Document/Exhibit Description Pages Size
1: 10-K Odwalla, Inc. Form 10-K 61 334K
2: EX-4.1 Warrant to Purchase Common Stock, Feb. 10, 1999 9 39K
3: EX-4.2 Warrant to Purchase Common Stock, May 22, 1997 6 25K
4: EX-10.1 Form of Indemnification Agreement 14 62K
6: EX-10.19 Important Notice and Agreement 4 15K
5: EX-10.5 Business Loan Agreement, July 12, 2001 35 121K
7: EX-21.1 Subsidiaries of the Registrant 1 4K
8: EX-23.1 Consent of Independent Accountants 1 5K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ODWALLA LOGO]
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 1, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-23036
ODWALLA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
[Download Table]
California 77-0096788
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
120 Stone Pine Road
Half Moon Bay, California 94019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE)
Registrant's telephone number, including area code: (650) 726-1888
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
[Download Table]
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 November 20, 2001, was approximately $83,595,270 (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 November 20, 2001 approximately 11,218,023 shares of the Registrant's
common stock, no par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
[Cover Page 2 of 2 pages]
CAUTIONS ABOUT FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements
about future financial results, future business changes and other events that
haven't yet occurred. For example, statements like "we expect," "we want," "we
anticipate" or "we believe" are forward-looking statements. Investors should be
aware that actual results may differ materially from our expressed expectations.
We will not necessarily update the information in this Form 10-K if any
forward-looking statement later turns out to be inaccurate. Details about risks
that could affect various aspects of our business are included throughout this
Form 10-K. Investors should read all of these risks carefully, and should pay
particular attention to risks affecting the following areas: availability and
pricing of raw materials (page 7); competition (page 8); our dependence on
significant trade partners (page 8); government regulations that may impact our
business (page 9); the specific risk factors discussed on pages 9 to 12; legal
proceedings (page 13); and commitments and contingencies described in Note 4 to
the financial statements. Investors should also refer to other documents that we
file from time to time with the Securities and Exchange Commission.
PART I
ITEM 1. BUSINESS
OVERVIEW
Odwalla began operations in September 1980 and was incorporated in
California in September 1985. When we refer to "we," "Odwalla" or the "Company"
in this Form 10-K, we mean our California corporation (Odwalla, Inc.) and our
Maine corporation (Fresh Samantha, Inc.), which we acquired on May 2, 2000. When
we refer to "Samantha," in this Form 10-K, we mean the branded products of Fresh
Samantha, Inc.
Odwalla's business is to provide easy access to great tasting
nourishment through the marketing and sale of beverage and food products. We are
the nation's leading branded super-premium beverage company, delivering great
tasting nourishment coast to coast with the Odwalla and Samantha lines of more
than 45 all natural juices, smoothies, dairy-free original and chocolate milk,
dairy-free shakes, spring water and natural food bars. Our beverage product
lines appeal to many consumers because of the superior taste and greater
nutritional value of minimally processed beverages compared to juice from
concentrate or with artificial flavors or to more highly processed non-dairy
products.
We seek to accomplish our business objectives by leading the industry in
beverage and food 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 our information systems, interacting with consumers and living our
vision.
Odwalla's sourcing procedures and production methods enable us to create
products with high nutritional value and flavor quality. The distribution of our
products through both our own and other direct-store-delivery systems allows us
to control product quality and presentation, as well as to develop relationships
with trade partners. We sell and distribute our products to over 7,500 retail
locations, including supermarkets, specialty retailers, natural food stores,
warehouse outlets, convenience stores, on-line grocers and food service
operators through our direct-store-delivery system.
Odwalla is committed to certain values -- nourishing consumers,
shareholders and other stakeholder groups; environmental awareness; and support
for the communities we serve. We believe that our products reflect these values.
Odwalla products are currently sold in almost 40 states. Our nourishing
food bars are available in additional states and can also be purchased through
our Web site at www.odwalla.com.
2
ACQUISITION BY THE COCA-COLA COMPANY
Odwalla has entered into an Agreement and Plan of Merger, dated as of
October 29, 2001 (the "Merger Agreement"), with The Coca-Cola Company ("TCCC")
and TCCC Acquisition Corp. (formerly known as Perry Phillip Corp., the
"Offeror"), a wholly owned subsidiary of TCCC. Pursuant to the Merger Agreement,
the Offeror has offered (the "Offer") to purchase all of the outstanding shares
of common stock of Odwalla for $15.25 per share, net to the seller in cash, less
any required withholding taxes and without interest thereon (the "Offer Price").
The Offer was launched on November 6, 2001. On that date, TCCC and the Offeror
filed a Tender Offer Statement on Form TO with the Securities and Exchange
Commission (the "SEC"), and Odwalla filed a Solicitation/Recommendation
Statement on Schedule 14D-9 with the SEC. The Offeror and TCCC also began
distributing the Offer materials, including the Tender Offer Statement and
Solicitation/Recommendation Statement, on November 6, 2001. Odwalla shareholders
are urged to read the Offer materials carefully.
The Merger Agreement, among other things, provides for the Offer, and,
upon the terms and subject to the conditions of the Merger Agreement and in
accordance with the California General Corporation Law (the "CGCL"), provides
that the Offeror will be merged with and into Odwalla (the "Merger") and each
share of Odwalla common stock then outstanding (other than shares owned by TCCC,
the Offeror, their direct or indirect subsidiaries and dissenting shareholders,
if any) will be converted into the right to receive the Offer Price less any
required withholding taxes and without interest thereon. Following the Merger,
Odwalla will continue as the surviving corporation (the "Surviving Corporation")
and become a wholly owned subsidiary of TCCC. The separate corporate existence
of the Offeror will cease.
The Offer is conditioned upon there being validly tendered and not
withdrawn prior to the expiration date of the Offer, which is scheduled to be
December 6, 2001, but which may be extended in accordance with the provisions of
the Merger Agreement, at least ninety and one-tenth percent (90.1%) of the
shares of Odwalla common stock then outstanding, including, for purposes of such
calculation, shares that are issuable upon exercise of vested options and
outstanding warrants but excluding shares that are issuable upon the exercise of
options and warrants of Odwalla that are cancelled pursuant to the Merger
Agreement (the foregoing being referred to herein as "Fully Diluted Basis") (the
"Minimum Condition"). The Offer is also subject to the expiration or termination
of all applicable waiting periods under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), and the satisfaction or
waiver of other terms and conditions set forth in the Merger Agreement. The
waiting period under the HSR Act expired on November 19, 2001.
Concurrently with the execution of the Merger Agreement, and as a
condition and inducement to TCCC's and the Offeror's entering into the Merger
Agreement, Odwalla entered into a Stock Option Agreement, dated as of October
29, 2001 (the "Option Agreement"), with TCCC and the Offeror. Pursuant to the
Option Agreement, Odwalla granted to the Offeror an irrevocable option (the
"Top-Up Stock Option") to purchase that number of shares of Odwalla common stock
(the "Top-Up Option Shares") equal to the number of shares that, when added to
the number of shares owned by TCCC and the Offeror immediately following
consummation of the Offer, will constitute 90.1% of the shares of Odwalla common
stock then outstanding on a Fully Diluted Basis (assuming the issuance of the
Top-Up Option Shares). However, the Top-Up Stock Option will not be exercisable
if the number of shares of Odwalla common stock subject to the Top-Up Stock
Option exceeds the number of shares available for issuance or the issuance of
such shares requires the approval of the Odwalla shareholders under the rules of
the National Association of Securities Dealers.
If the Minimum Condition is not satisfied on any scheduled expiration
date of the Offer, at the request of Odwalla, the Offeror shall, and TCCC shall
cause the Offeror to take any of the following actions at the discretion of the
Offeror: (x) extend the Offer pursuant to the provisions of the Merger
Agreement, (y) amend the Offer in contemplation of exercising the Top-Up Option
to reduce the Minimum Condition to that number of shares of Odwalla common stock
(the "Option Exercise Minimum Number") equal to the number of shares which, when
combined with the number of shares issued upon exercise of the Top-Up Option,
equals 90.1% of the shares of Odwalla common stock then outstanding on a Fully
Diluted Basis or (z) amend the Offer to provide that, if (i) the Minimum
Condition is not satisfied at the next scheduled expiration date of the Offer
(after giving effect to the issuance of any shares of Odwalla common stock
acquired by TCCC or the Offeror) and (ii) the number of shares of Odwalla common
stock tendered pursuant to the Offer and not withdrawn as of such next scheduled
expiration date is more than 50% of the then outstanding shares,
3
the Offeror shall waive the Minimum Condition and amend the Offer to reduce the
number of shares of Odwalla common stock subject to the Offer to 49.9% of the
shares then outstanding (the "Revised Minimum Number") and, subject to the prior
satisfaction or waiver of the other conditions of the Offer, purchase, on a pro
rata basis, the Revised Minimum Number of shares.
Under the CGCL, if TCCC or the Offeror acquires, pursuant to the Offer
or otherwise, at least 90% of the shares of Odwalla common stock then
outstanding, it will be able to effect the Merger without a vote of the
shareholders. In such event, TCCC, the Offeror and Odwalla have agreed in the
Merger Agreement to take, subject to the satisfaction or waiver of the
conditions set forth in the Merger Agreement, all necessary and appropriate
action to cause the Merger to be effective as soon as practicable after the
acceptance for payment and purchase of shares of Odwalla common stock pursuant
to the Offer, without a meeting of shareholders of Odwalla, in accordance with
the CGCL.
Under the CGCL, the merger consideration paid to the shareholders of
Odwalla may not be cash if TCCC and the Offeror own, directly or indirectly,
more than 50% but less than 90% of the then outstanding, shares of Odwalla
common stock, unless either all the shareholders of Odwalla consent to the
Merger or the Commissioner of Corporations of the State of California approves,
after a hearing, the terms and conditions of the Merger and the fairness
thereof. If, pursuant to the Offer, the Option Agreement or otherwise, the
Offeror does not acquire shares of Odwalla common stock that, taken together
with shares owned by TCCC, represent at least 90.1% of the shares of Odwalla
common stock then outstanding on a Fully Diluted Basis as of any scheduled
expiration date of the Offer, and the Offeror instead amends the Offer to reduce
the number of shares of Odwalla common stock subject to the Offer to the Revised
Minimum Number, then the Offeror, together with TCCC, would own 49.9% of the
shares then outstanding upon consummation of the Offer, and would thereafter
solicit the approval of the Merger and the Merger Agreement by a majority vote
of the shareholders of Odwalla. Under such circumstances, a significantly longer
period of time will be required to effect the Merger.
Concurrently with the execution and delivery of the Merger Agreement,
TCCC, entered into Tender Agreements, dated October 29, 2001 (the "Tender
Agreements"), with each of the following shareholders: Bain Capital Fund VI,
L.P.; BCIP Associates II; BCIP Trust Associates II; BCIP Associates II-B; BCIP
Trust Associates II-B; BCIP Associates II-C; PEP Investments Pty. Limited; U.S.
Equity Partners, L.P.; U.S. Equity Partners (Offshore), L.P.; Catterton-Simon
Partners III, L.P.; D. Stephen C. Williamson; James R. Steichen; Theodore R.
Leaman III; Douglas K. Levin; Michael Carter; Julie Carter; and Robert Carter
(collectively, the "Tendering Shareholders"). Pursuant to the Tender Agreements,
the Tendering Shareholders agreed to tender into the Offer an aggregate of
6,280,594 shares of Odwalla common stock owned by the Tendering Shareholders
(the "Committed Shares"). The Committed Shares represent approximately 57% of
the total outstanding shares of Odwalla common stock as of October 29, 2001.
The Tender Agreements also provide that Bain Capital Fund VI, L.P.; BCIP
Associates II; U.S. Equity Partners, L.P.; U.S. Equity Partners (Offshore),
L.P.; Catterton-Simon Partners III, L.P.; D. Stephen C. Williamson; Douglas K.
Levin; Michael Carter; Julie Carter; and Robert Carter (the "Voting
Shareholders"), representing in the aggregate 5,950,650 shares or 54% of the
total outstanding shares of Odwalla common stock as of October 29, 2001,
irrevocably appoint the Offeror as their proxy to vote their portion of such
Committed Shares in connection with the transaction in the following manner: (1)
for the adoption and approval of the Merger Agreement and the Merger and (2) in
any manner as TCCC, in its sole discretion, may see fit with respect to any
extraordinary corporate transaction (other than the Merger), such as a merger,
consolidation, business combination, tender or exchange offer, reorganization,
recapitalization, liquidation, sale or transfer of a material amount of the
assets or securities of Odwalla or any of its subsidiaries (other than pursuant
to the Merger) or any other change of control involving Odwalla or any of its
subsidiaries, including, but not limited to, any proposal from a third party
with respect to a merger, consolidation, share exchange, tender offer or similar
transaction involving Odwalla or any subsidiary of Odwalla, or any purchase or
other acquisition of 20% or more of the assets of Odwalla or any subsidiary of
Odwalla or any purchase or other acquisition of any equity interest in Odwalla
or any subsidiary of Odwalla. Notwithstanding the foregoing grant to TCCC of the
irrevocable proxy, if TCCC elects not to exercise its rights to vote the shares
of Odwalla common stock subject to the Tender Agreements, the Voting
Shareholders have agreed, (i) to vote such Voting Shareholder's shares of
Odwalla common stock in favor of or give such Voting Shareholder's consent to,
as applicable, a proposal to adopt and approve the Merger Agreement and the
Merger, or (ii) to vote such Voting Shareholder's shares of Odwalla common stock
in the manner directed by TCCC if the issue on which the Voting Shareholder is
requested to vote is a matter described in
4
clause (2) of the preceding sentence, in each case at any annual, special or
other meeting or action of the shareholders of Odwalla, in lieu of a meeting or
otherwise.
The Merger Agreement provides that, promptly after the Offeror acquires
shares of Odwalla common stock which represent at least the Minimum Condition,
the Option Exercise Minimum Number or the Revised Minimum Number, the Offeror
will be entitled to designate such number of directors, rounded up to the next
whole number, on the Board of Directors of Odwalla (the "Post-Acceptance
Board"), subject to compliance with Section 14(f) of the Securities Exchange Act
of 1934, as amended, as will make the number of Odwalla's directors designated
by the Offeror equal to the product of (1) the total number of available seats
on the Board of Directors and (2) the percentage that the number of shares of
Odwalla common stock owned by the Offeror and TCCC bears to the total number of
shares of Odwalla common stock issued and outstanding, provided that, prior to
or upon the purchase by the Offeror of any shares of Odwalla common stock in the
Offer, Odwalla shall increase the number of directors on the Board of Directors
from seven to eight and shall maintain the number of directors at eight until
the effective time of the Merger. Prior to the effective time of the Merger,
Odwalla shall use its reasonable best efforts to ensure that the Post-Acceptance
Board includes four directors in office as of October 29, 2001 (the "Continuing
Directors"). Odwalla shall, at such time, take all actions necessary to cause
the Offeror's designees to be so elected by its existing Board of Directors. In
addition, Odwalla will use its reasonable best efforts to cause individuals
designated by the Offeror to constitute the same percentage as such individuals
represented on the Post-Acceptance Board of each committee of such
Post-Acceptance Board (other than any committee of such Post-Acceptance Board
established to take action under the Merger Agreement).
In connection and simultaneously with the Offer, Odwalla has agreed to
use its reasonable best efforts to ensure that each holder of outstanding
options (whether vested or unvested) to acquire any shares of Odwalla common
stock (the Company Options) granted under Odwalla's Stock Option Plan adopted in
1993, Odwalla's 1994 Non-Employee Directors' Stock Option Plan and Odwalla's
Amended and Restated 1997 Stock Option/Stock Insurance Plan will execute an
agreement to exchange immediately prior to the consummation of the Offer such
holder's Company Options to Odwalla for an amount in cash determined by
multiplying (A) the excess, if any, of the Offer Price over the applicable
exercise price per share of the Company Option (regardless of the exercise
price) by (B) the number of shares of Odwalla common stock subject to the
Company Options (whether vested or unvested) held by such holder (such amount,
the "Option Consideration") less any amounts withheld to satisfy applicable tax
obligations. Upon the expiration date of the Offer, each holder of Company
Options immediately prior to the consummation of the Offer, who has exchanged
such Company Options shall become entitled to the Option Consideration, and all
rights of such holder associated with the Company Options shall be terminated
and canceled. As of the effective time of the Merger, either (1) each Company
Option not so exchanged immediately prior to the consummation of the Offer shall
be canceled, and in consideration for such cancellation the holder shall become
entitled to receive an amount in cash equal to the Option Consideration, subject
to any amounts withheld to satisfy applicable tax obligations, or (2) Odwalla
shall use its reasonable best efforts to ensure that each holder of a Company
Option shall execute an agreement which provides that such Company Option shall
be canceled, and in consideration for such cancellation the holder thereof shall
become entitled to receive an amount in cash equal to the product of (x) the
number of shares of Odwalla common stock subject to the Company Options, whether
vested or unvested, held by such holder and (y) the excess of the consideration
paid for shares of common stock in the Offer per share over the per share
exercise price of each such Company Option, subject to any amounts withheld to
satisfy applicable tax obligations.
See the section entitled "Executive Compensation--Employment Agreements"
for a discussion of the employment agreements between Odwalla and D. Stephen C.
Williamson. Also, see the section entitled "Certain Relationships and Related
Transactions--Loans to Odwalla Executives for Exercise of Stock Options" for a
discussion of loans that may be made to D. Stephen C. Williamson, James R.
Steichen and Theodore R. Leaman III in the event TCCC requires that the
Executives exercise their options in connection with the Offer.
The Board of Directors of Odwalla has unanimously approved the Offer and
the Merger and approved and adopted the Merger Agreement and the Option
Agreement and the transactions contemplated thereby, including the Offer, the
Option and the Merger, and determined that the terms of the Offer, the Option
and the Merger, are fair to and in the best interests of the shareholders of
Odwalla, and recommends that all holders of shares of Odwalla common stock
accept the Offer and tender their shares pursuant to the Offer.
5
ACQUISITION OF FRESH SAMANTHA
On May 2, 2000, we completed our acquisition of Fresh Samantha. We
accounted for the acquisition of Fresh Samantha as a purchase for accounting
purposes and, accordingly, the purchase price has been allocated to the tangible
and intangible assets acquired and liabilities assumed on the basis of their
fair values on the acquisition date. Odwalla's financial statements reflect
results of Fresh Samantha as a wholly owned subsidiary of Odwalla since the
acquisition. Note 2 to the Consolidated Financial Statements provides further
information regarding the acquisition.
PRODUCTS, DISTRIBUTION AND TRADE PARTNERS
Our current product line consists of single-flavor and blended fruit-
and vegetable-based juice products, dairy-free original and chocolate milk,
all-natural meal replacement and dairy-free shakes, nourishing food bars and
natural spring water. All of our juices are currently flash pasteurized and some
are produced on a seasonal basis.
Odwalla products are currently sold in Alaska, Arizona, British
Columbia, California, Colorado, Connecticut, Delaware, Florida, Georgia, Guam,
Idaho, Illinois, Indiana, Iowa, Louisiana, Maine, Massachusetts, Maryland,
Michigan, Minnesota, Missouri, Nevada, New Hampshire, New Jersey, New Mexico,
New York, Nevada, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island,
South Carolina, Tennessee, Texas, Utah, Virginia, Washington state, Washington,
D.C. area, Vermont, and Wisconsin.
We use our branded, custom-designed 450 milliliter and 325 milliliter
bottles made from recyclable, HDPE plastic for the Odwalla brand. This bottle
retains fresh fruit flavor notes better than the bottles commonly used by our
competitors. It also has a tamper-resistant, screw-on cap, which allows
consumers to easily reseal their beverage while drinking Odwalla on-the-go. The
characteristics of Odwalla's proprietary bottle also extend the shelf life of
our products. We establish shelf life standards for each product to maintain the
flavor and nutritional integrity that consumers associate with freshly produced
fruit and vegetable beverages. The shelf life of Odwalla's fruit and
vegetable-based products is typically between 10 and 25 days at a retail outlet.
Although the cost of the new bottle is approximately 50% greater than the prior
bottle, we believe that the ability to extend shelf life and thus our
distribution capabilities help offset the increased cost. In November 2001, we
introduced a branded, custom-designed 450 milliliter bottle made from
recyclable, HDPE plastic for the Samantha brand. Our food bars have a
significantly longer shelf life. Our policy is to have all products removed from
trade partners' shelves on or before their Odwalla-established expiration date.
Because of our "day of production" quality standards, products reflect
the seasonal changes in fruit varieties in color and taste. Our production
methods are designed to minimize the effect of processing on the fruit juice
extracted. Our entire product line varies due to a significant component of
seasonal ingredients, seasonal product usage, and the addition and deletion of
products.
We've trademarked various aspects of our brands, including labels,
certain product names, certain phrases and symbols, as we believe that these and
other intellectual property that we own are critical to our success. These items
help create the Odwalla and Samantha brands and connect in an important way with
our consumers. We have taken steps to protect our intellectual property and we
intend to continue to protect against imitation of our products and packages and
to protect our trademarks and copyrights as necessary. This action could be
time-consuming, result in costly litigation and divert management personnel.
Furthermore, there can be no assurance that we would be successful in such
action.
