UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-QSB
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the quarterly period ended July 31, 2005.
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Commission File Number: 0-16787
YOCREAM INTERNATIONAL, INC.
(Exact name of small business issuer
as specified in its charter)
Oregon 91-0989395
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
5858 N.E. 87th Avenue
Portland, Oregon 97220
(Address of principal executive office)
(Issuers telephone number, including area code): (503)256-3754
Indicate by check mark whether the issuer (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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ___ No X
The number of shares outstanding of the issuer's common stock, as of the latest
practicable date is:
Class: Common stock outstanding at
September 14, 2005: 2,106,100 shares
Transitional Small Business Disclosure Format: YES ___ NO X .
YOCREAM INTERNATIONAL, INC.
CONTENTS
<table>
<caption>
Page
<s> <c>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3-11
Balance Sheets as of July 31, 2005, 3
(unaudited) and October 31, 2004
Statements of Income for the 4
Three Months ended July 31, 2005 and 2004,
and Nine Months ended July 31, 2005 and 2004
(all unaudited)
Statements of Cash Flows for the 5
Nine Months ended July 31, 2005 and 2004
(all unaudited)
Notes to Financial Statements 6-11
Item 2. Management's Discussion and Analysis of 11-17
Financial Condition and Results of
Operations
Item 3. Controls and Procedures 17
<caption>
PART II OTHER INFORMATION
<s> <c>
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Small Business Issuer 17-18
Purchases of Equity Securities
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of 18
Security Holders
Item 5. Other Information 18
Item 6. Exhibits 18
SIGNATURES 19
</table>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
YOCREAM INTERNATIONAL, INC.
BALANCE SHEETS
<table>
<caption>
July 31, October 31,
2005 2004
(Unaudited)
ASSETS ----------- ----------
<s> <c> <c>
Current assets
Cash and cash equivalents $ 2,523,544 $ 3,806,993
Accounts receivable, net 1,434,351 858,720
Inventories 2,051,055 1,866,051
Other current assets 450,826 219,634
Income taxes receivable 5,300 51,154
Deferred tax asset 205,220 194,519
----------- ----------
Total current assets 6,670,296 6,997,071
Fixed assets, net 6,190,715 6,328,875
Intangible and other long-term assets, net 419,881 399,672
----------- -----------
$13,280,892 $13,725,618
=========== ===========
<caption>
LIABILITIES AND SHAREHOLDERS EQUITY
<s> <c> <c>
Current liabilities
Current portion of long-term debt $ 403,319 $ 403,319
Accounts payable 1,546,392 1,170,882
Accrued liabilities 152,472 156,120
----------- ----------
Total current liabilities 2,102,183 1,730,321
Long-term debt, less current portion 2,004,596 2,305,939
Interest rate swap, at fair value (13,300) -
Deferred tax liability 1,127,369 1,070,720
Other liabilities 58,522 46,060
----------- ----------
Total liabilities 5,279,370 5,153,040
----------- ----------
Shareholders equity
Preferred stock, no par value,
5,000,000 authorized; none issued - -
Common stock, no par value,
30,000,000 shares authorized;
2,106,300 and 2,282,500 shares issued
and outstanding at July 31, 2005 and
October 31, 2004, respectively 3,976,639 4,739,581
Retained earnings 4,016,683 3,832,997
Accumulated other comprehensive income 8,200 -
----------- -----------
Total shareholders equity 8,001,522 8,572,578
----------- ----------
$13,280,892 $13,725,618
=========== ===========
</table>
The accompanying notes are an integral part of the financial statements.
YOCREAM INTERNATIONAL, INC.
