Document/Exhibit Description Pages Size
1: 10-Q Form 10-Q for Quarterly Period Ended May 31, 1997 27 128K
2: EX-10.13 Loan and Security Agreement Dated May 22, 1997 22± 87K
3: EX-10.14 Loan Agreement With San Hill Capital LLC 4 20K
4: EX-11.1 Statement of Computation of Per Share Earnings 1 5K
5: EX-27 Financial Data Schedule 1 8K
10-Q — Form 10-Q for Quarterly Period Ended May 31, 1997
Document Table of Contents
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 0-23036
ODWALLA, INC.
(Exact name of registrant as specified in its charter)
[Download Table]
California 77-0096788
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
120 Stone Pine Road, Half Moon Bay, CA
94019 (Address and zip code of principal executive offices)
(415) 726-1888
(Registrant's telephone number)
------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check 4whether 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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
[Download Table]
Common Stock, no par value 5,022,859 shares
(Class) (Outstanding at July 11, 1997)
1
ODWALLA, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1997
INDEX
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Page
----
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets as of August 31, 1996
and May 31, 1997 ........................................................ 3
Consolidated Statements of Operations for the three-month and nine-
month periods ended May 31, 1996 and 1997 ............................... 4
Consolidated Statements of Cash Flows for the nine-month periods
ended May 31, 1996 and 1997.............................................. 5
Notes to Consolidated Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 10
Part II. Other Information
Item 1. Legal Proceedings........................................................ 23
Item 6. Exhibits and Reports on Form 8-K......................................... 24
2
PART I - FINANCIAL INFORMATION
ITEM-1. FINANCIAL STATEMENTS
[Enlarge/Download Table]
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
===============================================================================================
August 31, MAY 31,
1996 1997
-----------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
CURRENT
Cash and cash equivalents $ 5,975 $ 3,285
Short term investments 6,438 1,407
Trade accounts receivable, less allowance for
doubtful accounts of $306 and $569 5,302 4,893
Inventories (Note 2) 3,294 3,646
Prepaid expenses and other 964 1,071
Deferred tax asset, net (Note 5) 307 1,890
------- -------
TOTAL CURRENT ASSETS 22,280 16,192
PLANT, PROPERTY AND EQUIPMENT, net (Note 3) 12,641 13,931
OTHER ASSETS
Officer and shareholder loans 117 117
Excess of cost over net assets acquired 1,442 1,360
Covenants not to compete 874 772
Other noncurrent 346 288
------- -------
TOTAL ASSETS $37,700 $32,660
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,308 $ 6,006
Accrued payroll and related items 1,096 1,682
Line of credit (Note 6) -- 1,986
Income taxes payable 281 78
Other accruals 581 1,778
Current maturities of capital lease obligations 210 212
Current maturities of long-term debt 149 105
------- -------
TOTAL CURRENT LIABILITIES 7,625 11,847
CAPITAL LEASE OBLIGATIONS, less current maturities 384 222
LONG-TERM DEBT, less current maturities 90 222
OTHER 27 17
------- -------
TOTAL LIABILITIES 8,126 12,308
------- -------
SHAREHOLDERS' EQUITY
Common stock, no par value, shares authorized, 15,000,000; issued
and outstanding, 4,945,095 and 5,021,061 shares, respectively 28,813 29,296
Retained earnings (deficit) 761 (8,944)
------- -------
Total shareholders' equity 29,574 20,352
------- -------
Total liabilities and shareholders' equity $37,700 $32,660
======= =======
3
[ODWALLA LOGO]
4
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CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================================
Three Months Ended Nine Months Ended
--------------------- ---------------------
May 31, May 31, May 31, May 31,
1996 1997 1996 1997
-------- -------- -------- --------
------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
NET SALES $ 16,532 $ 13,685 $ 42,505 $ 39,043
COST OF SALES 8,017 7,119 22,048 22,550
-------- -------- -------- --------
GROSS MARGIN 8,515 6,566 20,457 18,493
-------- -------- -------- --------
OPERATING EXPENSES
Sales and distribution 5,436 5,403 14,569 16,972
Marketing 659 782 1,590 2,203
General and administrative 1,636 2,497 4,062 6,926
Direct recall costs (Note 4) -- -- -- 3,840
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 7,731 8,682 20,221 29,941
INCOME (LOSS) FROM OPERATIONS 784 (2,116) 236 (11,448)
OTHER INCOME (EXPENSE), net (23) 10 (55) 1
INTEREST INCOME, net of interest expense 81 13 356 158
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 842 (2,093) 537 (11,289)
INCOME TAX BENEFIT (EXPENSE) (320) 273 (204) 1,584
-------- -------- -------- --------
NET INCOME (LOSS) $ 522 $ (1,820) $ 333 $ (9,705)
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE AND
COMMON EQUIVALENT SHARE $ 0.10 $ (0.36) $ 0.06 $ (1.95)
-------- -------- -------- --------
WEIGHTED AVERAGE COMMON EQUIVALENT AND
COMMON EQUIVALENT SHARES OUTSTANDING 5,442 4,993 5,408 4,976
======== ======== ======== ========
5
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
=============================================================================================
Nine months ended
-------------------------
May 31, MAY 31,
1996 1997
---------------------------------------------------------------------------------------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 333 $ (9,705)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation & amortization 1,040 1,641
Deferred income taxes (74) (1,583)
Loss on sale of assets -- 13
Changes in assets and liabilities:
Trade accounts receivable (2,064) 409
Inventories (589) (352)
Prepaid expenses and other current assets 201 (107)
Other noncurrent assets (134) 36
Accounts payable 651 698
Accrued payroll and related items 813 586
Other accruals and other liabilities (4) 1,188
Income taxes payable (133) (203)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 40 (7,379)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (4,295) (2,536)
Sale of short-term investments, net -- 5,031
Proceeds from sale of assets -- 28
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (4,295) 2,523
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit -- 1,986
Principal payments under long-term debt (239) (142)
Proceeds from issuance of long-term debt 225 --
Payments of obligations under capital leases (94) (161)
Sale of common stock through option exercises 283 484
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 175 2,168
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,080) (2,689)
CASH AND CASH EQUIVALENTS, beginning of period 11,786 5,975
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 7,706 $ 3,285
======== ========
6
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated balance sheet of Odwalla, Inc. and its
subsidiary (the "Company") at May 31, 1997 and the related consolidated
statements of operations and cash flows for each of the three-month and
nine-month periods ended May 31, 1996 and 1997 have not been audited by
independent accountants. However, in the opinion of management, they include all
adjustments necessary for a fair presentation of the financial position and the
results of operations for the periods presented. The statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, certain information and footnote
disclosure normally included in financial statements prepared in conformity with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. The operating results for the interim periods are
not necessarily indicative of results to be expected for an entire year. The
aforementioned statements should be read in conjunction with the consolidated
financial statements for the year ended August 31, 1996 appearing in the
Company's 1996 Annual Report on Form 10-K.
