respectively. The increase in 1998 over 1997 was primarily due to increases
in professional fees, rent, and payroll related expenses, including 401k
contributions and payroll taxes associated with stock options exercised. A
portion of the increase relates to the costs associated with the Company
assuming the additional administrative functions described under sales and
marketing.
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 diluted
share in 1996.
Income from Operations
Income from operations for the years ended October 31, 1998, 1997, and
1996 was $616,079, $386,318, and $104,729 respectively. As a percentage of
revenues, income from operations was 6.0%, 4.5%, and 1.3% respectively. The
results for 1998 improved as a result of the increase in sales activity and the
net savings in selling, marketing and administrative expenses. The results for
1997 improved as a result of the improvement in gross profit, and because the
unusual expenses incurred in 1996 were non-recurring.
Provision for Income Taxes
Prior to 1995, the Company experienced losses in several years for income tax
purposes that resulted in net operating loss carryforwards (NOLs) which are
available to offset future taxable income. At October 31, 1998, the Company's
federal and state NOLs aggregated approximately $2,600,000 and $1,680,000,
respectively. In accordance with generally accepted accounting principles, the
Company records the benefit of such NOLs as a deferred tax asset. The Company
records a valuation allowance to the extent that management believes it is more
likely than not that the deferred tax asset will not be realized. As a result
of the evaluation of the future benefit of the Company's NOLs, the Company
reduced the valuation allowance and recognized a tax benefit of $200,000 in 1998
and $159,000 in 1997. As of October 31, 1998, the Company has recognized all of
the expected benefit of these NOLs in the financial statements, except for
$106,000. The Company expects that its provision for income taxes in the future
to be at or near the applicable federal and state statutory rates.
Net Income
Net income for the years ended October 31, 1998, 1997, and 1996 was
$702,703, $433,546, and $6,773, respectively. Net income for 1998 increased
over 1997 due to the increase in revenues and reduction in net selling,
marketing and administrative expenses. 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.
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 1998, the Company received $316,091 from employees due to the
exercise of options to purchase 106,800 shares of common stock.
During 1998, the Company recognized the tax benefit associated with the
additional compensation deduction that the Company will receive as a result of
employees exercising certain stock options. The benefit in the amount of
$334,000 was reflected as an addition to common stock.
During 1998 and 1997, 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 lease commitments.)
During 1996, the Company received $93,974, (net of related expenses of $11,526)
from subscriptions for 52,750 shares of unregistered common stock through a
private placement.
At October 31, 1998, the Company's total borrowings outstanding under its bank
line of credit were $782,800. The line permits borrowings up to $1,700,000
subject to the Company being in compliance with certain ratios and negative
covenants. Interest is at 1 percent over that bank's basic commercial lending
rate. Borrowings are collateralized by qualified accounts receivable,
inventories, and loan guarantee insurance provided by a governmental agency. The
line of credit is subject to renewal by May 1, 1999. Although management
expects the bank to renew its line of credit, there can be no guarantee of that
renewal.
Accounts receivable at October 31, 1998, and 1997 were $907,749 and
$828,860, respectively. The increase in 1998 is primarily due to the higher
level of revenues.
Inventories at October 31, 1998, and 1997 were $1,917,125, and $1,808,201,
respectively. The increase in 1998 is primarily due to a higher level of raw
materials inventory due to the development of new products.
At October 31, 1998, the Company had working capital of $1,414,713
compared with $978,907 in 1997. The improvement is primarily due to the
reduction in bank borrowings. This is the result of the increase in cash
provided from operating activities, and the proceeds for the exercise of stock
options. 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 1999. The Company believes that the
impact of inflation on net income has been minimal for fiscal years 1998, 1997,
and 1996.
The Company leases its offices and production facilities. The lease has a
remaining term of approximately 13 years with renewal provisions and provides
for a base rent of $172,000 annually for the next two years and then increasing
at approximately 3% per year thereafter. (See Note N of Notes to Financial
Statements for a description of the changes made during 1998.)