STATEMENTS OF INCOME
(Unaudited)
<table>
<caption>
Three months ended Nine months ended
------------------ -----------------
July 31, July 31,
-------- --------
2005 2004 2005 2004
---------- ---------- ----------- -----------
<s> <c> <c> <c> <c>
Sales $5,894,733 $5,906,991 $14,438,153 $14,212,727
Cost of sales 4,547,530 4,439,177 10,697,940 10,423,754
---------- ---------- ----------- -----------
Gross profit 1,347,203 1,467,814 3,740,213 3,788,973
Selling and marketing
expenses 657,488 635,405 1,761,706 1,619,764
General and administrative
expenses 566,412 542,311 1,664,738 1,581,716
---------- ---------- ----------- -----------
Income from operations 123,303 290,098 313,769 587,493
Other income (expenses)
Interest income 9,103 1,191 20,048 4,397
Interest expense (37,587) (21,438) (108,298) (66,108)
Other, net 28,314 13,000 26,067 12,288
---------- ---------- ----------- -----------
Income before taxes 123,133 282,851 251,586 538,070
Income tax provision 21,700 93,500 67,900 189,000
---------- ---------- ----------- -----------
Net income $ 101,433 $ 189,351 $ 183,686 $ 349,070
========== ========== =========== ===========
Earnings per common share:
Basic $.05 $.08 $.09 $.15
==== ==== ==== ====
Diluted $.05 $.08 $.09 $.15
==== ==== ==== ====
</table>
The accompanying notes are an integral part of the financial statements.
YOCREAM INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
For the nine months ended July 31, 2005 and 2004
(Unaudited)
<table>
<caption>
2005 2004
----------- -----------
<s> <c> <c>
Cash flows from operating activities:
Net income $ 183,686 $ 349,070
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and amortization 473,835 443,778
Gain on disposal of equipment (2,767) -
Deferred income taxes 40,848 112,462
Change in assets and liabilities
Accounts receivable (575,631) (290,174)
Inventories (185,004) (229,451)
Other assets (251,401) (26,424)
Accounts payable 375,510 223,911
Income taxes payable 45,854 74,822
Other accrued liabilities 8,814 32,503
----------- -----------
Net cash provided by
operating activities 113,744 690,497
----------- -----------
Cash flows from investing activities:
Expenditures for fixed assets (332,908) (825,576)
----------- -----------
Net cash used in investing
activities (332,908) (825,576)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 394,886
Principal payments on long-term debt (301,343) (282,556)
Repurchase of common stock (762,942) -
----------- -----------
Net cash provided by (used in)
financing activities (1,064,285) 112,330
----------- -----------
Net decrease in cash
and cash equivalents (1,283,449) (22,749)
Cash and cash equivalents, beginning of period 3,806,993 2,644,436
----------- -----------
Cash and cash equivalents, end of period $2,523,544 $2,621,687
</table> =========== ===========
The accompanying notes are an integral part of the financial statements
YOCREAM INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
Note A - Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, which
consist of normal recurring accruals, considered necessary for a fair presen-
tation have been included. Operating results for the quarter ended July 31,
2005 are not necessarily indicative of the results that may be expected for
the year ending October 31, 2005. For further information, refer to the
financial statements and related footnotes included in the Companys annual
report on Form 10-KSB for the year ended October 31, 2004.
Note B - Reclassifications
Certain prior period amounts have been reclassified to conform to the current
period presentation.
Note C - New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based
Compensation, (SFAS 123), and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. The effective date for the
Company is fiscal 2007, beginning November 1, 2006. On March 29, 2005, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
(SAB 107), which provides the Staffs views regarding interactions between SFAS
123R and certain SEC rules and regulations, and provides interpretations of the
valuation of share-based payments for public companies. SAB 107 covers key
topics related to the implementation of SFAS 123R which include the valuation
models, expected volatility, expected option term, income tax effects of SFAS
123R, classification of stock-based compensation cost, capitalization of
compensation costs, and disclosure requirements. The Company has reviewed the
requirements of SFAS 123R and has determined that grants of share-based
payments could have a material impact on earnings depending on factors e.g.
number of shares, price, and level of earnings in any given period.
In June 2005, the FASB issued Statement No. 154, Accounting Changes and
Error Corrections (SFAS 154), a replacement of APB Opinion No. 20, Accounting
Changes, and Statement No. 3, Reporting Accounting Changes in Interim Financial
Statements. SFAS 154 changes the requirements for the accounting for and the
reporting of a change in accounting principle. Previously, most voluntary
changes in accounting principles required recognition by recording a cumulative
effect adjustment within net income in the period of change. SFAS 154 requires
retrospective application to prior periods financial statements, unless it is
impracticable to determine either the specific period effects or the cumulative
effect of the change. SFAS 154 is effective for accounting changes made in
fiscal years beginning after December 15, 2005. The Company does not believe
SFAS 154 will have a material effect on its financial position, results of
operations or cash flow.
