Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Form 10-K 47 245K
2: EX-10.12 Office Lease Dated June 1995 73 225K
3: EX-11.1 Statement of Computation of Per Share Earnings 1 5K
4: EX-23.1 Consent of Price Waterhouse LLP 1 5K
5: EX-23.2 Consent of Bdo Seidman, LLP 1 6K
6: EX-27.1 Financial Data Schedule 1 9K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1996
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)
California 77-0096788
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
120 Stone Pine Road
Half Moon Bay, California 94019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE)
Registrant's telephone number, including area code: (415) 726-1888
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
Title of each class Name of Exchange on which registered
none none
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock (no par
value)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
[Cover page 1 of 2 pages]
The aggregate market value of voting stock held by non-affiliates of
the Registrant, as of December 9, 1996 was approximately $53,890,000 (based on
the closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market for the last trading day prior to that date). Shares of
Common Stock held by each executive officer, director, and holder of 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On December 9, 1996 approximately 4,972,335 shares of the Registrant's
Common Stock, no par value, were outstanding.
[Cover Page 2 of 2 pages]
This Annual Report on Form 10-K 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 those set forth under "Item 1.
Business" and elsewhere in this Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS
Odwalla, Inc. ("Odwalla" or the "Company") was founded in September
1980 and incorporated in California in September 1985. Odwalla is a leading
supplier of fresh and flash-pasteurized fruit- and vegetable-based beverage
products ("Nourishing Beverages") in the western United States and British
Columbia, Canada. The Company's Nourishing Beverages provide the consumer with
high-quality living nourishment. The Company believes that its Nourishing
Beverages appeal to many consumers because of the superior qualities of
beverages in their natural state and the greater nutritional value of Nourishing
Beverages compared to juice from concentrate or artificial beverages.
Odwalla's objective is to be the leading Nourishing Beverage company in
its existing and future markets. The Company seeks to achieve this objective by
leading the industry in Nourishing Beverage knowledge, optimizing quality
through sourcing and production, controlling product access and distribution
from production through retail, artful presentation, growing through geographic
and product line expansion, leveraging its information systems, interacting with
consumers and living its vision.
Odwalla's sourcing procedures and production methods enable it to
create products with high nutritional and flavor quality. The distribution of
Odwalla's products through its own direct-store-delivery system allows the
Company to control product quality and presentation, as well as to develop
relationships with its trade partners. Odwalla sells and distributes its
products to over 2,500 retail locations, including supermarkets, specialty
retailers, natural food stores, warehouse outlets and food service operators.
Odwalla is committed to certain values -- nourishment to consumers and
other stakeholder groups, environmental awareness and responsibility, cultural
creation and social responsibilities to its employees and the communities it
serves. Odwalla believes that its products must embody these values.
RECENT EVENTS
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 O157:H7 and Odwalla's apple juice products. The Company
immediately implemented a voluntary recall (the "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. As of November 22,
1996, there were 66 cases of E. coli O157:H7 epidemiologically linked to Odwalla
apple juice products, according to the Centers for Disease Control and
Prevention.
Immediately following the Recall, the Food and Drug Administration
("FDA") began an investigation of the Company's production and distribution
centers. The FDA informed the Company that a sample from one bottle of apple
juice taken from a distribution center tested positive for E. coli O157:H7. The
FDA investigation is on-going.
The Company has experienced a significant reduction in sales of all of
its products following the Recall. Although sales of the Company's products have
declined in all of its markets, declines in sales have been most significant in
the Pacific Northwest and Colorado. The significant decline in sales of the
Company's products can
2.
be attributed to the loss of consumer confidence, reduction of the number of
products on the market from 23 to eight, the removal of all of the Company's
products by certain trade partners and the loss of certain trade partners.
During November 1996, the Company reformulated five of the recalled products
without apple juice and returned them to the market and, in early December 1996,
the Company reintroduced all of its recalled apple juice-based products to the
market with flash-pasteurized apple juice. Most of the Company's trade partners
prior to the Recall are now stocking the Company's products. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operation - Overview."
To date, there are six personal injury claims and legal proceedings
seeking monetary damages and other relief relating to the Recall pending against
the Company. In addition, there is one legal proceeding alleging fraudulent
business acts and practices relating to the recalled products pending against
the Company. See "Item 3.
Legal Proceedings."
Following the Recall, the Company formed the Odwalla Nourishment & Food
Safety Advisory Council (the "Council") to advise management in developing new
industry practices in the sourcing, production and distribution of fresh juice
products in order to maintain a leadership position. Beginning in early December
1996, Odwalla reintroduced all apple juice-based products to the market using a
Hazard Analysis Critical Control Point Plan ("HACCP Plan"), which includes the
flash pasteurization of fresh apple juice. 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 with pasteurization processes at higher temperatures and for longer
periods of time.
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,
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. For a discussion
of the possible effects of the Recall on net sales, cost of sales and sales and
distribution, marketing and general and administrative costs, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
3.
PRODUCTS, DISTRIBUTION AND TRADE PARTNERS
Odwalla's current product line consists of single-strength and blended
fruit- and vegetable-based products and geothermal natural spring water. Except
for flash pasteurization applied to fresh apple juice, all single-strength
products are fresh fruit- and vegetable-based beverage products (some produced
on a seasonal basis). Blended products also contain 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 fresh fruit or vegetable juices,
except for 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 16 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.
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 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
4.
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 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 freeze that occurred in California in the winter of
fiscal 1991 affected the availability, quality and price of oranges for both
fiscal 1991 and fiscal 1992 and, as a result, adversely affected the Company's
results of operations in both of those years. 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.
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. Immediately following the Recall, Safeway and other significant
trade partners discontinued the sale of all of the Company's products for a
short period of time. The decision to discontinue the sale of the Company's
products during this period had a material adverse effect on
5.
the Company's business and results of operations. 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. The Company also is subject to Canadian labeling
laws for juices sold in British Columbia. There have been no significant costs
thus far associated with complying with FDA or Canadian 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. The Company did
not incur any significant costs in fiscal 1996 in complying with environmental
laws.
EMPLOYEES
As of December 2, 1996, the Company had 578 employees, 520 of whom were
full-time employees.
OTHER FACTORS AFFECTING THE COMPANY'S BUSINESS
Risks associated with perishable products. With the exception of its
geothermal spring water, the Company's products are either fresh or, in the case
of apple juice, only flash pasteurized, and do not contain any preservatives,
they have a limited shelf life. In addition, in order to maintain its "day of
juicing" quality standards, the Company further restricts the shelf life of its
products through early expiration dates. As a result, since the Company is not
able to hold any significant finished goods inventory, its results of operations
are highly dependent on its ability to accurately forecast its near term sales
in order to adjust fresh fruit and vegetable sourcing and production.
Historically, forecasting product demand has been difficult, and in light of the
Recall, the Company expects it to be an ongoing and more difficult challenge.
Failure to accurately forecast product demand could result in the Company either
being unable to meet higher than anticipated demand or producing excess
inventory that cannot be profitably sold. In addition, most of the Company's
trade partners have the right to return any products that are not sold by their
expiration date. The inability to meet higher than anticipated demand or excess
production or significant amounts of product returns could have a material
adverse effect on the Company's business and results of operations.
Cost sensitivity. The Company's profitability is highly sensitive to
increases in raw materials, labor and other operating costs. Unfavorable trends
or developments concerning factors such as inflation, raw material supply, labor
and employee benefit costs (including increases in hourly wage and minimum
unemployment tax rates), rent increases resulting from the rent escalation
provisions in the Company's leases, and the availability of hourly employees may
also adversely affect the Company. The Company believes recent relatively
favorable inflation rates and part-time labor supplies in its principal market
areas have contributed to relatively stable food and labor costs in recent
years. However, there can be no assurance that these conditions will continue or
that the Company will have the ability to control costs in the future.
6.
Product liability. Since the Company's products are not pasteurized
(except for 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
O157: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
$27,000,000 in product 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 related to the Recall or otherwise. See "Item 3. Legal
Proceedings."
Orchard production. Historically, the Company has been dependent upon
the fruit produced from the trees of large orchards. These trees may become
damaged, diseased or destroyed as a result of windstorms, pests or fungal
disease. Additionally, there are types of controllable fungal diseases which can
affect fruit production although not fatal to the trees themselves. These types
of fungal diseases are generally controllable with fungicides. However, there
can be no assurance that such control measures will continue to be efficacious.
Any decrease in the supply of fresh fruit as a result of windstorms, pests or
fungal disease could have a material adverse effect on the Company's business
and results of operations.
Geographic concentration. The Company's wholesale accounts and retail
trade partners have their largest concentration in Northern California, with
most located in the metropolitan areas surrounding the San Francisco Bay. As
such, the Company's business and results of operations may be adversely affected
by natural occurrences, economic downturns and other conditions affecting
Northern California.
Concentration of production capacity. Except for its geothermal water
production, all of the Company's production capacity is located at its Dinuba,
California facility. Because the Company attempts to maintain minimal finished
goods inventory as part of its "just in time" production system, in the event
that production at or transportation from such facility were interrupted by
fire, earthquakes, floods or other natural disasters, work stoppages, regulatory
actions or other causes, the Company would be unable to continue to produce its
products at such facility. Such an interruption would materially and adversely
affect the Company's business and results of operations.
Lack of diversification. Although the Company has been in existence
since 1980 and has been profitable in its most recent three fiscal years, 1994,
1995, and 1996, the Company is vertically integrated and its business is
centered around essentially one product. To date, the Company's operations have
been limited to the production and sale of Nourishing Beverages through its
direct-store-delivery system. The risks associated with the Company's focus on
essentially one product are exemplified by the material adverse effect on the
Company's business and results of operations that resulted from the Recall. Any
significant decrease in the consumption of Nourishing Beverages generally or
specifically with respect to the Company's products following the Recall could
have an adverse effect on the Company's business and results of operations.
Risks related to expansion. Although the Company's continued growth
depends in part upon its ability to expand into new geographic areas, either
through internal growth or by acquisition, the Company's plans for expansion
have been diverted at the present time in order to strengthen its position in
its present markets following the Recall. The Company anticipates continued
expansion in the Texas and Southern California markets in fiscal 1997. There can
be no assurance that the Company will expand into new geographic areas or
continue to invest in newer markets or if such expansion or investment is
undertaken that it will be successful or that such expansion can be accomplished
on a profitable basis. Demands on management and working capital costs
associated with the Recall as well as the perishability of the Company's
products and its reliance on its personnel-intensive direct-store-delivery
system may limit the ability, or increase the cost of, expansion into new
regions. Furthermore, perceptions
7.
of the Recall and consumer tastes vary by region and there can be no assurance
that consumers located in other regions will be receptive to the Company's
products.
