Annual Report — [x] Reg. S-K Item 405 — Form 10-K
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10-K405 Form 10-K405 for the Period Ended 08/31/97 44 231K
2: EX-11.1 Statment of Computation of Per Share Earnings 1 5K
3: EX-23.1 Consent of Price Waterhouse LLP. 1 5K
4: EX-23.2 Consent of Bdo Seidman LLP. 1 5K
5: EX-27.1 Financial Data Schedule 1 8K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 1997
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)
California 77-0096788
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
120 Stone Pine Road
Half Moon Bay, California 94019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE)
Registrant's telephone number, including area code: (415) 726-1888
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
Title of each class Name of Exchange on which registered
none none
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock
(no par value)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
[Cover page 1 of 2 pages]
The aggregate market value of voting stock held by non-affiliates of
the Registrant, as of November 20, 1997, was approximately $53,890,000 (based on
the closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market for the last trading day prior to that date). Shares of
Common Stock held by each executive officer, director, and holder of 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On November 21, 1997 approximately 5,039,669 shares of the
Registrant's Common Stock, no par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Registrant's definitive Proxy Statement
to be issued in conjunction with the Registrant's Annual Meeting of Shareholders
for the 1998 fiscal year.
[Cover Page 2 of 2 pages]
This Annual Report on Form 10-K contains forward-looking statements
relating to future events or the future financial performance of the Company,
which involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward looking statements as a
result of certain important factors, including those set forth under "Item 1.
Business" and elsewhere in this Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS
Odwalla, Inc. ("Odwalla" or the "Company") was founded in September
1980 and incorporated in California in September 1985. Odwalla is the leading
supplier of fresh-squeezed and nutritionally fortified juices and smoothies in
the western United States. The Company also supplies all-natural meal
replacement beverages and geothermal natural spring water. These products
compose what the Company calls "Nourishing Beverages." The Company's Nourishing
Beverages provide the consumer with easy access to natural, great tasting
nutrition. The Company believes that its Nourishing Beverages appeal to many
consumers because of the superior taste of fresh and minimally processed
beverages and the greater nutritional value of Nourishing Beverages compared to
juice from concentrate or with artificial flavors.
Odwalla's objective is to be the leading Nourishing Beverage company
in its existing and future markets. The Company seeks to achieve this objective
by leading the industry in Nourishing Beverage knowledge, optimizing quality
through sourcing and production, controlling product access and distribution
from production through retail, artful presentation, growing through geographic
and product line expansion, leveraging its information systems, interacting with
consumers and living its vision.
Odwalla's sourcing procedures and production methods enable it to
create products with high nutritional and flavor quality. The distribution of
Odwalla's products through its own and other direct-store-delivery systems
allows the Company to control product quality and presentation, as well as to
develop relationships with its trade partners. Odwalla sells and distributes its
products to almost 3,000 retail locations, including supermarkets, specialty
retailers, natural food stores, warehouse outlets, convenience stores and food
service operators through its direct-store-delivery system.
Odwalla is committed to certain values -- nourishing consumers,
shareholders and other stakeholder groups; environmental awareness; and support
for the communities it serves. Odwalla believes that its products should reflect
these values.
PRODUCT RECALL
On October 30, 1996, the Company was notified by the State of
Washington Environmental Health Services of an epidemiological link between
several cases of E. coli O157:H7 and Odwalla's apple juice products. The Company
immediately implemented a recall (the "Recall") of all Odwalla products
containing apple juice. On October 31, 1996, Odwalla expanded the Recall to
include its carrot and vegetable products because such products were processed
on the same production line as the apple juice.
Although the Company experienced a significant reduction in sales
following the Recall, as of August 31, 1997, the Company's sales have returned
to near their pre-Recall level. Most of the Company's trade partners prior to
the Recall currently stock the Company's products. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation -
Overview."
2.
To date, there have been seventeen personal injury claims and legal
proceedings seeking monetary damages and other relief relating to the Recall
filed against the Company. In addition, there has been one legal proceeding
alleging fraudulent business acts and practices relating to the recall products.
Seven of these claims and proceedings have been settled. In addition,
approximately 585 other claims for damages resulting from the Recall were
presented to the Company's insurance carrier and approximately 570 of those
claims have been settled. In early 1997, the Company was informed that it is the
subject of a federal grand jury investigation concerning events of 1996 and
before, including the E. coli O157:H7 incident. The Company has responded to a
subpoena and is cooperating fully with the government. At this time, the Company
cannot predict the outcome of the investigation. The response to the legal
proceedings and the grand jury investigation has required a significant amount
of management time during the year and has caused the Company to incur
significant legal fees. See "Item 3. Legal Proceedings." The Company expects to
continue to require management time in the future relating to these matters.
Following the Recall, the Company formed the Odwalla Nourishment &
Food Safety Advisory Council (the "Council") to advise management in developing
new industry leadership and practices in the sourcing, production and
distribution of Nourishing Beverage products. Beginning in early December 1996,
Odwalla began flash pasteurization of fresh apple juice as part of the Company's
Hazard Analysis Critical Control Point Plan ("HACCP Plan") and reintroduced all
apple juice-based products to the market. The flash pasteurization process
rapidly heats the juice for a short period of time to a temperature high enough
to kill harmful bacteria then quickly cools the juice to retain fresh flavors
that diminish in pasteurization processes at higher temperatures and for longer
periods of time. As a part of its HACCP Plan, the Company now flash pasteurizes
all of its fresh product ingredients with the exception of its 100% fresh
squeezed citrus product line.
The Company incurred significant costs as a result of the Recall,
including advertising and public relations costs, legal and professional fees,
cost of the product recalled (including the labor and freight involved in the
recall process), destruction of unsold product in inventory and packaging
supplies, costs of leased sales and distribution equipment in excess of current
volume requirements, costs of reformulating products and costs associated with
the flash pasteurization process. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operation Overview."
PRODUCTS, DISTRIBUTION AND TRADE PARTNERS
Odwalla's current product line consists of single-flavor and blended
fruit- and vegetable-based products, meal replacement beverages and geothermal
natural spring water. Except for its 100% fresh squeezed citrus line, all of
Odwalla's juices are flash pasteurized (some produced on a seasonal basis).
These products are currently sold in California, Washington, Oregon, Colorado,
New Mexico, Nevada, and Texas. Odwalla strives for consistent "day-of-juicing
quality" in its products. Shelf life standards for its products are based
primarily on maintaining the flavor quality and nutrient integrity of its
beverages. The shelf life of Odwalla's fruit and vegetable based products is
typically limited to between 8 and 17 days at the retail outlet.
The Company believes that its shelf life standards for each product
maintain the flavor and nutritional integrity that consumers associate with
freshly produced fruit and vegetable beverages. The Company's policy is to have
all products removed from trade partners' shelves on or before their
Odwalla-established expiration date. In addition, because of the Company's "day
of juicing" quality standards, the Company's products reflect the seasonal
changes in fruit varieties in color and taste. Odwalla's production methods are
designed to minimize the effect of processing on the fruit juice extracted. The
Company's product line includes several different types of Nourishing Beverages
and varies over time as a result of the addition of new products as well as due
to a significant component of seasonal products.
Odwalla's products are sold and distributed primarily through its
own direct-store-delivery ("DSD") system, which is serviced by route sales
people who deliver products directly to and merchandise products directly in the
retail display shelves of the Company's trade partners. This DSD system is
designed to permit Odwalla to optimally manage delivery schedules, efficiently
control its product mix, keep store shelves or its own coolers stocked with
fresh products and have a greater influence on determining in-store location and
merchandising of its products.
3.
At most of its DSD accounts, Odwalla maintains responsibility for
stocking, ordering and merchandising its products at the point of sales, and
Odwalla credits the trade partner for unsold product. This full service
relationship allows Odwalla to avoid paying slotting fees for shelf space as
well as other handling fees, and it also allows the Company to maintain control
over the merchandising of its products at the point of sales. Odwalla provides a
lesser degree of service to certain trade partners who are responsible for
stocking, ordering and merchandising the Company's products. These trade
partners do not receive credit for unsold products. Outlets that sell Odwalla
juices include supermarkets, specialty retail stores, natural food stores,
warehouse outlets and institutional food service trade partners, primarily
restaurants.
The Company has used third party distributors to distribute product
in certain geographic locations and to comply with certain trade partner
requests. At the very end of fiscal 1997, the Company expanded its distribution
channel by transferring approximately 40% of its Northern California account
base (which represented a significantly smaller percentage of its Northern
California sales volume) to an independent distributor. This distribution
channel, with merchandising support provided by the Company, provides an
opportunity to expand product distribution, increase DSD efficiency, and still
maintain relationships with trade partners. In November 1997, the expansion into
the Chicago market began using another third party distributor. Odwalla sells
directly to the third party distributors under these arrangements. Third party
distributors generally do not receive credit for unsold product.
RAW MATERIALS
Producing and selling Nourishing Beverages entails special
requirements in fruit sourcing, beverage production, distribution and sales in
order to preserve and maximize their freshness and flavor quality. Fruits and
vegetables must be sourced and selected to meet a variety of established
criteria, including variety, quality, ripeness and other factors. Transportation
and processing of the fruit and vegetables must be performed in a manner to
capture and preserve various qualities of fresh flavors and consistency. Odwalla
has focused on each of these elements in an effort to achieve its goal of
providing the safest, best tasting and most nutritious Nourishing Beverages for
consumers.
Odwalla buys fruits and vegetables according to stringent
specifications. Fruits and vegetables are purchased using different schedules
and methods depending on the type of produce. Because various types of fruit and
vegetable crops are harvested at different times of the year, the Company
obtains and produces different juices on a seasonal basis. The Company purchases
most of its fruits and vegetables in the open market on a negotiated basis.
Historically, oranges, apples and carrots are the commodities purchased in
largest volume by the Company. All three are subject to volatility in supply,
price and quality that could materially and adversely affect the Company's
business and results of operations, as could the availability, price and quality
of other ingredients.