Note D - Inventories
Inventories consist of the following:
<table>
<caption>
July 31, October 31,
2005 2004
---------- ----------
<s> <c> <c>
Finished goods $1,277,850 $1,467,790
Raw materials 499,982 249,068
Packaging materials and supplies 273,223 149,193
---------- ----------
$2,051,055 $1,866,051
========== ==========
</table>
Note E - Current and Long-Term Debt
The Company has an uncollateralized bank line of credit, which permits
borrowings of up to $2,000,000. The line, which bears interest at the banks
commercial lending rate of 6.25% at July 31, 2005 is subject to renewal by July
2007. There were no amounts drawn on this line at July 31, 2005.
In December 2003, the Company finalized the terms of a master lease facility
in the amount of $2,552,553. The facility provides for payments over seven
years with interest at 30-day LIBOR plus 175 basis points (5.26% at July 31,
2005), with the option to convert to a fixed rate by using an interest rate
swap at the Companys discretion (see Note F). The facility is subject to the
same financial covenants as the revolving line of credit, and is collateralized
by the aseptic system project assets, and by the other equipment and fixtures
related to the refinanced term loans.
The master finance lease facility contains certain financial covenants
including the ratio of senior liabilities (as defined) to adjusted tangible
capital, current ratio and operating cash flow to fixed charge as well as
limits on the amount of common stock which can be repurchased by the Company.
At July 31, 2005, the Company believes that it was in compliance with all of
these ratios and covenants.
Note F - Fair Value of Derivative Financial Instruments
In November 2004, the Company entered into an interest rate swap agreement,
which converted the variable interest rate paid on its debt to a fixed rate
of 5.88%. This agreement will terminate on January 1, 2011. It is the
Companys policy to enter into agreements when management deems them useful
in reducing risks to the Company. To the extent that the fixed rate is higher
than the Libor rate as defined in the Master Lease Agreement, payment is due
from the Company for the difference. To the extent that the fixed rate is
below the Libor rate, the Company is entitled to receive the difference. In
accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, the Company has reviewed and designated its interest
rate swap agreement as a cash flow hedge and recognizes the fair value of its
interest rate swap agreement on the balance sheet. Changes in the fair value
of this agreement are recorded in other comprehensive income. The hedge
ineffectiveness, if any, is recorded in earnings. There was no hedge
ineffectiveness for the periods ended July 31, 2005.
Note G - Comprehensive Income
Comprehensive income for the three-month periods ended July 31, are as follows:
<table>
<caption>
2005 2004
-------- --------
<s> <c> <c>
Net income $101,433 $189,351
Change in fair value of derivative
financial instruments, net of
deferred income taxes of ($6,500) 10,800 -
-------- --------
Comprehensive income $112,233 $189,351
======== ========
<caption>
Comprehensive income for the nine-month periods ended July 31, are as follows:
2005 2004
-------- --------
<s> <c> <c>
Net income $183,686 $349,070
Change in fair value of derivative
financial instruments, net of
deferred income taxes of ($5,100) 8,200 -
-------- --------
Comprehensive income $191,886 $349,070
======== ========
</table>
Note H - Common Stock Repurchase Plan
On November 8, 2004, the Companys Board of Directors authorized the repurchase
of up to $1,250,000 of the Companys common stock. Under the terms of the
repurchase plan, the Company may make purchases through open market, or
privately negotiated transactions. To assist the Company in executing the
stock repurchases, the Company entered into a 10b5-1 trading plan that was
administered and executed by a designated broker that purchased shares on
behalf of the Company beginning November 8, 2004 and ending on April 30, 2005.
On June 13, 2005 the trading plan was extended through October 20, 2005.
In the third quarter of 2005, the Company repurchased 4,100 shares at an
average price of $5.395 per share for a total cost of $22,118. For the nine
months ended July 31, 2005, total shares repurchased were 176,200 at an average
price of $4.33 for a total cost of $762,942. These shares have been retired,
as required under Oregon corporate law.
There were no repurchases in the nine months ended July 31, 2004.