Our products are sold and distributed primarily through our
direct-store-delivery system, which is serviced by route sales representatives
who sell, deliver and merchandise our products to our trade partners. This
direct-store-delivery system is designed to allow us to preserve the integrity
of our highly perishable all-natural products, optimally manage delivery
schedules, efficiently control product mix, keep store shelves or our own
coolers stocked with freshly prepared products and have a greater influence on
determining in-store location and merchandising of our products. At most
direct-store-delivery accounts, we stock, order and merchandise our products at
the point of sale, and we issue credits to the trade partner for unsold product.
This full service relationship allows us to avoid paying slotting fees for shelf
space, as well as other handling fees, and to maintain control over our product
merchandising at the point of sale.
6
We provide a lesser degree of service to certain trade partners who are
responsible for stocking, ordering and merchandising Odwalla products. These
trade partners do not receive credit for unsold products. Consumers can purchase
our products at supermarkets, specialty retail stores, natural food stores,
convenience stores, warehouse outlets, on-line grocers and institutional food
service trade partners.
We also distribute our products through third party distributors. This
distribution channel, with merchandising support provided by the distributors'
employees and/or our employees, provides opportunities to expand product
distribution in selected markets, some of which may be geographically difficult
for us to service, and still maintain relationships with trade partners. We sell
directly to third party distributors who generally do not receive credit for
unsold product. The third party distributors may also have their own
direct-store-delivery system or they may deliver product to a trade partner who
is then responsible for stocking and merchandising the product. As we increase
our penetration in existing markets and grow into new geographic markets, sales
through third party distributors will likely increase as a percentage of sales.
Our sales to third party distributors are discounted from our standard wholesale
pricing.
RAW MATERIALS
Producing and selling our minimally processed products entails special
requirements in ingredient sourcing, production, distribution and sales in order
to preserve and maximize the flavor profile and nutritional integrity of the
products. We source and select fruits and vegetables to meet a variety of
established criteria, including overall quality, flavor profile, variety,
ripeness and other factors. Processing of fruit and vegetables is performed in a
manner that captures and preserves the various qualities of fresh and consistent
flavors. Odwalla has focused on each of these elements in an effort to achieve
our goal of providing the safest, best tasting and most nutritious beverages and
other products for consumers.
Odwalla buys ingredients according to stringent specifications. Fruits
and vegetables, in particular, are purchased year-round or seasonally depending
on the type of produce. Because various types of fruit and vegetable crops are
harvested at different times of the year, we obtain and produce different juices
on a seasonal basis. Most of our fruits and vegetables are purchased in the open
market on a negotiated basis. Historically, oranges, apples, carrots and
tangerines are the largest volume commodities we purchase. We have developed an
extensive network of ingredient sourcing relationships over the years and rely
on this network as well as new sources for the ingredients we need. On the East
Coast, we currently utilize a Florida co-packing arrangement for
flash-pasteurized single-strength citrus products for the Samantha brand. We
also purchase organic oats as a significant ingredient in our food bars. All of
these key ingredients are subject to volatility in supply, price and quality
that could seriously harm our business and results of operations. We are subject
to the same risks with our other ingredients as well.
We also source a number of fruits, including tropical fruits, from
foreign suppliers in the form of frozen fruit puree. A puree is whole fruit that
has been processed, finely cut, heat treated, packed in a container and frozen.
A puree is not a concentrate. Purees are combined with the freshly extracted and
flash pasteurized juices of other fruits or ingredients in a number of our
products. The purees we purchase are heat treated to increase safety and meet
government regulations. Most purees are purchased under annual price contracts.
Independent companies produce some of our products, including our water and
nourishing food bars, to our specifications and recipes.
As with most agricultural products, the supply and price of raw
materials we use can be affected by a number of factors beyond our control,
including frost, drought, flood, hurricane and other natural disasters. Weather
conditions, economic factors affecting growing decisions, various plant diseases
and pests will affect the condition and size of the crop. For example, in
December 1998, a freeze damaged citrus crops in the San Joaquin Valley and other
portions of California. This freeze had a significant negative impact on the
cost and yield of fresh citrus products we used until the impact of the freeze
ended in the beginning of the third quarter of fiscal 2000. See Management's
Discussion and Analysis of Financial Conditions and Results of Operations
beginning on page 16 for more information. Adverse weather conditions could
negatively affect our business and results of operations.
7
Odwalla is pursuing a no genetically engineered organisms status on our
entire product line. However, ingredients that are not genetically modified are
at times difficult to source in the required volumes. Genetically modified
organisms are the product of splicing or modifying crops to release new
organisms to the environment. Crops are genetically modified in order to
increase crop yields, to withstand high doses of herbicides or to produce their
own insecticides. There are uncertainties about the potential risks genetically
modified foods pose to humans and the environment. While we have written and
verbal guarantees from our suppliers that the ingredients they supply us do not
contain genetically modified organisms, we do not independently test such
guarantees. We intend to provide our consumers information about any genetically
modified organisms that are used in our products.
COMPETITION
In a broad sense, our beverages compete with all beverages available to
consumers and our food bars compete with all food and energy bars currently
available. The natural foods market is highly competitive. It includes national,
regional and local producers and distributors; many of them have greater
resources than we do, and many of them have shelf-stable products that can be
distributed with significantly less cost. We believe our niche is easily
accessed nourishing beverages in the refrigerated super premium juice,
dairy-free beverages, nourishing food bar and bottled water categories. We
believe our direct competition in this market niche is currently from
nationally, regionally and locally focused juice producers, certain of which are
owned by major beverage producers, nationally branded meal replacement beverage
producers, private equity funds, food and energy bar companies, soy product
companies and premium bottled water companies.
Our direct competitors in the juice business include national brands
such as Horizon, Just Squeezed, Tropicana, Minute Maid, Newman's Own and
Nantucket Nectars. Our juice products also compete with regional brands, many of
which are owned by Ultimate Juice Co., a company owned by North Castle Partners,
a private equity fund which has heavily invested in the healthy living and aging
consumer goods products. Ultimate Juice Co. brands include Naked Juice, a brand
which is present in the Western region, Pacific Northwest, and recently on the
East Coast; Saratoga Beverage, in several different regions of the United
States; Zeigler, predominantly in the Northeast, Midwest and Southeast regions;
and Fantasia in Chicago and the Midwest. Other privately owned regional brands
of premium juice also serve as competition to Odwalla, including Rocket Juice in
the West and the Midwest. `Smoothie Bars' such as Jamba Juice are also
considered as direct competitors. In addition, a number of major supermarkets
and other retail outlets squeeze and market their own brand of fresh juices that
compete with the our products. A decision by North Castle or any other large
company to focus on Odwalla's existing markets or target markets could have a
material adverse effect on our business and results of operations. Our food bar
products, which entered the market in August 1998, compete with several more
established companies, including PowerBar (owned by Nestle), Balance Bar (owned
by Kraft Foods, a division of Phillip Morris) and Clif Bar. In March 2001, we
introduced dairy-free original and chocolate OdwallaMilk(TM), a blend of organic
soy, rice and oat milks. This product will compete with several more established
brands and companies, including Silk. Significant competitive pressure from
these or other companies could negatively impact our sales and results of
operations. While we believe that we compete favorably with our competitors on
factors including quality, nutritional integrity, food safety, merchandising,
service, sales and distribution, multiple flavor categories, brand name
recognition and loyalty, our products are typically sold at prices higher than
most other competing beverage and bar products.
DEPENDENCE ON ONE OR A FEW MAJOR TRADE PARTNERS
Safeway, Inc. is our largest single account and accounted for slightly
less than 10% of our fiscal 2001 sales. We spend considerable time to maintain a
good relationship with Safeway and other significant accounts, but we can't
offer any assurance that sales to significant accounts will not decrease or that
these trade partners will not choose to replace our products with those of
competitors. The loss of Safeway or other significant accounts or any
significant decrease in the volume of products purchased by their customers in
the future would seriously harm our business and results of operations.
Continuity of trade partner relationships is important, and events that impact
our trade partners, including their own internal labor disputes, may have an
adverse impact on our results of operations. The acquisition of Fresh Samantha
in May 2000 expanded our geographic reach and provided a broader base of sales
and account relationships.
8
GOVERNMENT REGULATION
The production and sales of beverages are subject to the rules and
regulations of various federal, state and local food and health agencies,
including the U.S. Food and Drug Administration and the California State Food
and Drug, Department of Health Services. In 1998, the FDA regulations for fresh
apple juice went into effect. The final regulations for fruit and vegetable
juices were enacted in January 2001. The FDA's ruling for citrus was to require
all fresh juice processors to show a 5-log reduction in potential pathogenic
bacterial loads, which represents a 100,000 fold reduction in the numbers of the
most resistant pathogens. The regulation also requires a Hazard Analysis
Critical Control Point plan, or HACCP. All Odwalla and Samantha products
produced in our Dinuba, California facility are manufactured under a HACCP plan
with validated critical control points. This includes pasteurization of the
products. By meeting the pasteurization and HACCP requirements, Odwalla and
Samantha products meet the FDA Regulations.
We are also subject to various federal, state and local environmental
laws and regulations that limit the discharge, storage, handling and disposal of
a variety of substances and 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. We believe that we comply in
all material respects with these laws and regulations, although we cannot assure
that the cost of future compliance with such laws or regulations will not have a
material adverse effect on our results of operations or financial condition. We
did not incur any significant costs in fiscal 2001 to comply with environmental
laws.
EMPLOYEES
On November 20, 2001, Odwalla had approximately 700 employees, almost
all of whom were full-time employees. We do not have any collective bargaining
agreements with our employees, and we believe employee relations are generally
good.
OTHER FACTORS AFFECTING ODWALLA'S BUSINESS
RISKS ASSOCIATED WITH PERISHABLE PRODUCTS. Except for our natural spring
water and food bars, Odwalla's products are flash pasteurized and heat treated.
Our products do not contain any preservatives. As a result, our products have a
limited shelf life. In order to maintain our "day-of-production" flavor quality
standards, we further restrict the shelf life of our products through early
expiration dates. This restricted shelf life means that we do not have any
significant finished goods inventory and our operating results are highly
dependent on our ability to accurately forecast near term sales in order to
adjust fresh fruit and vegetable sourcing and production. In addition, our
products are subject to issues such as the fermentation and subsequent bottle
bloating due to natural organisms in ingredients. We've historically experienced
difficulties in accurately forecasting product demands and expect that challenge
to continue. When we do not accurately forecast product demand, we are either
unable to meet higher than anticipated demand or we produce excess inventory
that cannot be profitably sold. In addition, most of our trade partners have the
right to return any products that are not sold by their expiration date. Our
inability to meet higher than anticipated demand or excess production or
significant amounts of product returns on any of our products could harm our
business and results of operations.
COST SENSITIVITY. Our profitability is highly sensitive to increases in
raw materials, labor and other operating costs. Unfavorable trends or
developments related to inflation, raw material supply, labor and employee
benefit costs, including increases in hourly wage and minimum unemployment tax
rates, rent increases resulting from rent escalation provisions in our leases,
the availability of hourly employees and increased price or availability of fuel
or other energy costs may also adversely affect our results. We've benefited in
prior years from relatively favorable inflation rates and part-time labor
supplies in our principal market areas. However, there is no assurance that
these conditions will continue or that we will have the ability to control costs
in the future. In fiscal 1999 and in the first half of fiscal 2000, for example,
the cost for citrus products increased significantly due to the citrus crop
freeze in California. Additionally, in some markets, the competition for a
skilled labor force requires us to pay salaries higher than we have experienced
historically and we expect this trend may continue for some period of time.
9
PRODUCT LIABILITY. Because our products are not irradiated or chemically
treated and are flash or gently pasteurized, they are highly perishable and
contain certain naturally occurring microorganisms. From time to time we receive
complaints from consumers regarding ill effects allegedly caused by our
products. As described in Item 7, "Management's Discussion and Analysis of
financial condition and Results of Operations -- Recall and Related Costs" and
in Note 2 to the Consolidated Financial Statements, Odwalla conducted a product
recall in 1996, and we were also the subject of related legal proceedings and
claims. These past claims haven't resulted in any material costs to Odwalla to
date, but there can be no assurance that we will not have future claims or that
any claims associated with the recall in 1996 will not result in adverse
publicity or monetary damages, either of which could seriously harm our business
and results of operations. Additionally, although we maintain product liability
insurance, our coverage may not be sufficient to cover the cost of defense or
related damages in the event of a significant product liability claim.
ORCHARD PRODUCTION. We depend upon the fruit produced from the trees of
large orchards. These trees may become damaged, diseased or destroyed as a
result of windstorms, pests, fungal disease or other causes. Additionally, there
are types of controllable fungal diseases that can affect fruit production
although not fatal to the trees themselves. These types of fungal diseases are
generally controllable with fungicides. However, we can't be sure that such
control measures will continue to be effective. Any decrease in the supply of
fresh fruit as a result of windstorms, pests, fungal disease or other causes
could have a material adverse effect on our business and results of operations.
GEOGRAPHIC CONCENTRATION. In spite of our Fresh Samantha acquisition
which increased our presence in the Northeastern portion of the United States,
our wholesale accounts and retail trade partners continue to have their largest
concentration in Northern California, with most located in the San Francisco Bay
metropolitan area. Due to this concentration, natural disasters, including
earthquakes, economic downturns and other conditions affecting Northern
California may adversely affect our business and results of operations.
CONCENTRATION OF PRODUCTION CAPACITY. All of our juice production
capacity is located at our Dinuba, California facility. We currently expect to
obtain a Florida facility and to begin operations in late calendar 2002, one
year later than we had previously estimated. The delay is primarily due to
delays in obtaining the necessary permits to begin construction of the facility
and the lower than projected East Coast sales volume growth. We also currently
utilize a citrus co-packer in Florida for Samantha brand single-strength citrus
products. Because we maintain minimal finished goods inventory at all production
locations as part of our "day-of-production" production system, we could be
challenged to continue to produce an adequate supply of beverages in the event
that production at or transportation from Dinuba were interrupted by fire,
earthquakes, floods or other natural disasters, work stoppages, regulatory
actions or other causes. Such an interruption at our Dinuba facility would
seriously harm our business and results of operations.
LACK OF DIVERSIFICATION. Odwalla's business is vertically integrated and
centered around essentially one product, all-natural super-premium beverages,
sold primarily through our direct-store-delivery system. Although we've added
dairy-free shakes, dairy-free original and chocolate milk, meal replacement
beverages, spring water, and food bars, and are using more third party
distributors, the risks associated with our focus on essentially one product are
exemplified by the significant adverse effect on our business and results of
operations that resulted from the impact of the California citrus freeze in
December 1998.
Any significant decrease in the consumption of beverages generally or
specifically with respect to our products due to general economic declines,
competition or other causes, would have an adverse effect on our business and
results of operations. The uncertainty following the September 11, 2001
terrorist attacks in New York and Washington, D.C. and the slow down in the
national economy have resulted in sales declines, compared to the prior year, in
some parts of the country during the initial weeks of fiscal 2002.
RISKS RELATED TO EXPANSION. Continued growth depends in part upon our
ability to expand into new geographic areas, either through internal growth or
by acquisition. Due to the extent of our operating losses in recent years until
the third quarter of fiscal 2000 and the effort to complete the Fresh Samantha
integration, we had limited expansion in fiscal 2001 beyond existing markets and
do not expect significant expansion at least through the first half of fiscal
2002. There can be no assurance that we will expand into new geographic areas or
continue to invest in new 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 resulting
from the perishable nature of our products
10
and current reliance on the personnel-intensive direct-store-delivery system may
limit the ability, or increase the cost of, expansion into new regions.
Furthermore, consumer tastes vary by region and there can be no assurance that
consumers located in other regions will be receptive to our products.
The Fresh Samantha acquisition has presented challenges to management,
including the integration of the operations, product lines, technologies and
personnel of Odwalla and Fresh Samantha and diversion of management attention.
We cannot assure you that the combined businesses will achieve increased sales
levels, profitability, efficiencies or synergies or that the integration will be
successfully completed. Conversely, the combined company may experience slower
rates of growth as compared to historical rates of growth of Odwalla and
Samantha independently. We cannot assure you that the companies will realize the
anticipated benefits of the merger.
In January 2001, we announced that we were closing the Saco, Maine
production facility and relocating East Coast production to a new facility to be
constructed in southern Florida. We currently expect a Florida facility to begin
operations in late calendar 2002, one year later than we had previously
estimated. The delay is primarily due to delays in obtaining the necessary
permits to begin construction of the facility and the lower than projected East
Coast sales volume growth. We have not completed negotiations for an appropriate
site in Florida, entered into a construction contract, or completed financing
arrangements for the new facility. Difficulties in negotiating a site location
or financing acceptable to Odwalla may occur. This could negatively impact the
timely completion of construction of the new facility, which could ultimately
result in additional costs to us.
Acquisitions generally 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 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. If we seek and find attractive acquisition candidates, we may not be
able to complete the transaction on acceptable terms, to successfully integrate
the acquisition into our operations, or to assure that the acquisition will not
have an adverse impact on our operations.
Any plans to invest in new markets or to consider additional
acquisitions may cause us to seek additional financing that may be dilutive to
current investors or result in a higher debt-to-equity ratio than would
otherwise be the case. Any financing we obtain may not be on terms favorable to
us, or available at all.
RISK RELATED TO TERMINATION OF MERGER AGREEMENT. There can be no
assurance that the transaction contemplated by the Merger Agreement and the
related tender offer described on page 3 will be completed on a timely basis or
at all. We expect that our common stock price, which increased following the
announcement of the pending transaction with TCCC, could decline if the
transaction is not consummated, or is consummated under different terms. The
costs we have incurred for professional fees and related transaction costs are
significant and would require use of existing working capital to satisfy these
obligations. Demands on management time to negotiate the transaction, prepare
for the due diligence process, and manage any issues resulting from the
termination or delay of the transaction could impact the business negatively.
Additionally, although Odwalla and TCCC entered into confidentiality agreements
prior to the due diligence process taking place, TCCC has had the opportunity to
learn considerable proprietary information regarding our current and future
plans. These and other factors could negatively impact our business.
QUARTERLY FLUCTUATIONS. Fruits and vegetables we use are purchased in
the open market on a negotiated basis, and the price and availability of key
ingredients fluctuate on a quarterly basis. Consumers tend to establish certain
buying patterns, and a disruption of those buying patterns may result in a
decline in sales. Other factors, including expansion into new markets,
consummating an acquisition, costs of integrating acquired operations, price
promotions of certain products, changes by our competitors, and introduction of
new products, can result in fluctuations to sales and costs on a quarterly
basis.
INTELLECTUAL PROPERTY RIGHTS. We believe our trademarks, trade dress,
trade secrets and similar intellectual property are critical to Odwalla's
success and we attempt to protect such property with registered and common law
trademarks and copyrights, restrictions on disclosure and other actions to
prevent infringement. We've licensed elements of our distinctive trademarks,
trade dress and similar proprietary rights to third parties in the past and may
continue this
11
practice. While we attempt to ensure that the quality of our brand is maintained
by these third party licenses, we cannot ensure that these third parties will
not take actions that might seriously harm the value of our proprietary rights
or the reputation of our products, either of which could have a material adverse
effect on our business. Product package and merchandising design and artwork are
important to the success of Odwalla, and we intend to take action to protect
against imitation of our products and packages and to protect our trademarks and
copyrights as necessary. This action could be time-consuming, result in costly
litigation and divert management personnel. Furthermore, there can be no
assurance that we would be successful in such action.
CONTROL BY OFFICERS AND DIRECTORS. Odwalla's officers, directors and
their affiliates beneficially own, in the aggregate, approximately 51% of the
outstanding shares of common stock. Through their holdings, these shareholders,
acting together, would be able to significantly influence most matters requiring
shareholder approval, including the election of a majority of our Board of
Directors. This control could have the effect of delaying, deferring or
preventing a change of control of the Company.
DEPENDENCE ON KEY PERSONNEL. Odwalla's success depends to a significant
extent upon the continued service of its senior management, including Stephen
Williamson, our Chairman and Chief Executive Officer, and the loss of services
from any of such key personnel could have a material adverse effect on our
business or results of operations. Furthermore, our continued growth strategy
depends on the ability to identify, recruit and retain key management personnel.
The competition for such employees is intense, and there can be no assurance we
will be successful in such efforts. We are also dependent on our ability to
continue to attract, retain and motivate production, distribution, sales,
communications and other personnel.
VOLATILITY OF STOCK PRICE. Odwalla's common stock price has, at certain
times, experienced significant price volatility. Announcements of developments
related to our business, fluctuations in operating results, failures 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 us or our competitors, fluctuations in the level of
cooperative development funding, acquisitions, changes in governmental
regulations, developments in patents or other intellectual property rights and
changes in our relationships with trade partners and suppliers could cause the
price of our common stock to fluctuate substantially. 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 our common stock. Read "Item 5, Market For
Registrant's Common Equity And Related Shareholder Matters."