Odwalla also obtains a number of fruits, such as tropical fruits,
from foreign suppliers in the form of frozen fruit puree. A puree is whole fruit
that has been finely cut and fresh-frozen for shipment. A puree is not a
concentrate. Purees are combined with the freshly extracted, flash pasteurized
juices of other fruits in a number of the Company's products. Purees used by the
Company are heat-treated which minimally affects the fresh fruit quality but
increases safety. Most purees are purchased under annual price contracts.
As with most agricultural products, supply and price of raw
materials used by the Company can be affected by a number of factors beyond the
control of the Company, such as frosts, droughts, floods and other natural
disasters, other weather conditions, economic factors affecting growing
decisions, various plant diseases and pests. The heavy rains and flooding that
occurred in California in the first and second quarters of fiscal 1995 resulted
in higher costs of fruit and lower yields from the California orange crop in the
last quarter of fiscal 1995 and the first quarter of fiscal 1996. The Company is
aware that the occurrence of significant El Nino conditions and other weather
patterns may have an adverse effect on the prices and availability of produce.
4.
COMPETITION
In a broad sense, the Company's products compete with all beverages
available to consumers. The beverage market is highly competitive. It includes
national, regional and local producers and distributors, many of whom have
greater resources than the Company, and many of whom have shelf stable products
that can be distributed with significantly less cost. The Company views its
niche as easily accessed nourishing beverages in the super premium juice,
emerging meal replacement beverage and bottled water categories. The Company
believes its direct competition in this market niche currently is from
nationally, regionally and locally focused juice producers, certain of which are
owned by major beverage producers, nationally branded meal replacement beverage
producers and premium bottled waters. The Company also views juice and smoothie
bars as competition. In addition, a number of major supermarkets and other
retail outlets squeeze and market their own brand of fresh juices that compete
with the Company's products. A large international company, Chiquita Brands
International, Inc. ("Chiquita"), is engaged in this market niche in certain
geographic areas. Odwalla entered the Los Angeles market in September 1995 and
is competing directly with Chiquita's products in that market. In addition,
Chiquita is a major competitor in Colorado. Chiquita and other major food and
beverage companies are becoming more active in the Nourishing Beverage business.
A decision by Chiquita or any other large company to focus on the Company's
existing markets or target markets could have a material adverse effect on the
Company's business and results of operations. While the Company believes that it
competes favorably with its competitors on factors such as quality, nutritional
integrity, food safety, merchandising, service, sales and distribution, multiple
flavor categories, brand name recognition and loyalty, the Company's products
are typically sold at prices higher than most other juice products. There can be
no assurance that the Company will not experience competitive pricing pressure
that could adversely affect its results of operations.
DEPENDENCE ON ONE OR A FEW MAJOR TRADE PARTNERS
In fiscal 1997, the Company's largest account, Safeway, accounted
for approximately 12% of the Company's sales. The Company puts considerable
effort into the maintenance of this and other significant accounts, but there
can be no assurance that sales to these accounts will not decrease or that these
trade partners will not choose to replace the Company's products with those of
competitors. The loss of Safeway or other significant accounts or any
significant decrease in the volume of products purchased by their customers in
the future would materially and adversely affect the Company's business and
results of operations. Continuity of trade partner relationships is important,
and events that impact the Company's trade partners, such as the Recall and
labor disputes, may have an adverse impact on the Company's results of
operations.
GOVERNMENT REGULATION
The production and sales of the Company's beverages are subject to
the rules and regulations of various federal, state and local food and health
agencies, including the FDA. In August, 1997, the FDA outlined their long term
strategy for regulation of the fresh juice industry in their Notice of Intent.
The FDA intends to mandate HACCP for the fresh juice industry as it has done in
the meat, fish and poultry industries. As an interim measure, the FDA
recommended that, in the absence of a HACCP plan, fresh juice companies should
place warning labels on unpasteurized juice. Because the Company's products are
produced at its Dinuba production facility under a HACCP plan with validated
critical control points, Odwalla believes it is already in full compliance with
the FDA's proposed regulations. The Company does not anticipate significant
additional costs associated with complying with FDA regulations.
In addition to laws relating to food products, the Company is
subject to various federal, state and local environmental laws and regulations
that limit the discharge, storage, handling and disposal of a variety of
substances. Operations of the Company are also governed by laws and regulations
relating to workplace safety and worker health, principally the Occupational
Safety and Health Administration Act, as well as similar state laws and
regulations. The Company believes that it presently complies in all material
respects with the foregoing laws and regulations, although there can be no
assurance that future compliance with such laws or regulations will not have a
material adverse effect
5.
on the Company's results of operations or financial condition. The Company did
not incur any significant costs in fiscal 1997 in complying with environmental
laws.
EMPLOYEES
As of November 20, 1997, the Company had approximately 465
employees, 435 of whom were full-time employees.
OTHER FACTORS AFFECTING THE COMPANY'S BUSINESS
Risks associated with perishable products. With the exception of its
geothermal spring water and meal replacement beverages, the Company's products
are either fresh or flash pasteurized and do not contain any preservatives.
Because of this they have a limited shelf life. In order to maintain its "day of
juicing" quality standards, the Company further restricts the shelf life of its
products through early expiration dates. As a result, since the Company is not
able to hold any significant finished goods inventory, its results of operations
are highly dependent on its ability to accurately forecast its near term sales
in order to adjust fresh fruit and vegetable sourcing and production.
Historically, forecasting product demand has been difficult, and in light of the
Recall, the Company expects it to continue as a challenge. Failure to accurately
forecast product demand could result in the Company either being unable to meet
higher than anticipated demand or producing excess inventory that cannot be
profitably sold. In addition, most of the Company's trade partners have the
right to return any products that are not sold by their expiration date. The
inability to meet higher than anticipated demand or excess production or
significant amounts of product returns could have a material adverse effect on
the Company's business and results of operations.
Cost sensitivity. The Company's profitability is highly sensitive to
increases in raw materials, labor and other operating costs. Unfavorable trends
or developments concerning factors such as inflation, raw material supply, labor
and employee benefit costs (including increases in hourly wage and minimum
unemployment tax rates), rent increases resulting from the rent escalation
provisions in the Company's leases, and the availability of hourly employees may
also adversely affect the Company. The Company believes recent relatively
favorable inflation rates and part-time labor supplies in its principal market
areas have contributed to relatively stable food and labor costs in recent
years. However, there can be no assurance that these conditions will continue or
that the Company will have the ability to control costs in the future.
Product liability. Since the Company's 100% fresh squeezed citrus
products and certain other citrus-based products are not pasteurized, nuclearly
irradiated or chemically treated, they are highly perishable and contain certain
naturally occurring microorganisms. In addition to the Recall associated with
the E. coli O157:H7 bacteria, the Company has from time to time received
complaints from consumers regarding ill effects allegedly caused by its
products. While such past claims have not resulted in any material liability to
date, there can be no assurance that future claims will not be made or that any
such claim or claims associated with the Recall will not result in adverse
publicity for the Company or monetary damages, either of which could materially
and adversely affect the Company's business and results of operations. The
Company currently maintains $52,000,000 in product liability insurance, which
may not be sufficient to cover the cost of defense or related damages in the
event of a significant product liability claim related to the Recall or
otherwise. See "Item 3. Legal Proceedings."
Orchard production. Historically, the Company has been dependent
upon the fruit produced from the trees of large orchards. These trees may become
damaged, diseased or destroyed as a result of windstorms, pests or fungal
disease. Additionally, there are types of controllable fungal diseases which can
affect fruit production although not fatal to the trees themselves. These types
of fungal diseases are generally controllable with fungicides. However, there
can be no assurance that such control measures will continue to be efficacious.
Any decrease in the supply of fresh fruit as a result of windstorms, pests or
fungal disease could have a material adverse effect on the Company's business
and results of operations.
6.
Geographic concentration. The Company's wholesale accounts and
retail trade partners have their largest concentration in Northern California,
with most located in the metropolitan areas surrounding the San Francisco Bay.
As such, the Company's business and results of operations may be adversely
affected by natural occurrences, economic downturns and other conditions
affecting Northern California.
Concentration of production capacity. Virtually all of the Company's
production capacity is located at its Dinuba, California facility. Because the
Company attempts to maintain minimal finished goods inventory as part of its
"just in time" production system, in the event that production at or
transportation from such facility were interrupted by fire, earthquakes, floods
or other natural disasters, work stoppages, regulatory actions or other causes,
the Company would be unable to continue to produce its products at such
facility. Such an interruption would materially and adversely affect the
Company's business and results of operations.
Lack of diversification. Although the Company has been in existence
since 1980 and has been profitable in the two fiscal years prior to fiscal 1997,
the Company is vertically integrated and its business is centered around
essentially one product. To date, the Company's operations have been limited to
the production and sale of Nourishing Beverages through its
direct-store-delivery system. The risks associated with the Company's focus on
essentially one product are exemplified by the material adverse effect on the
Company's business and results of operations that resulted from the Recall. Any
significant decrease in the consumption of Nourishing Beverages generally or
specifically with respect to the Company's products following the Recall could
have an adverse effect on the Company's business and results of operations.
Risks related to expansion. Although the Company's continued growth
depends in part upon its ability to expand into new geographic areas, either
through internal growth or by acquisition, the Company's plans for expansion
have been diverted at the present time in order to strengthen its position in
its present markets following the Recall. The Company currently anticipates
limited expansion in fiscal 1998. There can be no assurance that the Company
will expand into new geographic areas or continue to invest in newer markets or
if such expansion or investment is undertaken that it will be successful or that
such expansion can be accomplished on a profitable basis. Demands on management
and working capital costs associated with the Recall as well as the
perishability of the Company's products and its current reliance on its
personnel-intensive direct-store-delivery system may limit the ability, or
increase the cost of, expansion into new regions. Furthermore, perceptions of
the Recall and consumer tastes vary by region and there can be no assurance that
consumers located in other regions will be receptive to the Company's products.