The Company has expanded into certain new markets, such as the Pacific
Northwest and Colorado, through acquisitions of local juice manufacturers.
Acquisitions involve a number of special risks, including the diversion of
management's resources, issues related to the assimilation of the operations and
personnel of the acquired businesses, potential adverse effects on the Company's
operating results and amortization of acquired intangible assets. In addition,
gross margins may be negatively impacted to the extent that gross margins on
acquired product lines are lower than Odwalla's average gross margins. For
example, the Company's Colorado acquisition, completed in January 1995, resulted
in incremental increases in general and administrative expenses and diversion of
management resources. Although no acquisitions are being actively considered by
the Company at this time, the Company is unable to predict whether or when any
prospective acquisition candidates will become available. There can be no
assurance that the Company will find attractive acquisition candidates, that
acquisitions can be consummated on acceptable terms, that any acquired companies
can be integrated successfully into the Company's operations, or that any such
acquisitions will not have an adverse effect on the Company's business or
results of operations.
Intellectual property rights. The Company regards its trademarks, trade
dress, trade secrets and similar intellectual property as critical to its
success. Odwalla attempts to protect such property with registered and common
law trademarks and copyrights, restrictions on disclosure and other actions to
prevent infringement. The Company has in the past, and it expects that it may in
the future, license elements of its distinctive trademarks, trade dress and
similar proprietary rights to third parties. While the Company attempts to
ensure that the quality of its brand is maintained by such licenses, no
assurances can be given that such licensees will not take actions that might
materially and adversely affect the value of the Company's proprietary rights or
the reputation of its products, either of which could have a material adverse
effect on the Company's business. Product package and merchandising design and
artwork are important to the success of Odwalla, and the Company intends to take
action to protect against imitation of its products and packages and to protect
its trademarks and copyrights as necessary. Such action could be time-consuming,
result in costly litigation and divert management personnel. Furthermore, there
can be no assurance that the Company would be successful in such action. The
Company does not have any patents.
Control by officers and directors. The Company's officers, directors
and their affiliates beneficially own, in the aggregate, approximately 25% of
the Company's outstanding shares of Common Stock. As a result, these
shareholders, acting together, would be able to significantly influence most
matters requiring approval of the shareholders of the Company, including the
election of a majority of the Board of Directors. Such control could have the
effect of delaying, deferring or preventing a change of control of the Company.
Dependence on key personnel. The Company's success depends to a
significant extent upon the continued service of Greg Steltenpohl, the Chairman
of its Board of Directors, and Stephen Williamson, its Chief Executive Officer,
and the loss of either of such key personnel could have a material adverse
effect on the Company's business or results of operations. Furthermore, the
Company's continued growth depends on its ability to identify, recruit and
retain key management personnel. The competition for such employees is intense,
and there can be no assurance the Company will be successful in such efforts.
The Company is also dependent on its ability to continue to attract, retain and
motivate its production, distribution, sales, communications and other
personnel, of which there can be no assurance.
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
8.
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.
ITEM 2. PROPERTIES
Odwalla's production facility is in Dinuba, California and consists of
approximately 85,000 square feet of production, office and cold storage space on
a 13-acre parcel of land plus approximately 33 acres of land adjacent to the
production facility, including the property purchased in October 1996. Odwalla
owns this property, with $150,000 of debt against a parcel of land containing 20
of the 33 acres of adjacent land. The Company believes the building is
adequately insured. Odwalla's administrative offices are located in Half Moon
Bay, California. In addition, the Company has distribution centers throughout
California and in Seattle and Bellingham, Washington; Denver, Colorado;
Albuquerque, New Mexico; Eugene and Portland, Oregon; Austin and Dallas, Texas;
and Las Vegas, Nevada. Other than the Dinuba facility, the Company leases all of
its facilities.
ITEM 3. LEGAL PROCEEDINGS
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 O157: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. As of November 22, 1996, there were 66 cases
of E. coli O157:H7 epidemiologically linked to Odwalla apple juice products,
according to the Centers for Disease Control and Prevention.
The following personal injury claims and legal proceedings seeking
monetary damages and other relief relating to the Recall are pending against the
Company:
1. The Ishida Case: A class action lawsuit filed in King County
Superior Court, Seattle, Washington and served on November 12,
1996.
2. The Curtis Case: A class action lawsuit filed in the United
States District Court, Western District of Washington and
served on November 15, 1996.
3. The Kim Case: A personal injury lawsuit filed in King County
Superior Court, Seattle, Washington and served on November 15,
1996.
4. The Azzizi Case: A personal injury lawsuit filed in Alameda
County Superior Court, Alameda, California and served on
November 20, 1996.
5. The Beverly Case: A personal injury lawsuit filed in the
United States District Court, Western District of Washington
and served on December 3, 1996.
6. The Webb Case: A personal injury lawsuit filed in King County
Superior Court, Seattle, Washington and served on December 9,
1996.
In addition, the following claim was 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:
9.
Roderick P. Bushnell v. Odwalla, Inc.: A lawsuit filed in San Francisco
County Superior Court, San Francisco, California and served on November
13, 1996.
The Company currently maintains commercial general liability insurance
totaling $27,000,000. The Company has notified its insurance carrier of these
events. At this time, no discovery has commenced with respect to the
above-described legal proceedings and the Company is unable to determine the
potential liability on all such lawsuits and claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the
fourth quarter of fiscal 1996.
10.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock is listed on the Nasdaq National Market
("Nasdaq") under the symbol "ODWA." The Company's stock has been traded on that
market since May 18, 1995. Prior to that date, the Company's stock had been
traded on the Nasdaq SmallCap Market ("SmallCap") since December 15, 1993, when
the Company completed its initial public offering. Prior to that date, there was
no public market for the Company's Common Stock. As of December 9, 1996, there
were approximately 200 holders of record of the Company's Common Stock. The
following table sets forth, for the periods indicated, the high and low closing
sales prices, as to Nasdaq prices, and the high and low bid prices, as to
SmallCap prices, of shares of the Company's Common Stock, after giving effect to
a 3-for-2 stock split effected through a stock dividend on May 1, 1995:
[Download Table]
FISCAL YEAR ENDED AUGUST 31, 1996 HIGH LOW
Fourth Quarter $28.25 $16.375
Third Quarter $27.50 $15.50
Second Quarter $19.25 $15.25
First Quarter $20.75 $15.25
FISCAL YEAR ENDED AUGUST 31, 1995
Fourth Quarter $21.00 $16.50
Third Quarter $19.75 $10.17
Second Quarter $10.33 $ 6.67
First Quarter $ 7.33 $ 7.00
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock since
inception and does not anticipate paying cash dividends in the foreseeable
future. The Company currently anticipates that it will retain its earnings, if
any, for use in the operation of its business and does not expect to pay cash
dividends on its capital stock in the foreseeable future.
11.
ITEM 6. SELECTED FINANCIAL DATA
[Enlarge/Download Table]
Year Ended August 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA: (in thousands, except per share data)
Net sales......................................... $ 59,197 $ 35,869 $ 18,153 $ 12,551 $ 9,594
Cost of sales..................................... 29,889 18,425 8,984 6,342 4,835
-------- -------- -------- -------- --------
Gross Profit...................................... 29,308 17,444 9,169 6,209 4,759
Operating expenses:
Sales and distribution........................... 20,158 11,588 6,212 4,133 3,206
Marketing........................................ 2,257 891 484 469 264
General and administrative....................... 6,206 3,576 1,973 1,458 1,026
-------- -------- -------- -------- --------
Total operating expenses..................... 28,621 16,055 8,669 6,060 4,496
-------- -------- -------- -------- --------
Income from operations............................ 687 1,389 500 149 263
Other income (expenses), net...................... 346 108 (199) (575) (218)
-------- -------- -------- -------- --------
Income (loss) before income taxes................. 1,033 1,497 301 (426) 45
Provision for (benefit from)
income taxes..................................... 400 500 - (1) 6
-------- -------- -------- -------- --------
Net income (loss)................................. $ 633 $ 997 $ 301 $ (427) 39
======== ======== ======== ======== ========
Net income (loss) per share....................... $ 0.12 $ 0.22 $ 0.08 $ (0.15) $ 0.02
======== ======== ======== ======== ========
Weighted average common and common equivalent
shares outstanding............................... 5,420 4,472 3,623 2,889 2,111
======== ======== ======== ======== ========
[Enlarge/Download Table]
August 31,
--------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments........................... $ 12,413 $ 18,496 $ 2,137 $ 715 $ 96
Working capital (deficit)........................ 14,655 17,918 2,516 (295) 2,118
Total assets...................................... 37,700 35,481 12,072 8,038 6,691
Long-term liabilities............................. 501 736 872 2,467 1,901
Total shareholders' equity........................ 29,574 28,499 8,719 2,822 3,408
12.
ITEM 7. 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 those set forth under "Item 1.
Business" and elsewhere in this Annual Report on Form 10-K. The following
discussion and analysis should be read in conjunction with the Financial
Statements and related Notes contained elsewhere in this 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 net sales have grown from $18.2 million in fiscal 1994
to $35.9 million in fiscal 1995 to $59.2 million in fiscal 1996. The Company's
growth has come predominantly from continued penetration in existing markets,
sales of new products and expansion into new markets. The Company believes that
its sales have 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. 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 O157:H7 and Odwalla's apple juice products. The Company
immediately implemented a voluntary recall of all Odwalla products containing
apple juice. On
13.
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. Net sales of Nourishing Beverages and water products in
November were approximately 38% of August 1996 sales levels. New trade partner
accounts were opened at a significantly reduced rate during November 1996.
To date, there are six personal injury claims and legal proceedings
seeking monetary damages and other relief relating to the Recall pending against
the Company. In addition, there is one legal proceeding alleging fraudulent
business acts and practices relating to the recalled products pending against
the Company. 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
reintroduced all apple juice-based products to the market using a Hazard
Analysis Critical Control Point Plan, which includes the flash pasteurization of
fresh apple juice. 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 public relations,
advertising, marketing, legal and other professional fees, costs of
reformulating products and costs associated with the flash pasteurization
process. Notwithstanding the Recall the Company plans to continue to invest in
building an infrastructure capable of sustaining growth and expansion. This,
along with other factors, does not allow the Company to reduce costs
commensurate with the reduction in sales. Although the Company is still in the
planning stages following the Recall, the Company expects the costs associated
with the Recall and disruption in sales will result in a significant loss in the
first quarter of fiscal 1997 and that the Company will record a significant loss
for fiscal year 1997.
Cost of sales have increased since the Recall due to the significantly
reduced production demands in November 1996. Production volume is expected to
increase modestly with the reintroduction of the apple juice-based products,
with flash-pasteurized apple juice, to the market in early December 1996.