Note I - Earnings Per Share
Earnings per share is calculated as follows for the three months ended
July 31, 2005 and 2004:
<table>
<caption>
Three Months Ended July 31, 2005
--------------------------------
Net Earnings Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<s> <c> <c> <c>
Basic earnings per share
Net earnings $101,433 2,109,338 $ .05
Effect of dilutive securities - 21,880 -
-------- --------- -------
Diluted earnings per share $101,433 2,131,218 $ .05
======== ========= =======
<caption>
Three Months Ended July 31, 2004
--------------------------------
Net Earnings Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<s> <c> <c> <c>
Basic earnings per share
Net earnings $189,351 2,277,956 $ .08
Effect of dilutive securities - 7,072 -
-------- --------- -------
Diluted earnings per share $189,351 2,285,028 $ .08
======== ========= =======
Earnings per share is calculated as follows for the nine months ended
July 31, 2005 and 2004:
<caption>
Nine Months Ended July 31, 2005
-------------------------------
Net Earnings Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<s> <c> <c> <c>
Basic earnings per share
Net earnings $183,686 2,142,624 $ .09
Effect of dilutive securities - 9,660 -
-------- --------- -------
Diluted earnings per share $183,686 2,152,284 $ .09
======== ========= =======
<caption>
Nine Months Ended July 31, 2004
-------------------------------
Net Earnings Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<s> <c> <c> <c>
Basic earnings per share
Net earnings $349,070 2,277,956 $ .15
Effect of dilutive securities - 20,213 -
-------- --------- -------
Diluted earnings per share $349,070 2,298,169 $ .15
======== ========= =======
</table>
Options to purchase approximately 55,000 shares of common stock during the
periods ended July 31, 2005, and 223,334 shares of common stock during the
periods ended July 31, 2004, respectively, were outstanding but not included
in the computation of diluted earnings per share because the options exercise
prices were greater than the average market price of the underlying shares.
Note J - Supplemental Cash Flow Information
Supplemental cash flow information for the nine months ended July 31, is as
follows:
<table>
<caption>
2005 2004
-------- --------
<s> <c> <c>
Cash paid during the period for income taxes $ 1,761 $ 1,716
Cash paid during the period for interest $ 96,127 $ 66,739
Fair value of interest rate swap, net of taxes $ 8,200 -
Acquisition of capital assets with debt - $ 47,963
Payment of vendor payables used to acquire
capital assets - $303,529
</table>
Note K - Stock Based Compensation Plans
The Company has stock-based employee compensation plans for which it has
adopted the disclosure only provisions of Financial Accounting Standard No.
123, Accounting for Stock-Based Compensation (SFAS 123). It applies APB
Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its
Plans.
The Company paid $23,600 to employees to settle 30,000 shares of vested stock
options during the third quarter 2005. This amount has been recorded as
compensation expense during the period. The options were settled for the
difference in the options exercise price and the fair market value of the stock
on the date of the transaction.
Had the Company used the fair value methodology of SFAS 123 for determining
compensation expense, the Companys net income and net income per share for the
quarter and nine months ended July 31, would approximate the pro forma amounts
below:
<table>
<caption>
Three Months Ended Nine Months Ended
July 31, July 31,
------------------- ------------------
2005 2004 2005 2004
-------- -------- -------- --------
<s> <c> <c> <c> <c>
Net income, as reported $101,433 $189,351 $183,686 $349,070
Deduct: stock based
compensation expense
determined under the
fair value method
net of tax - - (41,000) (19,770)
-------- -------- -------- --------
Net income proforma $101,433 $189,351 $142,686 $329,300
======== ======== ======== ========
Net income per share
as reported
Basic $.05 $.08 $.09 $.15
Diluted $.05 $.08 $.09 $.15
Net income per share
pro forma
Basic $.05 $.08 $.07 $.14
Diluted $.05 $.08 $.07 $.14
Number of options which
became exercisable - - 36,668 16,668
Weighted average
assumptions:
Risk-free interest rate - - 3.22% 3.24%
Expected dividend yield - - 0 0
Expected lives - - 5 5
Expected volatility - - 37.0% 42.4%
</table>
Item 2. Managements 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
Companys management and on assumptions made by and information currently
available to management. All statements other than statements of historical
fact, regarding the Companys financial position, business strategy and plans
and objectives of management for future operations of the Company are forward-
looking statements. When used herein, the words anticipate, believe, estimate,
expect, and intend and words or phrases of similar meaning, as they relate to
the Company or management, are intended to identify forward-looking statements.