The Company has expanded into certain new markets, such as the
Pacific Northwest and Colorado, through acquisitions of local juice
manufacturers. Acquisitions involve a number of special risks, including the
diversion of management's resources, issues related to the assimilation of the
operations and personnel of the acquired businesses, potential adverse effects
on the Company's operating results and amortization of acquired intangible
assets. In addition, gross margins may be negatively impacted to the extent that
gross margins on acquired product lines are lower than Odwalla's average gross
margins. For example, the Company's Colorado acquisition, completed in January
1995, resulted in incremental increases in general and administrative expenses
and diversion of management resources. Although no acquisitions are being
actively considered by the Company at this time, the Company is unable to
predict whether or when any prospective acquisition candidates will become
available. There can be no assurance that the Company will find attractive
acquisition candidates, that acquisitions can be consummated on acceptable
terms, that any acquired companies can be integrated successfully into the
Company's operations, or that any such acquisitions will not have an adverse
effect on the Company's business or results of operations.
Intellectual property rights. The Company regards its trademarks,
trade dress, trade secrets and similar intellectual property as critical to its
success. Odwalla attempts to protect such property with registered and common
law trademarks and copyrights, restrictions on disclosure and other actions to
prevent infringement. The Company has in the past, and it expects that it may in
the future, license elements of its distinctive trademarks, trade dress and
similar proprietary rights to third parties. While the Company attempts to
ensure that the quality of its brand is maintained by such licenses, no
assurances can be given that such licensees will not take actions that might
materially and adversely affect the value of the Company's proprietary rights or
the reputation of its products, either of which could have a
7.
material adverse effect on the Company's business. Product package and
merchandising design and artwork are important to the success of Odwalla, and
the Company intends to take action to protect against imitation of its products
and packages and to protect its trademarks and copyrights as necessary. Such
action could be time-consuming, result in costly litigation and divert
management personnel. Furthermore, there can be no assurance that the Company
would be successful in such action. The Company does not have any patents.
Control by officers and directors. The Company's officers, directors
and their affiliates beneficially own, in the aggregate, approximately 24% of
the Company's outstanding shares of Common Stock. As a result, these
shareholders, acting together, would be able to significantly influence most
matters requiring approval of the shareholders of the Company, including the
election of a majority of the Board of Directors. Such control could have the
effect of delaying, deferring or preventing a change of control of the Company.
Dependence on key personnel. The Company's success depends to a
significant extent upon the continued service of Greg Steltenpohl, the Chairman
of its Board of Directors, and Stephen Williamson, its Chief Executive Officer,
and the loss of either of such key personnel could have a material adverse
effect on the Company's business or results of operations. Furthermore, the
Company's continued growth depends on its ability to identify, recruit and
retain key management personnel. The competition for such employees is intense,
and there can be no assurance the Company will be successful in such efforts.
The Company is also dependent on its ability to continue to attract, retain and
motivate its production, distribution, sales, communications and other
personnel, of which there can be no assurance.
Volatility of stock price. The price of the Company's Common Stock
has, at certain times, experienced significant price volatility. The Company
believes that factors such as announcements of developments related to the
Company's business, fluctuations in the Company's operating results, failure to
meet securities analysts' expectations, general conditions in the fruit and
vegetable industries and the worldwide economy, announcements of innovations,
new products or product enhancements by the Company or its competitors,
fluctuations in the level of cooperative development funding, acquisitions,
changes in governmental regulations, developments in patents or other
intellectual property rights and changes in the Company's relationships with
trade partners and suppliers could cause the price of the Company's Common Stock
to fluctuate substantially. In addition, in recent years the stock market in
general, and the market for small capitalization stocks in particular, has
experienced extreme price fluctuations which have often been unrelated to the
operating performance of affected companies. Such fluctuations could adversely
affect the market price of the Company's Common Stock. See "Item 5, Market For
Registrant's Common Equity And Related Shareholder Matters."
ITEM 2. PROPERTIES
Odwalla's production facility is in Dinuba, California and consists
of approximately 85,000 square feet of production, office and cold storage space
on a 13-acre parcel of land plus approximately 33 acres of land adjacent to the
production facility, including the property purchased in October 1996. Odwalla
owns this property, with $75,000 of debt against a parcel of land containing 20
of the 33 acres of adjacent land. The Company believes the building is
adequately insured. Odwalla's administrative offices are located in Half Moon
Bay, California. In addition, the Company has distribution centers throughout
California and in Seattle and Bellingham, Washington; Denver, Colorado;
Albuquerque, New Mexico; Eugene and Portland, Oregon; and Austin and Dallas,
Texas. Other than the Dinuba facility, the Company leases all of its facilities.
8.
ITEM 3. LEGAL PROCEEDINGS
The following personal injury claims and legal proceedings seeking
monetary damages and other relief relating to the Recall are pending against the
Company:
1. The Beverly Case: A personal injury lawsuit filed in the
United States District Court, Western District of Washington
and served on December 3, 1996 and has a trial date of March
28, 1998. A companion case was filed in King County Superior
Court and plaintiffs have asked to dismiss the Federal court
case.
2. The Starmack Case: A personal injury lawsuit filed in San
Diego County Superior Court, San Diego, California on January
3, 1997 and served on January 24, 1997. The case is currently
set for trial on March 2, 1998.
3. The McGregor Case: A personal injury lawsuit filed in Santa
Clara County Superior Court, Santa Clara, California on June
2, 1997 and served on June 16, 1997.
4. The Hiatt Case: A personal injury lawsuit filed in the United
States District Court, Western District of Washington and
served on August 14, 1997. The case is set for trial on
September 22, 1998.
5. The Dimock Case: A personal injury lawsuit filed in the United
States District Court, Western District of Washington and
served on August 14, 1997.
6. The Berman Case: A personal injury lawsuit filed in the King
County Superior Court and served on or about September 20,
1997. The case is set for trial on February 8, 1999.
7. The Sawchuk Case: A personal injury lawsuit filed in the
United States District Court for the Northern District of
California and served on or about October 10, 1997.
8. The Shaffer Case: A personal injury lawsuit filed in King
County Superior Court and served on or about October 13, 1997.
The case is set for trial on March 8, 1999.
9. The Maris Case: A personal injury case in Denver District
Court filed on or about November 3, 1997 and served on
November 18, 1997.
The Company maintained commercial general liability insurance
totaling $27,000,000 during the period including the Recall. The Company has
notified its insurance carrier of these events. At this time, the Company is
unable to determine the potential liability on all such lawsuits and claims.
The following personal injury claims and legal proceedings have been
settled:
1. The Kim Case: A personal injury lawsuit filed in King County
Superior Court, Seattle, Washington, served on November 15,
1996 and settled on January 9, 1997.
2. The Webb Case: A personal injury lawsuit filed in King County
Superior Court, Seattle, Washington, served on December 9,
1996 and settled on January 9, 1997.
3. The Azizi Case: A personal injury lawsuit filed in Alameda
County Superior Court, Alameda, California and served on
November 20, 1996 and settled on March 25, 1997.
4. The Ishida/Peterson Case: A class action lawsuit filed in King
County Superior Court, Seattle, Washington and served on
November 12, 1996 and settled on April 29, 1997.
9.
5. The Ali Case: A personal injury lawsuit filed in Los Angeles
County Superior Court, Los Angeles, California on October 10,
1997 and served on October 27, 1997. This case settled on
November 20, 1997.
6. The Curtis Case: A class action lawsuit filed in the United
States District Court, Western District of Washington and
served on November 15, 1996. On July 7, 1997, the United
States District Court denied the plaintiffs' motion for class
certification. On November 20, 1997, the Court granted the
plaintiffs motion to dismiss the case without prejudice.
7. The Fisher Case: A personal injury case filed in Los Angeles
Superior Court in November, 1997 was settled on November 19,
1997.
The settlement of the above legal proceedings was covered under the
Company's commercial general liability insurance policy and did not result in
any additional costs to the Company.
In addition, the Company settled the following claim filed under
California Business and Professions Code Section 17200 et seq. alleging
fraudulent business acts and practices of the Company relating to the recalled
products:
Roderick P. Bushnell v. Odwalla, Inc.: A lawsuit filed in San
Francisco County Superior Court, San Francisco, California and
served on November 13, 1996. This lawsuit was settled on January 16,
1997 and received court approval on March 19, 1997.
The Company has been informed that it is the subject of a federal
grand jury investigation (Eastern District of California) concerning events of
1996 and before, including the Recall. The Company has responded to a subpoena
and is cooperating fully with the government. At this time, the Company cannot
predict the outcome of the investigation.
ITEM 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 1997.
EXECUTIVE OFFICERS AND DIRECTORS
Certain information about the Company's directors and executive
officers as of November 20, 1997 is listed below:
[Enlarge/Download Table]
Name Age Position
Greg A. Steltenpohl 43 Chairman of the Board
D. Stephen C. Williamson 39 Chief Executive Officer
Penelope A. Douglas 45 Senior Vice President/Chief Learning Officer, Human Resources
Michael G. Casotti 38 Vice President, Sales
James R. Steichen 47 Vice President, Finance and Chief Financial Officer
Frank J. Ballentine 39 Vice President, Manufacturing
Paul H. Orbuch 46 Vice President, Operations
Martin S. Gans (1)(2) 55 Director
Richard Grubman (1)(2) 35 Director
Ranzell Nickelson, II 53 Director
-------------
10.
(1) Member of Audit Committee
(2) Member of Compensation Committee
GREG A. STELTENPOHL, the founder of the Company, has served as
Chairman of the Board since June 1996. Prior to that date, Mr. Steltenpohl
served as Co-Chairman of the Board and Co-Chief Executive Officer from January
1995 to June 1996. From the Company's incorporation in December 1985 until
January 1995, Mr. Steltenpohl served as Chairman of the Board and Chief
Executive Officer. In addition, Mr. Steltenpohl served as the Company's
President from November 1985 until May 1992. Mr. Steltenpohl holds a B.S. degree
in environmental sciences from Stanford University.