2. INVENTORIES
Inventories consist of the following (in thousands):
[Download Table]
AUGUST 31, MAY 31,
1996 1997
------ ------
Raw materials $2,467 $2,722
Packaging supplies and other 477 452
Finished product 350 472
------ ------
Total $3,294 $3,646
====== ======
3. PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment consist of the following (in thousands):
[Download Table]
August 31, MAY 31,
1996 1997
-------- --------
Land $ 411 $ 1,001
Buildings and building
improvements 6,339 6,614
Leasehold improvements 2,287 2,435
Machinery and equipment 5,242 6,214
Vehicles 619 542
Other 2,693 3,156
-------- --------
17,591 19,962
Less accumulated depreciation and
amortization (4,950) (6,031)
-------- --------
$ 12,641 $ 13,931
======== ========
7
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PRODUCT RECALL AND OTHER LEGAL MATTERS
On October 30, 1996, the Company was notified by the State of Washington
Environmental Health Services of an epidemiological link between several cases
of e. coli 0157:h7 bacteria illness and Odwalla's apple juice products. The
Company immediately implemented a voluntary recall (the "Recall") of all Odwalla
products containing apple juice and, on October 31, 1996, expanded the Recall to
include its carrot and vegetable products because such products were processed
on the same production line as the apple juice.
The Company experienced a significant reduction in sales of all of its
products following the Recall. Beginning in early December 1996, the Company
reintroduced all apple juice-based products to the market using flash
pasteurization of its fresh apple juice. In addition, the Company incurred
significant direct Recall costs including: advertising and public relations
costs; legal and professional fees; cost of the product recalled (including the
labor and freight involved in the recall process); destruction of unsold product
and now obsolete packaging supplies; costs of leased sales and distribution
equipment in excess of current volume requirements; costs of reformulating
products; and costs associated with the flash pasteurization process. Direct
Recall costs totaled $3,840,000 in the first quarter of fiscal 1997 and included
approximately $700,000 of estimated direct costs for the remainder of the year.
Approximately $235,000 and $225,000 of these estimated direct costs were
incurred in the second and third quarter, respectively. However, there can be no
assurance that the actual direct costs for the remainder of the year may not
exceed the estimated amount.
In keeping with long-term strategic objectives, the Company plans to
continue to invest in building an infrastructure capable of sustaining growth
and expansion. As a result of the plans for continued growth and infrastructure
development, the Company has not reduced costs commensurate with the reduction
of sales following the Recall. The Company expects the costs associated with the
Recall and disruption in sales will result in continuing operating losses and
will result in a significant loss for fiscal year 1997.
The Company maintains insurance coverage for product recall, product
adulteration, lost income and other first party business risks and intends to
present claims to its insurance carrier under the appropriate policy. In
February 1997, one claim for certain product recall costs was presented to its
insurance carrier. In April 1997, an additional partial claim was presented for
other losses incurred due to the Recall. However, the amount and timing of
proceeds, if any, from the February or April 1997 claims and any future
insurance claims cannot be presently determined. Accordingly, at May 31, 1997,
the Company has not recorded a significant receivable for insurance proceeds
related to these matters.
8
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PRODUCT RECALL AND OTHER LEGAL MATTERS (CONTINUED)
To date, there are four pending personal injury claims and legal
proceedings seeking monetary damages and other relief related to the Recall
filed against the Company. One of the remaining claims is a class action lawsuit
and three are personal injury lawsuits; however, the Company recently learned
that the pending class action lawsuit would not be certified as a class. Four
other personal injury claims and lawsuits have been settled as of July 11, 1997.
In addition, there was one legal proceeding alleging fraudulent business acts
and practices relating to the recalled products filed against the Company; this
suit was settled in January 1997 and received court approval in March 1997. The
settlement of the four personal injury legal proceedings was covered under the
Company's general liability insurance policy and did not result in any
additional costs to the Company. The Company is currently working with its
insurance carrier and legal counsel to assess the total potential liability to
the Company. However, due to the relatively short period of time since the
Recall, the Company is not presently able to determine whether the ultimate
liability resulting from these and potential future claims will exceed the
coverage available under its applicable insurance policies.
The Company continues to develop and implement plans to regain and build
on its customer base and anticipates that sales levels will improve throughout
the remainder of fiscal year 1997. There can be no assurance sales levels will
continue to improve and, in any event, the anticipated improvement in sales
levels is not expected to offset the effects of the lost sales and direct costs
associated with the Recall. While a significant loss is expected for fiscal year
1997, the Company believes it will have sufficient cash, including its ability
to borrow funds as needed, to fund its operations and capital expenditures
through the end of May 1998. However, this belief is based, in part, on future
sales estimates which are inherently uncertain given the disruption to the
Company's business caused by the Recall.
The Company has been informed that it is the subject of a federal grand
jury investigation concerning events of 1996 and before, including the Recall.
The Company has responded to a subpoena and is cooperating fully with the
government. At this time, the Company cannot predict the outcome of the
investigation.
5. INCOME TAXES
The Company's effective tax benefit rate differs from the federal
statutory rate for the nine months ended May 31, 1997, as follows:
[Download Table]
Federal statutory tax rate 34%
State income tax benefit due to net operating loss carryforward 3
Permanent differences and other (2)
Valuation allowance (21)
---
Effective tax rate 14%
===
The deferred tax asset valuation allowance was established to reduce the
recorded net deferred tax asset to an amount estimated as more likely than not
to be realized. The deferred tax asset recorded consists principally of the tax
effect of the expected tax losses for fiscal 1997 that will be carried back to
prior years' taxable income as well as the future tax benefits resulting from
tax loss carryforwards. The Company will assess the required valuation allowance
as additional information regarding the impact of the Recall is available.
9
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LINE OF CREDIT
In May 1997, the Company entered into a Loan and Security Agreement
(Agreement) with a lender which provides for borrowings of up to $5 million. The
actual borrowings cannot in the aggregate exceed 80% to 85% of eligible accounts
receivable (Receivable Line) plus a maximum of $500,000 available for new
capital equipment (Equipment Line). Interest on borrowings under the Agreement
is payable monthly at prime plus 1.5%, which rate was equal to 10% at May 31,
1997. Borrowings under the Equipment Line are subject to interest only for the
initial three months and then monthly interest and principal payments amortized
over a 45 month period. The entire loan matures on May 31, 1999, subject to
renewal as provided in the Agreement. The Company incurred approximately $35,000
of fees in connection with the Agreement and will incur a termination fee
(ranging from 3% to 1% of the committed balance, depending upon the remaining
loan term) if the Agreement is terminated prior to maturity.
The Agreement contains certain restrictions on the Company, including the
ability to borrow additional funds, pay dividends, purchase or otherwise acquire
Company stock, or encumber or sell Company assets. In addition, the interest
rate changes to prime plus 2% if adjusted net worth, as defined in the
Agreement, is less than $14 million. The Company is required to pay interest on
$2 million and, accordingly, borrowed approximately that amount under the
Receivable Line at May 31, 1997.