Although the Company believes that the expectations reflected in such forward-
looking statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Forward-looking statements are
subject to certain risks and uncertainties, which could cause actual results to
differ materially from those, indicated by the forward-looking statements.
These risks and uncertainties include the Companys ability to maintain or
expand its distribution abilities, including the risk of disruptions in the
transportation system and relationships with brokers and distributors. Further,
actual results may be affected by the Companys ability to compete on price and
other factors with other manufacturers and distributors of frozen dessert
products; customer acceptance of new products; general trends in the food
business as they relate to customer preferences for the Companys products; and
the Companys ability to obtain raw materials and produce finished products in a
timely manner, as well as its ability to develop and maintain its 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 Companys operations. The reader is advised that this list of risks
is not exhaustive and should not be construed as any prediction by the Company
as to which risks would cause actual results to differ materially from those
indicated by the forward-looking statements.
Results of Operations
The primary business of the Company is the manufacture, marketing and sales of
superior quality frozen yogurt, frozen custard, sorbet, cultured soy, frozen
beverage, coffee latte and ice cream products in a variety of premium, low-fat,
nonfat and low-carb flavors in either non-organic or organic formulations. The
Company also copacks similar products for other companies. Because of the
nature of these products, sales are subject to seasonal fluctuations, with the
summer months normally being the busiest season. The introduction and roll out
of new products has tended to level the seasonal fluctuations.
Sales
The Companys sales decreased 0.2% for the third quarter, and increased 1.6%
for the nine months ended July 31, 2005, compared to the corresponding periods
in 2004. The breakdown of sales by category for the nine months ended July 31,
2005 and 2004 are as follows:
<table>
<caption>
% % Dollar %
Category 2005 Total 2004 Total Increase Change
- -------- ----------- ----- ----------- ----- ----------- -------
<s> <c> <c> <c> <c> <c> <c>
Frozen Yogurt $ 9,205,000 63.8% $ 8,094,000 56.9% $1,111,000 13.7%
Frozen Beverage 4,876,000 33.8% 5,400,000 38.0% (524,000) (9.7)%
Coffee Latte
Freeze - 0.0% 213,000 1.5% (213,000) (100.0)%
Custard,
Ice Cream and Soy 293,000 2.0% 487,000 3.4% (194,000) (39.8)%
Copacking 64,000 0.4% 19,000 0.2% 45,000 236.8%
----------- ----- ----------- ----- ----------- -------
Total $14,438,000 100% $14,213,000 100% $ 225,000 1.6%
=========== ===== =========== ===== =========== =======
</table>
Frozen Yogurt: The 13.7% increase in frozen yogurt sales was primarily due
to continued growth in three sectors: wholesale club, healthcare, institu-
tions/general foodservice.
The Company continues to develop and experience success in its core business of
frozen yogurt. In 2005 concentrated sales activities continue to focus on the
healthcare and military/government segments as well as national broadline
distribution of the Companys core products. The Company has expanded its
sales efforts in the healthcare, institution and university segments. This
activity has resulted in successful sales conversions of competitors products
to the Companys products. This business also facilitated expanded distribution
of the Companys products with broadline foodservice distributors. The Company
continues to service wholesale club sales by maintaining a high level of
customer support.
Frozen Beverage: Sales decreased 9.7% in the first nine months when compared
to the same period last year. The growth in sales from new business has been
offset by the effect of the Companys lead customer electing in the first
quarter to use a competitors smoothie product for one of its nine distribution
centers. The Coffee latte freeze category was discontinued in 2004.
In addition to the normal growth in the remaining business for the smoothie
category, the Company expects additional sales as a result of the introduction
of the following new products:
Dannon Frozen Frusion by YoCream(registered trademark) is a unique frozen
smoothie of yogurt and fruit. This beverage is an example of a probiotic
product made with live yogurt cultures than can improve digestive health.