The Company's capital expenditures for 1998, 1997, and 1996 were approximately
$502,000, $250,000 and $385,000. The Company is in the process of evaluating
its capital expenditure plans for fiscal 1999, which are not expected to exceed
approximately $400,000. Financing for the capital expenditures are available
under an existing operating lease line, and an equipment financing facility with
its lender.
The Company has begun the process of making its assessment of its Year
2000 issues. Management has determined that its accounting software is Year
2000 ready, and the Company has recently completed a planned upgrade to its
network operating system, and replaced certain computers. Arrangements are in
process to work with a computer consultant to review all of its hardware and
systems. Contact has also been made with certain business partners, and in the
next few months the Company plans further contact with customers and suppliers,
and plans to evaluate risks, and formulate contingency plans. At this time,
management is not aware of any issues that would have a material impact on its
financial statements.
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 1999 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 1999 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 1999 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 1999 Annual Meeting of Shareholders.
PART IV
Item 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements. The response to this portion of Item 14 is
submitted as Appendix A to this report.
(a) (2) Financial Statement Schedules. The response to this portion of
Item 14 is submitted as Appendix A to this report.
(a) (3) Exhibits. The following exhibits are filed as part of this
annual Report on Form 10-K and this list constitutes the Exhibit Index.
Exhibit Filing
Number Exhibit Reference
3.1 Restated Articles of Incorporation i
of the Company.
3.2 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 1990 Non-Discretionary Stock Option iv
Plan for Non-Employee Directors.
10.2 1990 Non-Qualified Employee Stock iv
Option Plan
10.3 1994 Combined Incentive and Non-qualified vi
Stock Option Plan
10.4 Commercial lease and by and between v
John N. Hanna, David J. Hanna,
James S. Hanna, Harry M. Hanna
and Joseph J. Hanna Jr; landlord and
International Yogurt Company, dated
July 5, 1994. Assignment of the lease
To Pente Investments L.L.C.,
dated July 5, 1994
10.5 Amendment No.1 to commercial lease vi
between Pente Investments L.L.C. and
International Yogurt Company, dated
June 4, 1998, filed herewith.
10.6 Distribution Agreement, dated as of vii
September 1, 1997, between the Company,
Norpac Foods, Inc., and Robert Arneson,
Sales Agent, Inc., dba Norpac Food Sales
23.1 Consent of Independent Accountants
filed herewith
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 by reference from the Company's Registration
statement on Form S-8, dated August 7, 1996
vii Incorporated herein by reference from the Company's
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.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We have issued our reports dated January 12, 1999, accompanying the consolidated
financial statements included in the annual report of International Yogurt
company on form 10-K for the year ended October 31, 1998. We hereby consent to
the incorporation by reference of said reports in the Registration statement of
International Yogurt Company on Form S-8 ( File No. 333-09695, effective August
26, 1996).
GRANT THORNTON LLP
Portland, Oregon
January, 12, 1999
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 1
Balance Sheets at October 31, 1998 and 1997 2
Statements of Earnings for the years ended
October 31, 1998, 1997, and 1996 3
Statements of Shareholders' Equity for the years
Ended October 31, 1998, 1997, and 1996 4
Statements of Cash Flows for the years ended
October 31, 1998, 1997, and 1996 5
Notes to the Financial Statements 6-18
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, 1998, 1997, and 1996.
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, 1998 and 1997, and the related statements of income, shareholders' equity
and cash flows for each of the three years in the period ended October 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of International Yogurt Company as
of October 31, 1998 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended October 31, 1998, in
conformity with generally accepted accounting principles.