ITEM 2. PROPERTIES
Our production facility in Dinuba, California, consists of approximately
100,000 square feet of production, office and cold storage space on an
approximately 42 acre parcel of land. We own this property and believe we carry
adequate property insurance. Our administrative offices are located in Half Moon
Bay, California. We have an East Coast distribution center, consisting of
approximately 24,000 square feet of warehouse, cold storage and office space, in
Jessup, Maryland. We also have 8 distribution centers throughout California and
the following primary locations: Denver, Colorado; Stamford, Connecticut;
Pompano Beach, Florida; Saco, Maine; Jessup, Maryland; Woburn and Hadley,
Massachusetts; Pennsauken, New Jersey; Albuquerque, New Mexico; Brooklyn, New
York; Eugene and Portland, Oregon; Austin, Houston and Dallas, Texas; and
Seattle, Washington. We lease all our facilities other than the Dinuba
production facility. We believe our facilities and equipment are generally in
good operating condition and are adequate for current needs.
12
ITEM 3. LEGAL PROCEEDINGS
The following personal injury claims and legal proceedings seek monetary
damages and other relief relating to the product recall in 1996, as discussed in
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Recall and Related Costs" and Note 4 to the Consolidated
Financial Statements:
1. The McGregor Case: A personal injury lawsuit filed in Santa Clara
County Superior Court, San Jose, California on June 2, 1997 and
served on June 16, 1997. A settlement reached on September 6,
2001 received court approval on November 27, 2001.
2. The Nixon Case: A personal injury lawsuit filed in Sacramento
County Municipal Court, Sacramento, California on August 15,
1997. No trial date has been set.
We maintained commercial general liability insurance totaling
$27,000,000 during the period for which the above claims were filed and we
promptly notified our insurance carrier of these events. We are unable to
determine the potential liability from the remaining legal proceedings and
claims. The recall related legal proceedings settled to date were covered under
our commercial general liability insurance policy and did not result in any
additional costs to us.
We are subject to other legal proceedings and claims that arise in the
course of our business. We currently believe that the ultimate amount of
liability, if any, for any pending actions (either alone or combined) will not
materially affect our financial position, results of operations or liquidity.
However, the ultimate outcome of any litigation is uncertain, and unfavorable
outcomes could have a material negative impact on our results of operations and
financial condition.
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 2001.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Odwalla's common stock began trading on the Nasdaq SmallCap Market in
December 1993 at the time of our initial public offering. Since May 18, 1995,
our stock has traded on the Nasdaq National Market under the symbol "ODWA." The
following table shows the range of high and low sales prices reported on the
Nasdaq National Market for the periods indicated. On November 20, 2001, the
closing price of Odwalla's common stock was $15.21.
[Download Table]
FISCAL YEAR ENDED SEPTEMBER 1, 2001 HIGH LOW
------- -------
Fourth Quarter $ 11.00 $ 7.30
Third Quarter $ 10.59 $ 8.75
Second Quarter $10.625 $ 8.563
First Quarter $ 11.50 $ 6.25
[Download Table]
FISCAL YEAR ENDED SEPTEMBER 2, 2000 HIGH LOW
------- -------
Fourth Quarter $ 8.00 $ 5.875
Third Quarter $ 9.125 $ 5.25
Second Quarter $ 9.50 $ 4.625
First Quarter $ 7.625 $ 4.313
As of November 20, 2001, there were approximately 329 holders of record
of the Company's common stock.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock. We currently
anticipate that we will retain all future earnings for use in our business and
not pay any cash dividends for the foreseeable future.
14
ITEM 6. SELECTED FINANCIAL DATA
The following table shows selected consolidated financial information
for Odwalla for the past five fiscal years. To better understand the information
in the table, you should also read "Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page 16, and the
Consolidated Financial Statements and Notes beginning on page 40. The
consolidated financial information includes the results of operations of Fresh
Samantha since the acquisition on May 2, 2000.
[Enlarge/Download Table]
Fiscal Year
-------------------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA: (in thousands, except per share data)
Net sales ................................... $ 52,630 $ 59,088 $ 68,042 $ 93,450 $ 128,260
Cost of sales ............................... 27,650 29,236 35,542 47,477 61,723
--------- --------- --------- --------- ---------
Gross Profit ................................ 24,980 29,852 32,500 45,973 66,537
Operating expenses:
Sales and distribution ..................... 22,465 20,445 24,254 31,815 45,574
Marketing .................................. 2,919 2,696 2,908 2,795 3,672
General and administrative ................. 7,625 6,710 7,449 9,616 11,518
Amortization of intangible assets from
Fresh Samantha acquisition ............... -- -- -- 711 2,308
Restructuring and other charges ............ -- -- -- -- 3,490
Recall and related costs ................... 6,518 1,242 250 -- --
--------- --------- --------- --------- ---------
Total operating expenses ................ 39,527 31,093 34,861 44,937 66,562
--------- --------- --------- --------- ---------
Income (loss) from operations ............... (14,547) (1,241) (2,361) 1,036 (25)
Proceeds from insurance settlement, net ..... -- -- -- 5,458 --
Series A preferred stock inducement
expense .................................. -- -- -- (1,587) --
Other income (expense), net ................. 210 (163) (40) (112) (211)
--------- --------- --------- --------- ---------
Income (loss) before income taxes ........... (14,337) (1,404) (2,401) 4,795 (236)
Income tax (expense) benefit ................ 1,901 25 359 (1,140) (198)
--------- --------- --------- --------- ---------
Net income (loss) ........................... (12,436) (1,379) (2,042) 3,655 (434)
Preferred stock dividend .................... -- -- (267) (568) --
--------- --------- --------- --------- ---------
Net income (loss) applicable to
common shareholders ...................... $ (12,436) $ (1,379) $ (2,309) $ 3,087 $ (434)
========= ========= ========= ========= =========
Basic net income (loss) per share
applicable to common shareholders .......... $ (2.49) $ (0.27) $ (0.45) $ 0.44 $ (0.04)
========= ========= ========= ========= =========
Diluted net income (loss) per share
applicable to common shareholders .......... $ (2.49) $ (0.27) $ (0.45) $ 0.43 $ (0.04)
========= ========= ========= ========= =========
[Enlarge/Download Table]
End of Fiscal Year
-----------------------------------------------------------
1997 1998 1999 2000 2001
------- ------- ------- ------- -------
(in thousands)
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments ......... $ 3,225 $ 3,191 $ 7,369 $ 5,392 $ 4,364
Working capital ................. 1,449 1,849 7,674 11,712 12,092
Total assets .................... 31,006 29,350 35,305 89,354 91,085
Long-term liabilities ........... 441 888 688 12,076 13,013
Total shareholders' equity ...... 17,635 16,445 21,954 60,672 60,480
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements
about future financial results, future business changes and other events that
haven't yet occurred. For example, statements like "we expect," "we want," "we
anticipate" or "we believe" are forward-looking statements. Investors should be
aware that actual results may differ materially from our expressed expectations.
We will not necessarily update the information in this Form 10-K if any
forward-looking statement later turns out to be inaccurate. Details about risks
that could affect various aspects of our business are included throughout this
Form 10-K. Investors should read all of these risks carefully, and should pay
particular attention to risks affecting the following areas: availability and
pricing of raw materials (page 7); competition (page 8); our dependence on
significant trade partners (page 8); government regulations that may impact our
business (page 9); the specific risk factors discussed on pages 9 to 12; legal
proceedings (page 13); and commitments and contingencies described in Note 4 to
the financial statements. Investors should also refer to other documents that we
file from time to time with the Securities and Exchange Commission in
conjunction with the following discussion and analysis.
OVERVIEW
This section provides information about our operating results and
changes in financial position over the past three years and should be read in
conjunction with the Consolidated Financial Statements and related Notes
beginning on page 40. Fiscal 2001 contained 52 weeks compared to 53 weeks in
fiscal 2000 and 52 weeks in fiscal 1999. Our rate of sales growth in fiscal 2001
compared to fiscal 2000 on a comparative 52 week basis was approximately 41%
versus 37% due to the additional week of sales in fiscal 2000. Other than the
rate of sales growth distinction, we do not consider the impact of the one less
week in the fiscal period to be material to overall fiscal 2001 financial
performance. The operating results and other financial information discussed
below include the results of Fresh Samantha since the acquisition was completed
on May 2, 2000.
GENERAL BUSINESS
Net sales in fiscal 2001 increased to $128.3 million, an increase of 37%
from $93.4 million of sales last year, which represents a record sales year for
Odwalla. Our net loss for fiscal 2001 was ($434,000) or ($0.04) per basic and
diluted share compared to a gain of $3.1 million or $.44 per basic share and
$0.43 per diluted share last year. Net income in fiscal 2001, excluding the
restructuring and other charges recorded in the second quarter, was $1.7 million
or $0.15 per basic and diluted share. Net income in fiscal 2000, excluding, net
of tax, the insurance settlement proceeds, the cost of converting Series A
preferred stock, and the preferred stock dividend, was $603,000 or $0.09 per
basic share and $0.08 per diluted share.
Before considering the impact of the Fresh Samantha acquisition, our
sales strength this year has come predominantly from continued penetration in
existing markets and sales of new products. We believe that continued
recognition of the Odwalla and Samantha brand and consumer attraction to our
products, new product introductions, better store shelves placement, increased
placement of branded in-store coolers, and increased delivery system support has
contributed to our sales growth. We experienced a sales growth rate decline in
the second half of the fiscal year in some parts of the country due to the
slowing of the economy and operational challenges in certain East Coast markets.
We experience quarterly fluctuations in sales and costs, particularly in
raw materials, which are sometimes significant and we anticipate that these
fluctuations will continue in future quarters. Some factors behind the
fluctuations include: changes in the price or availability of raw materials,
particularly fruit products, due to seasonality, weather and other factors; new
product introductions; costs of expansion into new markets, which can continue
for many quarters beyond the market entry date; increased competition; sales
promotions; buying patterns of consumers; competitor product introductions;
overall economic trends influencing consumers. In addition, weather patterns
impacting consumers, including unseasonably cool or rainy weather, can result in
fewer sales to consumers and ultimately lower sales to trade partners and higher
return credits issued if we haven't been able to forecast and adjust for the
change in
16
consumer buying patterns. While the direct-store-delivery (DSD) system offers
many benefits to us, it is also an expensive and fairly fixed cost distribution
system. We have invested significantly in our production facilities and
management team; the benefit of this investment will result from higher volume
of product through the facilities. Conversely, lower volume than expected will
result in higher fixed costs as a percentage of sales. Finally, we may choose to
reduce prices or increase spending in response to competition in some markets,
which usually has a negative short-term effect on our results of operations.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain
statements of operations data for fiscal years 1999, 2000 and 2001. These
operating results are not necessarily indicative of the results for any future
period.
[Download Table]
YEAR ENDED
-------------------------------
1999 2000 2001
----- ----- -----
Net sales ................................... 100.0% 100.0% 100.0%
Cost of sales ............................... 52.2 50.8 48.1
----- ----- -----
Gross margin ................................ 47.8 49.2 51.9
Operating expenses
Sales and distribution .................... 35.6 34.0 35.5
Marketing ................................. 4.3 3.0 2.9
General and administrative ................ 10.9 10.3 9.0
Amortization of intangible assets from
Fresh Samantha acquisition .............. 0.0 0.8 1.8
Restructuring and other charges ........... 0.0 0.0 2.7
Recall and related costs .................. 0.4 0.0 0.0
----- ----- -----
Income (loss) from operations ............... (3.5) 1.1 0.0
Insurance settlement ........................ 0.0 5.8 0.0
Series A stock inducement expense ........... 0.0 (1.7) 0.0
Interest and other income (expense), net .... (0.0) (0.1) (0.2)
Income tax benefit (expense) ................ 0.5 (1.2) (0.2)
----- ----- -----
Net income (loss) ........................... (3.0)% 3.9% (0.4)%
===== ===== =====
NET SALES. Net sales for fiscal 2001 increased 37% to $128.3 million
compared to $93.4 million in fiscal 2000, and increased 37% in fiscal 2000 from
$68.0 million in fiscal 1999. After adjusting fiscal year 2000 sales for the
additional week, and adjusting fiscal 2001 sales to remove the non-comparable
sales impact of the Fresh Samantha acquisition, our sales increased 11% in
fiscal 2001. Our 2001 sales increase, excluding the non-comparable sales
resulting from the Fresh Samantha acquisition, occurred in all western and
midwestern geographic regions. We experienced a sales decline in our eastern
region markets. We did not enter any significant new markets in fiscal 2001.
After removing the impact of the additional week in fiscal 2000 and the impact
of the Fresh Samantha acquisition since May 2, 2000, our sales increased 14% in
fiscal 2000 compared to fiscal 1999. Our 2000 sales increase, excluding the
sales resulting from the Fresh Samantha acquisition, occurred in all geographic
regions and resulted primarily from growth in existing markets and accounts and
new products. Our food bar business continues as an important product, although
it continues to represent less than 5% of our net sales in both fiscal 2000 and
fiscal 2001.
Our sales growth this year was higher for our distributor business than
for our DSD business. This was primarily due to very strong growth in our
midwestern region, which is currently served exclusively by third party
distributors, plus the conversion from DSD to third party distributors in
selected markets on the East Coast. As a result of these factors, distributor
sales increased as a percentage of total sales in fiscal 2001. This had a
slightly negative impact on our sales growth rate due to the lower wholesale
pricing offered to our third party distributors compared to the retail pricing
offered through our DSD business. Our sales growth rate in fiscal 2000,
excluding the Fresh Samantha acquisition, was about the same for both our
direct-store-delivery and our distributor business.
17
Since September 1, 1999, we have used branded, custom-designed 450
milliliter and 325 milliliter bottles made from recyclable, HDPE plastic for the
Odwalla brand. Our new bottle retains fresh fruit flavor notes better than the
bottles commonly used by our competitors. It also has a tamper-resistant,
screw-on cap, which allows consumers to easily reseal their beverage while
drinking Odwalla on-the-go. The characteristics of the new bottle also extend
the shelf life of our products. At the same time, we began using a new bottling
line designed to accommodate our new bottles. During the first quarter of fiscal
2000, we experienced problems in producing beverage products to meet sales
orders during the initial introduction period. We also experienced unexpected
issues that caused some products to ferment and, ultimately, caused some bottles
to bloat. These issues disrupted a consistent flow of product during the first
half of the first quarter of fiscal 2000. We believe that these issues
negatively impacted sales in the first quarter of fiscal 2000, but had no impact
in fiscal 2001.
In 2000, we implemented the guidance in EITF 00-14, Accounting for
Certain Sales Incentives, which does not represent a change from our existing
accounting policies. Accordingly, any cash sales incentives are classified as a
reduction of revenue.
COST OF SALES. Cost of sales increased to $61.7 million or 48.1% of net
sales in fiscal 2001 compared to $47.5 million or 50.8% of net sales in fiscal
2000. This increase in absolute dollars was mainly due to the acquisition of
Fresh Samantha and the growth in Odwalla brand sales. Cost of sales was $35.5
million or 52.2% of net sales in fiscal 1999. Gross margin increased from 49.2%
in fiscal 2000 to 51.9% in fiscal 2001 after increasing from 47.8% in fiscal
1999. Gross margin increased primarily due to (a) the better efficiencies in
yields from the new bottling line and other investments in the Dinuba production
facility, (b) better purchasing practices for key materials for for both brands,
and (c) the citrus freeze discussed below which impacted the fiscal 2000 and
1999 margins negatively. Also, in the first quarter of fiscal 2001, we began
internally processing some products that had previously been produced at a
higher cost by a co-packer. The increased use of third party distributors also
negatively affected gross margins.
In late December 1998, the San Joaquin Valley in central California
experienced a citrus freeze that seriously damaged the navel orange crop. Other
parts of California were also affected, but to a significantly lesser extent.
The freeze also hurt the California Valencia orange crop and other citrus crops.
The impact of the freeze on our business extended throughout calendar year 1999
and into early calendar 2000. The immediate effect of the freeze during this
period was to increase the price of the fresh citrus we purchased. We also
experienced poorer citrus yields and some delay in fruit maturity. The freeze
also caused us to be more reliant on citrus sources farther from our production
facility than in prior years, which caused an increase in freight cost. After
the Fresh Samantha acquisition in May 2000, we had two production facilities.
The impact on cost of sales of the Fresh Samantha facility in Saco, Maine had a
slight negative impact in fiscal 2000 and in part of fiscal 2001 due to its
higher cost of goods structure relative to the existing Odwalla facility in
Dinuba, California. During fiscal 2001, we experienced a return to more
favorable pricing and yield for citrus crops.
Since the Fresh Samantha acquisition through the end of the third
quarter of fiscal 2001, we operated two production facilities. In January 2001,
we announced that we would cease production at the facility in Saco, Maine in
June 2001 and that we will construct a new production facility in southern
Florida to handle our East Coast production requirements. The Saco facility was
closed as scheduled, and we continue to develop our plans for construction of a
new Florida facility.
SALES AND DISTRIBUTION. Sales and distribution expenses were $45.6
million in fiscal 2001 compared to $31.8 million in fiscal 2000, and increased
as a percentage of net sales to 35.5% from 34.0% in fiscal 2000. The increase in
absolute dollars is due to the Fresh Samantha acquisition in May 2000, increased
costs of utilizing a direct-store-delivery system in some of our newer markets,
some of which were previously serviced with third party distributors, and
increased national and regional labor costs. The increase as a percentage of net
sales compared to last year results from a greater percentage of East Coast
sales than last year at a higher average distribution cost than our more
established West Coast markets, restructuring of the East Coast sales and
distribution organization, and investment in our national sales organization.
Sales and distribution expenses increased in absolute dollars to $31.8
million in fiscal 2000 from $24.2 million in fiscal 1999. However, sales and
distribution expenses as a percentage of net sales declined from 35.6% in fiscal
1999
18
to 34.0% in fiscal 2000. The increase in absolute dollars is due to the Fresh
Samantha acquisition in May 2000, increased costs of utilizing a
direct-store-delivery system in some of our newer markets, some of which were
previously serviced with third party distributors, and increased national and
regional labor costs.
Future decisions regarding growth and expansion consistent with
long-term strategic objectives may increase sales and distribution costs as a
percentage of net sales. We continue to look for efficiencies in this part of
our business. However, expansion into markets serviced by our
direct-store-delivery system will require an investment for some initial period
and changes to the Eastern Seaboard direct-store-delivery system may cause a
short-term increase in costs as we standardize our national operations. Expenses
will also continue to be affected as we seek to find the proper mix in a given
market between our own direct-store-delivery system and third party
distributors. The perishable nature of most of our products and our stringent
service standards can make it difficult to find appropriate distributors in some
markets.
MARKETING. Marketing expenses were $3.7 million or 2.9% of net sales in
fiscal 2001 compared to $2.8 million or 3.0% of net sales in fiscal 2000. Most
of the increase in expenses compared to last year is due to additional personnel
and marketing programs associated with the Fresh Samantha acquisition.
The fiscal 2000 expense represented a decrease from $2.9 million or 4.3%
of net sales in fiscal 1999. Most of the decrease in expenses resulted from a
change in marketing strategy which resulted in fewer employees, less
advertising, and decreased product tastings as we moved to more strategic
tastings, both in retail locations and at community events. These reductions
were offset by an increase in market research during a portion of fiscal 2000.
We expect marketing expenses to trend higher in absolute dollars in
fiscal 2002 as we continue to integrate the Odwalla and Samantha brands,
increase marketing support for a larger sales organization, and hire a vice
president of marketing.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$11.5 million in fiscal 2001 or 9.0% of net sales compared to $9.6 million or
10.3% of net sales in fiscal 2000 and $7.4 million or 10.9% of net sales in
fiscal 1999. The change was due primarily to a general increase in expenses
resulting from the Fresh Samantha acquisition and from infrastructure expenses,
including a new financial software package and information systems that were
operational at the beginning of fiscal 2001.
General and administrative expenses increased in absolute dollars in
fiscal 2000 over fiscal 1999 primarily due to professional fees and a general
increase in expenses resulting from the Fresh Samantha acquisition.
We expect general and administrative costs to increase in absolute
dollars in fiscal 2002 to support a larger, national operating company, but not
necessarily to increase as a percentage of net sales. We will also continue to
seek opportunities to invest in system infrastructure during fiscal 2002 to
allow for sustained profitable growth.
AMORTIZATION OF INTANGIBLE ASSETS FROM FRESH SAMANTHA ACQUISITION. The
cost of the intangible assets and goodwill acquired with the Fresh Samantha
acquisition are being amortized over their estimated useful lives as more fully
described in notes to the financial statements beginning on page 45. Due to the
significance of this expense, we have included it as a separate line item.
PROCEEDS FROM INSURANCE SETTLEMENT. On April 12, 2000, we entered into a
Mutual Release and Settlement Agreement with New Hampshire Insurance Company
regarding the business interruption insurance claim we filed following the
recall in October 1996. Under the Mutual Release and Settlement Agreement, New
Hampshire Insurance Company agreed to pay us $6.5 million. In connection with
the settlement, we dismissed our lawsuit against the insurance company filed on
May 21, 1999 in the United States District Court for the Eastern District of
California in Fresno, California. The proceeds from the insurance settlement
were recorded net of legal fees of $1.0 million in the third quarter of fiscal
2000.