This product was presented to the foodservice marketplace in the second
quarter of 2005.
Fruitquake(registered trademark) dispenser smoothies are a line of bold and
intense fruit beverages with high concentrations of real fruit. This new
ready-to-use line designed for bulk dispensers was selectively introduced in
the first quarter of 2005. This product is packaged on the Companys aseptic
packing line for a shelf stable product.
YoCaffe Latte(registered trademark) is an aseptically packaged coffee
concentrate product, which is designed to be mixed with milk and served
through a frozen beverage machine. This product has been developed in
response to foodservice operators demand for convenient coffee beverages.
In the second quarter of 2005, the Company introduced a new ready-to-use
version of YoCaffe Latte(registered trademark) that is pre-mixed with milk.
This is also an aseptically packaged product designed to be stored at room
temperature.
Jolly Rancher(trademark) Frozen Beverage is a new product line the Company
will introduce in the fourth quarter of 2005. The Jolly Rancher(trademark)
trademark and trade dress are used under license from the Hershey Company.
The beverage mixes will be available in ready-to-use and concentrated
formulas designed to be used in un-carbonated beverage dispensers, like slush
or granita machines, or in frozen carbonated beverage machines. The most
popular original Jolly Rancher(trademark) hard candy flavors (Green Apple,
Watermelon, Grape and Cherry) will be available for distribution in late
August.
Custard, Ice Cream and Soy: Sales in this category decreased when compared to
the same period in the prior year primarily due to a restaurant chain that had
been purchasing the Companys soft serve frozen custard changing to the Companys
reduced fat ice cream product in the second quarter of 2004, and then subse-
quently electing not to renew the contract in favor of local supply effective
in December 2004.
Copacking: The Company promotes its copacking capabilities, and the flexi-
bility of its manufacturing facility through industry affiliations such as
Northwest Food Processors Association and the All Star Dairy Buying Group, as
well as through the direct sales activities of business development managers
and senior sales staff. The increase in copacking revenue is the result of the
Company processing new proprietary products for test marketing by significant
customers that could result in high volume copacking business in the near
future.
Gross Profit
The Companys gross profit margin decreased from 24.8% to 22.9% for the third
quarter and from 26.7% to 25.9% for the nine months in 2005.
The decrease in gross margin was primarily due to increases in freight
surcharges. The Company continues to analyze its costs to identify savings
opportunities and is aggressively pursuing opportunities to reduce ingredient,
packaging, logistics, and production costs. Up to this point competitive
conditions have limited the Companys ability to pass on cost increases. Since
the end of the quarter there has been a change in market conditions, which is
expected to make it easier for the Company to pass on more of its cost
increases in the near term.
Selling and Marketing Expenses
Selling and marketing expenses increased, as a percentage of sales, from
10.8% to 11.2% for the third quarter, and increased from 11.4% to 12.2% for
the nine months in 2005. The increases in selling and marketing expenses
are due to an increase in commissions on higher sales and due to the sales
department reorganization in late 2004. The reorganization resulted in the
addition of senior level sales and marketing personnel to support projected
growth. This reorganization has resulted in increased personnel and travel
related expenses. Management believes that the reorganization has been a
significant factor contributing to the 13.7% increase in yogurt sales achieved
in 2005, and that continued opportunities merit the expected increase in
expenses related to the intensified sales and marketing activities.
General and Administrative Expenses
General and administrative expenses increased, as a percentage of sales, from
9.2% to 9.6% of sales for the quarter, and increased from 11.1% to 11.5% for
the nine months in 2005. General and administrative expenses have increased in
total due to higher personnel related expenses.
Income from Operations
As a percentage of sales, income from operations in the third quarter of 2005
was 2.1% of sales, compared to 4.9% for the quarter last year. For the nine
months, income from operations in 2005 was 2.2% of sales compared to 4.1% for
the same period in 2004. The decrease in income from operations was primarily
due to the increase in cost of sales as a result of freight surcharges.
Another factor was the increase in selling, general and administrative expenses
described above.
Management remains confident that stabilizing market conditions, along with
strategies for growth will enable the Company to regain its more favorable
profit margins.
Interest Expense
Interest expense increased in the third quarter and nine months of 2005
compared to 2004 as a result of the fixed swap rate in 2005 being higher than
the floating interest rates in 2004.