Grant Thornton LLP
Portland, Oregon
January 12, 1999
INTERNATIONAL YOGURT COMPANY
BALANCE SHEETS
October 31,
1998 1997
ASSETS
Current assets
Cash and cash equivalents $ 277,246 $ 414,194
Trade accounts receivable, net of allowance
for doubtful accounts of $14,189 in 1998 and
$14,584 in 1997 907,749 828,860
Inventories 1,917,125 1,808,201
Other current assets 254,325 329,352
Total current assets 3,356,445 3,380,607
Fixed assets, net 2,130,607 1,918,956
Deferred income taxes 818,000 284,000
Intangible and other long-term assets, net 250,605 227,030
$6,555,657 $5,810,593
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Note payable to bank $ 782,800 $1,337,000
Current portion of long-term debt 49,869 38,329
Current obligations under capital leases 48,105 36,862
Accounts payable 933,826 928,942
Other accrued liabilities 127,132 60,567
Total current liabilities 1,941,732 2,401,700
Long-term debt, less current portion 147,284 159,549
Long-term obligations under capital leases,
less current portion 15,321 63,426
Total liabilities 2,104,337 2,624,675
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 5,360,941 4,710,850
Accumulated deficit (775,033) (1,477,736)
4,585,908 3,233,114
Less common stock in treasury - at cost (134,588) (47,196)
Net shareholders' equity 4,451,320 3,185,918
$6,555,657 $5,810,593
The accompanying notes are an integral part of these statements.
INTERNATIONAL YOGURT COMPANY
STATEMENTS OF INCOME
For the year ended October 31,
1998 1997 1996
Revenue $ 10,206,524 $ 8,677,547 $ 7,922,144
Cost of goods sold 7,125,487 6,016,891 5,630,037
Gross profit 3,081,037 2,660,656 2,292,107
Selling and marketing expenses 1,315,708 1,284,587 1,120,942
General and administrative expenses 1,149,250 989,751 922,909
Unusual expenses - - 143,527
Income from operations 616,079 386,318 104,729
Other income (expense)
Interest income 13,048 16,499 12,605
Interest expense (134,452) (147,955) (131,573)
Other, net 8,028 19,684 21,012
Income before income taxes 502,703 274,546 6,733
Provision for income taxes
Current expense - - -
Deferred benefit 200,000 159,000 -
200,000 159,000 -
NET INCOME $ 702,703 $ 433,546 $ 6,773
Earnings per common share - basic $ 0.31 $ 0.20 $ 0.00
Earnings per common share - diluted $ 0.30 $ 0.19 $ 0.00
Shares used in basic
earnings per share 2,292,375 2,230,410 2,192,112
Shares used in diluted
earnings per share 2,358,668 2,260,963 2,197,553
The accompanying notes are an integral part of these statements.
International Yogurt Company
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Accumulated Treasury
Stock Net Shareholders'
Shares Amount Deficit Shares
Amount Equity
<S> <C> <C> <C> <C>
<C> <C>
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
Net income - - 702,703 -
- 702,703
Stock options exercised 106,800 316,091 - -
- 316,091
Treasury stock purchased - - - 21,000
(87,392) (87,392)
Tax benefit of options exercised - 334,000 - -
- 334,000
Balance, October 31, 1998 $2,364,593 $5,360,941 $ (775,033) 43,000
$(134,588) $4,451,320
</TABLE>
The accompanying notes are an integral part of these statements.
INTERNATIONAL YOGURT COMPANY
STATEMENTS OF CASH FLOWS
For the year ended October 31,
1998 1997 1996
Increase (Decrease) in Cash
and Cash Equivalents
Cash flows from operating activities
Net income $ 702,703 $ 433,546 $ 6,773
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities
Depreciation and amortization 285,418 307,703 262,405
Gain on disposal of equipment (8,028) (19,684) -
Deferred income taxes (200,000) (159,000) -
Change in assets and liabilities
Accounts receivable (78,889) (80,177) 124,508
Inventories (108,924) (238,928) (14,648)
Other assets 40,782 (143,571) (113,141)
Accounts payable 4,884 (166,457) 282,090
Other accrued liabilities 66,565 (70,661) 55,276
Net cash provided by (used in)
operating activities 704,511 (137,229) 603,263
Cash flows from investing activities
Proceeds from disposal of equipment 23,885 29,000 -
Expenditures for fixed assets (502,256) (249,907) (382,780)
Net cash used in investing
Activities (478,371) (220,907) (382,780)
Cash flows from financing activities
Net increase (decrease) in note payable
to bank (554,200) 398,000 (150,920)
Proceeds from issuance of long-term debt 42,241 15,175 152,529
Principal payments on long-term debt
and capital lease obligations (79,828) (146,032) (101,596)
Treasury stock purchased (87,392) (22,000) (21,218)
Proceeds from issuance of stock 316,091 15,400 93,974
Net cash provided by (used in)
financing activities (363,088) 260,543 (27,231)
Net increase (decrease) in
cash and cash equivalents (136,948) (97,593) 193,252
Cash and cash equivalents, beginning of year 414,194 511,787 318,535
Cash and cash equivalents, end of year $ 277,246 $ 414,194 $ 511,787
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 manufactures and wholesales frozen
yogurt deserts, snacks and beverages primarily under the name "YO CREAM". Sales
are made primarily throughout the United States to and through a variety of
outlets, including distributors, discount club warehouses, supermarkets,
grocery stores, convenience stores, restaurants, hospitals, schools, military
installations, yogurt shops and fast food chains.