However, production costs of the flash pasteurized products will increase cost
of sales and will offset any benefit achieved by increased production volume, if
any. The Company anticipates that cost of sales will continue to increase as a
percentage of net sales following the 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 and a revised route sales persons compensation plan. 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.
Marketing costs will increase in fiscal 1997 in both absolute dollars
and as a percentage of net sales as a result of planned increases and the
Recall. The degree of 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 costs will increase in fiscal 1997 in both
absolute dollars and as a percentage of net sales. The Company will continue to
invest in infrastructure, particularly in information systems, to provide for
sustainable growth. The Company also expects to incur significant legal and
other professional fees associated with the Recall.
The Company maintains insurance coverage for first party business risks
and intends to present claims to its insurance carriers under the appropriate
policies. However, there have been no claims prepared to date and the amount or
timing of proceeds, if any, from future insurance claims is not known at this
time.
14.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain
statements of operations data for the fiscal years ended August 31, 1994, 1995
and 1996. These operating results are not necessarily indicative of the results
for any future period.
[Enlarge/Download Table]
YEAR ENDED AUGUST 31,
----------------------------------------------
1994 1995 1996
--------------- --------------- ---------
Net sales 100.0% 100.0% 100.0%
Cost of sales 49.5 51.4 50.5
----- ----- -----
Gross margin 50.5 48.6 49.5
Operating expenses
Sales and distribution 34.2 32.3 34.1
Marketing 2.7 2.5 3.8
General and administrative 10.9 10.0 10.5
Income from operations 2.8 3.9 1.2
Interest and other income (expense), net (1.1) .3 .6
Income tax expense - (1.4) (.7)
Net income 1.7% 2.8% 1.1%
NET SALES. Net sales for fiscal 1996 increased 65% to $59.2 million
compared to $35.9 million in fiscal 1995, and 98% in fiscal 1995 from $18.2
million in fiscal 1994. Net sales growth for fiscal 1996 was attributable
primarily to (i) increased sales volume to supermarkets, specialty retailers and
natural food stores, (ii) new product sales and (iii) increased sales volumes in
newly entered markets.
Net sales growth for fiscal 1995 was attributable primarily to (i)
increased sales volume in existing markets, (ii) sales of new products and (iii)
increased sales volume in new markets through acquisitions and growth.
COST OF SALES. Cost of sales increased 62% to $29.9 million in fiscal
1996 compared to $18.4 million in fiscal 1995, and 105% in fiscal 1995 compared
to $9.0 million for fiscal 1994. Gross margin increased from 48.6% in fiscal
1995 to 49.5% in fiscal 1996 after decreasing from 50.5% in fiscal 1994. The
increase in gross margin in fiscal 1996 resulted from (i) a decrease in
packaging expenses negotiated in the second quarter of the fiscal year and (ii)
a decrease in fruit costs in the second half of the year that more than offset
the high fruit costs experienced in the first half of the year, especially
oranges and apples, as a result of efficiencies achieved in the production
processes and greater variety of product mix.
The decrease in gross margin in fiscal 1995 resulted from (i) an
increase in fruit costs, particularly oranges, in the second half of 1995 that
more than offset the reduction in fruit costs in the first half of fiscal 1995,
(ii) an increase in freight costs and (iii) an increase in packaging costs. The
increases in fiscal 1995 were partially offset by decreases in
production-related expenses as a percentage of net sales due to production costs
being spread over higher sales volumes.
SALES AND DISTRIBUTION. Sales and distribution expenses in fiscal 1996
increased 74% to $20.2 million compared to $11.6 million in fiscal 1995, and 87%
in fiscal 1995 from $6.2 million in fiscal 1994. Sales and distribution expenses
increased as a percentage of net sales in fiscal 1996 to 34.1% compared to 32.3%
in fiscal 1995. This increase resulted from higher expenses in less established
regions which were offset slightly by greater efficiencies in the more mature
regions. Within sales and distribution expenses, direct route expenses increased
81% and support expenses increased 68% in fiscal 1996 compared to fiscal 1995.
In fiscal 1995, direct route expenses increased 94% and support expenses
increased 82% compared to fiscal 1994. The increases in fiscal 1996 and 1995
15.
resulted from the Company's increased expenses associated with route sales
people, including additional and upgraded vehicles and greater support
personnel.
MARKETING. Marketing expenses increased 153% to $2.3 million in fiscal
1996 compared to $891,000 in fiscal 1995, and 84% in fiscal 1995 compared to
$484,000 in fiscal 1994. Marketing expenses increased in absolute dollars and as
a percentage of net sales in fiscal 1996 as the Company expanded its efforts to
enhance stakeholder awareness and incurred professional services related to new
product development and communications. Marketing expenses increased in absolute
dollars in fiscal 1995 as the Company focused efforts on enhancing stakeholder
awareness and incurred costs of salaries and professional services related to
new product development and communications. Marketing expenses decreased as a
percentage of net sales in fiscal 1995 due to greater growth in net sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased 74% to $6.2 million in fiscal 1996 and 81% to $3.6 million in fiscal
1995 from $2.0 million in fiscal 1994. As a percentage of net sales, general and
administrative expenses increased from 10.0% in fiscal 1995 to 10.5% in fiscal
1996. The increase in general and administrative expenses in absolute dollars
and as a percentage of net sales in fiscal 1996 resulted from additions to the
Company's management and administrative staff, expanded communications systems
and MIS support, and increased staff and management training. General and
administrative expenses increased in fiscal 1995 in absolute dollars primarily
from additions to the management and administrative staff and an increase in
consulting and legal fees. General and administrative expenses decreased as a
percentage of net sales in fiscal 1995 to 10.0% from 10.9% in fiscal 1994 due to
increases in the Company's sales.
INTEREST AND OTHER EXPENSE (INCOME). Odwalla had net interest income in
fiscal 1996 of $541,000 compared to net interest income of $91,000 in fiscal
1995. Gross interest income of $635,000 in fiscal 1996 and $247,000 in fiscal
1995 resulted primarily from the Company's investment of the proceeds of its
public offering in May 1995. Gross interest expense of $94,000 in fiscal 1996
resulted from interest on capital leases. Gross interest expense of $146,000 in
fiscal 1995 resulted from interest on capital leases and bank borrowings for the
Company's acquisition of J. S. Grant's, Inc. The bank borrowings were repaid
from the proceeds of the public offering.
INCOME TAX EXPENSE. The effective income tax rate for fiscal 1996 of
39% varies from the federal statutory tax rate of 34% primarily due to the
effective tax rate of California and other state income taxes. The effective
income tax rate for fiscal 1995 of 33% varies from the federal statutory tax
rate primarily due to effective tax rate reductions resulting from the
elimination of a $60,000 deferred tax valuation allowance partially offset by an
increase 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 August 31, 1996, the Company had working capital of $14.7 million
compared to working capital of $17.9 million at August 31, 1995. The decrease
resulted primarily from capital expenditures of $6.0 million. At August 31,
1996, the Company had cash, cash equivalents and short term investments of $12.4
million compared to $18.5 million at August 31, 1995.
Net cash used by operating activities for fiscal 1996 was $456,000.
This consisted of net income plus depreciation and amortization and increases in
accounts payable and other accrued expenses offset by an increase in accounts
receivable and inventory related to increased sales volume as well as an
inventory increase due to favorably priced cash purchases (rather than
contractual commitments) of frozen purees in late fiscal 1996. Net cash used in
investing activities for fiscal 1996 was $5.4 million, consisting primarily of
capital expenditures primarily for a new cold storage facility and production
equipment at the Dinuba plant. Net cash used in financing activities for fiscal
1996 was $3,000, consisting primarily of $442,000 for the sale of common stock
through the
16.
exercise of stock warrants and options offset by payments of long-term debt and
capital lease obligations.
In April 1996, the Company entered into a contract to purchase land
adjacent to the Dinuba production facility for $215,000. Odwalla paid $10,000 as
a deposit when the contract was signed and paid the balance when the purchase
was completed in October 1996. In May 1996, the Company entered into an
agreement, subject to certain contingencies, 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 Company completed the
transaction in October 1996 at a cost of $351,000, 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. As of August 31,
1996, the Company had entered into purchase commitments for the future delivery
of raw materials, approximately $1.5 million of which are under one-year
contracts to be completed through May 1997. One three-year contract is also
open, requiring purchase of $3.2 million of product, and is to be completed by
May 1999. Despite the decrease in production due to the Recall, the Company does
not anticipate that it will have excess inventory.
At August 31, 1996, the Company had $594,000 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
working with that leasing company and other equipment leasing companies to
obtain future lease commitments. There can be no assurance that the Company will
be able to use or continue to use such capital lease financing and the failure
to do so may have an adverse effect on the Company's business or results of
operations.
The Company's line of credit expired in March 1996 and the Company is
currently seeking to obtain a working capital line of credit. However, there can
be no assurance that the Company will be able to obtain such a credit facility
from its prior lender or another financial institution at favorable terms, if at
all.
Capital improvements necessary for flash pasteurization and other plant
modifications are expected to cost less than $2 million. The improvements will
be largely financed through available cash resources or, if available, debt or
lease financing.
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 the end of fiscal year 1997. However, this belief is based
on future sales estimates which are inherently uncertain given the disruption to
the Company's business caused by the Recall.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed herewith begin on page
F-1.
17.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On June 19, 1996, the Company's Board of Directors, upon recommendation
of its Audit Committee, dismissed BDO Seidman, LLP ("BDO Seidman") as the
Company's principal independent accountants engaged to audit the Company's
financial statements.
The independent auditor's report of BDO Seidman on the consolidated
financial statements of the Company for the three years ended August 31, 1995,
dated October 12, 1995, included in the Form 10-KSB for the fiscal year ended
August 31, 1995, contained no adverse opinion or disclaimer of opinion and was
not qualified as to uncertainty, audit scope or accounting principles.
In connection with the Registrant's audits for the fiscal years ended
August 31, 1994 and 1995, and in the subsequent interim period prior to BDO
Seidman's dismissal on June 19, 1996, there were (i) no disagreements with BDO
Seidman on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which disagreements, if not resolved
to the satisfaction of BDO Seidman, would have caused BDO Seidman to make
reference to the subject matter of the disagreement in connection with their
report; and (ii) no "reportable events" as described in Item 304(a)(1)(v) of
Regulation S-K.
The Registrant has furnished a copy of the disclosure contained in this
section to BDO Seidman requesting such firm to respond as to whether it agrees
with the information set forth herein relating to such firm. BDO Seidman has
responded that it agrees with the statements made herein with respect to such
firm and has agreed, as required by Item 304 of Regulation S-K, to furnish to
the Registrant a letter addressed to the Securities and Exchange Commission to
that effect.