Provision for Income Taxes
The effective tax rate was 17.6% and 27.0% for the third quarter and year-to-
date periods of 2005. The expected effective tax rate for the year is less
than normal due to the level of income and the benefit of tax credits. The
effective tax rate was 33.1% and 35.1% for the third quarter and year-to-date
periods of 2004.
Net Income
Earnings in the third quarter and nine months of 2005 decreased when compared
to the prior year due to the reasons described above.
Liquidity and Capital Resources
In recent years, the Company has financed its operations and expansion from
bank loans, operating leases, capital leases, stock sales, and internally
generated funds.
In December 2003 the Company arranged a master finance lease facility to fund
its new aseptic processing system, resulting in a long-term obligation totaling
approximately $2,953,000. This financing arrangement provides for payments
over seven years with interest at 30-day LIBOR plus 175 basis points (5.26% at
July 31, 2005), with the option to convert to a fixed rate by using an interest
rate swap at the Companys discretion.
In November 2004, the Company entered into an interest rate swap agreement to
take advantage of the current low interest rate environment. This swap
agreement is designated as a fair-value hedge of the Companys floating rate
debt, effectively converting this debt to a fixed rate of 5.88%. It is the
Companys policy to enter into interest rate swap agreements when management
deems them useful in reducing risks. The Company is accounting for this
interest rate swap as a cash flow hedge, which it has determined to be highly
effective. The fair value of the interest rate swap is recorded on the balance
sheet and changes in fair value of this instrument are shown, net of tax, in
accumulated other comprehensive income.
The Company has an unutilized bank line of credit of $2 million, which matures
in July 2007, and provides for an interest rate at prime, with the option to
lock in sub-prime rates on blocks of funds up to 90 days. The bank has also
offered an additional $500,000 term loan line for equipment purchases, which
has not been utilized.
Cash provided by operations of approximately $114,000 in the first nine months
of 2005 was less than the approximately $690,000 of cash provided by operations
in the same period in 2004. This was primarily due to an increase in accounts
receivable, which resulted from higher sales in July 2005 compared to 2004,
along with the lower level of earnings.
Expenditures for plant and equipment of approximately $333,000 in the first
nine months of 2005 were less than the $826,000 spent in the same period last
year. A majority of the plant and equipment expenditures in 2004 related to
the finalization of the aseptic packaging system, which was placed in service
in October 2003.
At July 31, 2005, working capital was approximately $4,568,000, including
$2,524,000 of cash and cash equivalents. This continues to be a strong working
capital position with a current ratio of 3.17 to 1. The decrease in working
capital from $5,267,000 at October 31, 2004 to the July 2005 level is primarily
due to the stock repurchases described in Note H.
The Company follows the practice of repurchasing its common stock from time to
time, pursuant to board-approved plans. The Company also purchases stock for
its required contributions to the Companys 401(k) Employee Savings Plan and
Trust.
On November 8, 2004, the Companys Board of Directors authorized the repurchase
of up to $1,250,000 of the Companys common stock. Under terms of the
repurchase plan, the Company may purchase its shares in the open market or in
privately negotiated transactions. For the nine months ended July 31, 2005,
total shares repurchased were 176,200 at an average price of $4.33 for a total
cost of $762,942. See Note H in the notes to financial statements for further
details. There were no repurchases in the nine months ended July 31, 2004.
The Company believes its existing assets, bank lines, and results from
operations will be sufficient to fund the Companys operations for at least the
next twelve months.
New Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-
Based Compensation, (SFAS 123), and supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees. SFAS 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair values. The effective date for the
Company is fiscal 2007, beginning November 1, 2006. On March 29, 2005, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
(SAB 107), which provides the Staffs views regarding interactions between SFAS
123R and certain SEC rules and regulations, and provides interpretations of the
valuation of share-based payments for public companies. SAB 107 covers key
topics related to the implementation of SFAS 123R which include the valuation
models, expected volatility, expected option term, income tax effects of SFAS
123R, classification of stock-based compensation cost, capitalization of
compensation costs, and disclosure requirements.