D. STEPHEN C. WILLIAMSON has served as Chief Executive Officer since
June 1996. Prior to that time, Mr. Williamson served as Co-Chairman of the Board
and Co-Chief Executive Officer from January 1995 to June 1996 and as Chief
Financial Officer of the Company from March 1991 to August 1996. Mr. Williamson
also served as the Company's President from May 1992 until January 1995. From
1988 to March 1991, Mr. Williamson was a general partner of Ellistan Partners, a
private investment firm. Prior to that, Mr. Williamson worked as an analyst and
an associate at First Boston Corp. Mr. Williamson holds a B.A. degree in history
from the University of California at Berkeley. He is also a director of Avenal
Land & Oil Company, a private investment company.
PENELOPE A. DOUGLAS has served as Senior Vice President/Chief
Learning Officer, Human Resources since September 1996. From 1990 to 1996, Ms.
Douglas was Chief Administrative Officer at Morrison & Forester. Ms. Douglas
holds a B. A. degree from Smith College.
MICHAEL G. CASOTTI has served as Vice President, Sales since
February 1996. From 1983 to 1996, Mr. Casotti was employed by Nestle Beverage
Company, most recently serving as Customer Division Manager from 1994 to 1996.
From 1990 to 1994, Mr. Casotti was the National Sales Manager for Sark's Gourmet
Coffee, a division of Nestle Beverage Company. Mr. Casotti holds a B. S. in
Marketing from California State University at Northridge.
JAMES R. STEICHEN has served as Vice President, Finance and Chief
Financial Officer since September 1996. From May 1996 to August 1996, Mr.
Steichen served as Vice President, Finance and had served as a consultant to the
Company since August 1995. Prior to that, he had been a partner with BDO
Seidman, LLP since December 1990. Mr. Steichen is a Certified Public Accountant
and holds a B.S. degree from the University of South Dakota.
FRANK J. BALLENTINE has served as Vice President, Manufacturing
since July 1995. From February 1990 to July 1995, Mr. Ballentine served as
Logistics Manager at Zacky Foods, Inc. Mr. Ballentine holds a B. S. degree in
Vineyard and Winery Management from the University of California at Davis and an
MBA from California State University in Fresno.
PAUL H. ORBUCH has served as Vice President, Operations and
Expansion since April 1997. From September 1995 until April 1997, Mr. Orbuch
served as Vice President of Expansion and from May 1993 until August 1995, he
served as Vice President of Sales. Prior to that, he was President and Chief
Executive Officer of Wildwood Natural Foods, Inc. Mr. Orbuch holds a B.A. from
Columbia University.
MARTIN S. GANS has been a director of the Company since December
1992. Mr. Gans served as Executive Vice President and Chief Financial Officer of
Sun World International, Inc. from 1978 until 1987, and he was a partner at
Touche Ross & Co., an accounting firm, from 1972 until 1978. Mr. Gans is a
certified public accountant and holds a B.B.A. from the University of Miami and
an M.B.A. from Northwestern University. Mr. Gans is also a director of Best
Collateral, Inc., a publicly-traded company. In addition, Mr. Gans is a director
of a number of private companies, including International Storage Management,
N.V. and LSL Biotechnologies, Inc.
RANZELL "NICK" NICKELSON, II has been a director of the Company
since August 1997. Dr. Nickelson has served as Director, International Food
Safety at IDEXX Laboratories, Inc. since October 1997. From 1996 to October
1997, he served as President of Red Mesa Microbiology, Inc. From 1991 to 1996,
Dr. Nickelson was vice president,
11.
Silliker Laboratories Group, Inc. Dr. Nickelson served as a member of the
National Advisory Committee on Microbiological Criteria for Foods and as
Coordinator, Blue Ribbon Task Force on E. coli O157:H7 for the National Live
Stock and Meat Board. Dr. Nickelson holds a B.S. in Animal Science, a M.S. in
Food Technology and a Ph.D in Microbiology from Texas A&M University.
RICHARD GRUBMAN has been a director of the Company since August
1997. Mr. Grubman has been a Managing Director of Development Capital, LLC (a
private direct investment firm) since January 1997 and a general partner of its
affiliate, Corporate Value Partners, LP, since November 1996. Mr. Grubman is
President of Sycamore Capital Management, Inc., a position he has 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 Archaelogy from Princeton University. He is also a director of the
Children's Motility Disorder Foundation.
12.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock is listed on the Nasdaq National Market
("Nasdaq") under the symbol "ODWA." The Company's stock has been traded on that
market since May 18, 1995. Prior to that date, the Company's stock had been
traded on the Nasdaq SmallCap Market ("SmallCap") since December 15, 1993, when
the Company completed its initial public offering. Prior to that date, there was
no public market for the Company's Common Stock. As of November 20, 1997, there
were approximately 240 holders of record of the Company's Common Stock. The
following table sets forth, for the periods indicated, the high and low closing
sales prices, as to Nasdaq prices, and the high and low bid prices, as to
SmallCap prices, of shares of the Company's Common Stock, after giving effect to
a 3-for-2 stock split effected through a stock dividend on May 1, 1995:
[Download Table]
FISCAL YEAR ENDED AUGUST 31, 1997 HIGH LOW
Fourth Quarter $14.125 $ 9.75
Third Quarter $13.50 $10.00
Second Quarter $15.00 $ 9.75
First Quarter $18.75 $10.375
FISCAL YEAR ENDED AUGUST 31, 1996
Fourth Quarter $28.25 $16.375
Third Quarter $27.50 $15.50
Second Quarter $19.25 $15.25
First Quarter $20.75 $15.25
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock
since inception and does not anticipate paying cash dividends in the foreseeable
future. The Company currently anticipates that it will retain its earnings, if
any, for use in the operation of its business and does not expect to pay cash
dividends on its capital stock in the foreseeable future.
13.
ITEM 6. SELECTED FINANCIAL DATA
[Enlarge/Download Table]
Year Ended August 31,
-------- ------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA: (in thousands, except per share data)
Net sales ................................... $ 12,551 $ 18,153 $ 35,869 $ 59,197 $ 52,630
Cost of sales ............................... 6,342 8,984 18,425 29,889 27,650
-------- -------- -------- -------- --------
Gross Profit ................................ 6,209 9,169 17,444 29,308 24,980
Operating expenses:
Sales and distribution .................... 4,133 6,212 11,588 20,158 22,046
Marketing ................................. 469 484 891 2,257 2,844
General and administrative ................ 1,458 1,973 3,576 6,206 8,119
Recall and related costs .................. -- -- -- -- 6,518
-------- -------- -------- -------- --------
Total operating expenses ............. 6,060 8,669 16,055 28,621 39,527
-------- -------- -------- -------- --------
Income (loss) from operations ............... 149 500 1,389 687 (14,547)
Other income (expenses), net ................ (575) (199) 108 346 210
-------- -------- -------- -------- --------
Income (loss) before income taxes ........... (426) 301 1,497 1,033 (14,337)
Provision for (benefit from)
income taxes .............................. 1 -- 500 400 (1,901)
-------- -------- -------- -------- --------
Net income (loss) ........................... $ (427) $ 301 $ 997 $ 633 $(12,436)
======== ======== ======== ======== ========
Net income (loss) per share ................. $ (0.15) $ 0.08 $ 0.22 $ 0.12 $ (2.49)
======== ======== ======== ======== ========
Weighted average common and common equivalent
shares outstanding ........................ 2,889 3,623 4,472 5,420 4,989
======== ======== ======== ======== ========
[Enlarge/Download Table]
August 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(in thousands)
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments .......... $ 715 $ 2,137 $18,496 $12,413 $ 3,225
Working capital (deficit) ........ (295) 2,516 17,918 14,655 1,300
Total assets ...................... 8,038 12,072 35,481 37,700 31,006
Long-term liabilities ............. 2,467 872 736 501 441
Total shareholders' equity ........ 2,822 8,719 28,499 29,574 17,635
14.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements relating
to future events or the future financial performance of the Company, which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward looking statements as a
result of certain important factors, including those set forth under "Item 1.
Business" and elsewhere in this Annual Report on Form 10-K. The following
discussion and analysis should be read in conjunction with the Financial
Statements and related Notes contained elsewhere in this Annual Report on Form
10-K.
OVERVIEW
The Company's net sales are generated by sales to supermarkets,
specialty retail stores, natural food stores, warehouse outlets and
institutional food service trade partners, primarily restaurants. Net sales are
net of product returns and allowances. The Company sells products to most of its
trade partners on a guaranteed basis and takes back expiring or expired product
for credit. The Company's net sales grew from $35.9 million in fiscal 1995 to
$59.2 million in fiscal 1996 and, despite the significant impact of the Recall,
were $52.6 million in fiscal 1997. The Company's growth and sales strength has
come predominantly from continued penetration in existing markets, sales of new
products and expansion into new markets. The Company believes that its sales
have been positively affected, both through growth and through a return to near
pre-Recall levels at the end of fiscal 1997, by continued recognition of the
Company's brand and products, the Company's introduction of new products, better
placement on store shelves, increased placement of the Company's in-store
coolers and increased support for route sales persons.
A significant portion of the Company's cost of sales is the cost of
raw materials. Although a portion of the cost of certain purees and other raw
materials is fixed on an annual basis, the majority of the Company's fresh fruit
and vegetable purchases and other key ingredients are made on the open market.
Consequently, the Company is subject to wide fluctuations in prices for the
fruits, vegetables and other nutritious products it purchases.
The Company has historically distributed its products primarily
through its direct-store-delivery system, which is serviced by route sales
people who deliver products directly to and merchandise products directly in the
retail display shelves of the Company's trade partners, using primarily leased
delivery trucks. This distribution system, although more expensive than using
independent distributors, has allowed the Company to control the quality of
service and product mix, in-store stocking of the Company's coolers or shelf
space and freshness of products. At the end of fiscal 1997, the Company expanded
its distribution channel by transferring approximately 40% of its Northern
California trade partner account base (which represented a significantly smaller
percentage of its Northern California sales volume) to an independent
distributor. This distribution channel, with merchandising support provided by
the Company, provides an opportunity to expand product distribution.
Both pre- and post-Recall, the Company has experienced significant
quarterly fluctuations in operating results and anticipates that these
fluctuations will continue in future periods. These fluctuations have been the
result of changes in the price of fruit and vegetables due to seasonality and
other factors, new product introductions, start-up costs associated with new
facilities, expansion into new markets, sales promotions and competition.