Simultaneously, the Company entered into a separate Loan Agreement (Loan
Agreement) with another party to provide a $1 million facility under
substantially the same terms noted for the Agreement. Borrowings under the Loan
Agreement mature on May 21, 1998. The Company agreed to issue a warrant for
7,000 shares of its common stock at $12.50 per share (fair market value at issue
date) which expires in May 2002. There were no borrowings under the Loan
Agreement at May 31, 1997.
The Agreement and the Loan Agreement are collateralized by all Company
assets.
7. EARNINGS PER SHARE
Primary income (loss) per common share and common equivalent shares has
been computed using the weighted average number of shares of common stock
outstanding during the period and incremental shares assumed issued for dilutive
common stock equivalents. Fully diluted earnings per share did not differ
materially from primary earnings per share.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" (FASB 128). This Statement supersedes
Accounting Principles Board Opinion No. 15, "Earnings per Share" (APB 15) and
its related interpretations and establishes new accounting standards for the
computation and manner of presentation of the Company's earnings per share. The
Company is required to adopt the provisions of FASB 128 for the quarter ending
February 28, 1998 and earlier application is not permitted. However, upon
adoption the Company may be required to restate previously reported annual and
interim income or loss per share in accordance with the provisions of FASB 128.
The Company does not believe the adoption of FASB 128 will have a material
impact on the computation or manner of presentation of its earnings per share
data as currently or previously presented under APB 15.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements relating to future
events or the future financial performance of the Company, which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
important factors, including without limitation those set forth in this section,
in the Company's Annual Report on Form 10-K for the year ended August 31, 1996,
and in other documents the Company files from time to time with the Securities
and Exchange Commission. The following discussion and analysis should be read in
conjunction with the accompanying consolidated financial statements and notes
thereto and the consolidated financial statements and related notes contained in
the Company's Annual Report on Form 10-K.
OVERVIEW
The Company's net sales are generated by sales to supermarkets, specialty
retail stores, natural food stores, warehouse outlets and institutional food
service trade partners, primarily restaurants. Net sales are net of product
returns and allowances. The Company sells products to most of its trade partners
on a guaranteed basis and takes back expiring or expired product for credit. The
Company's growth has come predominantly from continued penetration in existing
markets, sales of new products and expansion into new markets. Prior to the
Recall discussed below, the Company believes that its sales had been positively
affected by the Company's introduction of new products, higher recognition of
the Company's brand and products, better placement on store shelves, increased
placement of the Company's in-store coolers and increased support for route
sales persons.
A significant portion of the Company's cost of sales is the cost of raw
materials. Although a portion of the cost of certain purees and other raw
materials is fixed on an annual basis, the majority of the Company's fresh fruit
and vegetable purchases are made on the open market. Consequently, the Company
is subject to wide fluctuations in prices for the fruits, vegetables and other
nutritious products it purchases.
The Company distributes its products primarily through its
direct-store-delivery system, which is serviced by route sales people who
deliver products directly to and merchandise products directly in the retail
display shelves of the Company's trade partners, using primarily leased delivery
trucks. This distribution system, although more expensive than using independent
distributors, allows the Company to control the quality of service and product
mix, in-store stocking of the Company's coolers or shelf space and freshness of
products.
The Company has experienced significant quarterly fluctuations in
operating results and anticipates that these fluctuations will continue in
future periods. These fluctuations have been the result of changes in the price
of fruit and vegetables due to seasonality and other factors, new product
introductions, start-up costs associated with new facilities, expansion into new
markets, sales promotions and competition. Excluding the impact of the Recall
discussed in the following paragraphs, future operating results may fluctuate as
a result of these and other factors, including increased energy costs, the
introduction of new products by the Company's competitors, changes in the
Company's customer mix, and overall trends in the economy. The Company's
business is also significantly affected by weather patterns, and unseasonably
cool or rainy weather can adversely impact the Company's sales.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
A significant portion of the Company's expense levels is relatively fixed,
and the timing of increases in expense levels is based in large part on the
Company's forecasts of future sales. If sales are below expectations in any
given period, the adverse impact on results of operations may be magnified by
the Company's inability to adjust spending quickly enough to compensate for the
sales shortfall. The Company also may choose to reduce prices or increase
spending in response to competition, which may have an adverse effect on the
Company's results of operations.
On October 30, 1996, the Company was notified by the State of Washington
Environmental Health Services of an epidemiological link between several cases
of e. coli 0157:h7 and Odwalla's apple juice products. The Company immediately
implemented a voluntary recall of all Odwalla products containing apple juice.
On October 31, 1996, Odwalla expanded the Recall to include its carrot and
vegetable products because such products were processed on the same production
line as the apple juice.
To date, there have been eight personal injury claims and legal
proceedings seeking monetary damages and other relief relating to the Recall
filed against the Company. Four of these proceedings have been settled. In
addition, there was one legal proceeding alleging fraudulent business acts and
practices relating to the recalled products filed against the Company; this
proceeding was also settled. Following the Recall, the Company formed the
Odwalla Nourishment & Food Safety Advisory Council to advise management in
developing new industry leadership and practices in the sourcing, production and
distribution of Nourishing Beverage products. Beginning in early December 1996,
Odwalla began flash pasteurization of fresh apple juice as part of the Company's
Hazard Analysis Critical Control Point Plan and reintroduced all apple
juice-based products to the market. The flash pasteurization process rapidly
heats the juice for a short period of time to a temperature high enough to kill
harmful bacteria yet still retain vitamins, minerals and flavors that diminish
in pasteurization processes at higher temperatures and for longer periods of
time. The Company incurred significant costs related to the Recall, including
advertising and public relations costs, legal and professional fees, cost of the
product recalled (including the labor and freight involved in the recall
process), destruction of unsold product and now obsolete packaging supplies,
costs of leased sales and distribution equipment in excess of current volume
requirements, costs of reformulating products and costs associated with the
flash pasteurization process.
In keeping with long-term strategic objectives, the Company plans to
continue to invest in building an infrastructure capable of sustaining growth
and expansion. In October 1996, the Company entered Texas with the introduction
of beverage products in Austin, Dallas and Houston. As a result of the plans for
continued growth and infrastructure development, the Company has not reduced
costs commensurate with the reduction of sales following the Recall. The Company
expects the costs associated with the Recall and disruption in sales will result
in continuing operating losses and will result in a significant loss for fiscal
year 1997.
The Company maintains insurance coverage for product recall, product
adulteration, lost income and other first party business risks and intends to
present claims to its insurance carriers under the appropriate policies. In
February 1997, one claim for product recall costs was presented to its insurance
carriers. In April 1997, an additional claim was presented for business losses
incurred due to the Recall. However, the amount and timing of proceeds, if any,
from the February or April 1997 claims and any future insurance claims cannot be
presently determined.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
When reviewing the results of operations for the three and nine month
periods ended May 31, 1997, it is important to remember that the months of
September and October, 1996, which represent the first two months of the
periods, continued the net sales growth trend that the Company had reported in
fiscal 1996 and positively impacted the results of operations of each of those
periods. The last seven months of the nine month period reflect the significant
reduction in sales as a result of the Recall.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain
consolidated statements of operations data for the three-month and nine-month
periods ended May 31, 1997. These operating results are not necessarily
indicative of the results for any future period.