SERIES A PREFERRED STOCK INDUCEMENT EXPENSE. In connection with the
Fresh Samantha acquisition and the February 11, 2000 Preferred Stock Conversion
Agreement between Odwalla and Catterton-Simon Partners, we issued 1,333,333
shares of Odwalla's common stock to Catterton-Simon Partners in exchange for
1,074,666 shares of
19
Odwalla's Series A Preferred Stock, representing all of the outstanding shares
of such stock, held by Catterton-Simon Partners and cancellation of a warrant to
purchase 75,000 shares of Odwalla's common stock held by Catterton-Simon
Partners. During the third quarter of fiscal 2000, we recorded an expense of
$1.6 million to reflect the value of the 258,667 additional shares issued to
induce Catterton-Simon to convert the Series A stock that they held and to
cancel the outstanding warrant that they held. The inducement shares were valued
using the market price for our common stock at the date the shareholders
approved the issuance, which was April 25, 2000.
RECALL AND RELATED COSTS. On October 30, 1996, Odwalla 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. We
immediately implemented a recall of all Odwalla products containing apple juice.
We incurred significant direct costs as a result of the recall. Under our
arrangement with our insurance company, we pay a portion of the legal fees
related to third party claims resulting from the recall and related claims. We
originally established a $2.2 million charge to establish a liability for future
professional fees related to the recall. The reserve for professional fees is an
estimate, and there can be no assurance that the actual reserved liability
established will be adequate. In fiscal 1999, we reviewed available information,
including recently filed claims, and added $250,000 to this reserve. We reviewed
this charge in subsequent years and believe that the remaining balance of the
reserve established is reasonable. We will continue to assess this liability and
will make appropriate adjustments if circumstances change. Approximately
$520,000 of this reserve for professional fees remained at September 1, 2001.
INTEREST AND OTHER EXPENSE (INCOME). Odwalla had net interest expense in
fiscal 2001 of $352,000 compared to net interest expense of $218,000 in fiscal
2000 and $159,000 in fiscal 1999. Gross interest income of $211,000, $268,000
and $278,000 in fiscal 2001, 2000, and 1999 resulted primarily from the
remainder of the proceeds of the May 1996 public offering, the proceeds in 1999
of the January 1999 Series A Preferred Stock offering, and the net proceeds of
the private placement in May 2000 in connection with the Fresh Samantha
acquisition. Gross interest expense of $563,000, $486,000 and $437,000 in fiscal
2001, 2000, and 1999 resulted primarily from interest on the line of credit,
capital lease interest and other debt, including capital leases and debt
acquired with the Fresh Samantha acquisition.
INCOME TAXES. The $198,000 fiscal 2001 tax expense results from taxes
currently due of approximately $87,000 due primarily to alternative minimum
taxes plus deferred taxes of approximately $111,000 on temporary differences
between book and tax income. The effective tax rate of 84% for the year consists
of the statutory tax rate offset by the impact of the permanent difference
between the financial accounting basis and the income tax reporting basis of
goodwill, as noted below, and the increase in the deferred tax valuation
allowance. The $1.1 million tax expense in fiscal 2000 results from taxes
currently due of approximately $162,000 due primarily to alternative minimum
taxes plus deferred taxes of approximately $2.4 million on temporary differences
between book and tax income reduced by a $1.4 million reduction in the deferred
tax valuation allowance. The effective tax rate of 24% for the year considers
the effective tax rate of 15% applied prior to the Fresh Samantha acquisition
which was lower than the statutory tax rate primarily due to the valuation
allowance established. The Fresh Samantha acquisition was structured as a
tax-free reorganization for income tax purposes. This resulted in intangible and
other assets with a basis for accounting purposes, as the acquisition was
accounted for using purchase accounting, which does not exist for tax reporting
purposes. Because the financial accounting basis will result in future
accounting amortization in excess of tax amortization, a deferred tax liability
was established to account for that difference. At the same time, most of our
deferred tax valuation allowance established prior to the acquisition date was
removed and included in the determination of the cost of goodwill in accordance
with SFAS 109.
The $359,000 income tax benefit for fiscal 1999 results from the tax
benefit associated with operating losses. The 15% effective tax rate in 1999
varies from the federal statutory tax rate primarily due to the effect of
establishing a deferred tax asset valuation allowance. We recorded a valuation
allowance for a portion of the net deferred tax asset due to uncertainty as to
the ultimate realization of such assets. As noted above, most of the valuation
allowance was released in fiscal 2000.
20
LIQUIDITY AND CAPITAL RESOURCES
At September 1, 2001, we had working capital of $12.1 million compared
to working capital of $11.7 million at September 2, 2000. The increase resulted
primarily from operating activities. At September 1, 2001, the Company had cash,
cash equivalents and short term investments of $4.4 million compared to $5.4
million at the end of fiscal 2000.
Net cash provided by operating activities in fiscal 2001 was $6.8
million. This consisted of depreciation and amortization, reductions in other
non-current assets and an increase in accounts payable and other non-current
liabilities, offset by increases in accounts receivable, inventory, prepaid
expenses, and deferred taxes and decreases in accrued payroll and other accrued
expenses. During fiscal 2001, after further evaluation of the deferred tax asset
following completion of the Fresh Samantha corporate tax return, a
reclassification of $935,000 between acquired deferred tax asset and goodwill
was recorded. The reduction in other non-current assets was due primarily to
this reclassification. Accounts payable increased due mainly to higher customer
related liabilities. The increase in other non-current liabilities was due to a
liability established in the second quarter of fiscal 2001 for the closure of
the Saco facility and the restructuring of the East Coast management
organization. The increase in accounts receivable was generally due to
administrative issues with third party distributors and certain larger grocery
store chain accounts. The inventory increase is primarily due to higher Samantha
finished goods inventory caused by West Coast sourcing of East Coast production
requirements related to the closure of the Saco production facility. Prepaid
expenses increased primarily due to timing and amount of health insurance
payments, higher computer system maintenance expenses, and increased cooler
fleet related prepayments. Deferred taxes increased due to the reclassification
from goodwill, as previously noted. Accrued payroll expenses decreased mainly
due to a reduction in accrued vacation liability associated with the closure of
the Saco production facility and higher than normal vacation time taken in the
fourth quarter of fiscal 2001. Accrued expenses, which include the reserve for
recall related professional fees, decreased primarily as we paid for previously
accrued costs.
Net cash used in investing activities for fiscal 2001 was $5.2 million.
The decrease consisted primarily of the sale of short-term investments offset by
capital expenditures for data processing and computer hardware and software,
production equipment at the Dinuba plant, and display coolers, and by proceeds
from the sale of assets.
Net cash used in financing activities for fiscal 2001 was $0.8 million.
This consisted of principal payments under long term-debt and capital leases
partially offset by the issuance of common stock due to stock option exercises.
Our purchase commitments for the future delivery of raw materials as of
September 1, 2001, approximate $5.7 million under contracts expected to be
completed by December 2002.
We've used, and expect to continue to use, both operating and capital
lease financing to obtain refrigeration coolers used in selling our products,
computer and communication equipment, and production assets, primarily
equipment. If we do not obtain adequate lease or other financing, our inability
to obtain needed equipment may negatively impact our operations. At September 1,
2001, we owed $2.6 million for capital lease obligations, primarily related to
leasing of production equipment, computer equipment and vehicles.
On July 12, 2001, we entered into a Business Loan Agreement providing up
to $10.0 million of borrowing capability, including the ability to issue letters
of credit up to a certain maximum amount. The first $2.0 million of borrowings
do not require separate borrowing base reporting. Borrowings are limited to 75%
of eligible accounts receivable, which generally represent all trade accounts
receivable less delinquent balances and other balances as defined in the
Business Loan Agreement. We are also required to meet certain covenants,
including maintenance of certain financial ratios, a fixed charge coverage ratio
and certain tangible net worth. The Business Loan Agreement also contains
certain business restrictions, including the ability to borrow additional funds,
limitations on capital expenditures in excess of certain amounts, restrictions
on the payment of cash dividends, sale or purchase of Company stock, ability to
encumber or sell Company assets, and limitations on other business transactions
without prior approval from the lender. Interest is payable monthly at the prime
interest rate plus 0.0% to 0.5% depending on certain financial ratios. The
initial rate is prime plus 0.25%. We may also select either a IBOR or LIBOR rate
plus 2.75% to 3.5% depending on certain financial ratios. The Business Loan
Agreement has a two-year term ending in July 2003. Accounts receivable,
inventories and trademarks and other intangible assets provide collateral under
the Business Loan Agreement. This
21
facility replaced a prior Credit Agreement. As of September 1, 2001, we were not
in compliance with one covenant as we had exceeded the capital asset acquisition
limitation included in the Business Loan Agreement. We requested our lender to
waive the specific September 1, 2001 covenant violation and, in November 2001,
the lender granted the requested waiver.
Our prior Credit Agreement provided borrowings under a revolving credit
facility up to $10.0 million. We were also required to meet certain covenants,
including maintenance of certain financial, leverage, and debt service coverage
ratios, and a tangible net worth. The first $2.0 million of borrowings did not
require separate borrowing base reporting. Borrowings over $2.0 million and up
to $5.0 million were limited to 80% of eligible accounts receivable. Eligible
accounts receivable were generally all trade accounts receivable less delinquent
balances. The Credit Agreement also contained certain business restrictions,
including the ability to borrow additional funds, limitations on capital
expenditures in excess of certain amounts, restrictions on the payment of cash
dividends, sale or purchase of Company stock, ability to encumber or sell
Company assets, and limitations on other business transactions without prior
approval from the lender. Interest was payable monthly at either the prime
interest rate plus 1% or the Eurodollar rate plus 3.5%. The Credit Agreement had
a three-year term ending in April 2003, although the lender had notified us that
they would not extend additional credit or renew the agreement upon termination.
The increased costs associated with integrating Fresh Samantha, our
plans to invest in new products and certain new market areas, and general
corporate needs may cause us to seek additional financing that may be dilutive
to current investors or result in a higher debt-to-equity ratio than would
otherwise be the case. Any financing we obtain may not be on terms favorable to
us, even if it is available.
Based upon information currently available, we believe that our existing
cash and cash equivalents and our current and anticipated borrowing capability
will be adequate to meet our obligations as they become due in the next twelve
months.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. It is our policy not to enter into derivative
financial instruments. We do not currently have any significant foreign currency
exposure since we do not transact business in foreign currencies. Due to this,
we did not have significant overall currency exposure at September 1, 2001.
FOREIGN CURRENCY RATE RISK. As almost all of our sales and expenses are
denominated in U.S. dollars, we have experienced only insignificant foreign
exchange gains and losses to date, and we do not expect to incur significant
gains and losses. We do not engage in foreign currency hedging activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by
reference to the consolidated financial statements and supplementary data listed
in Item 14 of Part IV of this report.
All schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or notes
thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information about Odwalla's directors and executive officers as
of November 20, 2001 is listed below.
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NAME AGE POSITION(s) WITH ODWALLA
------------------------ -- -------------------------------------------------
D. Stephen C. Williamson 43 Chairman of the Board and Chief Executive Officer
Andrew B. Balson (1) 35 Director
Richard L. Grubman (1) (2) 39 Director
Ellis B. Jones (2) 47 Director
Mark E. Nunnelly 42 Director
Juan I. Prado 41 Director
Craig I. Sakin (1) (2) 41 Director
James R. Steichen 51 Senior Vice President, Finance and Chief Financial Officer
Michael Cote 46 Senior Vice President, Sales and Operations
Linda A. Frelka 40 Vice President, Quality Assurance
Theodore R. Leaman III 45 Vice President, Manufacturing
Susan M. Kirmayer 43 Vice President, Human Resources
--------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
There are no family relationships among the directors or executive
officers. There are no material proceedings to which any director or executive
officer, or any associate of any such director or executive officer, is a party
adverse to Odwalla or any subsidiary of Odwalla or has a material interest
adverse to Odwalla or any subsidiary of Odwalla.
The following are brief biographies of each director and executive
officer of Odwalla (including present principal occupation or employment, and
material occupations, positions, offices or employment for the past five years).
Under the terms of the Shareholders Rights Agreement, dated as of May 2, 2000,
among Odwalla and the shareholders of Odwalla named in the agreement,
Catterton-Simon Partners III, L.P. has the right to nominate one director, Bain
Capital Funds has the right to nominate two directors, and U.S. Equity Partners,
L.P. and U.S. Equity Partners (Offshore), L.P. together have the right to
nominate one director. Mr. Sakin is the nominee of Catterton-Simon Partners III,
L.P., Mr. Balson and Mr. Nunnelly are the nominees of Bain Capital Funds, and
Mr. Jones is the nominee of U.S. Equity Partners, L.P. and U.S. Equity Partners
(Offshore), L.P. Each director and officer of Odwalla is a citizen of the United
States, except for Mr. Prado who is a citizen of Brazil, and each individual's
business address is c/o Odwalla, Inc., 120 Stone Pine Road, Half Moon Bay,
California 94019. The term of each director shall expire in 2002.
[Enlarge/Download Table]
NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
----------------------------- ------------------------------------------------------------
D. Stephen C. Williamson (43) D. Stephen C. Williamson currently serves as Chairman of the
Board and as Chief Executive Officer, a position he has held
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
Odwalla from March 1991 to August 1996. Mr. Williamson also
served as Odwalla's President from May 1992 until January
1995. Mr. Williamson holds a B.A. degree in history from the
University of California at Berkeley. He is also Chairman of
Avenal Land & Oil Company, a private investment company.
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[Enlarge/Download Table]
NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
----------------------------- ------------------------------------------------------------
Andrew B. Balson (35)........ Andrew B. Balson has served as a director of Odwalla since May
2000. Mr. Balson has been a Managing Director of Bain Capital
since December 2000. Previously, Mr. Balson was a Principal of
Bain Capital since June 1998 and had been an Associate at Bain
Capital since November 1996. Prior to this, Mr. Balson was a
consultant with Bain & Company since August 1994. Mr. Balson
is also a director of Domino's Pizza, Inc. and Interpath, Inc.
Richard L. Grubman (39)..... Richard L. Grubman has served as a director of Odwalla since
August 1997. Mr. Grubman has been a Managing Director of
Highfields Capital Management, LP since April 1998. Prior to
this, Mr. Grubman was a Managing Director of Development
Capital, LLC since January 1997 and a general partner of its
affiliate, Corporate Value Partners, LP, since November 1996.
Mr. Grubman was also previously President of Sycamore Capital
Management, Inc., a position he held since January 1996. From
December 1992 to November 1995, Mr. Grubman was a general
partner of Lakeview Partners, L.P. During 1992, he was a vice
president of Gollust, Tierney and Oliver, Incorporated. Mr.
Grubman holds an A.B. degree in Art and Archaeology from
Princeton University.
Ellis B. Jones (47)......... Ellis B. Jones has served as a director of Odwalla since May
2000. Mr. Jones is Chief Executive Officer of Wasserstein &
Co. Formerly, Mr. Jones was a Managing Director of Wasserstein
Perella & Co., which he joined in February of 1995. He was a
Managing Director in investment banking at Salomon Brothers
during the period of 1988 through 1994. Mr. Jones graduated
from the Yale School of Management and the University of
California at Berkeley. He also serves on the Boards of
Directors of Element K Corporation, American Lawyer Media,
IMAX Corporation, Phoenix House (a non-profit organization)
and The Cate School in Carpinteria, California.
Mark E. Nunnelly (42)........ Mark E. Nunnelly has served as a director of Odwalla since May
2000. Mr. Nunnelly has been a Managing Director of Bain
Capital since 1990. Prior to that time, Mr. Nunnelly was a
partner at Bain & Company and was employed by Procter & Gamble
Company Inc. in product management. Mr. Nunnelly serves on the
board of directors of several companies, including Domino's
Pizza, Modus Media, Eschelon Telecommunications, CTC
Communications, Interpath and DoubleClick, Inc.
Juan I. Prado (41).......... Juan I. Prado has served as a director of Odwalla since August
2000. Mr. Prado has served as Chairman and CEO of Promisant
Ltd., a provider of global transaction processing services
since March 1999. Prior to this, Mr. Prado served as a senior
officer of the Coca-Cola Company's Latin American Group since
1991. Mr. Prado received an MBA from The Wharton School, an MA
in languages and international studies from The University of
Pennsylvania, and a B.S. in industrial engineering from Tufts
University.
Craig H. Sakin (41).......... Craig H. Sakin has served as a director of the Company since
February 1999. Mr. Sakin has served as Managing Director and
more recently a Managing Partner of Catterton Partners, a
group of affiliated private equity funds, since August 1996.
From November 1991 to August 1996, Mr. Sakin was Chairman and
Chief Executive Officer of Gold Coast Beverage Distributors, a
beer distribution company. Mr. Sakin holds a B.S. from St.
Lawrence University.
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NAME AND AGE PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
----------------------------- ------------------------------------------------------------
James R. Steichen (51)...... James R. Steichen has served as Senior Vice President, Finance
since August 1998 and as 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 Odwalla since August 1995. Prior to that, he had
been a partner with BDO Seidman, LLP, a public accounting
firm, since December 1990. Mr. Steichen is a Certified Public
Accountant and holds a B.S. degree from the University of
South Dakota.
Michael Cote (46)............ Michael Cote has served as Senior Vice President - Sales and
Operations since June 2001. Mr. Cote most recently served as
Customer Vice President, Growth Channels at Pepperidge Farm,
Inc. from May 1999 to May 2001. Prior to that, Mr. Cote served
as Customer Vice President, New England Sales at Pepperidge
Farm, Inc. from January 1998 to May 1999 and as Director -
Northeast Sales from August 1995 to January 1998. Mr. Cote
attended Nichols College and Franklin Pierce College, majoring
in Business Administration, and the University of Maine,
majoring in Criminal Justice.
Linda A. Frelka (40)........ Linda A. Frelka has served as Vice President, Quality
Assurance since September 1997. From October 1987 to August
1997, Ms. Frelka worked at Redi-Cut Foods, Inc. in several
quality assurance roles, most recently as Vice President from
1995 to 1997. Ms. Frelka has a B.S. degree in Biological
Sciences, emphasis Microbiology, from Northern Illinois
University.
Theodore R. Leaman III (45).. Theodore R. Leaman III has served as Vice President,
Manufacturing since April 1999. From January 1998 until April
1999, Mr. Leaman was Plant Manager for Stouffer Foods, a
subsidiary of Nestle Corporation. From January 1993 until
December 1998, Mr. Leaman served as Plant Manger for
Contadina, another Nestle Corporation subsidiary. Mr. Leaman
received a B.S. in Industrial Management from Carnegie-Mellon
University.
Susan M. Kirmayer (43)...... Susan M. Kirmayer has served as Vice President, Human
Resources since August 1998. From October 1997 until August
1998, Ms. Kirmayer served as Director, Human Resources. From
February 1992 to October 1997, Ms. Kirmayer served as Director
of Human Resources and Administrative Services for Collagen
Corporation. Ms. Kirmayer attended San Jose State University
and majored in Business Administration.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934 (the Exchange
Act) requires Odwalla's directors and executive officers, and persons who own
more than 10% of a registered class of Odwalla's equity securities, to file with
the Securities and Exchange Commission (SEC) initial reports of ownership and
reports of changes in ownership of common stock and other equity securities of
Odwalla. Officers, directors and greater than 10% shareholders are required by
SEC regulations to furnish Odwalla with copies of all Section 16(a) forms they
file.
To Odwalla's knowledge, based solely on a review of the copies of the
reports furnished to Odwalla and written representations that no other reports
were required during the fiscal year ended September 1, 2001, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners for fiscal 2001 were complied with on a timely basis.
25
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table contains information regarding
the compensation of Odwalla's Chief Executive Officer, President, and four other
most highly compensated officers for the fiscal years ended September 1, 2001,
September 2, 2000 and August 28, 1999 (the Named Executive Officers).
SUMMARY COMPENSATION TABLE
[Enlarge/Download Table]
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
NAME AND FISCAL ---------------------- UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (1) ($) (2)
------------------------------------- ---- ------- ------- ------- ------------
D. Stephen C. Williamson ............ 2001 394,712 -- 150,000 --
Chairman of the Board and Chief 2000 242,308 30,000 110,000 --
Executive Officer 1999 185,000 -- 160,000 --
James R. Steichen ................... 2001 266,827 -- 50,000 960
Senior Vice President, Finance 2000 193,750 20,000 40,000 772
and Chief Financial Officer 1999 169,577 -- 70,000 1,081
Theodore R. Leaman III .............. 2001 175,685 -- 25,000 673
Vice President, Manufacturing 2000 163,077 15,000 -- 554
1999 64,615 -- 50,000 --
Karen Lucas ......................... 2001 165,000 -- 30,000 18,699
Vice President, East Coast Sales 2000 154,614 15,070 20,000 717
1999 3,217 -- -- --
Susan M. Kirmayer ................... 2001 159,519 -- 25,000 580
Vice President, Human Resources 2000 124,692 15,000 -- 681
1999 103,994 -- 20,000 868
--------------------
(1) The options listed in the table were granted under the Company's 1997
Stock Option/ Stock Issuance Plan.
(2) Represents Odwalla's matching 401(k) plan contribution for all amounts
shown except the total shown for Ms. Lucas for fiscal 2001 includes
$17,694 for moving and housing allowance.
26
INDIVIDUAL OPTION GRANTS TO EXECUTIVE OFFICERS DURING FISCAL YEAR 2001
The following table sets forth certain information regarding stock
options granted in 2001 to the individuals named in the Summary Compensation
Table. No stock appreciation rights were granted to those individuals during the
fiscal year 2001.