Excluding the impact of the Recall discussed in the following paragraphs, future
operating results may fluctuate as a result of these and other factors,
including increased energy costs, the introduction of new products by the
Company's competitors, changes in the Company's customer mix, and overall trends
in the economy. The Company's business is also significantly affected by weather
patterns, and unseasonably cool or rainy weather can adversely impact the
Company's sales. A significant portion of the Company's expense levels is
relatively fixed, and the timing of increases in expense levels is based in
large part on the Company's forecasts of future sales. If sales are below
expectations in any given period, the adverse impact on results of operations
may be magnified by the Company's inability to adjust spending quickly enough to
compensate for the sales shortfall. The Company also may choose to reduce prices
or increase spending in response to competition, which may have an adverse
effect on the Company's results of operations.
15.
On October 30, 1996, the Company was notified by the State of
Washington Environmental Health Services of an epidemiological link between
several cases of E. coli O157:H7 and Odwalla's apple juice products. The Company
immediately implemented a recall of all Odwalla products containing apple juice.
On October 31, 1996, Odwalla expanded the Recall to include its carrot and
vegetable products because such products were processed on the same production
line as the apple juice. Net sales of Nourishing Beverages and water products in
November 1996 were approximately 38% of August 1996 sales levels. Beginning in
early December 1996, Odwalla began flash pasteurization of fresh apple juice as
part of the Company's Hazard Analysis Critical Control Point Plan ("HACCP Plan")
and reintroduced all apple juice-based products to the market. Although the
Company experienced a significant reduction in sales following the Recall, as of
August 31, 1997, the Company's sales have returned to near their pre-Recall
level.
To date, there have been seventeen personal injury claims and legal
proceedings filed against the Company seeking monetary damages and other relief
relating to the Recall. There has also been one legal proceeding alleging
fraudulent business acts and practices relating to the recall products. Seven of
these claims and proceedings have been settled. In addition, approximately 585
other claims for damages resulting from the Recall were presented to the
Company's insurance carrier and approximately 570 of those claims have been
settled. Settlement of these personal injury legal proceedings and claims was
covered under the Company's insurance policy. The Company believes that
remaining insurance coverage is adequate to cover the currently outstanding
claims and legal proceedings, but there can be no assurance that the remaining
coverage will be adequate. In early 1997, the Company was informed that it is
the subject of a federal grand jury investigation concerning events of 1996 and
before, including the E. coli O157:H7 incident. The Company has responded to a
subpoena and is cooperating fully with the government. At this time, the Company
cannot predict the outcome of the investigation. The response to the legal
proceedings and the grand jury investigation has required a significant amount
of management time during the year, and has caused the Company to incur
significant legal fees. The Company expects to continue to require significant
management time in the future relating to these matters.
The Company incurred significant costs related to the Recall,
including legal and professional fees, cost of the product recalled (including
the labor and freight involved in the recall process), destruction of unsold
product and now obsolete packaging supplies, advertising and public relations
costs, costs of leased sales and distribution equipment in excess of current
volume requirements, costs of reformulating products and costs associated with
the flash pasteurization process. Total Recall and related costs incurred in
fiscal 1997 were $6,518,000. This includes $2,334,000 of accrued professional
fees at August 31, 1997 which represents the Company's estimate of future legal
costs related to the Recall. The Company maintains insurance coverage for
product recall, product adulteration, lost income and other first party business
risks. During fiscal 1997, a claim for product recall costs was presented to its
insurance carriers as was an additional claim for business losses incurred due
to the Recall. However, the amount and timing of proceeds, if any, from the
claims and any future insurance claims cannot be presently determined.
Cost of sales increased following the Recall due to the reduced
production demands, especially the significantly reduced demand in the end of
the first quarter before volume increased throughout the rest of the year.
In late November, the Company completed a reduction in force of
approximately 50 employees primarily involved in sales and distribution. In
connection with the reduction in force, the Company initiated a sales route
restructuring plan and a revised route sales persons compensation plan. There
was a further work force reduction in other areas of the Company in the spring
of 1997. There can be no assurance that these and other cost control measures
will return sales and distribution costs as a percentage of net sales to
pre-Recall levels.
16.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales,
certain statements of operations data for the fiscal years ended August 31,
1995, 1996 and 1997. These operating results are not necessarily indicative of
the results for any future period.
[Download Table]
YEAR ENDED AUGUST 31,
------ ------ ------
1995 1996 1997
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of sales 51.4 50.5 52.5
------ ------ ------
Gross margin 48.6 49.5 47.5
Operating expenses
Sales and distribution 32.3 34.1 41.9
Marketing 2.5 3.8 5.4
General and administrative 10.0 10.5 15.4
Recall and related costs -- -- 12.4
Income (loss) from operations 3.9 1.2 (27.6)
Interest and other income (expense), net .3 .6 .4
Income tax (expense) benefit (1.4) (.7) 3.6
Net income (loss) 2.8% 1.1% (23.6)%
NET SALES. Net sales for fiscal 1997 decreased 11% to $52.6 million
compared to $59.2 million in fiscal 1996, and increased 65% in fiscal 1996 from
$35.9 million in fiscal 1995. Net sales decreased in fiscal 1997 due to the
impact of the Recall. Sales in November 1996 and during the second quarter of
fiscal 1997 decreased by 24% from fiscal 1996. Sales in the third and fourth
quarter of fiscal 1997 were also significantly impacted by the Recall, but had
returned to approximately 82% of sales for the same quarters in fiscal 1996. The
Company believes that the decline for the year was mitigated to some extent by
(i) new product introductions, including reformulated products and (ii)
increased sales volumes in newly entered markets.
Net sales growth for fiscal 1995 was attributable primarily to (i)
increased sales volume in supermarkets, specialty retailers and natural food
stores, (ii) new product sales and (iii) increased sales volume in newly entered
markets.
COST OF SALES. Cost of sales decreased 8% to $27.6 million in fiscal
1997 compared to $29.9 million in fiscal 1996, and increased 62% in fiscal 1996
compared to $18.4 million for fiscal 1995. Gross margin changed from 49.5% in
fiscal 1996 to 47.5% in fiscal 1997 after increasing from 48.6% in fiscal 1995.
The decrease in gross margin in fiscal 1997 resulted from (i) an increase in
plant operating expenses, including depreciation and consulting services, and
(ii) an increase in labor costs as a percentage of net sales. The increase in
these two cost areas is directly related to the lower volume of production
resulting from the Recall.
The increase in gross margin in fiscal 1996 resulted from (i) a
decrease in packaging expenses negotiated in the second quarter of the fiscal
year and (ii) a decrease in fruit costs in the second half of the year that more
than offset the high fruit costs experienced in the first half of the year,
especially oranges and apples, as a result of efficiencies achieved in the
production processes and greater variety of product mix.
SALES AND DISTRIBUTION. Sales and distribution expenses in fiscal
1997 increased 9.4% to $22.0 million compared to $20.2 million in fiscal 1996,
and 74% in fiscal 1996 from $11.6 million in fiscal 1995. Sales and distribution
expenses increased as a percentage of net sales in fiscal 1997 to 41.9% compared
to 34.1% in fiscal 1996. This increase resulted primarily from the Company's
need to maintain its existing sales and distribution infrastructure, which had
been designed for growth in both existing and newly entered markets, despite the
significantly reduced sales volume following the Recall. For example, the
Company's cost to deliver to a given trade partner did not vary significantly
despite the lower sales associated with each stop, particularly from November
1996 and well into the third quarter. In late July and early August 1997, the
Company expanded the use of its distribution channel by transferring
17.
approximately 40% of its accounts (which represented a significantly lower
percent of its sales volume) in Northern California to a third party
distributor. While this is intended to lower the Company's delivery cost, the
Company does not expect to experience cost savings from this change, if any,
until sometime in fiscal 1998.
In fiscal 1996, direct route expenses increased 81% and support
expenses increased 68% compared to fiscal 1995. The increases in fiscal 1996
resulted from the Company's increased expenses associated with route sales
people, including additional and upgraded vehicles and greater support
personnel.
MARKETING. Marketing expenses increased 26% to $2.8 million in
fiscal 1997 compared to $2.3 million in fiscal 1996, and 153% in fiscal 1996
compared to $891,000 in fiscal 1995. Marketing expenses increased in absolute
dollars and as a percentage of net sales in fiscal 1997 as the Company worked to
reinforce the existing consumer base and attract new consumers to the brand and
products following the Recall, expand outside communications, and develop and
launch new and newly formulated products and also incurred professional services
related to consumer research. Marketing expenses increased in absolute dollars
in fiscal 1996 as the Company expanded its efforts to enhance stakeholder
awareness and incurred professional services related to new product development
and communications.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased 31% to $8.1 million in fiscal 1997 and 74% to $6.2 million in fiscal
1996 from $3.6 million in fiscal 1995. As a percentage of net sales, general and
administrative expenses increased from 10.5% in fiscal 1996 to 15.4% in fiscal
1997. The increase in general and administrative expenses in absolute dollars
and as a percentage of net sales in fiscal 1997 resulted from an increase in (a)
personnel in operations support, customer service, and finance and (b) occupancy
costs. General and administrative expenses increased in fiscal 1996 in absolute
dollars primarily from additions to the Company's management and administrative
staff, expanded communications systems and MIS support, and increased staff and
management training.
RECALL AND RELATED COSTS. Recall and related costs were $6.5 million
in fiscal 1997. This total represents the costs directly associated with the
Recall, including: advertising and public relations costs; legal and
professional fees; costs of the product recalled, including the labor and
freight involved in the recall process; destruction of unsold product and
obsolete packaging supplies; costs of leased equipment in excess of volume
requirements; costs of reformulating products; and costs associated with the
flash pasteurization process. The Company initially recorded a $3.8 million
charge to operations for the anticipated costs associated with the Recall. In
the second and third quarters of fiscal 1997, certain costs incurred in
connection with the Recall, including estimated costs, had been classified as
general and administrative costs and have been reclassified as recall and
related costs. These costs were approximately $100,000 in the second quarter and
$400,000 in the third quarter. In the fourth quarter, changes in the recall
related matters discussed in Item 3. "Legal Proceedings" and further analysis of
the Company's claim for business losses resulting from the Recall indicated that
significant additional professional fees were expected to be incurred.