[Download Table]
Three Months Ended Nine Months Ended
May 31, May 31, May 31, May 31,
1996 1997 1996 1997
----------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 48.5 52.0 51.9 52.6
----- ----- ----- -----
Gross margin 51.5 48.0 48.1 47.4
----- ----- ----- -----
Operating expenses
Sales and distribution 32.9 39.5 34.3 43.5
Marketing 4.0 5.7 3.7 5.6
General and administrative 9.9 18.3 9.5 17.7
Direct recall costs -- -- -- 9.8
----- ----- ----- -----
Income (loss) from operations 4.7 (15.5) 0.6 (29.3)
Interest and income, net of expense 0.4 0.2 0.7 0.4
Income tax benefit (expense) (1.9) 2.0 (0.5) 4.1
----- ----- ----- -----
Net income (loss) 3.2 % (13.3)% 0.8% (24.9)%
===== ===== ===== =====
THREE MONTHS ENDED MAY 31, 1997 COMPARED TO THE THREE MONTHS ENDED MAY 31, 1996
NET SALES. Net sales for the third quarter were $13.7 million which
represents a 17% decrease from the $16.5 million reported for the third quarter
of fiscal 1996. Although sales increased 22% from the second quarter of fiscal
1997, third quarter sales were less than the corresponding quarter of fiscal
1996 as a result of the Recall. By the end of the third quarter, sales were in
excess of 80% of pre-Recall levels. The Company expects sales in the fourth
quarter of fiscal 1997 to be significantly lower than sales in the fourth
quarter of fiscal 1996.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
COST OF SALES. Cost of sales decreased to $7.1 million in the third
quarter of fiscal 1997 compared to $8.0 million for the same period during
fiscal 1996. Gross margin as a percentage of net sales was 48.0% in the third
quarter of fiscal 1997, a decrease from 51.5% during the third quarter of fiscal
1996. Gross margin decreased primarily due to (a) increases in labor and
operating expenses as a percentage of net sales resulting from the volume
decrease in the current quarter and higher fixed charges due to plant
improvements since the third quarter of fiscal 1996, (b) an increase in product
returns, and (c) slightly higher fruit prices, offset to some extent by better
fruit yield due to improvements installed during late fiscal 1996 at the
production facility in Dinuba, California. The Company anticipates that the
gross margin will increase as a percentage of net sales as volume is restored to
pre-Recall levels; however, there can be no assurance that gross margin as a
percentage of net sales will increase as sales volume increases or that such
increase will approach levels recorded in the third and fourth quarter of fiscal
1996.
SALES AND DISTRIBUTION. Sales and distribution expenses were $5.4 million
in both the third quarter of fiscal 1997 and fiscal 1996, but increased as a
percentage of net sales to 39.5% from 32.9% last year. The increase in sales and
distribution expenses as a percentage of net sales is attributable primarily to
the Recall as the sales and distribution structure in place to support the
expanding sales volume pre-Recall contained certain fixed elements that remain
despite the post-Recall reduced sales volume. In connection with a reduction in
work force in late November 1996, the Company initiated a sales route
restructuring plan (which began its initial test in one market during the third
quarter) and a revised route sales person compensation plan. During the third
quarter, the Company consolidated certain distribution operations and geographic
responsibilities. There can be no assurance that these and other cost control
measures will return sales and distribution costs as a percentage of net sales
to pre-Recall levels. In addition, future decisions regarding growth and
expansion consistent with long-term strategic objectives may increase sales and
distribution costs as a percentage of net sales as compared to their pre-Recall
levels.
MARKETING. Marketing expenses increased to $782,000 in the third quarter
of fiscal 1997 compared to $659,000 in the third quarter of fiscal 1996, and
increased as a percentage of net sales. Marketing costs will continue to
increase in fiscal 1997, in absolute dollars, as a result of the Recall and
planned expanded efforts to continue to enhance stakeholder awareness as well as
increased costs related to new product development, consumer research and
communications. The Company does not expect marketing costs to increase as a
percentage of net sales from the percentage achieved in the third quarter of
fiscal 1997 although there can be no assurance that an increase will not occur.
The increase in marketing costs as a result of the Recall cannot be quantified
at this time and will depend upon the results of on-going consumer research, the
response of consumers to the reintroduced product line, and other factors
affecting the restoration of consumer confidence.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $2.5 million in the third quarter of fiscal 1997 from $1.6 million in the
third quarter of fiscal 1996, and increased as a percentage of net sales,
primarily due to legal fees, additions to the Company's management and
administrative staff and increases in facilities costs. The Company does not
expect general and administrative costs during the remainder of fiscal 1997 to
increase in absolute dollars from the third quarter of fiscal 1997 or to
increase as a percentage of net sales. The Company will continue to invest in
infrastructure, particularly in information systems and research and
development, to provide for sustainable growth and will continue to incur legal
fees in excess of fiscal 1996 levels, however, there can be no assurance that
general and administrative costs will not increase in absolute dollars or as a
percentage of net sales.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
INTEREST. Odwalla had net interest income of $13,000 in the third quarter
of fiscal 1997 compared to $81,000 in the third quarter of fiscal 1996. Gross
interest income of $39,000 in the third quarter of fiscal 1997 resulted
primarily from the Company's investment of the remaining proceeds of its public
offering in May 1995. Gross interest expense of $26,000 in the third quarter of
fiscal 1997 resulted from interest on capital leases and other long-term debt
and, to a lesser extent, to the line of credit borrowing at the end of the
quarter. Gross interest income of $107,000 in the third quarter of fiscal 1996
was offset by interest expense of $26,000. Interest income is expected to
decrease in future periods as the Company utilizes a portion of its cash
equivalents and short-term investments. In addition, interest expense is
expected to increase due to new borrowing arrangements entered into at the end
of the third quarter. See "Liquidity and Capital Resources."
INCOME TAXES. The $273,000 income tax benefit for the third quarter of
fiscal 1997 resulted from the tax benefit associated with the loss for the
quarter. The 13% effective tax benefit rate varies from the federal statutory
tax rate primarily due to the effect of establishing a deferred tax asset
valuation allowance. The Company will assess the valuation allowance as
additional information regarding the impact of the Recall on the Company's
future profitability is available during fiscal 1997. The $320,000 income tax
expense for the third quarter of fiscal 1996 was calculated by applying the
estimated corporate federal and state tax rates to the income for the quarter.
The 38% effective tax rate for the third quarter of fiscal 1996 varied from the
federal statutory tax rate primarily due to California and other state income
taxes.