1. Cash and cash equivalents
Cash and cash equivalents include short-term investments with a remaining
maturity of three months or less when purchased.
2. Inventories
Inventories are stated at the lower of cost or market. The Company
determines cost based on the first-in, first-out (FIFO) method for raw
materials, packaging materials and supplies, and based on standard costs for
finished goods.
3. Fixed Assets
Fixed assets are stated at cost. Expenditures for replacements and
improvements are capitalized, and expenditures for repairs and maintenance and
routine replacements are charged to operating expense as incurred. When assets
are sold or otherwise disposed of, the cost and related accumulated depreciation
are eliminated from the accounts and any resulting gain or loss is included in
operations. Depreciation is provided for on a straight-line basis in amounts
sufficient to relate the cost of depreciable assets to operations over their
estimated service lives. Leasehold improvements are amortized over the life of
the lease or the service life of the improvement, whichever is shorter. The
estimated lives used in calculating depreciation and amortization are:
Plant equipment 10-25 years
Office equipment and furnishings 10 years
Leasehold improvements 5-10 years
4. Statement of Cash Flows
The Company made cash interest payments of $138,288, $154,418 and $125,025
for the years ended October 31, 1998, 1997, and 1996, respectively. No income
taxes have been paid during these periods.
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE A - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard (SFAS) No. 128 "Earnings per Share"
effective for fiscal periods ending after December 15, 1997. This statement
simplifies the standards for computing earnings per share ("EPS") previously
found in APB Opinion No. 15, Earnings per Share, and makes them comparable with
the international EPS standards. This statement requires restatement of all
prior period data presented and, therefore, the Company has restated EPS for
the years ended October 31, 1997 and 1996, respectively. The principal
differences between the provisions of SFAS No. 128 and previous authoritative
pronouncements are exclusion of common stock equivalents in the determination
of basic EPS and the market price at which common stock equivalents are
calculated in the determination of diluted 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.
7. Reclassifications
Certain reclassifications were made to the 1997 and 1996 financial
statements in order to conform to the 1998 presentation.
NOTE B - INVENTORIES
Inventories consist of the following at October 31,:
1998 1997
Finished goods $1,462,681 $1,451,729
Raw materials 336,821 171,893
Packaging material and supplies 117,623 184,579
$1,917,125 $1,808,201
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE C - FIXED ASSETS
Fixed assets consist of the following at October 31,:
1998 1997
Machinery and equipment $ 3,045,141 $ 2,693,749
Office equipment and furnishings 207,805 151,134
Leasehold improvements 804,045 609,763
Construction in process 28,847 149,980
4,085,838 3,604,626
Less accumulated depreciation
and amortization (1,955,231) (1,685,670)
$ 2,130,607 $ 1,918,956
Fixed assets at October 31, 1998 and 1997 include assets under leases
capitalized at amounts aggregating approximately $168,000, with related
accumulated amortization of approximately $67,000 and $50,200, respectively.
Depreciation and amortization of the Company's fixed assets aggregated
$274,748, $292,193, and $252,081, for the years ended October 31, 1998, 1997,
and 1996.