On June 19, 1996, the Company's Board of Directors, upon recommendation
of its Audit Committee, approved the appointment of Price Waterhouse LLP ("Price
Waterhouse") as principal independent accountants to audit the Company's
financial statements for the fiscal year ending August 31, 1996, in place of BDO
Seidman.
During the two most recent fiscal years and through June 19, 1996, the
Registrant has not consulted with Price Waterhouse regarding either (1) the
application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the Registrant's financial statements and either a written report was provided
to the Registrant or oral advice was provided that Price Waterhouse concluded
was an important factor considered by the Company in reaching a decision as to
the accounting, auditing or financial reporting issue; or (2) any matter that
was either the subject of a "disagreement" or a "reportable event" (as such
terms are defined in Item 304(a)(1) of Regulation S-K).
18.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Based upon (i) the copies of Section 16(a) reports which the Company
received from such persons for their 1996 fiscal year transactions in the Common
Stock and their Common Stock holdings, and (ii) the written representations
received from one or more of such persons that no annual Form 5 reports were
required to be filed by them for the 1996 fiscal year, the Company believes that
all executive officers and Board members complied with all their reporting
requirements under Section 16(a) for such fiscal year.
EXECUTIVE OFFICERS AND DIRECTORS
Certain information about the Company's directors and executive
officers as of December 9, 1996 is listed below:
[Enlarge/Download Table]
Name Age Position
---- --- --------
Greg A. Steltenpohl 42 Chairman of the Board
D. Stephen C. Williamson 38 Chief Executive Officer
Michael S. Young 45 Senior Vice President, MIS/Operations and Chief Operating
Officer
Penelope A. Douglas 44 Senior Vice President/Chief Learning Officer, Human Resources
Michael G. Casotti 38 Vice President, Sales
James R. Steichen 47 Vice President, Finance and Chief Financial Officer
Frank J. Ballentine 38 Vice President, Manufacturing
Kenneth H. Ausubel 45 Director
Lauren M. Doliva, Ph.D. (1)(2) 48 Director
Martin S. Gans (1)(2) 45 Director
----------
(1) Member of Audit Committee
(2) Member of Compensation Committee
GREG A. STELTENPOHL, the founder of the Company, has served as Chairman
of the Board since June 1996. Prior to that date, Mr. Steltenpohl served as
Co-Chairman of the Board and Co-Chief Executive Officer from January 1995 to
June 1996. From the Company's incorporation in December 1985 until January 1995,
Mr. Steltenpohl served as Chairman of the Board and Chief Executive Officer. In
addition, Mr. Steltenpohl served as the Company's President from November 1985
until May 1992. Mr. Steltenpohl holds a B.S. degree in environmental sciences
from Stanford University.
D. STEPHEN C. WILLIAMSON has served as Chief Executive Officer since
June 1996. Prior to that time, Mr. Williamson served as Co-Chairman of the Board
and Co-Chief Executive Officer from January 1995 to June 1996 and as Chief
Financial Officer of the Company from March 1991 to August 1996. Mr. Williamson
also served as the Company's President from May 1992 until January 1995. From
1988 to March 1991, Mr. Williamson was a general partner of Ellistan Partners, a
private investment firm. Prior to that, Mr. Williamson worked as an analyst and
an associate at First Boston Corp. Mr. Williamson holds a B.A. degree in history
from the University of California at Berkeley. He is also a director of Avenal
Land & Oil Company, a private investment company.
MICHAEL S. YOUNG has served as the Company's Senior Vice President,
MIS/Operations and Chief Operating Officer since July 1994. From 1991 to 1994,
he served as Vice President, Strategic Information Systems of Kransco Group
Companies, a toy company. From 1978 to 1991, he was employed by
Colgate-Palmolive
19.
Company, a consumer products company where he held several directorship
positions in the area of information systems, most recently as Director -
Information Systems, United States. Mr. Young holds a B.S. degree in Mathematics
and Economics from the University of Toronto.
PENELOPE A. DOUGLAS has served as Senior Vice President/Chief Learning
Officer, Human Resources since September 1996. From 1990 to 1996, Ms. Douglas
was Chief Administrative Officer at Morrison & Forester. Ms. Douglas holds a B.
A. degree from Smith College.
MICHAEL G. CASOTTI has served as Vice President, Sales since February
1996. From 1983 to 1996, Mr. Casotti was employed by Nestle Beverage Company,
most recently serving as Customer Division Manager from 1994 to 1996. From 1990
to 1994, Mr. Casotti was the National Sales Manager for Sark's Gourmet Coffee, a
division of Nestle Beverage Company. Mr. Casotti holds a B. S. in Marketing from
California State University at Northridge.
JAMES R. STEICHEN has served as Vice President, Finance and Chief
Financial Officer since September 1996. From May 1996 to August 1996, Mr.
Steichen served as Vice President, Finance and had served as a consultant to the
Company since August 1995. Prior to that, he had been a partner with BDO
Seidman, LLP since December 1990. Mr. Steichen is a Certified Public Accountant
and holds a B.S. degree from the University of South Dakota.
FRANK J. BALLENTINE has served as Vice President, Manufacturing since
July 1995. From February 1990 to July 1995, Mr. Ballentine served as Logistics
Manager at Zacky Foods, Inc. Mr. Ballentine holds a B. S. degree in Vineyard and
Winery Management from the University of California at Davis and an MBA from
California State University in Fresno.
KENNETH H. AUSUBEL has been a director of the Company since January
1995. Mr. Ausubel has been Director of New Business Development for Nutraceutix,
Inc., a nutraceutical products company, since November 1994. From April 1989 to
March 1994, Mr. Ausubel served as Chief Executive Officer of Seeds of Change,
Inc., an organic seed company that Mr. Ausubel co-founded. Mr. Ausubel holds a
B.A. in psychology from Columbia University.
LAUREN M. DOLIVA, PH.D. has been a director of the Company since
December 1994. Dr. Doliva is a partner and director of Heidrick & Struggles, an
executive search consulting firm. She has been a consultant with Heidrick &
Struggles since 1984 and was promoted to partner in 1985 and to director in
1986. From 1981 to 1984, Dr. Doliva served as Assistant to the President of
LucasFilm, Ltd. Dr. Doliva holds a Ph.D. in counseling psychology from the
University of California, Berkeley, an M.A. in teaching from Harvard University
and a B.A. in history from the University of California, Los Angeles.
MARTIN S. GANS has been a director of the Company since December 1992.
Mr. Gans served as Executive Vice President and Chief Financial Officer of Sun
World International, Inc. from 1978 until 1987, and he was a partner at Touche
Ross & Co., an accounting firm, from 1972 until 1978. Mr. Gans is a certified
public accountant and holds a B.B.A. from the University of Miami and an M.B.A.
from Northwestern University. Mr. Gans is also a director of Best Collateral,
Inc., a publicly-traded company. In addition, Mr. Gans is a director of a number
of private companies, including International Storage Management, N.V. and LSL
Biotechnologies, Inc.
---------------
[Download Table]
TRANSFER AGENT AND REGISTRAR INDEPENDENT ACCOUNTANTS
ChaseMellon Shareholder Services Price Waterhouse LLP
50 California Street, 10th Floor 555 California Street, Suite 3600
San Francisco, CA 94111 San Francisco, CA 94104
20.
LEGAL COUNSEL
Brobeck, Phleger & Harrison LLP
Two Embarcadero Place
2200 Geng Road
Palo Alto, CA 94303
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following Summary Compensation Table sets forth the compensation
earned, by the Company's current Chief Executive Officer and former Co-Chief
Executive Officer and the four other most highly compensated executive officers
for services rendered in all capacities to the Company and its subsidiaries for
the fiscal years ended August 31, 1994, 1995 and 1996. The listed individuals
shall be hereinafter referred to as the "Named Officers."
[Enlarge/Download Table]
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
---------------------------------- -------------
Securities
Name and Principal Underlying All Other
Position Years Salary($) Bonus Options(#)(1) Compensation (2)
------------------ ----- --------- ----- ------------- ----------------
D. Stephen C. Williamson(3) 1996 $ 125,481 $ -- 20,000 $ --
Chief Executive 1995 $ 125,000 $ -- -- $ --
Officer 1994 $ 78,954 $ -- 105,000(4) $ --
Greg A. Steltenpohl(5) 1996 $ 125,481 $ -- 20,000 $ --
Chairman of the Board 1995 $ 125,000 $ -- -- $ --
1994 $ 100,794 $ -- 90,000(6) $ --
Michael S. Young 1996 $ 125,481 $ -- 20,000 $ 928
Senior Vice President, 1995 $ 125,000 $ -- 60,000 $ --
MIS/Operations and 1994 $ 7,212(7) $ -- -- $ --
Chief Operating Officer
James R. Steichen 1996 $ 111,028(8) $ -- 25,000 $ --
Chief Financial 1995 $ -- $ -- -- $ --
Officer 1994 $ -- $ -- -- $ --
-----------------
(1) The options listed in the table were granted under the Company's Stock
Option Plan.
(2) Represents the Company's matching 401(k) plan contribution.
(3) Mr. Williamson served as Co-Chairman of the Board and Co-Chief Executive
Officer with Mr. Steltenpohl from January 1995 to June 1996.
(4) Includes options to purchase 30,000 shares granted to Mr. Williamson during
fiscal 1995 in consideration of
21.
a salary increase in fiscal 1994 that Mr. Williamson elected to completely
forego. Such options have a five-year term, have an exercise price of $8.62
per share (110% of the fair market value of the Common Stock on the date of
grant) and are fully vested as of the date of grant.
(5) Mr. Steltenpohl served as Co-Chairman of the Board and Co-Chief Executive
Officer with Mr. Williamson from January 1995 to June 1996.
(6) Includes options to purchase 15,000 shares granted to Mr. Steltenpohl during
fiscal 1995 in consideration of a salary increase in fiscal 1994 that Mr.
Steltenpohl elected to partially forego. Such options have a five-year term,
have an exercise price of $8.62 per share (110% of the fair market value of
the Common Stock on the date of grant) and are fully vested as of the date
of grant.
(7) Reflects salary paid to Mr. Young from July 1994 through August 1994, based
on annual salary of $125,000.
(8) Reflects consulting fees of $70,163 paid to Mr. Steichen prior to May 1996
when he became Vice President, Finance. Mr. Steichen was appointed Chief
Financial Officer effective September 1, 1996. Mr. Williamson was Chief
Financial Officer during fiscal 1996.
STOCK OPTIONS
The following table contains information concerning the stock option
grants made to each of the Named Officers for the 1996 fiscal year. No stock
appreciation rights were granted to those individuals during such year.