NINE MONTHS ENDED MAY 31, 1997 COMPARED TO THE NINE MONTHS ENDED MAY 31, 1996
NET SALES. Net sales for the first nine months of fiscal 1997 decreased 8%
to $39.0 million compared to $42.5 million for the same period during fiscal
1996. Net sales growth was approximately 45% for each of September and October
1996 compared to the corresponding months in fiscal 1996. Sales in the last
seven months of the nine month period were significantly reduced from the prior
year period as a result of the Recall. The Company expects sales in the fourth
quarter of fiscal 1997 to be significantly lower than sales in the fourth
quarter in fiscal 1996.
COST OF SALES. Cost of sales decreased to $20.6 million in the first nine
months of fiscal 1997 compared to $22.0 million for the same period during
fiscal 1996. Gross margin as a percentage of net sales was 47.4% in the first
nine months of fiscal 1997, a decrease from 48.1% during the first nine months
last year. Gross margin decreased primarily due to (a) better fruit yield due to
improvements installed during late fiscal 1996 at the production facility in
Dinuba, offset somewhat by (b) increases in labor and operating expenses
resulting from the significant volume decrease during the nine month period, (c)
an increase in product returns compared to the comparable period in 1996, and
(d) slightly higher fruit prices. The Company anticipates that cost of sales
will increase as a percentage of net sales during the fourth quarter of fiscal
1997, compared to the comparable quarter in fiscal 1996.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
SALES AND DISTRIBUTION. Sales and distribution expenses increased to $17.0
million in the first nine months of fiscal 1997 compared to $14.6 million for
the same period during fiscal 1996, and increased as a percentage of net sales.
The increase in sales and distribution expenses as a percentage of net sales is
attributable primarily to the Recall as the sales and distribution structure in
place to support an expanding sales volume was not reduced to correspond with
the reduced sales volume subsequent to the Recall and, to a lesser extent,
increased sales and distribution expenditures to foster growth and strong
partnerships with the trade. In an effort to reduce sales and distribution
expenses post-Recall, in late November, the Company completed a reduction in
force of approximately 50 employees primarily involved in sales and
distribution. In connection with the reduction in force, the Company initiated a
sales route restructuring plan (which began its initial test in one market
during the third quarter) and, on March 1, 1997, a revised route sales person
compensation plan. In the second quarter, the Company decided to consolidate
certain distribution operations and geographic responsibilities, resulting in an
$180,000 charge to operations. The consolidation was substantially implemented
by early May 1997. There can be no assurance that these and other cost control
measures will return sales and distribution costs as a percentage of net sales
to pre-Recall levels. In addition, future decisions regarding growth and
expansion consistent with long-term strategic objectives may increase sales and
distribution costs as a percentage of net sales compared to pre-Recall levels.
MARKETING. Marketing expenses increased to $2.2 million in the first nine
months of fiscal 1997 compared to $1.6 million during the same time period last
year, and increased as a percentage of net sales. Marketing costs increased in
the first nine months of fiscal 1997 and will continue to increase in fiscal
1997, in both absolute dollars and as a percentage of net sales, as a result of
the Recall and efforts to continue to enhance stakeholder awareness as well as
increased professional services related to new product development, consumer
research and communications. The increase in marketing costs as a result of the
Recall cannot be quantified at this time and will depend upon the results of
on-going consumer research, the response of consumers to the reintroduced
product line, and other factors affecting the restoration of consumer
confidence.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $6.9 million in the first nine months of fiscal 1997 from $4.1 million last
year, and increased as a percentage of net sales, primarily due to additions to
the Company's management and administrative staff, and increases in legal
services and facilities costs. General and administrative costs will increase in
fiscal 1997 in both absolute dollars and as a percentage of net sales compared
to fiscal 1996. The Company will continue to invest in infrastructure,
particularly in information systems and research and development, to provide for
sustainable growth.
DIRECT RECALL COSTS. The direct costs of the Recall were $3.8 million in
the first nine months of fiscal 1997. This total, which was reported in the
first quarter, represents the costs directly associated with the Recall,
including: advertising and public relations costs; legal and professional fees;
costs of the product recalled, including the labor and freight involved in the
recall process; destruction of unsold product and now obsolete packaging
supplies; and costs of leased equipment in excess of current volume
requirements; costs of reformulating products; and costs associated with the
flash pasteurization process. Direct recall costs recorded in the first quarter
include approximately $700,000 of estimated direct costs for the remainder of
the year, primarily legal and professional fees. Approximately $460,000 of these
estimated direct costs were incurred in the second and third quarters. However,
there can be no assurance that the actual direct costs for the remainder of the
year will not exceed the estimated amount.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
INTEREST. Odwalla had net interest income of $158,000 in the first nine
months of fiscal 1997 compared to $356,000 in the first nine months of fiscal
1996. Gross interest income of $217,000 in the first nine months of fiscal 1997
resulted primarily from the Company's investment of the proceeds of its public
offering in May 1995. Gross interest expense of $59,000 in the first nine months
of fiscal 1997 resulted primarily from interest on capital leases and other
long-term debt. Gross interest income of $440,000 in the first nine months of
fiscal 1996 was offset by interest expense of $76,000. Interest income is
expected to decrease in future periods as the Company utilizes a portion of its
cash equivalents and short-term investments. In addition, interest expense is
expected to increase due to new borrowing arrangements entered into at the end
of the third quarter. See "Liquidity and Capital Resources."
INCOME TAXES. The $1.6 million income tax benefit for the first nine
months of fiscal 1997 resulted from the tax benefit associated with the loss
resulting from the Recall. The 14% effective tax benefit rate varies from the
federal statutory tax rate primarily due to the effect of establishing a
deferred tax asset valuation allowance. The Company will assess the valuation
allowance as additional information regarding the impact of the Recall on the
Company's future profitability is available during fiscal 1997. The $204,000
income tax expense for the third quarter of fiscal 1996 was calculated by
applying the estimated corporate federal and state tax rates to the income for
the quarter. The 38% effective tax rate for the third quarter of fiscal 1996
varied from the federal statutory tax rate primarily due to California and other
state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through three primary sources:
private and public sales of equity securities, bank debt and capital lease
financing. At May 31, 1997, the Company had working capital of $4.3 million
compared to working capital of $14.7 million at August 31, 1996. The decrease
resulted primarily from operating losses and $2.5 million of capital
expenditures. At May 31, 1997, the Company had cash, cash equivalents and short
term investments of $4.7 million compared to $12.4 million at August 31, 1996.