NOTE D - INTANGIBLE AND OTHER LONG-TERM ASSETS
Intangible assets consist of the following at October 31,:
Period of
Amortization 1998 1997
Trademarks (principally "YO CREAM") 25 years $ 257,774 $ 257,774
Less accumulated amortization (118,857) (108,187)
$ 138,917 $ 149,587
As of October 31, 1998 and 1997, the Company had made deposits totaling
$56,521 and $49,221, respectively, related to the leases of various equipment
and its production and office facility and had investments in insurance
policies of $55,167 and $28,222, 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 bank line of credit which permits borrowing of up to
$1,700,000. Borrowings are collateralized by qualified accounts receivable,
inventories and loan insurance provided by the Oregon Economic Development
Department (OEDD). OEDD has guaranteed, through loan insurance, 33% of the
outstanding balance up to a maximum of $500,000. The line bears interest at
the bank's commercial lending rate plus 1% (9.0% at October 31, 1998 and 9.5%
at October 31, 1997). The line is subject to renewal by May 1, 1999.
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE E - NOTE PAYABLE TO BANK - Continued
The line of credit contains certain financial ratios including debt to
tangible capital ratio, current ratio and interest coverage ratio and certain
other negative covenants. At October 31, 1998, the Company was in compliance
with all of these ratios and covenants.
The Company also has an equipment financing line with a credit limit of
$300,000. There was no amount outstanding under this line as of October 31,
1998.
NOTE F - LONG-TERM DEBT
Long-term debt consists of the following at October 31,:
1998 1997
Industrial development loan, payable in monthly
Installments of $1,202 through April 2002,
including interest at 8%, collateralized by
certain equipment $ 45,477 $ 54,768
Notes payable to a bank in monthly installments
of $1,461 through September 2003, including
interest at 8.5%, collateralized by certain
equipment 68,583 79,690
Note 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 40,798 51,676
Note payable to a bank in monthly installments
of $483 through January 2000, including
interest at 9.0%, collateralized by certain
equipment 6,802 11,744
Note payable to a bank in monthly installments of
$657 through January 2003, including interest at
9.0%, collateralized by certain equipment 27,717 -
Note payable to a bank in monthly installments
of $356 through November 2000, including
interest at 12.9%. 7,776 -
197,153 197,878
Less portion due within one year (49,869) (38,329)
$ 147,284 $ 159,549
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE F - LONG-TERM DEBT - Continued
The principal portion of long-term debt is payable as follows:
Year ending
October 31,
1999 $ 49,869
2000 50,058
2001 49,088
2002 33,285
2003 14,853
$ 197,153
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,
1999 $ 52,204
2000 15,874
Total minimum lease payments 68,078
Less amount representing interest (4,652)
Present value of minimum lease payments 63,426
Less current portion (48,105)
Long-term portion $ 15,321
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 discretionary contributions to the Plan were approximately $41,600,
$24,800 and $8,500 during the years ended October 31, 1998, 1997 and 1996,
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.
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE I - STOCK OPTION PLANS
In September, 1987, the Company established 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 then 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 grant date. At October
31, 1998 these options had an exercise price of $4.00 and a weighted average
remaining contractual life of approximately ten months. This plan terminated
prior to October 31, 1998. Options granted under the plan continue to be
exercisable up to their expiration date.
A summary of option transactions relating to the Stock Option Plan for key
employees is as follows:
Shares Weighted
Under Average
Option Exercise Price
Balance, October 31, 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 160,800 3.61
Exercised (84,800) 3.22
Expired (38,500) 4.11
Balance, October 31, 1998 (exercisable) 37,500 4.00
In October 1990, the Company's Board of Directors adopted a nonqualified
Stock Option Plan for nonemployee directors. Based on the terms of the
Plan, options are to be granted to each director at the fair market value of
common stock on the grant date in October of each year. Options are exercisable
in such amounts and at such times as authorized by a Stock Option Agreement
applicable to each option. At October 31, 1998 these options had exercise
prices ranging from $1.88 to $3.75 and a weighted average remaining contractual
life of approximately 2 years. This plan terminated prior to October 31, 1998.
Options granted under the plan continue to be exercisable up to their
established expiration date.