INDIVIDUAL GRANTS
[Enlarge/Download Table]
POTENTIAL REALIZABLE
VALUE AT
NUMBER OF PERCENTAGE OF ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERM (2)
OPTIONS EMPLOYEES IN EXERCISE PRICE -----------------------------
NAME GRANTED FISCAL 2001 ($/ SHARE)(1) EXPIRATION DATE 5% 10%
---------------------- ---------- ------------- -------------- --------------- ---------- ----------
D. Stephen C.
Williamson ........... 150,000(3) 37.9% $ 9.938 2/8/11 $ 937,493 $2,375,792
James R. Steichen .... 50,000(3) 12.6% $ 9.938 2/8/11 $ 312,498 $ 791,931
Karen Lucas .......... 30,000(4) 7.6% $ 8.438 10/17/10 $ 159,198 $ 403,440
Theodore R. Leaman III 25,000(4) 6.3% $ 8.438 10/17/10 $ 132,665 $ 336,200
Susan M. Kirmayer .... 25,000(4) 6.3% $ 8.438 10/17/10 $ 132,665 $ 336,200
--------------------
(1) 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 the exercise.
(2) There is no assurance provided to the option holder or any other holder
of Odwalla'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.
(3) The options were granted under Odwalla's 1997 Stock Option/Stock Issuance
Plan on February 8, 2001, with a vesting commencement date of the same
date. The options granted have a maximum term of 10 years, all measured
from the grant date, subject to earlier termination upon the optionee's
cessation of service with Odwalla. All options will vest as to 1/36 of
the shares each month.
(4) The options were granted under the Company's 1997 Stock Option/Stock
Issuance Plan on October 17, 2000, with a vesting commencement date of
the same date. The options granted have a maximum term of 10 years, all
measured from the grant date, subject to earlier termination upon the
optionee's cessation of service with Odwalla. All options will vest as to
1/36 of the shares each month.
27
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table sets forth for each of the individuals named in the
Summary Compensation Table, certain information concerning the number of shares
subject to both exercisable and unexercisable stock options as of September 1,
2001. Also reported are values for "in-the-money" options that represent the
positive spread between the respective exercise prices of outstanding options
and the fair market value of the Company's common stock as of September 1, 2001.
No stock appreciation rights were exercised during fiscal 2001 or were
outstanding at the end of fiscal 2001.
[Enlarge/Download Table]
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
SHARES OPTIONS AT SEPTEMBER 1, 2001 FISCAL YEAR END (1)
ACQUIRED ON VALUE ----------------------------- -----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------------ ------------ --------- ----------- ------------- ----------- -------------
D. Stephen C. Williamson ..... -- $ -- 361,554 233,446 $190,577 $ 80,873
James R. Steichen ............ -- $ -- 127,737 82,363 $ 79,505 $ 40,265
Theodore R. Leaman III ....... -- $ -- 44,721 30,279 $ 69,313 $ 21,047
Karen Lucas .................. -- $ -- 21,667 28,333 $ 9,934 $ 4,966
Susan M. Kirmayer ............ -- $ -- 30,389 23,611 $ 12,567 $ 4,833
--------------------
(1) Based on the fair market value of the shares at the end of the 2001
fiscal year ($7.87 per share) less the option exercise price payable for
those shares.
EMPLOYMENT AGREEMENTS
On December 21, 1999, D. Stephen C. Williamson, Odwalla's Chief
Executive Officer, and James R. Steichen, Odwalla's Senior Vice President,
Finance and Chief Financial Officer, entered into employment agreements with
Odwalla that are effective until December 21, 2002. Thereafter, these agreements
are subject to three consecutive automatic one-year renewals. The agreements
generally provide for annual salaries to be paid at the most recently approved
salary approved by the Compensation Committee of the Board and the right to
participate in and to receive those employee benefits that are generally
provided to similarly situated employees at Odwalla. If Mr. Williamson's or Mr.
Steichen's employment is terminated due to death, a disability that prevents him
from performing his duties for six months, termination for cause, or resignation
without good reason, payment of his salary and benefits will cease.
If Mr. Williamson or Mr. Steichen is terminated other than for cause or
is terminated within 12 months of a change of control or corporate transaction
(as those terms are defined in Odwalla's 1997 Stock Option/ Issuance Plan), the
terminated employee will receive specified payments that are substantially
equivalent to the remaining payments he would have received had he remained
employed through the term of his agreement. The terminated employee will also
receive reimbursement for the cost of acquiring health benefits through the term
of his agreement. All stock options held by the terminated employee will
automatically become vested and fully exercisable at the time his termination
becomes effective. The total payments or benefits received by Mr. Williamson or
Mr. Steichen from Odwalla resulting from termination in connection with a change
of control or corporate transaction shall not exceed three times the terminated
employee's annualized compensation minus $1.00. If Mr. Williamson or Mr.
Steichen resigns for good reason, the resigning employee is entitled to received
severance pay equal to his base salary for a period of 12 months. The resigning
employee also would be entitled to reimbursement for the cost of acquiring
health benefits for a period of 12 months.
New Employment Agreement with D. Stephen C. Williamson
Concurrently with the execution of the Merger Agreement entered into
with TCCC and its subsidiary, Odwalla entered into a new employment agreement
with Mr. Williamson (the "New Employment Agreement"). The New Employment
Agreement will commence at the effective time of the Merger and will supersede
Mr. Williamson's current employment agreement with Odwalla, dated December 21,
1999, which is described above.
28
The initial term of the New Employment Agreement extends through
December 31, 2002, and thereafter is subject to automatic annual renewals
through December 31, 2005, unless either party provides 60 days written notice
to the other party in advance of a renewal period. Under the New Employment
Agreement, Mr. Williamson will receive an annual salary of $450,000, subject to
annual review by the Board of Directors, and will be eligible for a special
performance award of 20,000 TCCC stock options for achieving certain revenue and
operating income targets. Odwalla shall also provide Mr. Williamson customary
fringe benefits provided to similarly situated employees at Odwalla.
Upon expiration of the New Employment Agreement, Odwalla shall pay Mr.
Williamson his base salary then in effect for a period of one year following the
date of the expiration, offset by any severance payment Mr. Williamson may
otherwise receive. Odwalla may terminate the New Employment Agreement with
written notice for cause without liability or further obligation. If Mr.
Williamson is not terminated for cause or Mr. Williamson terminates the New
Employment Agreement for good reason, Odwalla will (1) pay Mr. Williamson his
base salary then in effect for a period of one year following the date of the
expiration, offset by any severance payment Mr. Williamson may otherwise
receive, (2) reimburse Mr. Williamson for the cost of acquiring health benefits
for a period of one year, and (3) negotiate with Mr. Williamson the treatment of
any special performance award. In the event that Mr. Williamson's severance and
other benefits constitute a parachute payment under the Federal tax law and
would be subject to an excise tax, then Mr. Williamson's benefits will either be
delivered in full or delivered to such lesser extent as to avoid an excise tax,
whichever results in Mr. Williamson receiving the greatest amount on an
after-tax basis.
Under the terms of the New Employment Agreement, Mr. Williamson agreed
that he will not, while employed by Odwalla and for a period of two years
following the expiration or termination of his employment, solicit, interfere
with or endeavor to entice away from TCCC or any of its subsidiaries any other
employee of TCCC. Additionally, Mr. Williamson agreed that he will not at any
time while employed by Odwalla and for a period of one year following the
expiration or termination of his employment engage in the manufacture, sale, or
distribution of non-alcoholic beverages in the United States.
During the term of the New Employment Agreement and at all times
thereafter, Mr. Williamson has agreed to keep in confidence and not publish, use
or disclose to others, without Odwalla's prior written consent, any trade
secrets or other confidential information related to TCCC or TCCC's business.
COMPENSATION OF DIRECTORS
Directors who are not employees currently receive $10,000 per year, in
addition to reimbursement for some expenses incurred in connection with their
attendance at meetings of the Board of Directors and committees.
Under the Automatic Option Grant Program of the Company's 1997 Stock
Option/Stock Issuance Plan, each individual who first becomes a non-employee
director, whether through election by the shareholders or appointment by the
Board, is automatically granted, at the time of the initial election or
appointment, a non-statutory option to purchase 5,000 shares of common stock,
provided the individual was not previously in Odwalla's employment. In addition,
on the date of each annual meeting, each individual who is to continue to serve
as a non-employee director, whether or not that individual is standing for
re-election to the Board at that particular annual meeting, will automatically
be granted at that meeting a non-statutory option to purchase 3,000 shares of
common stock, provided the individual has served as a non-employee director for
at least six months. There is no limit on the number of these 3,000-share option
grants any one non-employee director may receive over his or her period of
service as a director, and non-employee directors who have previously served in
Odwalla's employ will be fully eligible for one or more 3,000-share option
grants.
Each option granted under the Automatic Option Grant Program is subject
to the following terms and conditions:
1. The exercise price per share will be equal to 100% of the fair market
value per share of common stock on the automatic grant date;
29
2. Each option will have a maximum term equal to the lesser of (a) 10
years measured from the grant date or (b) 12 months following termination of
service as a director;
3. Each option will be immediately exercisable for all the option
shares, but any purchased shares will be subject to repurchase by Odwalla, at
the exercise price paid per share, upon the optionee's cessation of service as a
director prior to vesting in those shares;
4. The shares subject to each initial 5,000 share grant will vest in
four successive equal annual installments over the optionee's period of service
as a director, with the first installment to vest upon the completion of one
year of service as a director, measured from the automatic grant date. All of
the shares subject to each annual 3,000 share grant will vest upon the
optionee's completion of one year of service as a director, measured from the
automatic grant date;
5. The shares subject to each outstanding automatic option grant will
immediately vest should the optionee die or become permanently disabled while a
director or should any of the following events occur while the optionee
continues in service as a director: (a) an acquisition of Odwalla by merger or
asset sale; (b) the successful completion of a hostile tender offer for more
than 50% of the total combined voting power of Odwalla's outstanding securities;
or (c) a change in the majority of the members of the Board of Directors
occasioned by one or more contested elections for directors; and
6. Upon the successful completion of a hostile tender offer for
securities possessing more than fifty percent (50%) of the total combined voting
power of Odwalla's outstanding securities, each outstanding automatic option
grant may be surrendered to Odwalla for a cash distribution per surrendered
option share in an amount equal to the excess of (a) the greater of (1) the fair
market value per share of common stock on the date the option is surrendered to
Odwalla in connection with a hostile tender offer or (2) the highest price per
share of common stock paid in the hostile tender offer over (b) the exercise
price payable per share.
Under the Automatic Option Grant Program described above, the following
options were granted to non-employee directors under the Company's 1997 Stock
Option/Stock Issuance Plan in fiscal 2001: Mr. Balson, Mr. Grubman, Mr. Jones,
Mr. Nunnelly and Mr. Sakin, were each granted options to purchase 3,000 shares
at an exercise price of $10.00 per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between Odwalla's executive
officers, the Board of Directors or compensation committee and any executive
officer or member of the Board of Directors or compensation committee of any
other company, nor has such interlocking relationship existed in the past.
REPORT OF THE COMPENSATION COMMITTEE
The following Compensation Committee's Report on Executive Compensation
shall not be deemed to be "soliciting material" or to be "filed" with the SEC or
subject to Regulations 14A or 14C of or to the liabilities of Section 18 of the
Exchange Act, and shall not be deemed incorporated by reference into any filing
under the Securities Act of 1933, as amended (the "Securities Act"), or the
Exchange Act, notwithstanding any general incorporation by reference of this
Information Statement into any other document.
THE REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors, subject to review
by the full Board of Directors, is responsible for the establishment of
remuneration arrangements for senior management and the administration of
compensation and employee benefit plans. In addition, the Compensation Committee
sets the base salary of the Company's executive officers, approves individual
bonus programs for executive officers, and administers the Company's stock
option plans under which grants may be made to executive officers and other key
employees. The following is a summary of policies of the Compensation Committee
that affect the compensation paid to executive officers during the fiscal year
2001, as reflected in the tables and text set forth elsewhere in this document.
30
General Compensation Policy
The objectives of the Company's executive compensation program are to
motivate and retain current executives and to attract future ones. The Company's
executive compensation program is designed to: (1) provide a direct and
substantial link between the Company's performance and executive pay, (2)
consider individual performance and accomplishments and compensate accordingly,
and (3) determine the Company's position in the specialty beverage and food
labor markets and be competitive in those labor markets. The Company's intent is
to position its executive pay levels at the median of U.S. specialty beverage
and food companies. The Committee also considers geographic location and
companies that may compete with the Company in recruiting executive talent.
The principal factors which the Compensation Committee considered in
establishing the components of each executive officer's compensation package for
fiscal 2001 are summarized below. The Compensation Committee may, however, in
its discretion apply entirely different factors in setting executive
compensation for future years.
Base Salary
The base salary for each officer is set on the basis of personal
performance, the Compensation Committee's assessment of salary levels in effect
for comparable positions with the Company's principal competitors, and internal
comparability considerations. The weight given to each of these factors may vary
from individual to individual, and the Compensation Committee did not rely upon
any specific compensation surveys for comparative compensation purposes.
Instead, the Compensation Committee made its decisions as to the appropriate
market level of base salary for each executive officer on the basis of its
understanding of the salary levels in effect at companies with which Odwalla
competes for executive talent. Base salaries will be reviewed on an annual
basis, and adjustments will be made in accordance with the factors indicated
above.
Long-Term Incentive Compensation
Long-term incentives are provided through stock option grants. The
grants are designed to align the interests of the executive officers with those
of the shareholders, and to provide each officer with a significant incentive to
manage the Company from the perspective of an owner with an equity stake in the
business. The stock option plan encourages long term retention and provides
rewards to executives and other eligible employees commensurate with growth in
shareholder value. It is the Committee's practice to grant options to purchase
shares at the market price on the date of grant with a term of up to 10 years.
The options granted to the Company's executive officers during fiscal 2001 will
vest from the date of grant in thirty-six or forty-eight equal monthly
installments. Accordingly, the options will provide a return to the executive
officer only if he or she remains in the Company's employ and the market price
of the underlying shares of common stock appreciates.
The number of shares subject to each option grant is set at a level
intended to create a meaningful opportunity for stock ownership based on the
officer's current position with the Company, the base salary associated with
that position, the size of comparable awards made to individuals in similar
positions within the industry, the individual's potential for increased
responsibility and promotion over the option term, and the individual's personal
performance in recent periods. The Committee also takes into account the number
of unvested options held by the executive offer in order to maintain an
appropriate level of equity incentive for that individual. However, the
Committee does not adhere to any specific guidelines as to the relative option
holdings of the Company's executive officers.
Compensation of Chief Executive Officer
The compensation payable to Mr. Williamson, Odwalla's Chief Executive
Officer, was determined by the Compensation Committee. Mr. Williamson's base
salary was set at a level which the Committee believed would be competitive with
the base salary levels in effect for chief executive officers at similarly-sized
companies within the industry. For fiscal 2001, Mr. Williamson's compensation
package was set by the Compensation Committee on the basis of the compensation
policy summarized in this report.
31
Deductibility of Executive Compensation
The Compensation Committee has considered the impact of Section 162(m)
of the Internal Revenue Code adopted under the Omnibus Budget Reconciliation Act
of 1993, which section disallows a deduction for any publicly held corporation
for individual compensation exceeding $1 million in any taxable year for the
chief executive officer and the four other most highly compensated executive
officers, respectively, unless such compensation meets the requirements for the
"performance-based" exception to Section 162(m). The compensation paid to the
Company's executive officers for fiscal 2001 did not exceed the $1 million limit
per officer, and it is not expected that the compensation to the Company's
executive officers for fiscal 2002 will exceed that limit. In addition, the
Company's 1997 Stock Option/Stock Issuance Plan is structured so that any
compensation deemed paid to an executive officer in connection with the exercise
of his or her outstanding options under the 1997 Stock Option/Stock Issuance
Plan will qualify as performance-based compensation which will not be subject to
the $1 million limitation. It is the Compensation Committee's policy to qualify,
to the extent reasonable, its executive officers' compensation for deductibility
under the applicable tax law. However, we may from time to time pay compensation
to our executive officers that may not be deductible.
SUBMITTED BY THE COMPENSATION COMMITTEE:
RICHARD L. GRUBMAN,
BOARD MEMBER AND COMPENSATION COMMITTEE CHAIRMAN
ANDREW B. BALSON,
BOARD MEMBER AND COMPENSATION COMMITTEE MEMBER
CRAIG H. SAKIN,
BOARD MEMBER AND COMPENSATION COMMITTEE MEMBER
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on
the Company's common stock with that of the Nasdaq Stock Market (U.S.) Index and
the Russell 2000 Index. The comparison for each of the periods assumes that $100
was invested on August 31, 1996 in the Company's common stock including
reinvestment of dividends. These indices, which reflect formulas for dividend
reinvestment and weighing of individual stocks, do not necessarily reflect
returns that could be achieved by individual investors.
COMPARISON OF FIVE (5) YEAR CUMULATIVE TOTAL RETURN
AMONG THE COMPANY, THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE RUSSELL 2000 INDEX
[Download Table]
Nasdaq Stock Market
The Company (U.S.) Russell 2000
----------- ------------------- ------------
August 1996 100.00 100.00 100.00
August 1997 68.70 139.49 128.95
August 1998 54.96 131.81 103.94
August 1999 43.89 244.89 133.42
August 2000 41.22 374.16 169.65
August 2001 48.24 160.03 149.92
Notwithstanding anything to the contrary set forth in any of the
Company's previous filings under the Securities Act or the Exchange Act that
might incorporate future filings, including this proxy statement, in whole or in
part, the preceding Compensation Committee Report on Executive Compensation and
the preceding Performance Graph shall not be incorporated by reference into any
of these filings; nor shall the Report or graph be incorporated by reference
into any future filings.
32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the ownership of
the Company's common stock as of November 20, 2001, by (1) each director, (2)
the Chief Executive Officer and each of the four other most highly compensated
executive officers of the Company, determined for the Company's fiscal year
ended September 1, 2001, (3) all those known by the Company to be beneficial
owners of more than five percent of its common stock, and (4) all directors and
executive officers as a group. Except as otherwise indicated, the address of
each of the people in this table is as follows: c/o Odwalla, Inc., 120 Stone
Pine Road, Half Moon Bay, California 94019.
[Enlarge/Download Table]
COMMON STOCK
BENEFICIALLY OWNED (1) (2)
------------------------------------
NUMBER OF SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS (1)
----------------------------------------------------------------- ------------------ --------------------
Bain Capital Funds (3) (16) ..................................... 2,774,568 24.73%
c/o Bain Capital Partners, LLC
111 Huntington Avenue
Boston, MA 02199
Catterton-Simon Partners III, L.P. (16) ......................... 1,493,461 13.31%
7 Greenwich Office Park
Greenwich, CT 06830
D. Stephen C. Williamson (4) (16) ............................... 1,042,548 8.95%
U.S. Equity Partners, L.P. and U.S. Equity Partners (Offshore),
L.P. (5) (16) .................................................. 764,612 6.82%
1999 Avenue of the Stars, Suite 2950
Los Angeles, CA 90067
Richard Grubman (6) ............................................. 60,848 *
Craig H. Sakin (7) .............................................. 5,500 *
Andrew B. Balson (8) ............................................ 1,250 *
Ellis B. Jones (9) .............................................. 1,250 *
Mark E. Nunnelly (10) ........................................... 1,250 *
Juan I. Prado (11) .............................................. 58,742 *
James R. Steichen (12) (16) ..................................... 151,208 1.33%
Theodore R. Leaman III (13) (16) ................................ 55,138 *
Susan M. Kirmayer (14) .......................................... 36,938 *
All directors and executive officers as a group (12 persons) (15) 1,445,595 12.89%
----------
* Less than one percent (1%).
(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) Beneficial ownership is determined in accordance with the rules of the
SEC and generally includes voting or investment power with respect to
securities. Shares of common stock, subject to options currently
exercisable or exercisable within 60 days of November 20, 2001, are
deemed outstanding for computing the percentage of the person holding the
options, but are not deemed outstanding for computing the percentage of
any other person. Percentage of ownership is based on 11,218,023 shares
of common stock outstanding on November 20, 2001.
33
(3) Includes (i) 1,971,664 shares of common stock held by Bain Capital Fund
VI, L.P. whose sole general partner is Bain Capital Partners VI, L.P.,
whose sole general partner is Bain Capital Investors, LLC ("BCI"); (ii)
472,960 shares of common stock held by BCIP Associates II, whose managing
general partner is BCI; (iii) 92,331 shares of common stock held by BCIP
Associates II-B, whose managing general partner is BCI; (iv) 88,166
shares of common stock held by BCIP Associates II-C, whose managing
general partner is BCI; (v) 91,430 shares of common stock held by BCIP
Trust Associates II, whose managing general partner is BCI; (vi) 51,474
shares of common stock held by BCIP Trust Associates II-B, whose managing
general partner is BCI; and (vii) 6,543 shares of common stock held by
PEP Investments Pty. Ltd., as to which BCI holds a power of attorney. Mr.
Balson and Mr. Nunnelly are managing directors of Bain Capital, LLC and
partners of certain of BCI, BCIP Associates II, BCIP Associates II-B,
BCIP Associates II-C, BCIP Trust Associates II, and BCIP Trust Associates
II-B and accordingly may be deemed to beneficially own shares owned by
such funds of which they are partners. Mr. Balson and Mr. Nunnelly
disclaim beneficial ownership of any of such shares in which they do not
have a pecuniary interest.