Net cash used in operating activities for the first nine months of fiscal
1997 was $7.4 million. This consisted of the net loss plus depreciation and
amortization, decreases in accounts receivable (due to significantly reduced
sales volume following the Recall) and increases in accounts payable and other
accrued expenses offset by increases in the deferred income taxes (due primarily
to tax benefits of the net operating loss) and in inventory due to favorably
priced cash purchases of frozen purees in fiscal 1997 based upon commitments
from fiscal 1996. Net cash provided by investing activities for the first nine
months of fiscal 1997 was $2.5 million, consisting primarily of sale of
short-term investments offset by capital expenditures for production equipment
at the Dinuba plant and, to a lesser extent, computer equipment and coolers. Net
cash provided by financing activities for the first nine months of fiscal 1997
was $2.2 million, consisting primarily of $2.0 million in borrowings under a
line of credit obtained in May 1997 and $484,000 for the sale of common stock
through the exercise of stock warrants and options offset by payments of
long-term debt and capital lease obligations.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
In October 1996, the Company completed two land purchases contracted in
fiscal 1996. The first was for a parcel of land adjacent to the Dinuba
production facility which resulted in payments of $10,000 when the contract was
signed in April 1996 and $205,000 upon closing in October. The second was to
complete an agreement reached in May 1996 to purchase land adjacent to its Half
Moon Bay administrative offices and, upon closing on the land purchase, to
extend its lease on the administrative offices (the "Half Moon Bay
Transaction"). The Company completed the Half Moon Bay Transaction in October
1996 at a cost of $395,000, of which $230,000 represents assumption of the
existing mortgage (interest at 8.75% per annum, monthly principal and interest
payments until maturity in 1999 when the remaining balance of approximately
$220,000 is due) on the property.
At May 31, 1997, the Company had $434,000 outstanding in capital lease
obligations, primarily related to leasing of production equipment, delivery
vehicles and in-store coolers. The Company has used, and expects to continue to
use, capital lease financing as necessary to obtain needed production assets,
primarily equipment. However, as a result of the Recall, the leasing company
used for computer and cooler financing has notified the Company that it has
placed a hold on future lease commitments. The Company is currently exploring
additional leasing or lease financing sources to obtain future commitments for
computer and cooler equipment. There can be no assurance that the Company will
be able to use or continue to use such lease financing and the failure to do so
may have an adverse effect on the Company's business or results of operations.
In May 1997, the Company entered into a Loan and Security Agreement
(Agreement) with a lender which provides for borrowings of up to $5 million. The
actual borrowings cannot in the aggregate exceed 80% to 85% of eligible accounts
receivable (Receivable Line) plus a maximum of $500,000 available for new
capital equipment (Equipment Line). Interest on borrowings under the Agreement
is payable monthly at prime plus 1.5% (10% at May 31, 1997). Borrowings under
the Equipment Line are subject to interest only for the initial three months and
then monthly interest and principal payments amortized over a 45 month period.
The entire loan matures on May 31, 1999, subject to renewal as provided in the
Agreement. The Company incurred approximately $35,000 of fees in connection with
the Agreement and will incur a termination fee (ranging from 1% to 3% of the
committed balance, depending upon the remaining loan term) if the Agreement is
terminated prior to maturity. The Agreement contains certain restrictions,
including the ability to borrow additional funds, pay dividends, purchase or
otherwise acquire Company stock, or encumber or sell Company assets. In
addition, the interest rate changes to prime plus 2% if adjusted net worth, as
defined in the Agreement, is approximately $14 million. The Company is required
to pay interest on $2 million and, accordingly, borrowed approximately that
amount under the Receivable Line at May 31, 1997. Simultaneously, the Company
entered into a separate Loan Agreement (Loan Agreement) with another party to
provide a $1 million facility under substantially the same terms noted for the
Agreement. Borrowings under the Loan Agreement mature on May 21, 1998. The
Company agreed to issue a warrant under the Loan Agreement for 7,000 shares of
common stock at $12.50 per share (fair market value at issue date) which expires
in May 2002. There were no borrowings under the Loan Agreement at May 31, 1997.
The Agreement and the Loan Agreement are collateralized by substantially all
Company assets.
Capital improvements necessary for flash pasteurization and other plant
modifications are currently expected to cost less than $2.5 million in fiscal
1997. The improvements will be largely financed through available cash resources
or debt or, if available, lease financing.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
The Company anticipates that the increased costs associated with the
Recall, including equipment and plant modifications required for flash
pasteurization and legal and marketing costs, may cause the Company to pursue
additional financing that may be dilutive to current investors or result in a
higher debt-to-equity ratio than would otherwise be the case. There can be no
assurance that such financing will be available on terms favorable to the
Company, if at all. If adequate financing is not available, the Company may be
required to reduce planned expenditures, particularly in the areas of
advertising and marketing, in order to conserve cash.
While the Company expects a significant loss for fiscal year 1997, the
Company believes it will have sufficient cash to fund its operations and capital
expenditures through May 1998. However, this belief is based in part on future
sales estimates and other plans which are inherently uncertain given the
disruption to the Company's business caused by the Recall.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS
POST-RECALL MANAGEMENT. Prior to the Recall, the Company experienced
substantial growth in its revenue, operations and employee base, and underwent
substantial changes in its business that placed significant demands on the
Company's management, working capital and financial and management control
systems. Although the Company will continue to face the demands of a growing
business and expansion in its newer markets, the Company must also address the
challenges and increasing costs and demands on management and working capital
resulting from the Recall, including restoring consumer confidence in its
products, adapting its production processes and procedures to accommodate flash
pasteurization and other new production methods, managing pending and future
legal proceedings and settlement of first and third party claims with its
insurance carriers. All of the foregoing demands and challenges will require the
expenditure of a significant amount of management effort and working capital.
The Company anticipates that the increased costs associated with the Recall,
including equipment and plant modifications required for flash pasteurization
and legal and marketing costs, may require the Company to pursue additional
financing that may be dilutive to current investors or result in a higher
debt-to-equity ratio than would otherwise be the case. There can be no assurance
that such financing will be available on terms favorable to the Company, if at
all.
Although the Company believes that its management, working capital,
existing debt arrangements, financial and management systems and controls will
be adequate to address its current needs, only a short period of time has
elapsed since the Recall and there can be no assurance that its management,
working capital and such systems will be adequate to address future requirements
of the Company's business. The Company's results of operations will be adversely
affected if revenues do not increase sufficiently to compensate for the increase
in operating expenses resulting from the Recall and planned expansion, and there
can be no assurance that it will not adversely affect the Company's ability to
continue to improve and expand its management and financial control systems, to
attract, retain and motivate key employees, and to raise additional capital.
There can be no assurance that the Company will be successful in these regards.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
The Company has experienced significant quarterly fluctuations in
operating results and anticipates that these fluctuations will continue in
future periods. These fluctuations have been the result of changes in the price
of fruit and vegetables due to seasonality and other factors, new product
introductions, start-up costs associated with new facilities, expansion into new
markets, sales promotions and competition. Excluding the impact of the Recall,
future operating results may fluctuate as a result of these and other factors,
including increased energy costs, the introduction of new products by the
Company's competitors, changes in the Company's customer mix, and overall trends
in the economy. The Company's business is also significantly affected by weather
patterns, and unseasonably cool or rainy weather can adversely impact the
Company's sales. A significant portion of the Company's expense levels is
relatively fixed, and the timing of increases in expense levels is based in
large part on the Company's forecasts of future sales. If sales are below
expectations in any given period, the adverse impact on results of operations
may be magnified by the Company's inability to adjust spending quickly enough to
compensate for the sales shortfall. The Company also may choose to reduce prices
or increase spending in response to competition, which may have an adverse
effect on the Company's results of operations.