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE I - STOCK OPTION PLANS - Continued
A summary of option transactions relating to the Stock Option Plan for
nonemployee directors is as follows:
Shares Weighted
Under Average
Option Exercise Price
Balance, October 31, 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 55,000 3.62
Expired (10,000) 8.00
Balance, October 31, 1998 (exercisable) 45,000 2.65
In January 1994, the Company's Board of Directors adopted a Combined
Incentive and Nonqualified Stock Option Plan and reserved 200,000 shares of
common stock for issuance pursuant to this Plan. At October 31, 1998, there
were 53,000 shares available under the plan for future grants. Options are
exercisable in such amounts and at such times as authorized by a Stock Option
Agreement applicable to each option. At October 31, 1998 these options had
exercise prices ranging from $1.75 to $4.00 and a weighted average contractual
life of approximately 3.1 years.
A summary of option transactions relating to the Combined Incentive and
Nonqualified Stock Option Plan is as follows:
Shares Weighted
Under Average
Option Exercise Price
Balance, October 31, 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 116,000 2.76
Granted 50,000 4.00
Exercised (22,000) 1.97
Expired (19,000) 6.78
Balance, October 31, 1998
(75,000 exercisable) 125,000 2.79
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE I - STOCK OPTION PLANS - Continued
At October 31, 1998, there were 260,500 shares of common stock reserved for
issuance under the Company's stock option plans.
The Company has adopted the disclosure only provisions of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (FAS
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 for determining compensation
expense, the Company's net income and net income per share would approximate
the pro forma amounts below:
1998 1997 1996
Net income, as reported $ 702,703 $ 433,546 $ 6,773
Net income, pro forma $ 693,630 $ 412,472 $ (41,467)
Diluted net income per common
share as reported $ 0.30 $ 0.19 $ 0.00
Diluted net income (loss)
per common share, pro forma $ 0.29 $ 0.18 $ (0.02)
The weighted-average fair value of options granted during the years ended
October 31, 1998, 1997 and 1996 were $2.53, $1.36 and $1.14, 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 5.03% in 1998 and 5.6% in 1996 and 1997 and an expected life of 5 years.
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS - Continued
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, 1998:
Weighted
Average Per-
Income Shares Share
1996 (Numerator) (Denominator) Amount
Basic earnings per share
Income available to
common stockholders $6,773 2,192,112 $ 0.00
Effect of dilutive securities
Stock options - 5,441
Diluted earnings per share
Income available to
common stockholders $6,773 2,197,553 $ 0.00
1997
Basic earnings per share
Income available to
common stockholders $433,546 2,230,410 $ 0.20
Effect of dilutive securities
Stock options - 30,553
Diluted earnings per share
Income available to
common stockholders $433,546 2,260,963 $ 0.19
1998
Basic earnings per share
Income available to
common stockholders $702,703 2,292,375 $ 0.31
Effect of dilutive securities
Stock options - 66,295
Diluted earnings per share
Income available to
common stockholders $702,703 2,358,668 $ 0.30
During 1998, 1997 and 1996 options to purchase 57,325 and 209,550 and 292,300
shares of common stock at various prices were outstanding but were not included
in the calculation of diluted EPS because their effect would have been
antidilutive.
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE K - FINANCIAL INSTRUMENTS
The carrying values of the Company's financial instruments consisting of
cash, accounts receivable and payable approximates 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.
NOTE L - ADVERTISING COSTS
Advertising costs are charged to operations in the year incurred, and for
the years ended October 31, 1998, 1997 and 1996 aggregated approximately
$559,700, $492,000 and $452,000, 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 payable for the years ended October 31, 1998, 1997 and 1996.