(4) Includes 41,250 shares of common stock held by Alexandra Bowes, Mr.
Williamson's wife, and 194,851 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 424,331 shares of common stock subject to options exercisable
within 60 days of November 20, 2001.
(5) Includes 601,667 shares of common stock held by U.S. Equity Partners,
L.P. and 162,945 shares of common stock held by U.S. Equity Partners
(Offshore), L.P. managed by Wasserstein & Co., of which Mr. Jones
disclaims beneficial ownership. Mr. Jones is chief executive officer of
Wasserstein & Co.
(6) Includes 1,000 shares of common stock held by Caroline Mortimer, Mr.
Grubman's wife, and 46,000 shares of common stock subject to options
exercisable within 60 days of November 20, 2001, plus Mr. Grubman's
interest in 1,548 shares of common stock held by Willy Juice Partners.
(7) Excludes 1,493,461 shares of common stock held by Catterton-Simon
Partners III, L.P., a Delaware limited partnership. Mr. Sakin disclaims
beneficial ownership of the shares held by Catterton-Simon Partners III,
L.P. Mr. Sakin is a manager of Catterton-Simon Managing Partners III,
L.L.C., the general partner of Catterton-Simon Partners III, L.P.
Includes 5,500 shares of common stock subject to options exercisable
within 60 days of November 20, 2001.
(8) Includes 1,250 shares of common stock subject to options exercisable
within 60 days of November 20, 2001 and excludes shares of common stock
held by BCI, BCIP Associates II, BCIP Associates II-B, BCIP Associates
II-C, BCIP Trust Associates II, and BCIP Trust Associates II-B, as
discussed in Note 3.
(9) Includes 1,250 shares of common stock subject to options exercisable
within 60 days of November 20, 2001.
(10) Includes 1,250 shares of common stock subject to options exercisable
within 60 days of November 20, 2001 and excludes shares of common stock
held by BCI, BCIP Associates II, BCIP Associates II-B, BCIP Associates
II-C, BCIP Trust Associates II, and BCIP Trust Associates II-B, as
discussed in Note 3.
(11) Includes 57,492 shares of common stock held by JIP Enterprises, Inc., of
which Mr. Prado is the sole stockholder, and 1,250 shares of common stock
subject to options exercisable within 60 days of November 20, 2001.
(12) Includes 151,208 shares of common stock subject to options exercisable
within 60 days of November 20, 2001.
(13) Includes 55,138 shares of common stock subject to options exercisable
within 60 days of November 20, 2001.
(14) Includes 36,938 shares of common stock subject to options exercisable
within 60 days of November 20, 2001.
34
(15) Includes 756,286 shares of common stock subject to options exercisable
within 60 days of November 20, 2001, and excludes common stock held by
entities of which BCI is the sole general partner or holds a power of
attorney, Catterton-Simon Partners III, L.P., U.S. Equity Partners, L.P.
and U.S. Equity Partners (Offshore), L.P. of which Mr. Balson, Mr.
Nunnelly, Mr. Jones and Mr. Sakin disclaims beneficial ownership as
discussed in Notes 3, 5, and 7.
(16) These parties have entered into Tender Agreements with TCCC in connection
with the Merger Agreement among Odwalla, TCCC and the Offeror. See Item
1. "Business - Acquisition by The Coca-Cola Company" for a description of
the Tender Agreements.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Termination Agreement with Karen Lucas
By letter agreement, dated September 21, 2001, Karen Lucas, Odwalla's
Vice President, Marketing and East Coast Sales, agreed with Odwalla to terminate
her employment on October 8, 2001. From October 9, 2001 through April 9, 2002,
Odwalla agreed to provide Ms. Lucas (1) $82,500 in severance pay, less all
applicable withholdings, payable on Odwalla's bi-weekly payroll schedule, (2)
payment for continuation of COBRA benefits, (3) outplacement services with a
firm and in an amount determined by Odwalla and (4) relocation expenses should
Ms. Lucas move to Seattle, Washington.
The letter agreement also specified the number of vested stock options
Ms. Lucas had as of the termination date and that Ms. Lucas has until January 6,
2002 to exercise any of these vested shares.
In consideration for receiving the severance payments, COBRA
reimbursement, outplacement and relocation benefits described above, Ms. Lucas
waived and released and promised to never to assert any claims or causes of
action against Odwalla, its predecessors, successors, or past or present
subsidiaries, officers, directors, agents, employees and assigns with respect to
any matter arising out of or connected with Ms. Lucas' employment with Odwalla.
Under the terms of the letter agreement, for a period ending on April 8,
2003, Ms. Lucas has agreed not to (1) solicit employment of any employee of
Odwalla, (2) own, manage, operate, sell, control, participate in the ownership,
management, operation, sales or control of any business in the United States
that directly competes with Odwalla's business, or (3) solicit Odwalla's
customers or suppliers that Ms. Lucas contacted, solicited or became acquainted
with during her employment with Odwalla.
Douglas K. Levin Separation Agreement and Release
On December 14, 2000, Odwalla entered into a separation agreement and
release with Douglas K. Levin. As of the date of the agreement, Mr. Levin was
deemed to have resigned from all offices and directorships of Odwalla or any
affiliate. Odwalla agreed to pay Mr. Levin $654,000 in bi-weekly installment
payments, beginning December 29, 2000 through December 31, 2003, also known as
the "Severance Term." Under the terms of the agreement, Mr. Levin agreed that
all stock option agreements between him and Odwalla were cancelled and void, and
Mr. Levin further acknowledged that he had no rights and Odwalla had no
obligations under any of these stock option agreements.
For the 18 month period following the date of the separation agreement
and release, Odwalla agreed to provide Mr. Levin COBRA health benefits, and at
the end of this period, Odwalla agreed to reimburse Mr. Levin for the cost of
purchasing health care coverage for an additional 18 months. Odwalla also agreed
to pay, for the period beginning January 1, 2001 through June 30, 2001, Mr.
Levin's housing payments equal to $6,000 per month.
Upon receipt of his first severance payment, Mr. Levin agreed to dismiss
promptly and with prejudice any and all lawsuits and other actions against
Odwalla involving Mr. Levin. Mr. Levin has no obligation to seek alternative
employment during the Severance Term and will continue to receive severance
payments from Odwalla in the event that Mr. Levin does secure alternative
employment.
35
Mr. Levin agreed not to disclose or use any information regarding
Odwalla's business, employees or customers, which was produced by any employee
of Odwalla in the course of his or her employment, and which is not properly in
the public domain. For a period of two-and-one-half years following the date of
the separation agreement and release, Mr. Levin agreed not to (1) divert or
attempt to divert from Odwalla or any affiliate any business in which it is
engaged, (2) employ or recommend for employment any person employed by Odwalla
or any affiliate, other than his wife Abby Carter, or (3) engage in any business
activity that is competitive with Odwalla or any affiliate in any state where
Odwalla conducts its business, unless Mr. Levin can prove that his actions were
done without the use of confidential information. In addition, for a period of
two-and-one-half years following the date of the separation agreement and
release, Mr. Levin agreed not to (1) solicit any customer of Odwalla or any
affiliate known to Mr. Levin to have been a customer for the provision of
substantially the same products or services as provided by Odwalla, or (2)
solicit for employment any person employed by Odwalla or any affiliate, other
than his wife Abby Carter.
Under the separation agreement and release, Mr. Levin completely
released and discharged Odwalla and any affiliate, and its and their present and
former shareholders, officers, directors, agents, employees, attorneys,
successors and assigns from all claims of every kind, known or unknown, mature
or unmatured, which Mr. Levin may now have or in the future arising from any act
or omission or condition occurring prior to the date of the agreement. Odwalla
and Mr. Levin agreed that the agreement reflects a compromise settlement of
disputed claims and that the furnishing of consideration for the agreement was
not an admission of liability by Odwalla.
Loans to Odwalla Executives for Exercise of Stock Options
Under the terms of the Tender Agreements with each of D. Stephen C.
Williamson, James R. Steichen and Theodore R. Leaman III (the "Executives"),
TCCC may cause immediately prior to the consummation of the Offer such Executive
to exercise any of the Executive's vested Company Options. Under the terms of
the Merger Agreement, if TCCC requires any of the Executives to exercise Company
Options to purchase Shares immediately prior to the consummation of the Offer
under the terms of such Executives' Tender Agreement, Odwalla will loan to the
Executives such funds as may be necessary to permit such Executives to exercise
such Company Options. If Odwalla becomes obligated to advance funds to
Executives for the exercise of the Executive's Company Options and Odwalla fails
to advance such funds to any Executive, TCCC has agreed to advance such funds to
any Executive on commercially reasonable terms.
36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
[Download Table]
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
PAGE
----
Report of independent accountants ............................................ 40
Consolidated Balance Sheets, September 2, 2000 and September 1, 2001 ......... 41
Consolidated Statements of Operations, three years in the period ended
September 1, 2001 ...................................................... 42
Consolidated Statements of Changes in Shareholders' Equity, three years in the
period ended September 1, 2001 .......................................... 43
Consolidated Statements of Cash Flows, three years in the period ended
September 1, 2001 ....................................................... 44
Notes to Consolidated Financial Statements ................................... 45
[Download Table]
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1* Amended and Restated Articles of Incorporation of the Registrant.
3.2** Amended and Restated Bylaws of the Registrant.
4.1 Warrant to Purchase Common Stock dated February 10, 1999 between
the Registrant and Hambrecht & Quist LLC.
4.2 Warrant to Purchase Common Stock dated May 22, 1997 between the
Registrant and Sand Hill Capital LLC.
10.1 Form of Indemnification Agreement entered into between the
Registrant and its directors and officers.
10.2* Registrant's 1993 Stock Option Plan, as amended (and related
stock option grant forms).
10.3* Registrant's 1994 Non-Employee Directors' Stock Option Plan (and
related stock option grant forms).
10.4# Registrant's 1997 Stock Option/Stock Issuance Plan (and related
stock option grant forms).
10.5 Business Loan Agreement dated July 12, 2001 between the
Registrant and Bank of America, N.A.
10.6## Employment Agreement dated December 21, 1999 between Registrant
and D. Stephen C. Williamson.
10.7*** Employment Agreement dated October 29, 2001 between Registrant
and D. Stephen C. Williamson.
10.8## Employment Agreement dated December 21, 1999 between Registrant
and James R. Steichen.
10.9+ Separation Agreement and Release, dated as of December 14, 2000,
between Douglas Levin and Registrant.
10.10+ Consulting Agreement, dated as of December 14, 2000, between
Douglas Levin and Registrant.
10.11** Stock Purchase Agreement dated February 11, 2000 between
Registrant, U.S. Equity Partners, L.P. and Catterton-Simon
Partners III, L.P.
10.12** Amendment No. 1 to the Stock Purchase Agreement dated April 25,
2000 between Registrant, U.S. Equity Partners, L.P., U.S. Equity
Partners (Offshore), L.P., Catterton-Simon Partners III, L.P.,
and BancBoston Investments, Inc.
10.13** Shareholders Rights Agreement dated May 2, 2000 among Registrant,
Samantha Investors, LLC, and the shareholders of Registrant and
other persons named therein.
10.14** Preferred Stock Conversion Agreement dated as of April 24, 2000,
between Registrant and Catterton-Simon Partners III, L.P.
10.15** Letter Agreement, dated May 1, 2000, from Bain Capital Fund VI,
L.P., to Registrant and Catterton-Simon Partners III, L.P.
10.16## Agreement and Plan of Merger dated February 2, 2000 by and among
Registrant, Fresh Samantha, Inc., and Orange Acquisition Sub,
Inc.
37
[Download Table]
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.17### Agreement and Plan of Merger dated October 29, 2001 by and among
The Coca-Cola Company, Perry Phillip Corp. and Registrant.
10.18### Stock Option Agreement dated October 29, 2001 by and among
Registrant, The Coca-Cola Company and Perry Phillip Corp.
10.19 Important Notice And Agreement Regarding Treatment Of Vested And
Unvested Options In Tender Offer Under The Odwalla, Inc. Stock
Option Plan Adopted In 1993, 1994 Non-Employee Directors' Stock
Option Plan And Amended And Restated 1997 Stock Option/Stock
Issuance Plan of November 9, 2001 to holders of Registrant's
common stock options.
21.1 Subsidiaries of the Registrant
23.1 Consent of independent accountants
----------
* Incorporated by reference to Registrant's Report on Form 10-KSB for the
fiscal year ended August 31, 1994, as filed with the SEC.
** Filed as an exhibit to the Registrant's Current Report on Form 8-K (File
No. 0-23036) filed with the Securities and Exchange Commission on May 10,
2000 and incorporated herein by reference.
*** Incorporated by reference to Schedule TO filed by The Coca-Cola Company
and TCCC Acquisition Corp. (formerly Perry Phillip Corp.) on November 6,
2001.
# Filed as an exhibit to the Registrant's filing on Form S-8 filed with the
Securities and Exchange Commission on August 21, 1997 and incorporated
herein by reference.
## Filed as an exhibit to the Registrant's definitive Proxy Statement (File
No. 0-23036) filed with the Securities and Exchange Commission on March
16, 2000 and incorporated herein by reference.
### Filed as an exhibit to the Registrant's Current Report on Form 8-K (File
No. 0-23036) filed with the Securities and Exchange Commission on
November 2, 2001.
+ Incorporated by reference to Registrant's Report on Form 10-Q for the
fiscal quarter ended December 2, 2000.
(b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the quarter ended
September 1, 2001.
38
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 November 27, 2001.
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 and James R.
Steichen, as his true and lawful attorneys-in-fact and agents, 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.
[Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
/s/ D. STEPHEN C. WILLIAMSON Chairman of the Board and November 27, 2001
---------------------------- Chief Executive Officer
D. Stephen C. Williamson (Principal Executive Officer)
/s/ ANDREW B. BALSON Director November 27, 2001
-----------------------------
Andrew B. Balson
/s/ RICHARD L. GRUBMAN Director November 27, 2001
-----------------------------
Richard L. Grubman
/s/ ELLIS B. JONES Director November 27, 2001
-----------------------------
Ellis B. Jones
/s/ MARK E. NUNNELLY Director November 27, 2001
-----------------------------
Mark E. Nunnelly
/s/ JUAN I. PRADO Director November 27, 2001
-----------------------------
Juan I. Prado
/s/ CRAIG H. SAKIN Director November 27, 2001
-----------------------------
Craig H. Sakin
/s/ JAMES R. STEICHEN Senior Vice President, Finance November 27, 2001
----------------------------- and Chief Financial Officer
James R. Steichen (Principal Financial and
Accounting Officer)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Odwalla, Inc.
In our opinion, the accompanying consolidated balance sheets 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 subsidiaries at September 1, 2001 and September 2, 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended September 1, 2001, in conformity with accounting
principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
November 16, 2001
40
ODWALLA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
[Enlarge/Download Table]
SEPTEMBER 2, SEPTEMBER 1,
2000 2001
------------ ------------
Current assets
Cash and cash equivalents $ 3,374 $ 4,106
Short term investments 2,018 258
Trade accounts receivable, less allowance for doubtful
accounts and product returns of $1,436 and $1,830 11,599 12,605
Inventories 6,705 6,913
Prepaid expenses and other current assets 2,357 3,077
Deferred tax asset, current 2,265 2,725
-------- --------
Total current assets 28,318 29,684
-------- --------
Plant, property and equipment, net 20,011 23,789
-------- --------
Other assets
Intangible assets, net 35,091 31,740
Covenants not to compete, net 393 304
Deferred tax asset, non-current 4,864 4,863
Other noncurrent assets 677 705
-------- --------
Total other assets 41,025 37,612
-------- --------
Total assets $ 89,354 $ 91,085
======== ========
Current liabilities
Accounts payable $ 9,139 $ 9,322
Accrued payroll and related items 2,328 2,112
Line of credit 1,950 1,987
Other accruals 2,574 2,517
Income taxes payable 24 22
Current maturities of capital lease obligations 372 1,419
Current maturities of long-term debt 219 213
-------- --------
Total current liabilities 16,606 17,592
Capital lease obligations, less current maturities 735 1,155
Long-term debt, less current maturities 390 276
Deferred tax liability 10,296 9,906
Other 655 1,676
-------- --------
Total liabilities 28,682 30,605
-------- --------
Commitments and contingencies (Note 4)
Shareholders' equity
Common stock, no par value, shares authorized, 15,000,000; shares
issued and outstanding, 11,033,000 and 11,080,000 72,948 73,190
Accumulated deficit (12,276) (12,710)
-------- --------
Total shareholders' equity 60,672 60,480
-------- --------
Total liabilities and shareholders' equity $ 89,354 $ 91,085
======== ========
See accompanying notes to consolidated financial statements.
41
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
[Enlarge/Download Table]
YEAR ENDED
-----------------------------------------
1999 2000 2001
--------- --------- ---------
Net sales $ 68,042 $ 93,450 $ 128,260
Cost of sales 35,542 47,477 61,723
--------- --------- ---------
Gross profit 32,500 45,973 66,537
--------- --------- ---------
Operating expenses
Sales and distribution 24,254 31,815 45,574
Marketing 2,908 2,795 3,672
General and administrative 7,449 9,616 11,518
Amortization of intangible assets from Fresh
Samantha acquisition -- 711 2,308
Restructuring and other charges -- -- 3,490
Recall and related costs 250 -- --
--------- --------- ---------
Total operating expenses 34,861 44,937 66,562
--------- --------- ---------
Income (loss) from operations (2,361) 1,036 (25)
Proceeds from insurance settlement, net of legal fees -- 5,458 --
Series A preferred stock inducement expense -- (1,587) --
Other (expense) income, net (40) (112) (211)
--------- --------- ---------
Income (loss) before income taxes (2,401) 4,795 (236)
Income tax benefit (expense) 359 (1,140) (198)
--------- --------- ---------
Net income (loss) (2,042) 3,655 (434)
Preferred stock dividend (267) (568) --
--------- --------- ---------
Net income (loss) applicable to common shareholders $ (2,309) $ 3,087 $ (434)
========= ========= =========
Basic net income (loss) applicable to common
shareholders per share $ (0.45) $ 0.44 $ (0.04)
========= ========= =========
Shares used in per share amounts 5,098 7,074 11,058
========= ========= =========
Diluted net income (loss) applicable to common
shareholders per share $ (0.45) $ 0.43 $ (0.04)
========= ========= =========
Shares used in per share amounts 5,098 7,134 11,058
========= ========= =========
See accompanying notes to consolidated financial statements.
42
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
[Enlarge/Download Table]
Common Stock
---------------------- Additional Accumulated
Shares Amount Paid-in Capital deficit Total
-------- -------- -------- -------- --------
Balance, August 30, 1998 5,061 $ 29,499 $(13,054) $ 16,445
Exercise of common stock options 64 251 -- 251
Issuance of stock warrants in connection with
preferred stock -- -- $ 62 -- 62
Preferred Stock dividend -- -- -- (267) (267)
Net loss for the year -- -- -- (2,042) (2,042)
-------- -------- -------- -------- --------
Balance, August 28, 1999 5,125 29,750 62 (15,363) 14,449
Issuance of common stock to holders of Fresh
Samantha stock at time of acquisition 3,612 27,475 -- -- 27,475
Conversion of Series A convertible preferred stock
in connection with acquisition of Fresh Samantha 1,075 8,073 -- -- 8,073
Issuance of common stock to Series A preferred
shareholder as inducement to convert stock 259 1,649 (62) -- 1,587
Issuance of common stock in private placement 961 6,000 -- -- 6,000
Exercise of common stock options 1 1 -- -- 1
Preferred Stock dividend -- -- -- (568) (568)
Net income for the year -- -- -- 3,655 3,655
-------- -------- -------- -------- --------
Balance, September 2, 2000 11,033 72,948 -- (12,276) 60,672
Exercise of common stock options and warrant 47 242 -- -- 242
Net loss for the year -- -- -- (434) (434)
-------- -------- -------- -------- --------
Balance, September 1, 2001 11,080 $ 73,190 $ -- $(12,710) $ 60,480
======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
43
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
[Enlarge/Download Table]
YEAR ENDED
-----------------------------------
1999 2000 2001
------- ------- -------
Cash flows from operating activities
Net income (loss) $(2,042) $ 3,655 $ (434)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 2,130 3,072 5,482
Amortization 220 933 2,540
Deferred taxes (348) 937 (849)
Preferred stock inducement expense -- 1,587 --
Gain on sale of assets (141) (44) (346)
Changes in assets and liabilities
Trade accounts receivable (581) (2,819) (1,006)
Inventories (675) (1,599) (208)
Prepaid expenses and other current assets (844) (454) (720)
Other noncurrent assets 81 (270) 872
Accounts payable 1,537 (1,668) 183
Accrued payroll and related items 51 345 (216)
Other accrued liabilities (837) (1,280) (57)
Other noncurrent liabilities -- 644 1,540
Income taxes payable -- 24 (2)
------- ------- -------
Net cash provided by (used in) operating activities (1,449) 3,063 6,779
------- ------- -------
Cash flows from investing activities
Capital expenditures (2,291) (5,344) (7,153)
(Purchase) proceeds from short-term investments, net (4,788) 2,770 1,760
Net cash costs of Fresh Samantha acquisition -- (1,239) --
Proceeds from sale of assets 673 146 192
------- ------- -------
Net cash used in investing activities (6,406) (3,667) (5,201)
------- ------- -------
Cash flows from financing activities
Principal payments under long-term debt (457) (294) (120)
Net borrowings under line of credit 274 (369) 37
Payments of obligations under capital leases (123) (114) (1,005)
Issuance of mandatorily redeemable and convertible
preferred stock 7,300 -- --
Payment of debt acquired from Fresh Samantha -- (3,827) --
Sale of common stock 251 6,001 242
------- ------- -------
Net cash provided by (used in) financing activities 7,245 1,397 (846)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (610) 793 732
Cash and cash equivalents, beginning of period 3,191 2,581 3,374
------- ------- -------
Cash and cash equivalents, end of period $ 2,581 $ 3,374 $ 4,106
======= ======= =======
See accompanying notes to consolidated financial statements.