PRODUCTS, DISTRIBUTION AND TRADE PARTNERS. Odwalla's product line consists
of single-strength and blended fruit- and vegetable-based products and
geothermal natural spring water. In May 1997, Odwalla expanded its product line
with Future Shake - a pasteurized, non-juice based, meal replacement drink
intended to secure a position in the growing category of meal replacement and
nutritionally fortified beverages. Except for flash pasteurization applied to
fresh apple juice, all single-strength products are raw fresh fruit- and
vegetable-based beverage products (some produced on a seasonal basis). Blended
products also contain raw fresh fruit- and vegetable-based beverage products,
and, in some products, flash pasteurized apple juice. These products are
currently sold in California, Washington, Oregon, Colorado, New Mexico, Nevada,
Texas and parts of British Columbia. Because all of Odwalla's products contain
raw fresh fruit or vegetable juices, except for Future Shake, flash-pasteurized
apple juice and geothermal spring water, and do not contain preservatives, the
shelf life of the product is typically limited to between 5 and 18 days at the
retail outlet.
Odwalla strives for consistent "day-of-juicing quality" in its products by
establishing stringent shelf life standards for its products, based primarily on
maintaining the flavor quality and nutrient integrity of its beverages. The
Company believes that its shelf life standards for each drink maintain the fresh
and better tasting qualities that consumers associate with freshly produced
fruit and vegetable beverages. The Company's policy is to have all products
removed from trade partners' shelves on or before their Odwalla-established
expiration date. In addition, because of the Company's "day of juicing" quality
standards, the Company's products reflect the seasonal changes in fruit
varieties and taste. Odwalla's production methods are designed to minimize the
effect of processing on the fruit juice extracted. The Company's product line
includes several different types of Nourishing Beverages and varies over time as
a result of the addition of new products as well as due to a significant
component of seasonal products.
Odwalla's products are sold and distributed primarily through its own
direct-store-delivery ("DSD") system, which is serviced by route sales people
who deliver products directly to and merchandise products directly in the retail
display shelves of the Company's trade partners. This DSD system is designed to
permit Odwalla to optimally manage delivery schedules, efficiently control its
product mix, keep store shelves or its own coolers stocked with fresh products
and have a greater influence on determining in-store location and merchandising
of its products.
20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
At most of its accounts, Odwalla maintains responsibility for stocking,
ordering and merchandising its products at the point of sales, and Odwalla
credits the trade partner for unsold product. This full service relationship
allows Odwalla to avoid paying slotting fees for shelf space as well as other
handling fees, and it also allows the Company to maintain control over the
merchandising of its products at the point of sales. Odwalla provides a lesser
degree of service to certain trade partners who are responsible for stocking,
ordering and merchandising the Company's products. These trade partners do not
receive credit for unsold products. Outlets that sell Odwalla juices include
supermarkets, specialty retail stores, natural food stores, warehouse outlets
and institutional food service trade partners, primarily restaurants.
RAW MATERIALS. Producing and selling raw fresh and flash-pasteurized
fruit- and vegetable-based beverage products ("Nourishing Beverages") entails
special requirements in fruit sourcing, beverage production, distribution and
sales in order to preserve and maximize their freshness and flavor quality.
Fruits and vegetables must be sourced and selected to meet a variety of
established criteria, including variety, quality, ripeness and other factors.
Transportation and processing of the fruit and vegetables must be performed in a
manner to capture and preserve various qualities of fresh flavors and
consistency. Odwalla has focused on each of these elements in an effort to
achieve its goal of providing the freshest, most flavorful and most enjoyable
Nourishing Beverages for consumers.
Odwalla buys fruits and vegetables according to different schedules and
methods depending on the type of produce. Because various types of fruit and
vegetable crops are harvested at different times of the year, the Company
obtains and produces different juices on a seasonal basis. The Company purchases
most of its fruits and vegetables in the open market on a negotiated basis.
Historically, oranges, apples and carrots are the commodities purchased in
largest volume by the Company. All three are subject to volatility in supply,
price and quality that could materially and adversely affect the Company's
business and results of operations, as could the availability, price and quality
of other ingredients.
Odwalla also obtains a number of fruits, such as tropical fruits, from
foreign suppliers in a frozen fruit puree. A puree is not a concentrate, but is
a whole fruit that has been pureed and frozen for shipment. Purees are heat
treated and combined with freshly extracted juices, including flash pasteurized
apple juice, of other fruits in a number of the Company's products. Purees used
by the Company have not been subjected to any processing methods that could
materially affect the fresh fruit quality. Most purees are purchased under
annual price contracts.
As with most agricultural products, supply and price of raw materials used
by the Company can be affected by a number of factors beyond the control of the
Company, such as frosts, droughts, floods and other natural disasters, other
weather conditions, economic factors affecting growing decisions, various plant
diseases and pests. The Company was not significantly affected by raw material
supply issues in either fiscal 1993 or fiscal 1994. The heavy rains and flooding
that occurred in California in the first and second quarters of fiscal 1995
resulted in higher costs of fruit and lower yields from the California orange
crop in the last quarter of fiscal 1995 and the first quarter of fiscal 1996.
The Company is not currently aware of natural events which should impact the
price of raw materials in the near term.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
COMPETITION. The Company's products compete broadly with all beverages
available to consumers. The beverage market is highly competitive. It includes
national, regional and local producers and distributors, many of whom have
greater resources than the Company, and many of whom have shelf stable products
that can be distributed with significantly less cost. The Company views its
niche as conveniently accessed nourishing beverages and fresh, preservative-free
juices and juice-based beverages. The Company believes its direct competition in
this market niche currently is from regionally or locally focused producers,
certain of which are owned by major beverage producers. In addition, a number of
major supermarkets and other retail outlets squeeze and market their own brand
of fresh juices that compete with the Company's products. A large national
company, Chiquita Brands International, Inc. ("Chiquita"), has entered this
market niche in certain limited geographic areas, both directly and by
acquisition. Although the Company has not experienced significant competition
from Chiquita to date, Odwalla entered the Los Angeles market in September 1995
and is competing directly with Chiquita's products in that market. Chiquita and
other major food and beverage companies may become more active in the Nourishing
Beverage business, either directly or by acquisition of smaller juice companies.
A decision by Chiquita or any other large company to focus on the Company's
existing markets or target markets could have a material adverse effect on the
Company's business and results of operations. While the Company believes that it
competes favorably with its competitors on factors such as quality,
merchandising, service, sales and distribution, multiple flavor categories and
brand name recognition and loyalty, the Company's products are typically sold at
prices higher than most other juice products. There can be no assurance that the
Company will not experience competitive pricing pressure that could adversely
affect its results of operations.