Accordingly, the Company recorded a $2.2 million charge to operations to
establish a liability for future professional fees related to the Recall.
However, there can be no assurance that the actual liability established is
adequate. The Company will continue to assess this liability and will make
appropriate adjustments if circumstances change.
INTEREST AND OTHER EXPENSE (INCOME). Odwalla had net interest income
in fiscal 1997 of $173,000 compared to net interest income of $541,000 in fiscal
1996. Gross interest income of $322,000 in fiscal 1997 and $635,000 in fiscal
1996 resulted primarily from the Company's investment of the proceeds of its
public offering in May 1995. Gross interest expense of $149,000 in fiscal 1997
resulted primarily from interest on the line of credit established in May 1997,
capital lease interest and other debt. Gross interest expense of $94,000 in
fiscal 1996 resulted from interest on capital leases.
18.
INCOME TAX EXPENSE (BENEFIT). The $1.9 million income tax benefit
for fiscal 1997 results from the tax benefit associated with the loss resulting
from the Recall. The 13% effective tax benefit rate varies from the federal
statutory tax rate primarily due to the effect of establishing a deferred tax
asset valuation allowance. The Company has provided the valuation allowance for
a portion of its net deferred tax assets due to uncertainty as to the ultimate
realization of such assets. The Company will assess the valuation allowance as
additional information regarding the impact of the Recall on the Company's
future profitability is available. The effective income tax rate for fiscal 1996
of 39% varies from the federal statutory tax rate of 34% primarily due to the
effective tax rate of California and other state income taxes. The effective
income tax rate for fiscal 1995 of 33% varies from the federal statutory tax
rate primarily due to effective tax rate reductions resulting from the
elimination of a $60,000 deferred tax valuation allowance partially offset by an
increase due to California and other state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through three primary
sources: private and public sales of equity securities, bank debt and capital
lease financing. At August 31, 1997, the Company had working capital of $1.3
million compared to working capital of $14.7 million at August 31, 1996. The
decrease resulted primarily from operating losses and $3.0 million of capital
expenditures. At August 31, 1997, the Company had cash, cash equivalents and
short term investments of $3.2 million compared to $12.4 million at August 31,
1996.
Net cash used in operating activities in fiscal 1997 was $8.4
million. This consisted of the net loss plus depreciation and amortization,
decreases in accounts receivable (due to reduced sales volume following the
Recall) and increases in accounts payable and other accrued expenses offset by
increases in the deferred income taxes and refundable income taxes. Net cash
provided by investing activities for fiscal 1997 was $2.6 million, consisting
primarily of sale of short-term investments offset by capital expenditures for
production equipment at the Dinuba plant and, to a lesser extent, computer
equipment and coolers. Net cash provided by financing activities for fiscal 1997
was $2.1 million, consisting primarily of $2.0 million in borrowings under a
line of credit obtained in May 1997 and $497,000 for the sale of common stock
through the exercise of stock warrants and options offset by payments of
long-term debt and capital lease obligations.
As of August 31, 1997, the Company had entered into purchase
commitments for the future delivery of raw materials, approximately $1.0 million
of which are under one-year contracts to be completed through May 1997. One
three-year contract is also open, requiring purchase of $2.5 million of raw
material product, and is to be completed by May 1999. Despite the decrease in
production due to the Recall, the Company does not anticipate that it will have
excess inventory.
At August 31, 1997, the Company had $374,000 outstanding in capital
lease obligations, primarily related to leasing of production equipment,
delivery vehicles and in-store coolers. The Company has used, and expects to
continue to use, capital lease financing as necessary to obtain needed
production assets, primarily equipment. However, as a result of the Recall, the
leasing company used for computer and cooler financing has notified the Company
that it has placed a hold on future lease commitments. The Company is currently
exploring additional leasing or lease financing sources to obtain future
commitments for computer and cooler equipment. There can be no assurance that
the Company will be able to use or continue to use such lease financing and the
failure to do so may have an adverse effect on the Company's business or results
of operations.
19.
In May 1997, the Company entered into a Loan and Security Agreement
(Agreement) with a lender which provided borrowings up to $5 million. The actual
borrowing cannot exceed 80% to 85% of eligible accounts receivable (Receivable
Line) plus a maximum of $500,000 available for new capital equipment (Equipment
Line). Interest on borrowings under the Agreement is payable monthly at prime
plus 1.5% (10% at August 31, 1997). Borrowings under the Equipment Line are
subject to interest only for the initial three months and then monthly interest
and principal payments amortized over a 45 month period. The entire loan matures
on May 31, 1999. The Company incurred approximately $35,000 of fees in
connection with the Agreement and will incur a termination fee (ranging from 3%
to 1% of the committed balance, depending upon the remaining loan term) if the
Agreement is terminated prior to maturity. The Agreement contains certain
restrictions, including the ability to borrow additional funds, pay dividends,
purchase or otherwise acquire Company stock, or encumber or sell Company assets.
In addition, the interest rate changes to prime plus 2% if the Company's
adjusted net worth, as defined, is less than $14 million. The Company is
required to pay interest on borrowings of $2 million and, accordingly, borrowed
approximately that amount under the Receivable Line at August 31, 1997.
Simultaneously, the Company entered into a separate Loan Agreement (Loan
Agreement) with another party to provide a $1 million facility under the same
terms noted for the Agreement, except that borrowings under the Loan Agreement
mature on May 21, 1998. The Company agreed to issue a warrant under the Loan
Agreement for 7,000 shares of common stock at $12.50 per share (fair market
value at issue date) which expires in May 2002. There were no borrowings under
the Loan Agreement at August 31, 1997. The Agreement and the Loan Agreement are
collateralized by all Company assets.
The Company anticipates that the increased costs associated with
recovering from the impact of the Recall may cause the Company to pursue
additional financing that may be dilutive to current investors or result in a
higher debt-to-equity ratio than would otherwise be the case. There can be no
assurance that such financing will be available on terms favorable to the
Company, if at all.
Based upon information currently available, the Company believes
that its current borrowing capability under the Agreement and Loan Agreement
will be adequate to meet its obligations as they become due in fiscal 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required to be filed herewith begin on page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information required by this item relating to the Company's
executive officers and key employees is included under the caption "Executive
Officers and Directors" in Part I of this Annual Report on Form 10-K. The
information regarding directors is incorporated herein by reference from the
section entitled "Election of Directors" from the Company's definitive Proxy
Statement to be filed within 120 days after the Company's fiscal year ended
August 31, 1997 pursuant to Regulation 14A of the Securities and Exchange Act of
1934, as amended, for the Company's Annual Meeting of Shareholders for the 1998
fiscal year (the "Proxy Statement").
Based upon (i) the copies of Section 16(a) reports which the Company
received from such persons for their 1996 fiscal year transactions in the Common
Stock and their Common Stock holdings, and (ii) the written representations
received from one or more of such persons that no annual Form 5 reports were
required to be filed by them for the 1996 fiscal year, the Company believes that
all executive officers and Board members complied with all their reporting
requirements under Section 16(a) for such fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation"
in the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders to
be filed with the Commission on or before December 30, 1997 is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Company's Proxy Statement for
the 1998 Annual Meeting of Stockholders to be filed with the Commission on or
before December 30, 1997 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships
and Related Transactions" in the Company's Proxy Statement for the 1998 Annual
Meeting of Stockholders to be filed with the Commission on or before December
30, 1997 is incorporated herein by reference.
21.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1* Amended and Restated Articles of Incorporation of the
Registrant.
3.2* Bylaws of the Registrant, including all related amendments.
4.1* Reference is made to Exhibits 3.1 and 3.2.
4.2** Investors' Rights Agreement dated August 31, 1992 between
the Registrant and Silicon Valley Bank.
4.3** Registration Rights Agreement dated March 27, 1991 between
the Registrant and Silicon Valley Bank.
4.4** Registration Rights Agreement dated March 25, 1992 between
the Registrant and Silicon Valley Bank.
10.1** Form of Indemnity Agreement entered into between the
Registrant and its directors and officers.
10.2* Registrant's Stock Option Plan, as amended (and related
stock option grant forms).
10.6** Promissory Note dated March 1, 1993 between the Registrant
and Greg A. Steltenpohl.
10.7** Promissory Note dated March 1, 1993 between the Registrant
and Bonnie Bassett Steltenpohl.
10.8* Lease Agreement between Fred M. Bailey and Bren E. Bailey
and the Registrant, dated December 6, 1982 as amended on
June 19, 1991, November 13, 1991, and July 22, 1994.
10.9* Registrant's 1994 Non-Employee Directors' Stock Option Plan
(and related stock option grant forms).
10.10+ Asset Purchase Agreement dated January 31, 1995 by and among
Registrant, J.S. Grant's Inc., Grant Peck and Michael
Delaney.
10.11++ Supply and License Agreement dated January 12, 1995 between
the Registrant and Trinity Springs Ltd.
10.12# Office Lease dated June 1995 by and between University Bank
& Trust Company of Palo Alto and Registrant.
10.13## Loan and Security Agreement dated May 22, 1997 between the
Registrant and Coast Business Credit.
10.14## Loan Agreement dated May 22, 1997 between the Registrant and
Sand Hill Capital LLC.
11.1 Statement of Computation of Per Share Earnings.
16.1+++ Letter Regarding Change in Certifying Accountant
23.1 Consent of Price Waterhouse LLP
23.2 Consent of BDO Seidman, LLP
27.1 Financial Data Schedule
----------
* Incorporated by reference to Registrant's Report on Form 10-KSB for the
fiscal year ended August 31, 1994, as filed with the SEC.
** Incorporated by reference to Registrant's Registration Statement on Form
SB-2, SEC File No. 33-71530-LA, as filed with the SEC on November 9,
1993, as amended.