44
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company. Odwalla's business is to provide easy access to great
tasting nourishment. We are the nation's leading branded super-premium beverage
company, delivering nourishment coast to coast with the Odwalla and Samantha
lines of more than 45 all natural juices, smoothies, dairy-free shakes, spring
water and natural food bars.
Basis of presentation and principles of consolidation. The accompanying
consolidated financial statements include the accounts of the Company and our
wholly owned subsidiaries Fresh Samantha, Inc. and Odwalla Canada, Inc. The
accounts of Fresh Samantha are included since May 2, 2000, the date of
acquisition. We have eliminated all significant intercompany balances and
transactions. Beginning September 1, 1997, we changed our annual reporting
periods to the 52 or 53 week period ending on the Saturday nearest August 31.
The year ended September 1, 2001 contains 52 weeks. The change doesn't
materially impact the comparability of information presented in these financial
statements. All references to years refer to the Company's fiscal year. In these
financial statements, our fiscal years ended August 28, 1999, September 2, 2000,
and September 1, 2001.
Use of estimates. To comply with generally accepted accounting
principles, we make estimates and use assumptions that affect the amounts
reported in the financial statements and disclosures made in the accompanying
notes. Our most significant estimates are related to the collectibility of
accounts receivable, reserves for products to be returned, reserves for
inventory that may not be useable and reserves for legal fees related to claims
and litigation. We also use estimates to determine the carrying value of
goodwill and purchased intangibles. Actual results may differ from our
estimates.
Cash, cash equivalents and short term investments. We consider all
investments with an initial maturity of three months or less at the date of
purchase to be cash equivalents. Both cash equivalents and short term
investments are considered available-for-sale securities and are reported at
amortized cost, which approximates fair value. The following schedule summarizes
the estimated fair value of our cash, cash equivalents and short-term
investments (in thousands):
[Download Table]
SEPTEMBER 2, SEPTEMBER 1,
2000 2001
------------ ------------
Cash and cash equivalents:
Cash $2,277 $2,195
Cash equivalents 1,097 1,911
------ ------
$3,374 $4,106
====== ======
Short term investments
U. S. government securities $ -- $ --
Corporate obligations 2,018 258
------ ------
$2,018 $ 258
====== ======
Interest earned on cash, cash equivalents and short-term investments was
$268,000 and $211,000 in 2000 and 2001.
Inventories. Inventories are valued at the lower of cost (first-in,
first-out) or market (net realizable value). Our inventories consist of the
following (in thousands):
[Download Table]
SEPTEMBER 2, SEPTEMBER 1,
2000 2001
------------ ------------
Raw materials $4,276 $4,078
Packaging supplies and other 944 1,106
Finished product 1,485 1,729
------ ------
Total $6,705 $6,913
====== ======
45
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plant, property, equipment and depreciation. Plant, property and
equipment are stated at the lower of cost or, if impaired, the fair value at
date of impairment. We calculate depreciation and amortization using the
straight-line method over the estimated useful lives of the assets. For
leasehold improvements, the amortization period is the shorter of the estimated
useful life or the remaining lease term. Amortization of assets under capital
leases is based upon the shorter of the lease term or useful life of the leased
asset and is included with depreciation expense.
Estimated useful lives that we use are generally as follows:
[Download Table]
Buildings and building improvements .............. 7 to 35 years
Leasehold improvements............................ 3 to 15 years
Machinery and equipment........................... 3 to 15 years
Vehicles.......................................... 5 years
Other............................................. 3 to 7 years
Property and equipment consisted of the following (in thousands):
[Download Table]
SEPTEMBER 2, SEPTEMBER 1,
2000 2001
------------ ------------
Land $ 618 $ 618
Buildings and building improvements 7,244 8,016
Leasehold improvements 2,314 2,238
Machinery and equipment 14,018 18,047
Vehicles 997 1,927
Data processing equipment 4,019 7,429
Other 1,619 977
-------- --------
30,829 39,252
Less accumulated depreciation and amortization (10,818) (15,463)
-------- --------
Plant, property and equipment, net $ 20,011 $ 23,789
======== ========
Intangible assets and covenants not to compete. Working with third
parties, we evaluate the fair value of intangible assets that we acquire. We
record goodwill when the cost of net assets we acquire exceeds their fair value.
Intangible assets and goodwill are amortized on a straight-line basis over their
estimated life. We regularly perform reviews to determine if the carrying value
of the assets is impaired. The reviews look for the existence of facts or
circumstances, either internal or external, which indicate the carrying value of
the asset cannot be recovered. No such impairment has been indicated to date. If
there is impairment prior to the adoption of SFAS 142, we will measure the
amount of the loss based on undiscounted expected future cash flows from the
impaired assets. The cash flow calculations would be based on management's best
estimates, using appropriate assumptions and projections at the time.
We entered into covenants not to compete when we acquired certain
businesses. The cost is amortized on a straight-line basis over the life of the
agreements.
46
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill and covenants not to compete consisted of the following (in
thousands):
[Download Table]
SEPTEMBER 2, SEPTEMBER 1, ESTIMATED LIFE
2000 2001 (IN YEARS)
------------ ------------ --------------
Goodwill $ 10,642 $ 9,707 15 - 20
Trade name 21,980 21,980 20
Customer list 3,790 3,790 5
-------- --------
36,412 35,477
Accumulated amortization (1,321) (3,737)
-------- --------
Net $ 35,091 $ 31,740
======== ========
Covenants not to compete $ 890 $ 890 10
Accumulated amortization (497) (586)
-------- --------
Net $ 393 $ 304
======== ========
Concentration of credit risk. Odwalla operates a multi-faceted business,
both manufacturing and distribution. Many circumstances could have an
unfavorable impact on our operating results. Examples include unfavorable
weather impact on raw materials, changes in government regulations, changes in
consumer demands or the emergence of significant competitors. A large portion of
our business and our customers are currently concentrated in Northern
California.
We are also subject to risks related to our significant trade accounts
receivable, although our customer base is generally diversified in each of our
market areas due to the number of accounts that we service. We perform ongoing
evaluations of customer credit to reduce the risk associated with accounts
receivable. We maintain reserves for estimated credit losses, based on specific
customers, historical trends and other information, and those losses have
historically been within our expectations.
One customer represented approximately 13% and, 11% of sales in 1999 and
2000. No customer represented more than 10% of net sales in 2001.
Revenue recognition. We recognize sales when products are delivered to
our customers. Most of our sales are through our own direct-store-delivery
system. We usually guarantee that sales through our direct-store-delivery system
will be sold to consumers and we record a reserve for products estimated to be
returned. Most of our sales to independent distributors are not guaranteed. In
2000, we implemented the guidance in EITF 00-14, Accounting for Certain Sales
Incentives, which does not represent a change from our existing accounting
policies. Accordingly, any cash sales incentives are classified as a reduction
of revenue.
Earnings per share. Basic earnings per share is computed using the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period. Common
equivalent shares consist of the shares issuable upon the exercise of stock
options and warrants under the treasury stock method.
47
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the computation of basic and diluted earnings
per share, in thousands except per share data:
[Enlarge/Download Table]
YEAR ENDED
-------------------------------------------
1999 2000 2001
-------- -------- --------
Basic:
Weighted average common shares outstanding 5,098 7,074 11,058
Net income (loss) $ (2,042) $ 3,655 $ (434)
Net income (loss) attributable to common shareholders $ (2,309) $ 3,087 $ (434)
Per share amount, attributable to common shareholders $ (0.45) $ 0.44 $ (0.04)
Diluted:
Weighted average common shares outstanding 5,098 7,074 11,058
Common equivalent shares -- 60 --
Shares used in per share amounts 5,098 7,134 11,058
Net income (loss) $ (2,042) $ 3,655 $ (434)
Net income (loss) attributable to common shareholders $ (2,309) $ 3,087 $ (434)
Per share amount, attributable to common shareholders $ (0.45) $ 0.43 $ (0.04)
We had no dilutive common equivalent shares during fiscal 1999 or 2001
due to the reported net loss.
Holders of Series A Preferred Stock ("Series A Stock") were entitled to
receive an 8% annual dividend which was payable in either cash or additional
Series A Stock, at our election. The dividend was payable semi-annually. In 1999
and 2000, we adjusted net income by $267,000 and $568,000 to arrive at net
income attributable to common shareholders. In connection with the purchase of
Fresh Samantha in May 2000, the Series A Stock was converted into common stock
as of the effective date of the Fresh Samantha acquisition.
Recent Accounting Pronouncements. In June 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 141,
"Business Combinations" (SFAS 141). This statement requires that all business
combinations initiated after June 30, 2001 be accounted for under the purchase
method of accounting. Use of the pooling-of-interests method is no longer
permitted. Although none are currently anticipated, this will apply to any
future acquisitions we make.
In June 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" (SFAS 142). This statement continues to require recognition of goodwill
as an asset, but amortization of goodwill as currently required by APB Opinion
No. 17, "Intangible Assets", is no longer permitted. In lieu of amortization,
goodwill must be tested for impairment using a fair-value-based approach. We are
currently assessing the impact that this new pronouncement will have on the
recorded amounts of goodwill and other intangibles. Amortization of goodwill and
other intangibles totaled $108,000, $625,000 and $1,658,000 for the fiscal years
ended in 1999, 2000 and 2001. SFAS 142 is required to be implemented for fiscal
years beginning after December 15, 2001. We expect to implement SFAS 142 in the
first quarter of fiscal 2003.
In October 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Impairment on Disposal of
Long-Lived Assets" (SFAS 144). Under the new rules, the criteria required for
classifying an asset as held-for-sale have been significantly changed. Assets
held-for-sale are stated at the lower of their fair values or carrying amounts,
and depreciation is no longer recognized. In addition, more dispositions will
qualify for discontinued operations treatment in the statement of operations.
SFAS 144 is required to be implemented for fiscal years beginning after December
15, 2001. We are evaluating the impact, if any, of SFAS 144 on our financial
statements and have not yet determined if we will adopt the provisions prior to
the required date.
48
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. ACQUISITION AND RELATED MATTERS
On May 2, 2000, we completed our acquisition of Fresh Samantha. We
accounted for the acquisition of Fresh Samantha as a purchase for accounting
purposes and, accordingly, the purchase price has been allocated to the tangible
and intangible assets acquired and liabilities assumed on the basis of their
fair values on the acquisition date. The Statement of Operations includes the
results of Fresh Samantha as a wholly owned subsidiary since the acquisition.
The total purchase price of approximately $29.0 million consisted of the
issuance of 3,612,122 shares of Odwalla common stock with an estimated fair
value of $27.5 million plus transaction costs of approximately $1.5 million,
consisting principally of professional fees. The purchase price of $29.0 million
plus $1.7 million in net assumed liabilities and $3.8 million in acquired
deferred tax assets, net of a $10.2 million deferred tax liability and the
release of a deferred tax valuation allowance of $2.3 million recorded in
accordance with Statement of Financial Accounting Standards No. 109, resulted in
total intangible assets related to the Fresh Samantha acquisition of $34.8
million at the time of the acquisition. After evaluating the nature of the
intangible assets acquired, the acquisition cost was allocated as shown below
(amounts in thousands). During fiscal 2001, after further evaluation of the
deferred tax asset following completion of the Fresh Samantha corporate tax
return, a reclassification of $935,000 between acquired deferred tax asset and
goodwill was recorded.
[Download Table]
SEPTEMBER 2, SEPTEMBER 1,
2000 2001
------------ ------------
Trade name $21,980 $21,980
Customer list 3,790 3,790
Goodwill 9,022 8,087
------- -------
$34,792 $33,857
======= =======
The fair value of the common stock issued was determined using the
average closing market price of Odwalla's common stock for several days before
and after the merger announcement.
The following unaudited pro forma financial information shows pro forma
net revenue, net loss and net loss per share as if the acquisition had occurred
at the beginning of each of the periods presented. The pro forma information
includes the amortization of goodwill. The pro forma information is not
necessarily indicative of operating results that might have been if the
acquisition had taken place as of the beginning of each of the periods presented
and may not be indicative of future operating results. The pro forma information
for the years ended in 1999 and 2000 is unaudited and is stated in thousands,
except per share data.
[Download Table]
1999 2000
--------- ---------
Revenue $ 100,200 $ 121,472
Net loss (10,550) (462)
Loss per share, basic and diluted $ (0.96) $ (0.04)
Weighted average shares, basic and diluted 11,004 11,033
We also issued shares of our common stock to three funds managed by
Wasserstein Perella Group, Inc. and to Catterton-Simon Partners III, L.P.
pursuant to a Stock Purchase Agreement dated as of February 11, 2000, and
amended as of April 25, 2000, among Odwalla, U.S. Equity Partners, L.P.
(representing the Wasserstein Perella
49
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
funds), and Catterton-Simon Partners. We issued 800,641 shares of our common
stock to the Wasserstein Perella funds on May 2, 2000 for an aggregate purchase
price of $5.0 million. We also agreed, pursuant to the Stock Purchase Agreement,
to issue an additional 160,128 shares of our common stock to Catterton-Simon
Partners for an aggregate purchase price of $1.0 million, which was completed in
late May 2000. In addition, under a Preferred Stock Conversion Agreement, dated
as of February 11, 2000, between Odwalla and Catterton-Simon Partners, we issued
1,333,333 shares of our common stock to Catterton-Simon Partners in exchange for
1,074,666 shares of Odwalla's Series A Preferred Stock, representing all of the
outstanding shares of such stock, held by Catterton-Simon Partners and
cancellation of a warrant to purchase 75,000 shares of Odwalla's common stock
held by Catterton-Simon Partners. The issuance of common stock to
Catterton-Simon Partners as an inducement for early conversion was approved by
Odwalla's shareholders on April 25, 2000. We recorded an expense of $1.6 million
to reflect the value of the 258,667 additional shares issued to induce
Catterton-Simon to convert the Series A Stock that they held and to cancel the
outstanding warrant that they held. The inducement shares were valued using the
closing market price for our common stock at the date the shareholders approved
the issuance.
3. DEBT
LINE OF CREDIT
In September 1999, we entered into a Revolving Credit Agreement ("Credit
Agreement") with a lender and paid the balance then outstanding under, and
terminated, our then existing credit arrangement. The Credit Agreement provided
a revolving credit facility up to $5.0 million. The first $2.0 million of
borrowings did not require separate borrowing base reporting. Borrowings over
$2.0 million and up to $5.0 million are limited to 80% of eligible accounts
receivable. The Credit Agreement defined eligible accounts receivable which
generally represents all trade accounts receivable less delinquent balances.
Interest was payable monthly at either the prime interest rate plus 1% or the
Eurodollar rate plus 3.5%. The interest rate to be incurred was selected by
Odwalla at the inception of each loan and could be changed during the period in
which the borrowed amount was outstanding in accordance with provisions included
in the Credit Agreement. The initial term of the Credit Agreement was for three
years.
In late April, 2000, the credit facility was increased from $5.0 million
to $10.0 million in connection with the close of the Fresh Samantha acquisition.
The terms of the amended credit facility, which had a three year term, were
substantially the same as the original credit facility. As before, all of our
consolidated assets were pledged as collateral under the credit agreement. We
were also required to meet certain covenants, including maintenance of certain
financial, leverage, and debt service coverage ratios, and certain tangible net
worth. The credit agreement also contained certain business restrictions,
including restrictions on the ability to borrow additional funds, limitations on
capital expenditures in excess of certain amounts, restrictions on the payment
of cash dividends, sale or purchase of Company stock, ability to encumber or
sell Company assets, and limitations on other business transactions without
prior approval from the lender.
On July 12, 2001, we entered into a Business Loan Agreement with a new
lender providing up to $10.0 million of borrowing capability, including the
ability to issue letters of credit up to a certain maximum amount. This facility
replaced our prior Credit Agreement. The first $2.0 million of borrowings do not
require separate borrowing base reporting. Borrowings are limited to 75% of
eligible accounts receivable, which generally represent all trade accounts
receivable less delinquent balances and other balances as defined in the
Business Loan Agreement. We are also required to meet certain covenants,
including maintenance of certain financial ratios, a fixed charge coverage ratio
and certain tangible net worth. The Business Loan Agreement also contains
certain business restrictions, including restrictions on the ability to borrow
additional funds, limitations on capital expenditures in excess of certain
amounts, restrictions on the payment of cash dividends, sale or purchase of
Company stock, ability to encumber or sell Company assets, and limitations on
other business transactions without prior approval from the lender. The
restrictions include the transaction described in Note 13 to the financial
statements. Interest is payable monthly at the prime interest rate plus 0.0% to
0.5%
50
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
depending on certain financial ratios. The initial rate is prime plus 0.25%. We
may also select either a IBOR or LIBOR rate plus 2.75% to 3.5% depending on
certain financial ratios. The Business Loan Agreement has a two-year term ending
in July 2003. Accounts receivable, inventories and trademarks and other
intangible assets provide collateral under the Business Loan Agreement. We wrote
off $151,000 in unamortized loan fee costs associated with the former Credit
Agreement in the fourth quarter of fiscal 2001. At September 1, 2001, the
interest rate applicable to loans under the Business Loan Agreement was 6.75%.
In September 2001, we issued a $600,000 letter of credit under the
Business Loan Agreement.
As of September 1, 2001, we were not in compliance with one covenant of
our Business Loan Agreement as we had exceeded the capital asset acquisition
limitation. We requested our lender to waive the specific September 1, 2001
covenant violation and, in November 2001, the lender granted the requested
waiver.
LONG-TERM DEBT
As part of our plea agreement with the U.S. government discussed in Note
4, we agreed to pay $1.5 million over a five-year period, without interest.
Generally accepted accounting principles require that we impute interest, which
means that we record the obligation on a discounted basis and charge the income
statement with interest expense (in this situation, at 9.5% per year) over the
five-year period. The discounted amount recorded in July 1998 was $1,242,000.
The U.S. government may file a lien on all of our assets under the plea
agreement but, if they do, has agreed to allow the lender under the Business
Loan Agreement to retain priority interest in our assets.
The carrying value of debt approximates its fair value except that we
carry the value of the U.S. government debt at cost less imputed interest, as
discussed above, as there is no reasonable way to evaluate this non-interest
bearing obligation.
The following summarizes long-term debt (in thousands):
[Download Table]
SEPTEMBER 2, SEPTEMBER 1,
2000 2001
------------ ------------
U.S. government obligation $ 581 $ 484
Other 28 5
----- -----
609 489
Less current portion (219) (213)
----- -----
$ 390 $ 276
===== =====
4. COMMITMENTS AND CONTINGENCIES
OPERATING AND CAPITAL LEASES
Odwalla leases office space, branch distribution facilities, equipment
and vehicles under various operating leases. These leases expire at various
dates through 2011 and many facility leases contain renewal options. Most
property leases require us to pay utilities, property taxes and common
maintenance costs. Total operating lease rent expense was $5.6 million, $6.2
million, and $7.5 million for the years ended in 1999, 2000, and 2001. Odwalla
also leases some furniture, equipment and vehicles under capital leases expiring
through 2006.
51
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table lists property under capital leases by major classes
(in thousands):
[Download Table]
SEPTEMBER 2, SEPTEMBER 1,
2000 2001
------------ ------------
Machinery and equipment $ 488 $ 894
Vehicles 232 1,094
Computer and data processing 472 1,568
Other 18 20
------- -------
1,210 3,576
Less accumulated amortization (124) (1,002)
------- -------
Net leased equipment under capital leases $ 1,086 $ 2,574
======= =======
Future net minimum lease payments under existing capital and operating
leases as of September 1, 2001, are as follows (in thousands):
[Download Table]
CAPITAL OPERATING
YEAR ENDING IN AUGUST LEASES LEASES
--------------------- ------- ---------
2002 $ 1,627 $ 6,484
2003 982 5,891
2004 198 4,733
2005 78 3,450
2006 8 2,388
Thereafter -- 5,728
-------- --------
2,893 $ 28,674
========
Less amount representing interest (319)
--------
Present value of net minimum lease payments 2,574
Less current maturities (1,419)
--------
Long-term portion $ 1,155
========
We occasionally sublease all or portions of our leased facilities to
third parties under sublease agreements. We earned $26,000, $9,000 and $106,000
under sublease agreements in 1999, 2000 and 2001.
RAW MATERIAL CONTRACTS
We had purchase commitments for the future delivery of raw materials as
of September 1, 2001, approximately $5.7 million of which are under contracts
and are expected to be completed by December 2002.