DEPENDENCE ON ONE OR A FEW MAJOR TRADE PARTNERS. In fiscal 1996, the
Company's largest account, Safeway, accounted for approximately 14% of the
Company's sales. The Company puts considerable effort into the maintenance of
this and other significant accounts, but there can be no assurance that sales to
these accounts will not decrease or that these trade partners will not choose to
replace the Company's products with those of competitors. The loss of Safeway or
other significant accounts or any significant decrease in the volume of products
purchased by their customers in the future would materially and adversely affect
the Company's business and results of operations. Continuity of trade partner
relationships is important, and events that impact the Company's trade partners,
such as the Recall and labor disputes, may have an adverse impact on the
Company's results of operations.
GOVERNMENT REGULATION. The production and sales of the Company's beverages
are subject to the rules and regulations of various federal, state and local
food and health agencies, including the FDA. There have been no significant
costs thus far associated with complying with FDA regulations.
In addition to laws relating to food products, the Company is subject to
various federal, state and local environmental laws and regulations that limit
the discharge, storage, handling and disposal of a variety of substances.
Operations of the Company are also governed by laws and regulations relating to
workplace safety and worker health, principally the Occupational Safety and
Health Administration Act, as well as similar state laws and regulations. The
Company believes that it presently complies in all material respects with the
foregoing laws and regulations, although there can be no assurance that future
compliance with such laws or regulations will not have a material adverse effect
on the Company's results of operations or financial condition.
22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
PRODUCT LIABILITY. Since the Company's products are not pasteurized
(except for Future Shake and flash pasteurization applied to apple juice),
nuclearly irradiated or chemically treated, they are highly perishable and
contain certain naturally occurring microorganisms. In addition to the Recall
associated with the e. coli 0157:h7 bacteria, the Company has from time to time
received complaints from consumers regarding ill effects allegedly caused by its
products. While such past claims have not resulted in any material liability to
date, there can be no assurance that future claims will not be made or that any
such claim or claims associated with the Recall will not result in adverse
publicity for the Company or monetary damages, either of which could materially
and adversely affect the Company's business and results of operations. The
Company currently maintains $52 million in commercial general liability
insurance, which may not be sufficient to cover the cost of defense or related
damages in the event of a significant product liability claim. See Part II "Item
1. Legal Proceedings."
VOLATILITY OF STOCK PRICE. The price of the Company's Common Stock has
experienced significant price volatility. The Company believes that factors such
as announcements of developments related to the Company's business, fluctuations
in the Company's operating results, failure to meet securities analysts'
expectations, general conditions in the fruit and vegetable industries and the
worldwide economy, announcements of innovations, new products or product
enhancements by the Company or its competitors, fluctuations in the level of
cooperative development funding, acquisitions, changes in governmental
regulations, developments in patents or other intellectual property rights and
changes in the Company's relationships with trade partners and suppliers could
cause the price of the Company's Common Stock to fluctuate substantially. In
addition, in recent years the stock market in general, and the market for small
capitalization stocks in particular, has experienced extreme price fluctuations
which have often been unrelated to the operating performance of affected
companies. Such fluctuations could adversely affect the market price of the
Company's Common Stock.
23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The following personal injury claims and legal proceedings seeking
monetary damages and other relief relating to the Recall are pending against the
Company:
The Curtis Case: A class action lawsuit filed in the United States
District Court, Western District of Washington and served on November
15, 1996. On June 30, 1997, the Magistrate Judge stated that he would
recommend that the United States District Court deny plaintiffs' motion
for class certification.
The Beverly Case: A personal injury lawsuit filed in the United States
District Court, Western District of Washington and served on December
3, 1996.
The Starmack Case: A personal injury lawsuit filed in San Diego County
Superior Court, San Diego, California on January 3, 1997 and served on
January 24, 1997.
The McGregor Case: A personal injury lawsuit filed in Santa Clara Superior
Court, Santa Clara, California on June 2, 1997 and served on June 16,
1997.
The Company maintained commercial general liability insurance totaling
$27,000,000 during the period including the Recall. The Company has notified its
insurance carrier of these events. At this time, no discovery has commenced with
respect to the remaining above-described legal proceedings and the Company is
unable to determine the potential liability on all such lawsuits and claims.
The following personal injury claims and legal proceedings have been
settled:
The Kim Case: A personal injury lawsuit filed in King County Superior
Court, Seattle, Washington, served on November 15, 1996 and settled on
January 9, 1997.
The Webb Case: A personal injury lawsuit filed in King County Superior
Court, Seattle, Washington, served on December 9, 1996 and settled on
January 9, 1997.
The Azizi Case: A personal injury lawsuit filed in Alameda County Superior
Court, Alameda, California and served on November 20, 1996 and settled
on March 25, 1997.
The Ishida/Peterson Case: A class action lawsuit filed in King County
Superior Court, Seattle, Washington and served on November 12, 1996 and
settled on April 29, 1997.
The settlement of the above legal proceedings was covered under the
Company's commercial general liability insurance policy and did not result in
any additional costs to the Company.
24
ITEM 1. LEGAL PROCEEDINGS, continued:
In addition, the Company settled the following claim filed under
California Business and Professions Code Section 17200 et seq. alleging
fraudulent business acts and practices of the Company relating to the recalled
products:
Roderick P. Bushnell v. Odwalla, Inc.: A lawsuit filed in San Francisco
County Superior Court, San Francisco, California and served on November
13, 1996. This lawsuit was settled on January 16, 1997 and received court
approval on March 19, 1997.
The Company has been informed that it is the subject of a federal grand
jury investigation (Eastern District of California) concerning events of 1996
and before, including the Recall. The Company has responded to a subpoena and is
cooperating fully with the government. At this time, the Company cannot predict
the outcome of the investigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit 10.13 - Loan and Security Agreement dated May 22, 1997 between the
Registrant and Coast Business Credit.
Exhibit 10.14 - Loan Agreement dated May 22, 1997 between the Registrant
and San Hill Capital LLC.
Exhibit 11.1 - Statement of Computation of Per Share Earnings
Exhibit 27.1 - Financial Data Schedule
B. REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended
May 31, 1997.
25
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ODWALLA, INC.
(Registrant)
Date: July 14, 1997 By: /s/ D. STEPHEN C. WILLIAMSON
-------------------------------
D. Stephen C. Williamson
Chief Executive Officer
(Principal Executive Officer)
Date: July 14, 1997 By: /s/ JAMES R. STEICHEN
-------------------------------
James R. Steichen
Chief Financial Officer
(Principal Financial and
Accounting Officer)
26
EXHIBIT INDEX
Exhibit
No. Document
------- --------
10.13 - Loan and Security Agreement dated May 22, 1997 between the
Registrant and Coast Business Credit.
10.14 - Loan Agreement dated May 22, 1997 between the Registrant
and San Hill Capital LLC.
11.1 - Statement of Computation of Per Share Earnings
27.1 - Financial Data Schedule
Dates Referenced Herein and Documents Incorporated by Reference
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