+ Incorporated by reference to Registrant's Report on Form 8-K as filed
with the SEC on February 13, 1995, as amended.
++ Incorporated by reference to Registrant's Registration Statement on Form
SB-2, SEC File No. 33-91170, as filed with the SEC on April 13, 1995, as
amended.
+++ Incorporated by reference to Registrant's Report on Form 8-K, SEC File
No. 0-23036, as filed with the SEC on June 25, 1996.
22.
# Incorporated by reference to Registrant's Report on Form 10-K for the
fiscal year ended August 31, 1996, as filed with the SEC.
## Incorporated by reference to Registrant's Report on Form 10-Q for the
fiscal quarter ended May 31, 1997.
(b) REPORTS ON FORM 8-K.
None
23.
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 25, 1997.
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.
[Enlarge/Download Table]
SIGNATURE TITLE DATE
/s/ D. STEPHEN C. WILLIAMSON Chief Executive Officer November 25, 1997
------------------------------------------- and Director
D. Stephen C. Williamson (Principal Executive Officer)
/s/ GREG A. STELTENPOHL Chairman of the Board November 25, 1997
-------------------------------------------
Greg A. Steltenpohl
/s/ RICHARD GRUBMAN Director November 25, 1997
-------------------------------------------
Richard Grubman
/s/ RANZELL NICKELSON, II Director November 25, 1997
-------------------------------------------
Ranzell Nickelson, II
/s/ MARTIN S. GANS Director November 25, 1997
-------------------------------------------
Martin S. Gans
/s/ JAMES R. STEICHEN Chief Financial Officer November 25, 1997
------------------------------------------- (Principal Financial and
James R. Steichen Accounting Officer)
24.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ODWALLA, INC.
PAGE
Reports of Independent Accountants F-2 - F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8 - F-19
F-1
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 subsidiary at August 31, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Francisco, California
October 20, 1997
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Odwalla, Inc.
Half Moon Bay, California
We have audited the accompanying statements of operations, changes in
shareholders' equity and cash flows of Odwalla, Inc. for the year ended August
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Odwalla, Inc. at August 31,
1995, and the results of its operations and its cash flows for the year ended
August 31, 1995 in conformity with generally accepted accounting principles.
BDO Seidman, LLP
San Francisco, California
October 12, 1995
F-3
ODWALLA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
[Enlarge/Download Table]
AUGUST 31,
---------------------
1996 1997
-------- --------
Current assets
Cash and cash equivalents (Note 2) $ 5,975 $ 2,217
Short term investments (Note 2) 6,438 1,008
Trade accounts receivable, less allowance for doubtful
accounts of $306 and $592 (Note 15) 5,302 4,610
Inventories (Note 3) 3,294 3,910
Refundable income taxes (Note 9) -- 660
Prepaid expenses and other 964 730
Deferred tax asset, current (Note 9) 307 1,095
-------- --------
Total current assets 22,280 14,230
-------- --------
Plant, property and equipment, net (Notes 4 and 8) 12,641 13,875
-------- --------
Other assets
Officer and shareholder loans (Note 5) 117 117
Excess of cost over net assets acquired, net of accumulated
amortization of $178 and $286 (Note 6) 1,442 1,333
Covenants not to compete, net of accumulated amortization
of $226 and $362 (Note 6) 874 738
Deferred tax asset, non-current (Note 9) -- 410
Other noncurrent 346 303
-------- --------
Total other assets 2,779 2,901
-------- --------
Total assets $ 37,700 $ 31,006
======== ========
Current liabilities
Accounts payable $ 5,308 $ 5,395
Accrued payroll and related items 1,096 1,263
Line of credit (Note 7) -- 2,014
Income taxes payable (Note 9) 281 --
Other accruals (Note 16) 581 3,947
Current maturities of capital lease obligations (Note 8) 210 212
Current maturities of long-term debt (Note 7) 149 99
-------- --------
Total current liabilities 7,625 12,930
Capital lease obligations, less current maturities (Note 8) 384 162
Long-term debt, less current maturities (Note 7) 90 262
Other 27 17
-------- --------
Total liabilities 8,126 13,371
-------- --------
Commitments and contingencies (Notes 8 and 16)
Shareholders' equity (Note 11)
Preferred stock, no par value, shares authorized, 5,000,000; no shares
issued and outstanding -- --
Common stock, no par value, shares authorized, 15,000,000; shares
issued and outstanding, 4,945,000 and 5,024,000 28,813 29,310
Retained earnings (deficit) 761 (11,675)
-------- --------
Total shareholders' equity 29,574 17,635
-------- --------
Total liabilities and shareholders' equity $ 37,700 $ 31,006
======== ========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
[Download Table]
YEAR ENDED AUGUST 31,
------------------------------------
1995 1996 1997
-------- -------- --------
Net sales $ 35,869 $ 59,197 $ 52,630
Cost of sales 18,425 29,889 27,650
-------- -------- --------
Gross profit 17,444 29,308 24,980
-------- -------- --------
Operating expenses
Sales and distribution 11,588 20,158 22,046
Marketing 891 2,257 2,844
General and administrative 3,576 6,206 8,119
Recall and related costs (Note 16) -- -- 6,518
-------- -------- --------
Total operating expenses 16,055 28,621 39,527
-------- -------- --------
Income (loss) from operations 1,389 687 (14,547)
Other (expense) income
Other 17 (195) 37
Interest income, net (Note 12) 91 541 173
-------- -------- --------
Income (loss) before income taxes 1,497 1,033 (14,337)
Income tax (expense) benefit (Note 9) (500) (400) 1,901
-------- -------- --------
Net income (loss) $ 997 $ 633 $(12,436)
======== ======== ========
Net income (loss) per common share $ 0.22 $ 0.12 $ (2.49)
======== ======== ========
Weighted average common and common equivalent
shares outstanding 4,472 5,420 4,988
======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
[Enlarge/Download Table]
Common Stock Retained
-------------------- earnings
Shares Amount (deficit) Total
-------- -------- -------- --------
Balance, September 1, 1994 3,744 $ 9,588 $ (869) $ 8,719
Proceeds from public offering 1,065 18,594 -- 18,594
Exercise of common stock options and warrants,
including related tax benefits (Note 11) 82 189 -- 189
Net income for the year -- -- 997 997
-------- -------- -------- --------
Balance, August 31, 1995 4,891 28,371 128 28,499
Exercise of common stock options, including
related tax benefits (Note 11) 54 442 -- 442
Net income for the year -- -- 633 633
-------- -------- -------- --------
Balance, August 31, 1996 4,945 28,813 761 29,574
Exercise of common stock options, including
related tax benefits (Note 11) 79 497 -- 497
Net loss for the year -- -- (12,436) (12,436)
-------- -------- -------- --------
Balance, August 31, 1997 5,024 $ 29,310 $(11,675) $ 17,635
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
[Enlarge/Download Table]
Year ended August 31,
------------------------------------
1995 1996 1997
-------- -------- --------
Cash flows from operating activities
Net income (loss) $ 997 $ 633 $(12,436)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 913 1,288 1,936
Amortization 152 244 273
Deferred taxes 36 (276) (1,198)
Loss (gain) on sale of assets -- 202 (25)
Changes in assets and liabilities
Trade accounts receivable (1,679) (1,824) 692
Inventories (537) (1,708) (615)
Refundable income taxes -- -- (660)
Prepaid expenses and other current assets (239) (391) 234
Other noncurrent assets (119) 11 16
Accounts payable 2,201 948 87
Accrued payroll and related items 524 98 167
Other accrued liabilities 24 448 3,357
Income taxes payable 410 (129) (281)
-------- -------- --------
Net cash provided by (used in) operating activities 2,683 (456) (8,453)
-------- -------- --------
Cash flows from investing activities
Purchase of J.S. Grant's business assets, including covenant
not to compete (2,525) -- --
Capital expenditures (2,231) (5,681) (3,016)
Purchase of short-term investments (6,710) -- --
Proceeds from short-term investments, net -- 272 5,430
Other investing activities (100) -- --
Proceeds from sale of assets -- 57 145
-------- -------- --------
Net cash provided by (used in) investing activities (11,566) (5,352) 2,559
-------- -------- --------
Cash flows from financing activities
Principal payments under long-term debt (1,196) (197) (153)
Proceeds from issuance of long-term debt 1,149 -- --
Net borrowings under line of credit -- -- 2,014
Payments of obligations under capital leases (204) (248) (222)
Sale of common stock 18,783 442 497
-------- -------- --------
Net cash provided by (used in) financing activities 18,532 (3) 2,136
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 9,649 (5,811) (3,758)
Cash and cash equivalents, beginning of period 2,137 11,786 5,975
-------- -------- --------
Cash and cash equivalents, end of period $ 11,786 $ 5,975 $ 2,217
======== ======== ========
Cash paid during the year for:
Interest $ 146 $ 94 $ 123
Income taxes $ 42 $ 219 $ 203
Noncash investing and financing activities: During 1995, the Company assumed
approximately $135,000 of capital lease obligations in connection with the
acquisition of J.S. Grant's, Inc. (Note 6). During 1996, the Company purchased
property in Dinuba by issuing a $225,000 note payable. During 1997, the Company
purchased property in Half Moon Bay by assuming a $230,000 mortgage and $45,000
of assessment bonds.
See accompanying notes to consolidated financial statements.
F-7
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
Business. Odwalla, Inc. ("Odwalla" or the "Company") was incorporated in
California on September 19, 1985. Odwalla is the leading branded fresh juice and
beverage company in the country, serving selected markets in the western United
States. Odwalla's complete product line consists of more than 25 fresh-squeezed
and nutritionally fortified juices and smoothies, all natural meal replacement
beverages and geothermal natural spring water.
Principles of Consolidation. The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary,
Odwalla Canada, Inc. All significant intercompany balances and transactions have
been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents. The Company considers all investments with an initial
maturity of three months or less to be cash equivalents.
Inventories. Inventories are valued at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method.