[Enlarge/Download Table]
POTENTIAL REALIZABLE
INDIVIDUAL GRANT VALUE AT ASSUMED
------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING RANTED TO EXERCISE FOR OPTION TERM (3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED(1) FISCAL YEAR ($/SHARE)(2) DATE 5% 10%
---- ---------- ----------- ------------ ---- -------- -----
D. Stephen C. Williamson...... 20,000 7.38% $22.28 9/2/00 $123,083 $271,982
Greg A. Steltenpohl........... 20,000 7.38% $22.28 9/2/00 $123,083 $271,982
Michael S. Young.............. 20,000 7.38% $20.25 9/2/05 $254,702 $645,466
James R. Steichen............. 25,000 9.23% $20.25 9/2/05 $318,378 $806,832
---------------
(1) The options were granted under the Company's Stock Option Plan on May
3, 1996, with a vesting commencement date of September 1, 1995. The
options granted to Messrs. Williamson and Steltenpohl have a maximum
term of 5 years and the options granted to Messrs. Young and Steichen
have a maximum term of 10 years, all measured from the vesting
commencement date, subject to earlier termination upon the optionee's
cessation of service with the Company. All options will vest as to
1/60th of the shares each month.
(2) The exercise price may be paid in cash, in shares of Common Stock
valued at fair market value on the exercise date or through a cashless
exercise procedure involving a same-day sale of the purchased shares.
The Company may also finance the option exercise by loaning the
optionee sufficient funds to pay the exercise price for the purchased
shares and the Federal and state income and employment tax liability
incurred by the optionee in connection with such exercise.
22.
(3) There is no assurance provided to the option holder or any other holder
of the Company's securities that the actual stock price appreciation
over the five- or 10-year option term will be at the 5% and 10% assumed
annual rates of compounded stock price appreciation.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning option exercises
and option holdings for the 1996 fiscal year by each of the Named Officers. No
stock appreciation rights were exercised during such year or were outstanding at
the end of the year.
[Download Table]
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT FY-END FY-END (2)
-------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
D. Stephen C. Williamson 74,000 51,000 $623,950 $342,125
Greg A. Steltenpohl 59,000 51,000 $507,475 $342,125
Michael S. Young 29,000 51,000 $213,625 $299,075
James R. Steichen 5,000 20,000 $ - $ --
--------------
(1) Based on the fair market value of the purchased option shares at the
time of exercise less the option exercise price paid for those shares.
(2) Based on the fair market value of the shares at the end of the 1996
fiscal year ($16.375 per share) less the option exercise price payable
for those shares.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of the Company's Common Stock as of December 9, 1996 by (i) each
director and (ii) all those known by the Company to be beneficial owners of more
than five percent of its Common Stock.
[Enlarge/Download Table]
Beneficial Ownership (1)
Number of Percent of
Beneficial Owner Shares Total (2)
---------------- ------ ---------
D. Stephen C. Williamson (3)............................................. 681,563 13.48%
c/o Odwalla, Inc.
120 Stone Pine Road
Half Moon Bay, CA 94019
Greg A. Steltenpohl (4).................................................. 647,736 12.85%
c/o Odwalla, Inc.
120 Stone Pine Road
Half Moon Bay, CA 94019
Kenneth H. Ausubel (5)................................................... 1,350 *
Lauren M. Doliva......................................................... 3,000 *
Martin S. Gans........................................................... 41,658 *
Directors and executive officers as a group (9 persons) (8).............. 1,427,967 27.58%
---------------
* Less than one percent
23.
(1) This table is based upon information supplied by officers, directors
and principal shareholders and Schedules 13D and 13G filed with the
SEC. Unless otherwise indicated in the footnotes to this table and
subject to community property laws applicable, the Company believes
that each of the shareholders named in this table has sole voting and
investment power with respect to the shares indicated as beneficially
owned.
(2) Percentage of ownership is based on 4,972,355 shares of Common Stock
outstanding on December 9, 1996, adjusted as required by rules
promulgated by the SEC.
(3) Includes 41,250 shares of Common Stock held by Alexandra Bowes, Mr.
Williamson's wife, and 197,939 shares held by Willy Juice Partners, a
limited partnership of which Mr. Williamson is the general partner. Mr.
Williamson disclaims beneficial ownership of shares held by Willy Juice
Partners, except to the extent of his pecuniary interest therein. Also
includes 81,917 shares of Common Stock subject to options exercisable
within 60 days of December 9, 1996.
(4) Includes 232,785 shares of Common Stock held by Bonnie Bassett
Steltenpohl, Mr. Steltenpohl's wife, and 11,539 shares held by the
Estate of Benita Johnson, of which Mr. Steltenpohl is the executor.
Also includes 66,917 shares of Common Stock subject to options
exercisable within 60 days of December 9, 1996.
(5) Also includes 1,125 shares of Common Stock subject to options
exercisable within 60 days of December 9, 1996.
(6) Also includes 3,000 shares of Common Stock subject to options
exercisable within 60 days of December 9, 1996.
(7) Also includes 3,000 shares of Common Stock subject to options
exercisable within 60 days of December 9, 1996.
(8) Includes the following shares of Common Stock subject to options
exercisable within 60 days of December 9 1996: Mr. Ballentine, 2,125
shares; Mr Casotti, 3,667 shares; Mr. Steichen, 7,083 shares; Mr.
Young, 35,667 shares.
COMPLIANCE WITH THE REPORTING REQUIREMENTS OF SECTION 16(A)
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than ten percent of a registered
class of the Company's equity securities, to file with the SEC initial reports
of ownership and reports of changes in ownership of Common Stock and other
equity securities of the Company. Officers, directors and greater than ten
percent shareholders are required by SEC regulations to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended August 31, 1996, all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten percent beneficial owners were complied with, except that one monthly
transaction report of both Mr. Ausbel and Mr. Ballentine were filed late.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Steltenpohl is a 50 percent owner of the Davenport property at
which certain marketing offices and warehouse facilities are located (the
"Davenport Property"). The Company leases the Davenport Property at a
24.
monthly rent of $9,320 pursuant to a lease that expires in July 1999 with
respect to its office facilities and July 1998 for the warehouse facilities. The
rent payable under this lease will be adjusted in August 1998 based on the
percentage increase in the United States Department of Labor, Bureau of Labor
Statistics, Consumer Price Index for All Urban Consumers for the San
Francisco-Oakland-San Jose area. The Company believes that the rental terms of
the Davenport Property lease are fair and reasonable and no less favorable than
those that would be available to the Company in a transaction with an
unaffiliated lessor.
In December 1995, the Company's Board of Directors authorized the
Company's employment of Nina Simons, who is the wife of Mr. Ausubel. Ms. Simons
serves as the Company's Director of Strategic Marketing Initiatives. Her annual
salary is $60,000 plus approximately $400 per month for home office facilities.
In June 1996, the Company's Board of Directors authorized the Company
to enter into a consulting arrangement with a consulting company solely owned by
Mr. Ausubel. The contract was approved by a majority of disinterested directors
and was entered into on standard industry terms. Payments to Mr. Ausubel under
this arrangement were less than $60,000 in fiscal 1996.
In April 1995, the Company's Board of Directors authorized the Company
to enter into an executive search contract with Heidrick & Struggles, an
executive search firm of which Dr. Doliva, a director of the Company, is a
partner and Director. The contract was approved by a majority of disinterested
directors and was entered into on standard industry terms. Payments to Heidrick
& Struggles in fiscal 1996 totaled $74,000.
25.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
3.1* Amended and Restated Articles of Incorporation of the Registrant.
3.2* Bylaws of the Registrant, including all related amendments.
4.1* Reference is made to Exhibits 3.1 and 3.2.
4.2** Investors' Rights Agreement dated August 31, 1992 between the
Registrant and Silicon Valley Bank.
4.3** Registration Rights Agreement dated March 27, 1991 between the
Registrant and Silicon Valley Bank.
4.4** Registration Rights Agreement dated March 25, 1992 between the
Registrant and Silicon Valley Bank.
10.1** Form of Indemnity Agreement entered into between the Registrant and its
directors and officers.
10.2* Registrant's Stock Option Plan, as amended (and related stock option
grant forms).
10.3** License Agreement dated October 18, 1993 between Pacific Asia Marketing
Ltd. and the Registrant.
10.4** Purchase Option Agreement dated September 15, 1993 between the
Registrant and Richard A. Long.
10.5*** Loan and Security Agreement dated January 30, 1995, as amended between
the Registrant and Silicon Valley Bank.
10.6** Promissory Note dated March 1, 1993 between the Registrant and Greg A.
Steltenpohl.
10.7** Promissory Note dated March 1, 1993 between the Registrant and Bonnie
Bassett Steltenpohl.
10.8* Lease Agreement between Fred M. Bailey and Bren E. Bailey and the
Registrant, dated December 6, 1982 as amended on June 19, 1991,
November 13, 1991, and July 22, 1994. 10.9* Registrant's 1994
Non-Employee Directors' Stock Option Plan (and related stock option
grant forms).
10.10+ Asset Purchase Agreement dated January 31, 1995 by and among
Registrant, J.S. Grant's Inc., Grant Peck and Michael Delaney.
10.11++ Supply and License Agreement dated January 12, 1995 between the
Registrant and Trinity Springs Ltd.
10.12 Office Lease dated June 1995 by and between University Bank & Trust
Company of Palo Alto and Registrant.
11.1 Statement of Computation of Common and Common Equivalent Shares.
16.1+++ Letter Regarding Change in Certifying Accountant
23.1 Consent of Price Waterhouse LLP
23.2 Consent of BDO Seidman, LLP
27.1 Financial Data Schedule
----------
* Incorporated by reference to Registrant's Report on Form 10-KSB for the
fiscal year ended August 31, 1994, as filed with the SEC.
** Incorporated by reference to Registrant's Registration Statement on
Form SB-2, SEC File No. 33-71530-LA, as filed with the SEC on November
9, 1993, as amended.
*** Incorporated by reference to Registrant's Report on Form 10-QSB for the
fiscal quarter ended February 28, 1995.
+ Incorporated by reference to Registrant's Report on Form 8-K as filed
with the SEC on February 13, 1995, as amended.
26.
++ Incorporated by reference to Registrant's Registration Statement on
Form SB-2, SEC File No. 33-91170, as filed with the SEC on April 13,
1995, as amended.
+++ Incorporated by reference to Registrant's Report on Form 8-K, SEC File
No. 0-23036, as filed with the SEC on June 25, 1996.
(b) REPORTS ON FORM 8-K.
The Company filed a current report on Form 8-K (the "Report") (File No.
0-23036) with the Securities and Exchange Commission on June 25, 1996. The
Report contained information regarding the change in the Company's principal
independent accountants from BDO Seidman, LLP to Price Waterhouse LLP.
27.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on December 12, 1996.
ODWALLA, INC.