In June 2005, the FASB issued Statement No. 154, Accounting Changes and Error
Corrections (SFAS 154), a replacement of APB Opinion No. 20, Accounting
Changes, and Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements. SFAS 154 changes the requirements for the accounting for
and the reporting of a change in accounting principle. Previously, most
voluntary changes in accounting principles required recognition by recording a
cumulative effect adjustment within net income in the period of change. SFAS
154 requires retrospective application to prior periods financial statements,
unless it is impracticable to determine either the specific period effects or
the cumulative effect of the change. SFAS 154 is effective for accounting
changes made in fiscal years beginning after December 15, 2005. The Company
does not believe SFAS 154 will have a material effect on its financial
position, results of operations or cash flow.
Critical Accounting Policies and Estimates
The critical accounting policies and the use of estimates as reported in the
Companys Form 10-KSB for the year ended October 31, 2004 are reaffirmed.
Item 3. Controls and Procedures
(a) Disclosure Controls and Procedures
Under the supervision and with the participation of its Chief Executive Officer
and Chief Financial Officer, management has evaluated the effectiveness of the
Companys disclosure controls and procedures as of the end of the period covered
by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of
1934 (the Exchange Act). Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer have concluded that, as of the end of the period
covered by this report, the Companys disclosure controls and procedures are
effective in ensuring that information required to be disclosed in the Companys
Exchange Act reports is (1) recorded, processed, summarized and reported in a
timely manner, and (2) accumulated and communicated to the Companys management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.
(b) Internal Control Over Financial Reporting
There has been no change in the Companys internal control over financial
reporting that occurred during the last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any material pending legal proceedings.
Item 2. Changes in Securities and Small Business Issuer
Repurchases of Equity Securities
<table>
<caption>
(c) Total
Number of (d) Dollar
Shares Value of
Purchased as Shares that
Part of May be
(a) Total Publicly Purchased
Number of (b) Announced Under the
Shares Average Price Plans or Plans of
Period Purchased Paid Per Share Programs Programs
------ --------- -------------- -------- --------
<s> <c> <c> <c> <c>
5/1/05 -
5/31/05 - - - 509,176
6/1/05 -
6/30/05 1,600 5.311 1,600 500,679
7/1/05 -
7/31/05 2,500 5.448 2,500 487,058
------- ------ ------- -------
Total 4,100 $5.395 4,100
======= ====== =======
</table>
On November 8, 2004, the Companys Board of Directors authorized the repurchase
of up to $1,250,000 of the Companys common stock. Under terms of the
repurchase plan, the Company may purchase its shares in the open market or in
privately negotiated transactions. For the nine months ended July 31, 2005,
total shares repurchased were 176,200 at an average price of $4.33 for a total
cost of $762,942.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Security Holders
None.
Item 5. Other Information
All items required to be reported on Form 8-K were timely filed.
Item 6. Exhibits
3.1 Restated Articles of Incorporation of the Company,
incorporated by reference from the Companys
Registration Statement on Form S-1 dated
November 17, 1987
3.1.1 Articles of Amendment, dated October 29, 1991, incorporated
by reference from the Companys Form 10-K for the fiscal year
ended October 31, 1991
3.1.2 Articles of Amendment, dated March 24, 1999, incorporated by
reference from the Companys Quarterly Report on Form 10-Q
for the quarter ended April 30, 1999
3.1.3 Articles of Amendment, dated April 16, 2003, incorporated by
reference from the Companys Annual Report on Form 10-K for
the fiscal year ended October 31, 2003
3.2 Restated and Amended Bylaws of the Company, incorporated by
reference from the Companys Annual Report on Form 10-K for
the fiscal year ended October 31, 2003
31.1 Certification of John N. Hanna pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of W. Douglas Caudell pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of John N. Hanna pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
32.2 Certification of W. Douglas Caudell pursuant to 18 U.S.C.
Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by
theundersigned thereunto duly authorized.
Registrant:
YOCREAM INTERNATIONAL, INC.
Date: September 14, 2005 By: /s/ John N. Hanna
-------------------------
John N. Hanna, Chairman of the
Board, and Chief Executive
Officer
Date: September 14, 2005 By: /s/ W. Douglas Caudell
----------------------------
W. Douglas Caudell
Chief Financial Officer