RECALL AND RELATED COSTS
On October 30, 1996, Odwalla 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. We immediately
implemented a recall of all Odwalla products containing apple juice. Thirty-five
personal injury claims and legal proceedings have been filed against Odwalla
seeking monetary damages and other relief relating to the recall. There was also
one legal proceeding alleging fraudulent business acts and practices relating to
the recall products. Thirty-four of these claims and proceedings have been
settled. In addition, approximately 400 other claims for damages or inquiries
resulting from the recall were presented to our insurance carrier and
approximately 398 of those claims have been either settled or resolved. We also
received two claims in fiscal 1999 and one claim in fiscal 2001 allegedly
arising out of product consumption prior to the recall, which have all been
settled. Settlement of the personal injury legal proceedings and claims was
covered under our insurance policy. At this time, we are unable to determine the
potential liability from
52
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the remaining legal proceedings and claims. We believe our insurance coverage is
adequate to cover such claims and legal proceedings, but the ultimate outcome of
any litigation is uncertain and we cannot be certain that insurance coverage
will be adequate. Litigation can also have an adverse impact on a company,
regardless of the outcome, due to defense costs, diversion of management
resources and other factors.
In early 1997, Odwalla was informed that it was the subject of a federal
grand jury investigation (Eastern District of California) concerning the E. coli
O157:H7 incident and related issues. In July 1998, in connection with the
investigation, we entered into a misdemeanor plea agreement with the U.S.
government. As part of the plea agreement, Odwalla agreed to pay, over a period
of five years, $1.25 million to the U.S. government and $250,000 to three
non-profit organizations involved with advancing the cause of food safety. We
also agreed, as part of the conditions attached to a five-year term of
unsupervised Court probation, to develop and implement a HACCP plan and to
undertake other measures related to food safety.
Odwalla also incurred significant direct costs as a result of the
recall. Under our arrangement with our insurance company, we pay a portion of
the legal fees related to third party claims resulting from the recall and
related claims. We originally established a $2.2 million charge to establish a
liability for future professional fees related to the recall. The reserve for
professional fees is an estimate, and there can be no assurance that the actual
reserved liability established will be adequate. In fiscal 1999, we reviewed
available information, including recently filed claims, and added $250,000 to
this reserve. We reviewed this charge in subsequent years and believe that the
remaining balance of the reserve established is reasonable. We will continue to
assess this liability and will make appropriate adjustments if circumstances
change. Approximately $520,000 of this reserve for professional fees remained at
September 1, 2001.
Odwalla maintains insurance coverage for product recall, product
adulteration, lost income and other first party business risks. The claim we
submitted to our insurance carriers for product recall costs and for business
losses incurred due to the recall was denied for substantially all of the
amounts claimed. On May 21, 1999, we filed a lawsuit in United States District
Court for the Eastern District of California in Fresno, California, against New
Hampshire Insurance Company to seek recovery on our business interruption
insurance claim. On April 12, 2000, we entered into a Mutual Release and
Settlement Agreement with the insurance company regarding the business
interruption insurance claim. Under the Mutual Release and Settlement Agreement,
the insurance company agreed to pay us $6.5 million and, in connection with the
settlement, we dismissed our lawsuit against the insurance company. The proceeds
from the insurance settlement were recorded net of legal fees of $1.0 million.
RESTRUCTURING AND OTHER CHARGES
Restructuring and other charges in 2001 consist of the following items
(in thousands):
[Download Table]
Separation agreement and severance agreements $ 1,230
Exit from Saco, Maine production facilities 2,260
-------
$ 3,490
=======
Separation agreement and severance agreements. On December 14, 2000, we
announced that Doug Levin, Founder and CEO of Fresh Samantha, was leaving the
Company after helping to complete the successful merger of Odwalla and Fresh
Samantha. In December 2000 and January 2001, management changes were implemented
in our East Coast operations. As a result of these actions, we recorded a
$1,230,000 charge to operations.
53
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Exit from Saco, Maine production facilities. On January 11, 2001, we
announced the closure of the Fresh Samantha production facilities in Saco,
Maine. The main components of the cost of this closure are as follows:
- The closure included the termination of approximately 60
employees, primarily from the manufacturing operation, and
estimated severance payments and related payments of $752,000.
All employees were notified of their pending termination in
January 2001.
- The exit from the Saco facility resulted in excess leased
facilities, excess transportation equipment, and certain other
assets that have no recoverable value due to the closure. These
items total $1,508,000.
As of September 1, 2001, the liability for the above charges, net of
payments applicable to the year ended September 1, 2001, are included in the
following accounts (in thousands):
[Download Table]
Other accruals $ 897
Other long-term liabilities 1,174
5. MANDATORILY REDEEMABLE AND CONVERTIBLE PREFERRED STOCK
Series A Preferred Stock. On January 7, 1999, we signed an agreement
with Catterton-Simon Partners III, L.P. to sell 1,000,000 shares of Odwalla
Series A Preferred Stock at $8.00 per share. The Series A Stock received an 8%
annual dividend which was payable in either cash or additional Series A Stock,
at our election. The dividend was payable semi-annually. All Series A Stock was
convertible on a one-for-one basis into Odwalla common stock (a) upon a request
by Catterton-Simon at any time after July 6, 1999, and (b) automatically upon
the earlier of (i) an acquisition of Odwalla by another company, either for cash
or publicly traded stock, at a price in excess of $12.00 per share, (ii) the
average trading price of Odwalla common stock exceeding $12.00 per share for 20
consecutive trading days, or (iii) January 7, 2002. Holders of Series A Stock
were entitled to preferential payment, in the event of any liquidation of
Odwalla, in an amount equal to the greater of $8.00 per share, plus any accrued
but unpaid dividends, or the amount due each holder of common stock.
Catterton-Simon also received a warrant to purchase 75,000 shares of Odwalla
common stock at $10.00 per share. The warrant expired in seven years. We also
paid fees and issued a warrant to our financial advisor in connection with this
transaction. The warrant is for 24,806 shares of common stock at an exercise
price approximating $6.45 per share and expires in five years.
As previously discussed, under a Preferred Stock Conversion Agreement,
dated as of February 11, 2000, between Odwalla and Catterton-Simon, we issued
1,333,333 shares of our common stock to Catterton-Simon on May 2, 2000, in
exchange for 1,074,666 shares of Odwalla's Series A Preferred Stock,
representing all of the outstanding shares of such stock, held by
Catterton-Simon and cancellation of the warrant to purchase 75,000 shares of
Odwalla's common stock held by Catterton-Simon. The issuance of common stock to
Catterton-Simon as an inducement for early conversion was approved by Odwalla's
shareholders on April 25, 2000. We recorded an expense of $1.6 million to
reflect the value of the 258,667 additional shares issued to induce
Catterton-Simon to convert the Series A Stock that they held and to cancel the
outstanding warrant that they held. The inducement shares were valued using the
closing market price for our common stock at the date the shareholders approved
the issuance.
Preferred stock dividends recorded represent dividends declared by our
Board of Directors, prior to the conversion, for the Series A shareholder. All
dividends were paid in common stock.
54
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SHAREHOLDERS' EQUITY
Warrants. We issued two warrants in connection with the Series A
Preferred Stock financing described in Note 5. One warrant, issued for 75,000
shares of common stock at $10.00 per share expiring in February 2006, was
cancelled in connection with the conversion of the Series A Preferred Stock at
the time of the Fresh Samantha acquisition in May 2000. The other warrant,
issued for 24,806 shares of common stock at $6.45 per share, expires in February
2004. In 1997, we also issued a warrant for 7,000 shares of common stock at
$12.00 per share, which expires in May 2002, in connection with a loan agreement
that has since expired.
Stock Option Plans. Under the 1993 Stock Option Plan, incentive stock
options could be granted to employees and nonstatutory stock options could 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.
In April 1997, Odwalla's shareholders approved the 1997 Stock Incentive
Plan ("1997 Plan") which replaced both the Stock Option Plan and the Directors'
Plan. The 1997 Plan consists of three programs: (i) a Discretionary Option Grant
Program ("Discretionary Program"), (ii) a Stock Issuance Program ("Stock
Program"), and (iii) an Automatic Option Grant Program ("Automatic Program"). A
total of 1,648,475 shares of common stock are reserved for issuance under the
1997 Plan, which includes all outstanding options under the Stock Option Plan
and Directors' Plan. In April 2000, Odwalla's shareholders approved an
additional 500,000 shares of common stock to be added to the 1997 Plan.
The Discretionary Program allows us to issue both incentive and
non-qualified stock options, at an exercise price not less than 100% of fair
market value on the grant date, which expire ten years or less from the grant
date; vesting is generally in a series of installments measured from the grant
date. The Stock Program allows us to issue common stock directly for cash,
promissory note or for past services with no cash payment; vesting may be
immediate or in one or more installments. The Automatic Program awards 5,000
shares of common stock to each non-employee Board member upon initial election
or appointment and 3,000 shares of common stock at each annual shareholders
meeting. Awards under the Automatic Program are made at an exercise price equal
to the closing fair market value of the Company's common stock on the award
date, will have a maximum term of ten years from the grant date and vest in
annual installments over a four year period at the 5,000 share award level and
after one year for the 3,000 share award level. Under all programs of the 1997
Plan, accelerated vesting provisions apply in certain situations.
55
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The activity under the above plans was as follows:
[Enlarge/Download Table]
SHARES AVAILABLE OPTIONS OPTION PRICE WEIGHTED AVERAGE
FOR GRANT OUTSTANDING PER SHARE PRICE PER SHARE
---------------- ----------- -------------- ----------------
Balance at August 30, 1998 320,082 1,240,649 $3.33-$13.75 $ 9.18
Options granted (448,750) 448,750 $5.44-$10.06 $ 6.74
Options exercised -- (66,070) $3.33-$3.90 $ 3.89
Options canceled 195,476 (195,476) $3.33-$13.75 $10.42
--------- ---------
Balance at August 28, 1999 66,808 1,427,853 $3.33-$13.75 $ 8.56
Additional shares reserved 500,000 --
Options granted (416,111) 416,111 $4.875-$7.125 $ 6.59
Options exercised -- (1,085) $6.375-$7.125 $ 6.66
Options canceled 258,950 (258,950) $3.33-$13.75 $ 9.11
--------- ---------
Balance at September 2, 2000 409,647 1,583,929 $3.33-$13.75 $ 7.95
Options granted (410,500) 410,500 $8.438-$10.00 $ 9.29
Options exercised -- (42,370) $3.90-$8.438 $ 5.48
Options canceled 243,980 (243,980) $3.33-$13.75 $ 7.56
--------- ---------
Balance at September 1, 2001 243,127 1,708,079 $3.33-$13.75 $ 8.39
========= =========
We follow Accounting Principles Board Opinion 25 ("APB 25"), "Accounting
for Stock Issued to Employees," in accounting for stock-based compensation.
Accordingly, we are not required to record compensation expense when stock
options are granted to employees, as long as the exercise price is not less than
the fair market value of the stock when the option is granted. All options that
we have granted were at exercise prices at or above fair market value of the
common stock. In October 1995, the FASB issued SFAS 123, "Accounting for
Stock-Based Compensation." Although SFAS 123 allows us to continue to follow the
present APB 25 guidelines, we are required to disclose pro forma net income
(loss) and net income (loss) per share as if we had adopted the new statement.
The pro forma impact of applying SFAS 123 in fiscal 1999, 2000 and 2001 is not
likely to be representative of the pro forma impact in future years.
We have elected to use the Black-Scholes model to estimate the fair
value of options granted. This valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. This model requires the input of highly subjective
assumptions including the expected stock price volatility. Because our employee
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect this estimate, we believe the Black-Scholes model does not necessarily
provide a reliable single measure of fair value of our employee stock options.
Inputs used for the valuation model are as follows for 1999, 2000, and 2001:
dividend yield of 0% for all years; expected volatility of 4.5%, 4.8%, and 5.0%;
risk-free interest rates of 5.4%, 6.0%, and 5.2%; and expected lives
approximating 5 years in 1999 and 2000 and 4 years in 2001.
Had the fair value of the options been calculated in accordance with FAS
123, net income (loss) applicable to common shareholders would have been
$(2,634,000), $2,736,000, and $(663,000) and basic net income (loss) per share
applicable to common shareholders would have been $(0.52), $0.39, and $(0.06)
for fiscal 1999, 2000, and 2001.
56
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were 790,940, 976,081, and 1,199,118 options exercisable at the
end of fiscal 1999, 2000, and 2001. The weighted average exercise price of
options exercisable at the end of 1999, 2000, and 2001 was $8.70, $8.42, and
$8.348 per share. At September 1, 2001, a total of approximately 2,148,475
shares of common stock have been reserved for issuance under the Company's stock
option plans.
The following table summarizes information about options outstanding at
September 1, 2001:
[Download Table]
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (years) Price Exercisable Price
--------------- ----------- ------------ --------- ----------- ---------
$ 3.33 - $ 7.00 589,781 6.20 $ 6.30 444,721 $ 6.17
$7.125 - $9.938 742,785 7.88 $ 8.75 406,640 $ 8.46
$10.00 - $13.75 375,513 3.95 $ 10.97 347,757 $ 11.01
--------- ---------
1,708,079 6.44 $ 8.39 1,199,118 $ 8.35
========= =========
7. EMPLOYEE BENEFIT PLAN
Odwalla matches 10% of each employee's contribution to our 401(k)
Employee Benefit Plan ("Plan"). Odwalla contributions to the Plan approximated
$52,000, $55,000, and $84,000 in 1999, 2000, and 2001.
8. TAXES ON INCOME
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. We provide a
valuation allowance against certain deferred tax assets due to the uncertainty
of whether we will ultimately realize their benefit.
Deferred tax assets consist principally of the following (in thousands):
[Download Table]
SEPTEMBER 2, SEPTEMBER 1,
2000 2001
------------ ------------
Reserves and accruals $ 1,938 $ 2,474
Net operating loss carryforward 4,744 4,794
Tax credits 152 197
Property, plant and equipment 386 279
Inventories 75 73
Other 170 165
------- -------
7,465 7,982
Less valuation allowance (336) (394)
------- -------
Net deferred tax asset $ 7,129 $ 7,588
======= =======
Deferred tax liability consist principally of the following (in
thousands):
[Download Table]
SEPTEMBER 2, SEPTEMBER 1,
2000 2001
------------ ------------
Basis difference from acquisition $10,173 $ 9,426
Property, plant and equipment 123 480
------- -------
Net deferred tax liability $10,296 $ 9,906
======= =======
57
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The basis difference from acquisition results from the Fresh Samantha
acquisition in fiscal 2000. The acquisition was structured as a tax-free
reorganization for income tax purposes. This results in intangible and other
assets with a basis for accounting purposes, as the acquisition was accounted
for using the purchase method, that do not exist for tax reporting purposes.
Because the financial accounting basis will result in future accounting
amortization in excess of tax amortization, a deferred tax liability was
established to account for that difference.
The Company's effective tax rate differs from the federal statutory rate
as follows:
[Download Table]
YEAR ENDED
------------------------------
1999 2000 2001
---- ---- ----
Federal statutory tax rate (34)% 35% (35)%
State income taxes (5) 5 10
Deferred tax asset valuation allowance 25 (30) --
Permanent differences and other (1) 14 109
---- ---- ----
(15)% 24% 84%
==== ==== ====
The permanent difference in fiscal 2000 results primarily from the
Series A preferred stock inducement expense. The permanent difference in fiscal
2001 consists of goodwill with a basis for accounting purposes, as the
acquisition was accounted for using the purchase method, that do not exist for
tax reporting purposes and, to a lesser extent, certain non-deductible items.
Taxes on income consisted of the following (in thousands):
[Download Table]
YEAR ENDED
-------------------------------------
1999 2000 2001
------- ------- -------
Current:
Federal $ -- $ 134 $ 73
State -- 28 14
------- ------- -------
-- 162 87
------- ------- -------
Deferred:
Federal (860) 2,227 334
State (131) 164 (223)
------- ------- -------
(991) 2,391 111
------- ------- -------
Change in valuation allowance (see below) 632 (1,413) --
------- ------- -------
$ (359) $ 1,140 $ 198
======= ======= =======
The valuation allowance in fiscal 2000 was reduced from $4.0 million at
the beginning the year to $336,000 at the end of the year. The reduction
consists of two components. The first component, shown above, represents the
change that impacts taxes on income for fiscal 2000. The second component
represents the portion of the valuation allowance, $2.3 million, which was
reduced as part of the recording of the Fresh Samantha acquisition.
At September 1, 2001, we had federal and state net operating loss
carryforwards of $12.1 million and $10.8 million, respectively, which expire
between 2002 and 2020.
58
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. RELATED PARTY TRANSACTIONS
We retained a board member for consulting services and incurred fees of
$9,000 in 1999. The board member resigned in May 2000.
10. OTHER (EXPENSE) INCOME, NET
Other (expense) income, net consisted of the following (in thousands):
[Download Table]
YEAR ENDED
-------------------------------
1999 2000 2001
----- ----- -----
Interest income $ 278 $ 268 $ 211
Interest expense (437) (486) (563)
Other 119 106 141
----- ----- -----
$ (40) $(112) $(211)
===== ===== =====
Included in other income for 1999 is a gain of $145,000 on the sale of
land adjacent to our administrative offices in Half Moon Bay, California.
Included in other income for 2001 is a gain of $347,000 associated with the sale
of assets, primarily second generation hand held computer equipment.
11. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND PRODUCT RETURNS
The following summarizes activity in the allowance for doubtful accounts
and product returns for the years shown (in thousands):
[Enlarge/Download Table]
YEAR ENDED
-------------------------------------
1999 2000 2001
------- ------- -------
Allowance for doubtful accounts and product returns,
beginning of year $ 588 $ 631 $ 1,436
Allowance purchased with Fresh Samantha acquisition -- 295 --
Bad debt expense and change in allowance for product
returns for the year 360 1,061 945
Accounts receivable written off during the year (317) (551) (551)
------- ------- -------
Allowance for doubtful accounts and product returns,
end of year $ 631 $ 1,436 $ 1,830
======= ======= =======
12. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOW
Noncash investing and financing activities: The acquisition of Fresh
Samantha in fiscal 2000 resulted from a non-cash transaction as discussed in
Note 2 to the financial statements. In 2000, we entered into capital lease
obligations and acquired assets valued at $634,000 in addition to the assets
valued at $535,000 that we acquired through the Fresh Samantha acquisition. In
2001, we entered into capital lease obligations and acquired assets valued at
$2.5 million.
Cash paid for interest in 1999, 2000, and 2001 was $437,000, $380,000,
and $443,000. Income taxes paid in 1999, 2000, and 2001 were $2,000, $145,000,
and $109,000.
59
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. SUBSEQUENT EVENT
On October 29, 2001, Odwalla entered into an Agreement and Plan of
Merger with The Coca-Cola Company ("TCCC") and its wholly owned subsidiary, TCCC
Acquisition Corp. The Merger Agreement provides for the acquisition of Odwalla
by TCCC at a cash price of $15.25 per share of our common stock. On November 6,
2001, TCCC commenced a tender offer to purchase all of our outstanding shares.
The offer is conditioned upon, among other things, there being validly tendered
and not withdrawn a number of shares which equals at least 90.1% of the
outstanding shares of Odwalla on a fully diluted basis, as defined. The offer is
also subject to the receipt of customary regulatory approvals and the
satisfaction or waiver of other closing conditions. The offer is scheduled to
expire on December 6, 2001, unless extended. Upon successful completion of the
tender offer and closing of the merger, Odwalla would be a wholly owned
subsidiary of TCCC.
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
[Enlarge/Download Table]
Net income
(loss) Basic and diluted
attributable net income (loss)
Net Gross Net income to common attributable to common
Sales Profit (loss) shareholders shareholders per share
-------- -------- -------- ------------- ------------------------
Fully
Basic Diluted
--------- --------- -
1999
1st Quarter $ 15,332 $ 7,696 $ (479) $ (479) $ (0.09) $ (0.09)
2nd Quarter 16,342 7,333 (817) (817) (0.16) (0.16)
3rd Quarter 19,124 9,048 (279) (279) (0.05) (0.05)
4th Quarter 17,244 8,419 (467) (734) (0.14) (0.14)
-------- -------- -------- --------
$ 68,042 $ 32,500 $ (2,042) $ (2,309) $ (0.45) $ (0.45)
======== ======== ======== ======== ======== ========
2000
1st Quarter $ 16,769 $ 7,813 $ (725) $ (938) $ (0.18) $ (0.18)
2nd Quarter 18,090 8,505 (266) (479) (0.09) (0.09)
3rd Quarter 25,682 12,994 4,112 3,970 0.59 0.58
4th Quarter 32,909 16,661 534 534 0.05 0.05
-------- -------- -------- --------
$ 93,450 $ 45,973 $ 3,655 $ 3,087 $ 0.44 $ 0.43
======== ======== ======== ======== ======== ========
2001
1st Quarter $ 31,442 $ 16,585 $ 518 $ 518 $ 0.05 $ 0.05
2nd Quarter 31,693 16,732 (1,552) (1,552) (0.14) (0.14)
3rd Quarter 34,540 17,809 865 865 0.08 0.08
4th Quarter 30,585 15,411 (265) (265) (0.02) (0.02)
-------- -------- -------- --------
$128,260 $ 66,537 $ (434) $ (434) $ (0.04) $ (0.04)
======== ======== ======== ======== ======== ========
60
Dates Referenced Herein and Documents Incorporated by Reference
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