By /s/ D. STEPHEN C. WILLIAMSON
--------------------------------
D. Stephen C. Williamson
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints D. Stephen C. Williamson, as his true and
lawful attorneys-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this Report on Form 10-K, and to file the same, with all exhibits thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
[Enlarge/Download Table]
SIGNATURE TITLE DATE
/s/ D. STEPHEN C. WILLIAMSON Chief Executive Officer December 12, 1996
------------------------------------------ (Principal Executive Officer)
D. Stephen C. Williamson
/s/ GREG A. STELTENPOHL Chairman of the Board December 12, 1996
------------------------------------------
Greg A. Steltenpohl
/s/ KENNETH H. AUSUBEL Director December 11, 1996
------------------------------------------
Kenneth H. Ausubel
/s/ LAUREN M. DOLIVA Director December 10, 1996
------------------------------------------
Lauren M. Doliva
/s/ MARTIN S. GANS Director December 11, 1996
------------------------------------------
Martin S. Gans
/s/ JAMES R. STEICHEN Chief Financial Officer December 12, 1996
------------------------------------------ (Principal Financial and
James R. Steichen Accounting Officer)
28.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ODWALLA, INC.
[Download Table]
PAGE
--------
Reports of Independent Accountants F-2 - F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 - F-18
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Odwalla, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Odwalla, Inc. and its subsidiary at August 31, 1996, and the results of their
operations and their cash flows for the year in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
As discussed in Note 16 to the consolidated financial statements, the Company
recalled certain of its products on October 30, 1996. As a result, net sales for
November declined significantly and the Company expects to report a significant
loss in the first quarter and for fiscal year 1997. The Company intends to
present claims to its insurance carriers for certain recall-related losses. In
addition, several personal injury claims and legal proceedings have been filed
against the Company since the recall.
Price Waterhouse LLP
San Francisco, California
October 21, 1996, except as to Note 16,
which is as of December 11, 1996
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Odwalla, Inc.
Half Moon Bay, California
We have audited the accompanying balance sheet of Odwalla, Inc. as of August 31,
1995 and the related statements of operations, changes in shareholders' equity
and cash flows of Odwalla, Inc. for each of the two years in the period ended
August 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Odwalla, Inc. at August 31,
1995, and the results of its operations and its cash flows for each of the two
years in the period ended August 31, 1995 in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
San Francisco, California
October 12, 1995
F-3
ODWALLA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
[Enlarge/Download Table]
AUGUST 31,
-------------------
1995 1996
---- ----
Current assets
Cash and cash equivalents (Note 2) $11,786 $ 5,975
Short term investments (Note 2) 6,710 6,438
Trade accounts receivable, less allowance for doubtful
accounts of $166 and $306 3,478 5,302
Inventories (Note 3) 1,586 3,294
Prepaid expenses and other 573 964
Deferred tax asset (Note 9) 31 307
------- -------
Total current assets 24,164 22,280
------- -------
Plant, property and equipment, net (Notes 4 and 8) 8,283 12,641
------- -------
Other assets
Officer and shareholder loans (Note 5) 84 117
Excess of cost over net assets acquired, net of accumulated
amortization of $69 and $178 (Note 6) 1,549 1,442
Covenants not to compete, net of accumulated amortization
of $89 and $226 (Note 6) 1,011 874
Other noncurrent 390 346
------- -------
Total other assets 3,034 2,779
------- -------
Total assets $35,481 $37,700
======= =======
Current liabilities
Accounts payable $ 4,360 $ 5,308
Accrued payroll and related items 998 1,096
Income taxes payable (Note 9) 410 281
Other accruals 112 581
Current maturities of capital lease obligations (Note 8) 242 210
Current maturities of long-term debt (Note 7) 124 149
------- -------
Total current liabilities 6,246 7,625
Capital lease obligations, less current maturities (Note 8) 600 384
Long-term debt, less current maturities (Note 7) 88 90
Other 48 27
------- -------
Total liabilities 6,982 8,126
------- -------
Commitments and contingencies (Notes 8 and 16)
Shareholders' equity
Common stock, no par value, shares authorized, 15,000,000; shares
issued and outstanding, 4,890,860 and 4,945,095 28,371 28,813
Retained earnings 128 761
------- -------
Total shareholders' equity 28,499 29,574
------- -------
Total liabilities and shareholders' equity $35,481 $37,700
======= =======
See accompanying notes to consolidated financial statements.
F-4
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
[Enlarge/Download Table]
YEAR ENDED AUGUST 31,
------------------------------------
1994 1995 1996
---- ---- ----
Net sales $ 18,153 $ 35,869 $ 59,197
Cost of sales 8,984 18,425 29,889
-------- -------- --------
Gross profit 9,169 17,444 29,308
-------- -------- --------
Operating expenses
Sales and distribution 6,212 11,588 20,158
Marketing 484 891 2,257
General and administrative 1,973 3,576 6,206
-------- -------- --------
Total operating expenses 8,669 16,055 28,621
-------- -------- --------
Income from operations 500 1,389 687
Other (expense) income
Other -- 17 (195)
Interest (expense) income, net (Note 12) (199) 91 541
-------- -------- --------
Income before income taxes 301 1,497 1,033
Income tax expense (Note 9) -- (500) (400)
-------- -------- --------
Net income $ 301 $ 997 $ 633
======== ======== ========
Net income per common share $ 0.08 $ 0.22 $ 0.12
======== ======== ========
Weighted average common and common equivalent
shares outstanding 3,623 4,472 5,420
======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
[Enlarge/Download Table]
Series A Series B
---------------- -----------------
Common Stock Preferred Stock Preferred Stock Retained
------------------- ---------------- ----------------- earnings
Shares Amount Shares Amount Shares Amount (deficit) Total
------ ------ ------ ------ ------ ------ --------- -----
Balance, September 1, 1993 1,418 $ 345 346 $ 739 927 $ 2,908 $(1,170) $ 2,822
Conversion of Preferred Stock to
common stock (Note 11) 1,273 3,647 (346) (739) (927) (2,908) -- --
Proceeds from initial public
offering (Note 11) 1,050 5,586 -- -- -- -- -- 5,586
Exercise of Common Stock Options 3 10 -- -- -- -- -- 10
Net income for the year -- -- -- -- -- -- 301 301
------- ------- ------- ------- ---- ------- ------- -------
Balance, August 31, 1994 3,744 9,588 -- -- -- -- (869) 8,719
Proceeds from public offering 1,065 18,594 -- -- -- -- -- 18,594
Exercise of Common Stock Options
and warrants, including related
tax benefits (Note 11) 82 189 -- -- -- -- -- 189
Net income for the year -- -- -- -- -- -- 997 997
------- ------- ------- ------- ---- ------- ------- -------
Balance, August 31, 1995 4,891 28,371 -- -- -- -- 128 28,499
Exercise of Common Stock Options,
including related tax benefits
(Note 11) 54 442 -- -- -- -- -- 442
Net income for the year -- -- -- -- -- -- 633 633
------- ------- ------- ------- ---- ------- ------- -------
Balance, August 31, 1996 4,945 $28,813 -- $ -- -- $ -- $ 761 $29,574
======= ======= ======= ======= ==== ======= ======= =======
See accompanying notes to consolidated financial statements.
F-6
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
[Enlarge/Download Table]
Year ended August 31,
----------------------------------
1994 1995 1996
---- ---- ----
Cash flows from operating activities
Net income $ 301 $ 997 $ 633
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 676 913 1,288
Amortization 8 152 244
Deferred tax asset (67) 36 (276)
Loss (gain) on sale of assets (9) -- 202
Changes in assets and liabilities
Trade accounts receivable (447) (1,679) (1,824)
Inventories (450) (537) (1,708)
Prepaid expenses and other current assets (115) (239) (391)
Other noncurrent assets (164) (119) 11
Accounts payable 451 2,201 948
Accrued payroll and related items 73 524 98
Other accrued liabilities (43) 24 448
Income taxes payable -- 410 (129)
-------- -------- --------
Net cash provided by (used in) operating activities 214 2,683 (456)
-------- -------- --------
Cash flows used in investing activities
Purchase of J.S. Grant's business assets, including covenant
not to compete -- (2,525) --
Capital expenditures (1,464) (2,231)
Purchase of short-term investments -- (6,710) --
Sale of short-term investments, net -- -- 272
Other investing activities -- (100) --
Payment for purchase of Dharma Juice Company (230) -- --
Proceeds from sale of assets 9 -- 57
-------- -------- --------
Net cash used in investing activities (1,685) (11,566) (5,352)
-------- -------- --------
Cash flows from financing activities
Principal payments under long-term debt (2,434) (1,196) (197)
Proceeds from issuance of long-term debt -- 1,149 --
Payments of obligations under capital leases (269) (204) (248)
Sale of common stock 5,596 18,783 442
-------- -------- --------
Net cash provided by (used in) financing activities 2,893 18,532 (3)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,422 9,649 (5,811)
Cash and cash equivalents, beginning of period 715 2,137 11,786
-------- -------- --------
Cash and cash equivalents, end of period $ 2,137 $ 11,786 $ 5,975
======== ======== ========
Cash paid during the year for:
Interest $ 262 $ 146 $ 94
Income taxes $ 59 $ 42 $ 219
Noncash investing and financing activities: During 1994, the Company incurred
capital lease obligations of $249,000 to purchase equipment. During 1994, the
Company entered into a covenant not to compete, requiring payments totaling
$110,000, in connection with the Dharma purchase (Note 6). During 1994,
1,273,209 shares of preferred stock were exchanged for 1,273,209 shares of
common stock. During 1995, the Company assumed approximately $135,000 of capital
lease obligations in connection with the acquisition of J.S. Grant's, Inc. (Note
6). During 1996, the Company purchased property in Dinuba by issuing a $225,000
note payable.
See accompanying notes to consolidated financial statements.
F-7
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
Business. Odwalla, Inc. ("Odwalla" or the "Company") was incorporated in
California on September 19, 1985. Odwalla is a leading branded fresh juice and
beverage company in the country, serving selected markets in the western United
States and the province of British Columbia. Odwalla's complete product line
consists of more than 30 juice blends and natural spring water.
Principles of Consolidation. In January 1996, the Company formed a wholly
owned subsidiary, Odwalla Canada, Inc. ("Odwalla Canada"), under the laws of
British Columbia. The accompanying consolidated financial statements include the
accounts of the Company and Odwalla Canada. All significant intercompany
balances and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents. The Company considers all investments with an initial
maturity of three months or less to be cash equivalents.
Inventories. Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
Plant, Property, Equipment and Depreciation. Plant, property and equipment
are stated at cost. Depreciation and amortization are computed over the
estimated useful lives of the assets by the straight-line method for financial
reporting purposes and by accelerated methods for income tax purposes. For
assets under capital leases, amortization is based upon the shorter of the lease
term or useful life and is included with depreciation expense.