The effective tax rate differed from the statutory federal tax rate due to
the following:
Year ended October 31,
1998 1997 1996
Statutory federal tax rate (graduated) 34.0% 32.9 % 15.0%
State taxes, net of federal benefit 4.4 4.4 5.6
Change in valuation allowance (78.2) (95.2) (20.6)
(39.8)% (57.9)% 0.0%
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE M - INCOME TAXES - Continued
Deferred tax assets (liabilities) consist of the following at October 31,:
1998 1997
Allowance for doubtful accounts $ 5,500 $ 5,000
Inventory 15,500 15,000
Net operating loss carryforwards 942,000 1,090,000
Gross deferred tax assets 963,000 1,110,000
Deferred tax asset valuation allowance (106,000) (765,000)
Net deferred tax asset 857,000 345,000
Property, plant and equipment (39,000) (61,000)
Gross deferred tax liabilities (39,000) (61,000)
Net noncurrent deferred tax asset $ 818,000 $ 284,000
At October 31, 1998, the Company had federal and state net operating loss
carryforwards aggregating approximately $2,600,000 and $1,680,000,
respectively, which may be used to offset taxable income, if any, in future
years. The net operating loss carryforwards expire from 2002 through 2008.
The Company has established a valuation allowance against a portion of
deferred tax assets due to the uncertainty surrounding the realization of such
assets. Management evaluates on a quarterly basis the recoverability of the
deferred tax assets and the level of the valuation allowance. The net change
in the valuation allowance for the years ended October 31, 1998 and 1997 was a
decrease of $659,000 and $99,000, respectively. The decrease in the valuation
allowance for the year ended October 31, 1998 resulted primarily from the
utilization of net operating loss carryforwards and management's evaluation of
the future recoverability of net deferred tax assets due to the likelihood of
future taxable income. Approximately $150,000 of the decrease in the valuation
allowance for the year ended October 31, 1998 resulted from the operating loss
carryforwards utilized in such year.
NOTE N - OPERATING LEASE COMMITMENTS INCLUDING THOSE WITH RELATED PARTIES
During fiscal year 1998, the Company restructured its operating lease
agreement for its production and office facilities. The lease restructuring
was caused by the construction of new office facilities attached to the
existing building. In addition to an increase in the monthly lease payments
and an extension of the lease term, the Company incurred approximately $150,000
of additional tenant improvement costs which have been capitalized as leasehold
improvements. The building is owned by a company whose owners are the
Company's chief operating officer and its president (both of whom are also
shareholders of the Company) and certain other shareholders of the Company.
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE N - OPERATING LEASE COMMITMENTS INCLUDING THOSE WITH RELATED PARTIES -
Continued
In addition, the Company leases equipment under noncancelable operating
leases with unrelated third parties.
Minimum lease payments required under these operating leases are as follows:
Year ending
October 31,
1999 $ 250,033
2000 249,868
2001 261,253
2002 261,253
2003 265,453
Thereafter 2,021,847
$ 3,309,707
Operating lease expense under the related party lease for the years ended
October 31, 1998, 1997, and 1996 approximated $140,000, $109,000, $103,000,
respectively. Lease expense, exclusive of related parties, was approximately
$68,500, $13,600 and $34,700 for the years ended October 31, 1998, 1997, and
1996. Operating lease expenses are allocated between manufacturing costs and
general and administrative expenses in the accompanying statement of operations.
During 1998, the Company entered into a lease arrangement providing for up to
$500,000 of available lease funding for equipment. This funding is available
to be utilized through June 30, 1999. As of October 31,1998, the Company had
leased approximately $107,000 of equipment under this arrangement.
NOTE O - 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, 1998, 1997 and 1996, amounts paid to Norpac for
brokerage, commission, freight and advertising expenses approximated $114,000,
$535,000 and $590,000, respectively. At October 31, 1998 and 1997, Norpac held
approximately 3% of the Company's outstanding shares of common stock.
International Yogurt Company
NOTES TO FINANCIAL STATEMENTS - Continued
NOTE P - MAJOR CUSTOMERS
Revenues derived from the Company's largest customer represents 50%, 41%, and
35% of total revenues in the years ended October 31, 1998, 1997 and 1996.
NOTE Q - RECENT ACCOUNTING STANDARDS
Certain accounting standards have been issued by the Financial Accounting
Standards Board which are not yet required to be adopted by the Company. These
include Statement of Financial Accounting Standards (SFAS) Nos. 130, 131, 132
and 133, "Reporting Comprehensive Income", "Disclosures about Segments of an
Enterprise and Related Information", "Employers' Disclosure about Pensions and
Other Postretirement Benefits" and "Accounting for Derivative Instruments and
Hedging Activities." The future adoption of these standards will modify
certain disclosures for the Company. However, management does not expect
future adoption of these standards to materially affect the Company's financial
statements.