[Download Table]
Estimated useful lives are as follows:
Buildings and building improvements .......................... 7 to 35 years
Leasehold improvements........................................ 5 to 15 years
Machinery and equipment....................................... 5 to 15 years
Vehicles...................................................... 5 years
Other......................................................... 3 to 7 years
Excess of Cost over Net Assets Acquired. The excess of cost over net assets
acquired, which relates to the Company's acquisitions of Dharma Juice Company
and J. S. Grant's, Inc., are being amortized over a 15-year period using the
straight-line method. Periodically, the recoverability of the excess of cost
over net assets acquired is evaluated by comparing estimated future income to
projections made at the time of acquisition.
Covenants Not to Compete. The covenants not to compete associated with the
acquisitions of Dharma Juice Company (four-year term), J. S. Grant's, Inc.
(ten-year term) and the expansion into a new regional market (five-year term)
are being amortized using the straight-line method over the terms of the
agreements.
Deferred Taxes. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Revenue Recognition. Net sales are recognized at the time of delivery to the
customer. A reserve for returns is recorded at the time of sale.
F-8
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Accounting for Stock-Based Compensation. In October 1995, Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," was issued which establishes accounting and reporting standards
for stock-based compensation plans. The Company is required to adopt this
standard in fiscal 1997. This standard encourages the adoption of the fair
value-based method of accounting for employee stock options or similar equity
instruments, but continues to allow the Company to measure compensation cost for
those equity instruments using the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Under the fair value-based method, compensation cost is
measured at the grant date based on the value of the award. Under the intrinsic
value-based method, compensation cost is the excess, if any, of the quoted
market price of the stock at the grant date or other measurement date over the
amount the employee must pay to acquire the stock. The Company intends to
continue the use of the intrinsic value-based method. As a result, adoption of
this standard will not have any effect to the Company's consolidated financial
statements other than to require disclosure of the pro forma effect on net
income of using the fair value-based method of accounting.
Net Income Per Share. Net income per common and common equivalent share
using the weighted average number of common and common equivalent shares
outstanding was computed by applying Securities and Exchange Commission Staff
Accounting Bulletin No. 83 (SAB 83). Pursuant to SAB 83, common and common
equivalent shares issued by the Company during the 12 months immediately
preceding its initial public offering at a price below the initial public
offering price together with common share equivalents which result from the
grant of common stock options and warrants having exercise prices below the
initial public offering price during the same period have been included in the
calculation of the shares used in computing net income per share as if they were
outstanding for all periods prior to the initial public offering. Net income per
share for periods subsequent to the initial public offering have been computed
using the treasury stock method, under which the number of shares outstanding
includes an assumed use of the proceeds from the issuance of such shares and
from the assumed exercise of such options and warrants to repurchase shares of
the Company's common stock at current market prices.
Reclassification. Certain 1994 and 1995 operating expenses previously
included in sales and distribution expense have been reclassified to marketing
and general and administrative expenses to conform to 1996 classifications.
Short-term investments transactions have been classified as an investing
activity in the consolidated statement of cash flows in 1996 to more accurately
reflect the nature of the investments; 1995 short-term investments transactions
have been reclassified to conform with the 1996 presentation.
2. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents include cash management funds totaling $10,678,000
and $5,726,000 at August 31, 1995 and 1996. Cash management funds are generally
invested in money market and tax-free municipal bond funds. The carrying amount
approximates fair value because of the short maturity of these instruments.
Short-term investments consist primarily of U. S. Government securities and
tax free municipal bonds. The carrying amount of these investments approximates
fair value. Interest income, net, includes $242,000 of interest earned from
these investments.
F-9
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVENTORIES
Inventories consist of the following (in thousands):
[Download Table]
AUGUST 31,
-----------------------
1995 1996
-------- ------
Raw materials $ 1,267 $ 2,793
Packaging supplies and other 37 151
Finished product 282 350
---------- ---------
Total $ 1,586 $ 3,294
========== =========
4. PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment consist of the following (in thousands):
[Download Table]
AUGUST 31,
----------------------
1995 1996
-------- ------
Land $ 100 $ 411
Buildings and building improvements 2,943 6,339
Leasehold improvements 1,785 2,287
Machinery and equipment 4,675 5,242
Vehicles 1,134 619
Other 1,440 2,693
-------- --------
12,077 17,591
Less accumulated depreciation and amortization (3,794) (4,950)
-------- --------
Plant, property and equipment, net $ 8,283 $ 12,641
======== ========
The above includes leased property under capital leases as described in
Note 8.
5. OFFICER AND SHAREHOLDER LOANS
At August 31, 1995 and 1996, outstanding loans to officers totaled
$74,000 and $106,000, and outstanding loans to other shareholders totaled
$10,000 and $11,000. These loans bear interest at rates from 0% to 7.5% and are
due at various dates through 2001.
6. BUSINESS ACQUISITIONS
In January 1995, the Company acquired substantially all of the assets
of the fresh juice business of J.S. Grant's, Inc., a Colorado corporation
("Grant's"). The acquired assets included cash, accounts receivable, inventory,
machinery, equipment and supplies, intangible assets such as recipes,
formulations, trade secrets, trade names, and goodwill (collectively, the
"Assets"). Odwalla purchased the Assets for approximately $1.59 million,
including approximately $94,000 of legal, accounting and other costs incurred by
the Company. The acquisition resulted in an excess of costs over net assets
acquired of $1.46 million, which is being amortized over 15 years on a straight
line basis.
Odwalla entered into a ten year non-competition agreement with each of
the two former officers of Grant's for an aggregate consideration of $890,000.
The non-competition agreements are being amortized over ten years on a straight
line basis.
F-10
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BUSINESS ACQUISITIONS (CONTINUED)
The acquisition was accounted for as a purchase and, accordingly,
Grant's financial results are included in the Company's financial statements
from January 31, 1995. The following pro forma results are unaudited and reflect
purchase accounting adjustments assuming the acquisition occurred at the
beginning of each period (in thousands, except per share data).
[Download Table]
YEAR ENDED
AUGUST 31,
-----------------------
1994 1995
-------- ------
Net sales $22,080 $37,325
Net income 12 728
Net income per share $ 0.00 $ 0.16
In June 1995, Odwalla entered into a five year non-competition
agreement with an individual for $100,000 in connection with the expansion into
a new regional market. The non-competition agreement is being amortized over
five years on a straight line basis.
7. LONG-TERM DEBT
The Company's long-term debt consists of (a) $89,000 of equipment notes
payable, interest at 9% to 14%, payable in monthly principal and interest
installments and (b) a promissory note for $150,000, payable in annual principal
installments of $75,000 plus interest at 5%. Principal payments of $149,000, and
$90,000 are due in 1997 and 1998.
In conjunction with prior loan agreements, the bank received warrants
to acquire 18,000 shares of the Company's common stock at $3.05 per share which
were due to expire thirty days following notice to the bank. The bank also
received warrants to purchase an additional 9,000 shares of the Company's common
stock at an aggregate exercise price of $3.05 per share which were due to expire
in March 1997, assuming thirty days' notice had been given. In January 1995,
with the market price of the stock at $8.00, the bank converted the above
mentioned warrants into 16,715 shares of common stock in a cashless transaction.
The Company entered into a Loan and Security Agreement (the
"Agreement") with a bank on January 31, 1995. The Agreement provided a $3
million line of credit, including the ability to issue letters of credit up to
$500,000 as part of the total committed balance, and was collateralized by all
of the Company's assets. Interest was at the bank's prime interest rate plus
0.5%. Approximately $1.1 million was borrowed under the Agreement to assist in
the purchase of Grant's (Note 6) and was paid in full in the third quarter of
fiscal 1995. The Agreement expired in March 1996 and was not renewed.
8. COMMITMENTS
OPERATING AND CAPITAL LEASES
The Company leases certain property consisting of its production
facilities, offices, branch distribution facilities, equipment and certain
vehicles under operating leases, including the related party lease described
below. These leases expire at various dates through 2007 and many facility
leases contain renewal options. Most property leases require the Company to pay
utilities, property taxes and common maintenance costs. Total rent expense under
operating leases approximated $420,000, $1,241,000 and $3,490,000 for the years
ended August 31, 1994, 1995 and 1996. The Company also leases various furniture,
equipment and vehicles under capital leases expiring through 2001.
F-11
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS (CONTINUED)
Following is an analysis of leased property under capital leases by
major classes (in thousands):
[Download Table]
AUGUST 31,
------------------------
1995 1996
------ -----
Machinery and equipment $ 1,412 $ 971
Vehicles 717 140
Other 115 84
------- -------
2,244 1,195
Less accumulated amortization (943) (333)
------- -------
Net leased equipment under capital leases $ 1,301 $ 862
======= =======
As of August 31, 1996, future net minimum lease payments under
capital leases and future minimum rental payments required under operating
leases are as follows (in thousands):
[Download Table]
CAPITAL OPERATING
YEAR ENDING AUGUST 31, LEASES LEASES
---------------------- ------- --------
1997 $ 258 $ 4,596
1998 238 4,381
1999 166 3,802
2000 8 3,084
2001 -- 1,738
Thereafter -- 1,570
-------- --------
670 $ 19,171
========
Less amount representing interest (76)
--------
Present value of net minimum lease payments 594
Less current maturities (210)
--------
Long-term portion $ 384
========
Certain leases are guaranteed by Company shareholders and officers.
The Company leased a portion of its office facility through March 1996
and subleases portions of two distribution facilities under sublease agreements
requiring payments by the lessees of $136,000, $126,000, $126,000 and $52,000 in
1997, 1998, 1999 and 2000. The Company earned $26,000 and $71,000 under sublease
agreements in 1995 and 1996.
RELATED PARTY LEASE
The Company's storage facility and offices in Davenport, California,
are leased from a partnership of which Mr. Steltenpohl, the Company's Chairman,
is a significant partner. The lease for this facility expires in July 1998 as to
the storage facility and July 1999 as to the office space. Rent and lease
related expenses paid to the partnership approximated $112,000 during each of
the years ended August 31, 1994, 1995 and 1996. Total accumulated leasehold
improvements at this facility, net of accumulated amortization, approximated
$271,000 and $221,000 at August 31, 1995 and 1996.
F-12
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS (CONTINUED)
OTHER COMMITMENTS
Supply and License Agreement
In January 1995, the Company entered into an exclusive Supply and
License Agreement ("Agreement") whereby Trinity Springs Ltd. ("Trinity")
supplies a product to be bottled, packaged, marketed and distributed by Odwalla.
Under the Agreement, the Company is required to pay a license fee equal to 50%
of the net profits, as defined, on a quarterly basis. The Company agreed to
distribute certain minimum quantities of the product. The Agreement is for five
years and is automatically renewable for unlimited successive five-year terms,
with either party retaining the right not to renew under certain circumstances.
The Company was granted 10% of the then outstanding shares of Trinity in January
1995, although the shares have not been issued to date. The Company will also be
issued a warrant to purchase 1% of Trinity's outstanding capital stock on each
of the first five anniversary dates of the Agreement. The Agreement became
effective in October 1995. There were no license fees paid in 1996.
Raw Material Contracts
As of August 31, 1996, the Company had entered into purchase
commitments for the future delivery of raw materials. Approximately $1.5 million
of commitments are under one-year contracts to be completed through May 1997.
One three-year contract is also open, requiring purchase of $3.2 million of
product, and is to be completed by May 1999.
Land Purchases
In April 1996, the Company entered into a contract to purchase land
adjacent to the Dinuba production facility for $215,000. Odwalla paid $10,000 as
a deposit when the contract was signed and paid the balance when the purchase
was completed in October 1996.
In May 1996, the Company entered into an agreement, subject to certain
contingencies, 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 Company completed the transaction in October 1996 at
a cost of $351,000, of which $230,000 represents assumption of the existing
mortgage on the property. The extended lease terms are included in operating
lease commitments above.
9. TAXES ON INCOME
The Company recognizes deferred tax liabilities and assets by applying
enacted statutory tax rates applicable to future years for the expected future
tax consequences of temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
F-13
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. TAXES ON INCOME (CONTINUED)
Deferred tax assets consist principally of the following (in
thousands):
[Download Table]
AUGUST 31,
-------------------
1995 1996
------ -----
Reserves and accruals $ 35 $ 369
Tax credits 27 64
Property, plant and equipment (29) (150)
Inventories -- 22
State taxes -- 35
Other (2) (33)
----- -----
$ 31 $ 307
===== =====
The Company's effective tax rate differs from the federal statutory
rate as follows:
[Download Table]
YEAR ENDED AUGUST 31,
---------------------
1995 1996
------ -----
Federal statutory tax rate 34% 34%
State income taxes 6 5
Reduction of valuation allowance through utilization
of net operating loss carryforward (4) -
Permanent differences (3) (6)
Taxes for prior periods -- 6
--- --
Effective tax rate 33% 39%
=== ==
Taxes on income consisted of the following (in thousands):
[Download Table]
YEAR ENDED AUGUST 31,
-------------------------------
1994 1995 1996
------ ------ -----
Current:
Federal $ 105 $390 $429
State 13 90 127
----- ---- ----
118 480 556
----- ---- ----
Deferred:
Federal (52) 64 (130)
State - 16 (26)
----- ---- ----
(52) 80 (156)
------ ---- -----
66 560 400
Change in valuation allowance (66) (60) -
$ - $500 $400
===== ==== ====
During the years ended August 31, 1996 and 1995, the Company recognized
certain tax benefits related to stock option plans in the amount of $12,000 and
$42,000. These benefits were recorded as a reduction of income taxes payable and
an increase in common stock.
F-14
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EMPLOYEE BENEFIT PLAN
The Company's matches 10% of each employee's contribution to the 401(k)
Employee Benefit Plan ("Plan"), as amended in September 1992 by the Board of
Directors. Total contributions to the Plan approximated $9,000, $24,000 and
$36,000 for the years ended August 31, 1994, 1995 and 1996.
11. SHAREHOLDERS' EQUITY
On March 31, 1995, the Company's Board of Directors declared a common
stock dividend. On May 1, 1995, each shareholder of record on April 17, 1995
received one additional share of common stock for every two shares held.
Earnings per share and all relevant stock and per share information have been
retroactively restated to reflect the stock dividend.
Initial Public Offering. Effective upon the initial public offering of
the Company's securities in December 1993, the authorized stock was 5,000,000
shares of preferred stock and 15,000,000 shares of common stock. The preferred
stock may be issued in one or more series. All outstanding preferred stock was
converted to common stock on a one-for-one basis in conjunction with the initial
public offering.
Warrants. The Company issued warrants to purchase an aggregate of
90,158 shares of common stock at prices ranging from $3.05 to $5.03 per share.
These warrants were exercised in 1995, principally in cashless transactions, and
an aggregate of 69,642 shares of common stock were issued.
The underwriters of the Company's initial public offering were issued
warrants to purchase 105,000 shares of common stock at $7.20 per share. These
warrants expire in September 1998 and are currently outstanding.
Stock Option Plans. Under the Stock Option Plan, incentive stock
options ("Incentive Options") may be granted to employees and nonstatutory stock
options ("Nonstatutory Options") may be granted to employees, directors or
consultants. In December 1994, the Board of Directors adopted the 1994
Non-Employee Directors' Stock Option Plan ("Directors' Plan") and, in January
1995, the shareholders approved this plan.
Incentive Options may be granted at an exercise price not less than
100% of fair market value on the grant date; Nonstatutory Options may be granted
at an exercise price not less than 85% of fair market value on the grant date.
The options generally vest one-sixtieth per month from the grant date, although
approximately 85,000 outstanding Nonstatutory Options vested immediately on the
grant date. Directors' Plan options may be granted at an exercise price not less
than 100% of fair market value and generally vest quarterly over a five-year
period. In general, options terminate ten years from date of grant.
F-15
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY (CONTINUED)
The activity under the above plans was as follows:
[Download Table]
SHARES OPTIONS OPTION PRICE
AVAILABLE OUTSTANDING PER SHARE
--------- ----------- ------------
Balance at September 1, 1993 457,095 292,905 $ 3.33-$3.90
Options granted (180,000) 180,000 $ 3.97-$6.60
Options exercised -- (3,090) $3.33
-------- ---------
Balance at August 31, 1994 277,095 469,815 $ 3.33-$6.60
Additional shares reserved 282,000 --
Options granted (272,648) 272,648 $ 7.83-$8.62
Options exercised -- (11,709) $ 3.33-$7.83
Options canceled 29,690 (29,690) $ 3.33-$3.97
-------- ---------
Balance at August 31, 1995 316,137 701,064 $ 3.33-$8.62
Additional shares reserved 266,500 --
Options granted (270,906) 270,906 $20.25-$22.28
Options exercised -- (59,625) $ 3.33-$20.25
Options canceled 46,471 (46,471) $ 3.90-$20.25
-------- ----------
Balance at August 31, 1996 358,202 865,874 $ 3.33-$22.28
======== =========
12. INTEREST INCOME (EXPENSE)
Interest (expense) income consisted of the following (in thousands):
[Download Table]
YEAR ENDED AUGUST 31,
-----------------------------------
1994 1995 1996
------ ------ -----
Interest income $ 81 $ 237 $ 635
Interest expense (280) (146) (94)
----- ----- -----
Net interest (expense) income (199) 91 $ 541
===== ===== =====
No amounts of interest expense were capitalized in 1994, 1995 or 1996.
13. SIGNIFICANT CUSTOMER AND CREDIT CONCENTRATION
One customer, Safeway, Inc., represented approximately 15%, 16% and 14%
of sales in fiscal 1994, 1995, and 1996. Another customer, PriceCostco,
represented approximately 11% of sales in fiscal 1994. Although a significant
portion of the Company's customers are concentrated in Northern California,
trade accounts receivable are generally diversified due to the large number of
entities comprising the Company's customer base.
F-16
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. RELATED PARTY TRANSACTIONS
The Company incurred executive recruitment fees of $37,000 and $74,000
during 1995 and 1996 by utilizing a company of which one of the Company's
directors is a partner. The Company incurred consulting fees of $35,000 during
1996 by utilizing a company which is owned by one of the Company's directors.
15. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company performs ongoing credit evaluations of its customers and
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other information.
The following summarizes the activity in the allowance for doubtful accounts for
the three years ended August 31, 1996 (in thousands):
[Download Table]
YEAR ENDED AUGUST 31,
------------------------------
1994 1995 1996
------ ------ -----
Allowance for doubtful accounts, beginning of year $ 70 $ 98 $ 166
Bad debt expense for the year 69 112 398
Allowance established at time of Grant's
acquisition -- 20 --
Accounts receivable written off during the year (41) (64) (258)
----- ----- -----
Allowance for doubtful accounts, end of year $ 98 $ 166 $ 306
===== ===== =====
16. SUBSEQUENT EVENT
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 O157: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. 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. As of
November 22, 1996, there were 66 cases of E. coli O157:H7 illness
epidemiologically linked to Odwalla apple juice products, according to the
Centers for Disease Control and Prevention.
Immediately following the Recall, the Food and Drug Administration
("FDA") began an investigation of the Company's production and distribution
centers. The FDA informed the Company that a sample from one bottle of apple
juice taken from a distribution center tested positive for E. coli O157:H7. The
FDA investigation is on-going.
The Company has experienced a significant reduction in sales of all of
its products following the Recall. Although sales of the Company's products have
declined in all of its markets, declines in sales have been most significant in
the Pacific Northwest and Colorado. Net sales in November 1996 were
approximately 38% of August 1996 sales levels. The significant decline in sales
of the Company's products can be attributed to the loss of consumer confidence,
reduction of the number of products on the market from 23 to eight and the
removal of all of the Company's products by certain trade partners. Beginning in
early December 1996, the Company reintroduced all apple juice-based products to
the market using flash pasteurization of its fresh apple juice. The Company
incurred significant costs related to the Recall, including public relations,
advertising, marketing, legal and other professional fees, costs of
reformulating products and costs associated with the flash pasteurization
process.
F-17
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. SUBSEQUENT EVENT (CONTINUED)
The Company has invested in building an infrastructure capable of
sustaining a growth and expansion organization. This, along with other factors,
does not allow the Company to reduce costs commensurate with the reduction in
sales. Although the Company is still in the planning stages following the
Recall, the Company expects the costs associated with the Recall and disruption
in sales will result in a significant loss in the first quarter of fiscal 1997
and 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.
However, there have been no claims prepared as of December 11, 1996, and the
amount or timing of proceeds, if any, from future insurance claims cannot be
presently determined.
As of December 11, 1996, there have been six personal injury claims and
legal proceedings seeking monetary damages and other relief filed against the
Company since the Recall. Two are class action lawsuits and four others are
personal injury lawsuits. In addition, there is one legal proceeding alleging
fraudulent business acts and practices relating to the recalled products pending
against 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 short period of time since the Recall, the Company is not
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 is designing plans to regain and build on its customer base
and anticipates that sales levels will improve throughout the remainder of
fiscal year 1997. However, the improvement is not expected to offset the effects
of lost sales and costs associated with the Recall. While a significant loss is
expected for fiscal year 1997, the Company believes it will have sufficient cash
to fund its operations and capital expenditures through the end of fiscal year
1997. However, this belief is based on future sales estimates which are
inherently uncertain given the disruption to the Company's business caused by
the Recall.
F-18
Dates Referenced Herein and Documents Incorporated by Reference
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Filing Submission 0000891618-96-003054 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
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