Exhibit 10.5
AMMENDMENT NO. 1 TO COMMERCIAL LEASE
This Amendment made this 4th day of June, 1998, by and between PENTE
INVESTMENTS, L.L.C., an Oregon limited liability company, ("Landlord") and
INTERNATIONAL YOGURT COMPANY, an Oregon corporation, ("Tenant").
WHEREAS, a certain Commercial Lease was entered into between Landlord and
Tenant dated July 5, 1994, covering the Premises described as:
"Land and improvements (including two walk-in freezers and one
cooler) located at 5858 NE 87th, Portland, Oregon and legally
described as Lot 2, Block 3, A.P. INDUSTRIAL PARK, City of
Portland, Multnomah County, Oregon; and
WHEREAS, Tenant has requested Landlord to have constructed on the Premises
additional office space and Landlord is willing to construct the building shell
for approximately 4,200 square feet of office space; and
WHEREAS, in consideration of the additional space to be provided, the
parties have agreed to an increase in the lease term and the base rent;
NOW THEREFORE, for and in consideration of the mutual covenants herein
contained and other good and valuable consideration, the parties hereto agree as
follows:
That certain Commercial Lease by and between Landlord and Tenant dated
July 5, 1994 shall be and hereby is modified, altered, and amended in the
following respects only:
1. "Section 1.1 Original Term" is hereby deleted in its entirety and in
lieu thereof, the following is inserted:
"Section 1.1 Original Term. The term of this Lease shall be for a
period of eighteen (18) years commencing July 5, 1994 and
continuing through July 4, 2012, unless sooner terminated as
hereinafter provided."
2. "Section 2.1 Base Rent" is hereby deleted in its entirety and in lieu
thereof; the following is inserted:
"Section 2.1 Base Rent. During the lease term, Tenant shall pay to
Landlord as base rent the following sums:
July 5, 1996 through July 4, 1997 $ 8,600.00 per month
July 5, 1997 through June 4, 1998 $ 9,600.00 per month
June 5, 1998 through July 4, 2000 $14,335.00 per month
July 5, 2000 through July 4, 2003 $15,600.00 per month
July 5, 2003 through July 4, 2006 $17,000.00 per month
July 5, 2005 through July 4, 2009 $18,400.00 per month
July 5, 2009 through July 4, 2012 $19,900.00 per month
Rent shall be payable on the first day of each month in advance at
such place as may be designated by Landlord expect that rent for the
first month and last month has been paid upon the execution of this
Lease, and Landlord acknowledges receipt of this sum."
Except as specifically amended hereinabove, said Commercial Lease shall
remain in full force and effect according to the terms and conditions thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1
on the date first hereinabove written.
Landlord: Tenant:
PENTE INVESTMENTS, L.L.C. INTERNATIONAL YOGURT COMPANY
By: By:
Harry M. Hanna, Member John N. Hanna, CEO
By:
John N. Hanna, Member
By:
Joseph J. Hanna, Jr., Member
By:
David J. Hanna, Member
By:
James S. Hanna, Member
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<CASH> 277,246
<SECURITIES> 0
<RECEIVABLES> 907,749
<ALLOWANCES> 0
<INVENTORY> 1,917,125
<CURRENT-ASSETS> 3,356,445
<PP&E> 2,130,607
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,555,657
<CURRENT-LIABILITIES> 1,941,732
<BONDS> 0
0
0
<COMMON> 5,360,941
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,555,657
<SALES> 10,206,524
<TOTAL-REVENUES> 10,206,524
<CGS> 7,125,487
<TOTAL-COSTS> 9,590,445
<OTHER-EXPENSES> (21,076)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 134,452
<INCOME-PRETAX> 502,703
<INCOME-TAX> (200,000)
<INCOME-CONTINUING> 702,703
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 702,703
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.30
</TABLE>