Plant, Property, Equipment and Depreciation. Plant, property and equipment
are stated at the lower of cost or, if impaired, the fair value at date of
impairment. Depreciation and amortization are computed over the estimated useful
lives of the assets by the straight-line method for financial reporting purposes
and by accelerated methods for income tax purposes. For assets under capital
leases, amortization is based upon the shorter of the lease term or useful life
and is included with depreciation expense.
Estimated useful lives are as follows:
[Download Table]
Buildings and building improvements .................... 7 to 35 years
Leasehold improvements ................................. 5 to 15 years
Machinery and equipment ................................ 5 to 15 years
Vehicles ............................................... 5 years
Other .................................................. 3 to 7 years
Excess of Cost over Net Assets Acquired. The excess of cost over net assets
acquired, which relates to the Company's acquisitions of Dharma Juice Company
and J. S. Grant's, Inc., are being amortized over a 15-year period using the
straight-line method. Periodically, the recoverability of the excess of cost
over net assets acquired is evaluated by comparing estimated future income to
projections made at the time of acquisition.
Covenants Not to Compete. The covenants not to compete associated with the
acquisitions of Dharma Juice Company (four-year term), J. S. Grant's, Inc.
(ten-year term) and the expansion into a new regional market (five-year term)
are being amortized using the straight-line method over the terms of the
agreements.
Deferred Taxes. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
Revenue Recognition. Net sales are recognized at the time of delivery to
the customer. A reserve for returns is recorded at the time of sale.
F-8
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. BUSINESS AND SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
Financial Instruments. The carrying value of the Company's financial
instruments approximate their fair values.
Accounting for Stock-Based Compensation. On September 1, 1996, the Company
adopted Statement of Financial Accounting Standards No. 123 ("FAS 123"),
Accounting for Stock-Based Compensation, which allows companies to measure
compensation cost in connection with their employee stock compensation plans
either using a fair value based method or continuing to use an intrinsic value
based method. The Company will continue to use the intrinsic value based method
prescribed by Accounting Principles Board Opinion No. 25 ("APB 25") and its
related interpretations, which generally does not result in compensation cost.
The Company's stock option plans are discussed in Note 11.
Net Income (Loss) Per Share. Net income (loss) per common share has been
computed using the weighted average number of common and common equivalent
shares, if dilutive, outstanding during each year. Common equivalent shares
consist of stock options and warrants using the treasury stock method.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 ("FAS 128"), Earnings Per Share. FAS 128 establishes new accounting
standards for the computation and manner of presentation of the Company's
earnings per share. The Company will be required to adopt the provisions of FAS
128 for the quarter ending February 28, 1998. Earlier application is not
permitted. The Company does not believe the adoption of FAS 128 will have a
material impact on earnings per share data.
2. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash and cash equivalents include cash management funds totaling $5,726,000
and $1,008,000 at August 31, 1996 and 1997. Cash management funds are generally
invested in money market and tax-free municipal bond funds. The carrying amount
approximates fair value because of the short maturity of these instruments.
Short-term investments consist primarily of U. S. Government securities and
tax free municipal bonds with maturities from three months to one year. The
carrying amount of these investments approximates fair value. Interest income,
net, includes $242,000 and $236,000 of interest earned from these investments in
1996 and 1997.
3. INVENTORIES
Inventories consist of the following (in thousands):
[Download Table]
AUGUST 31,
-----------------
1996 1997
------ ------
Raw materials $2,467 $2,657
Packaging supplies and other 477 420
Inventory deposits -- 329
Finished product 350 504
------ ------
Total $3,294 $3,910
====== ======
F-9
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment consist of the following (in
thousands):
[Download Table]
AUGUST 31,
----------------------
1996 1997
-------- --------
Land $ 411 $ 1,046
Buildings and building improvements 6,339 7,097
Leasehold improvements 2,287 2,441
Machinery and equipment 5,242 6,612
Vehicles 619 530
Other 2,693 2,667
-------- --------
17,591 20,393
Less accumulated depreciation and amortization (4,950) (6,518)
-------- --------
Plant, property and equipment, net $ 12,641 $ 13,875
======== ========
The above includes leased property under capital leases as described
in Note 8.
5. OFFICER AND SHAREHOLDER LOANS
At both August 31, 1996 and 1997, outstanding loans to officers
totaled $106,000, and outstanding loans to other shareholders totaled $11,000.
These loans bear interest at rates from 0% to 7.5% and are due at various dates
through 2001.
6. BUSINESS ACQUISITION
In January 1995, the Company acquired substantially all of the
assets of the fresh juice business of J.S. Grant's, Inc., a Colorado corporation
("Grant's"). The acquired assets included cash, accounts receivable, inventory,
machinery, equipment and supplies, intangible assets such as recipes,
formulations, trade secrets, trade names, and goodwill (collectively, the
"Assets"). Odwalla purchased the Assets for approximately $1.59 million,
including approximately $94,000 of legal, accounting and other costs incurred by
the Company. The acquisition resulted in an excess of costs over net assets
acquired of $1.46 million, which is being amortized over 15 years on a
straight-line basis.
Odwalla entered into a ten year non-competition agreement with each
of the two former officers of Grant's for an aggregate consideration of
$890,000. The non-competition agreements are being amortized over ten years on a
straight-line basis.
The acquisition was accounted for as a purchase and, accordingly,
Grant's financial results are included in the Company's financial statements
from January 31, 1995. The following pro forma results are unaudited and reflect
purchase accounting adjustments assuming the acquisition occurred at the
beginning of the period (in thousands, except per share data).
[Download Table]
YEAR ENDED
AUGUST 31, 1995
---------------
Net sales $37,325
Net income 728
Net income per share $ 0.16
F-10
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT
LINE OF CREDIT
In May 1997, the Company entered into a Loan and Security Agreement
("Security Agreement") with a lender which provides a revolving line of credit
up to $5 million. The outstanding borrowings cannot exceed 85%, depending upon
terms described in the Security Agreement, of eligible accounts receivable
("Receivable Line") plus a maximum of $500,000 available for new capital
equipment ("Equipment Line"). Interest on borrowings under the Security
Agreement is payable monthly at prime plus 1.5% (10% at August 31, 1997).
Borrowings under the Equipment Line are subject to interest payments only for
the initial three months and then monthly interest and principal payments
amortized over a 45 month period. The entire loan matures on May 31, 1999. The
Company incurred $47,000 of fees in connection with the Security Agreement and
will incur a termination fee (ranging from 3% to 1% of the committed balance,
depending upon the remaining loan term) if the Security Agreement is terminated
prior to maturity.
The Security Agreement contains certain restrictions, including the
ability to borrow additional funds, pay dividends, purchase or otherwise acquire
Company stock, or encumber or sell Company assets. In addition, the interest
rate changes to prime plus 2% if the Company's adjusted net worth, as defined,
is less than $14 million. The Company is required to pay interest on $2 million
and, accordingly, borrowed approximately that amount under the Receivable Line
at August 31, 1997.
Also in May 1997, the Company entered into a Loan Agreement ("Loan
Agreement") with another party to provide a $1 million facility under the same
terms noted for the Security Agreement, except that borrowings under the Loan
Agreement mature on May 21, 1998. There were no borrowings under the Loan
Agreement at August 31, 1997. Upon executing the Loan Agreement, the Company
agreed to issue a warrant for 7,000 shares of its common stock at $12.50 per
share (fair market value at issue date) which expires in May 2002.
The fair value of the warrant is not significant to these financial statements.
The Security Agreement and the Loan Agreement are collateralized by
all Company assets.
LONG-TERM DEBT
In October 1996, the Company assumed a $230,000 mortgage and $45,000
of Half Moon Bay assessment bonds in connection with the purchase of land
adjacent to its Half Moon Bay administrative offices. Mortgage terms include
interest at 8.75% per annum and monthly principal and interest payments until
maturity in 1999 when the remaining balance of approximately $220,000 is due.
The Half Moon Bay assessment bonds bear interest at 7% per annum and require
annual principal and interest payments to 2006.
The following summarizes long-term debt (in thousands):
[Download Table]
AUGUST 31,
-------------
1996 1997
---- ----
Mortgage on Half Moon Bay property, due in fiscal 1999 $ -- $226
Bonds on Half Moon Bay property -- 45
Promissory note (interest at 5%) 150 75
Various equipment loans (interest from 9% to 14%) 89 15
---- ----
239 361
Less current portion 149 99
---- ----
$ 90 $262
==== ====
F-11
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS
OPERATING AND CAPITAL LEASES
The Company leases certain property consisting of its production
facilities, offices, branch distribution facilities, equipment and certain
vehicles under operating leases, including the related party lease described
below. These leases expire at various dates through 2007 and many facility
leases contain renewal options. Most property leases require the Company to pay
utilities, property taxes and common maintenance costs. Total rent expense under
operating leases approximated $1,241,000, $3,490,000 and $5,500,000 for the
years ended August 31, 1995, 1996 and 1997. The Company also leases various
furniture, equipment and vehicles under capital leases expiring through 2001.
Following is an analysis of leased property under capital leases by
major classes (in thousands):
[Download Table]
AUGUST 31,
--------------------
1996 1997
------- -------
Machinery and equipment $ 971 $ 971
Vehicles 140 140
Other 84 84
------- -------
1,195 1,195
Less accumulated amortization (333) (410)
------- -------
Net leased equipment under capital leases $ 862 $ 785
======= =======
As of August 31, 1997, future net minimum lease payments under
capital leases and future minimum rental payments required under operating
leases are as follows (in thousands):
[Download Table]
CAPITAL OPERATING
YEAR ENDING AUGUST 31, LEASES LEASES
---------------------- -------- -------
1998 $ 238 $ 4,571
1999 166 4,068
2000 8 3,455
2001 -- 1,974
2002 -- 321
Thereafter -- 1,264
-------- --------
412 $ 15,653
======== ========
Less amount representing interest (38)
--------
Present value of net minimum lease payments 374
Less current maturities (212)
--------
Long-term portion $ 162
========
Certain leases are guaranteed by Company shareholders and officers.
The Company leased a portion of its office facility through March
1996 and subleases portions of two distribution facilities under sublease
agreements requiring payments by the lessees of $109,000 and $6,000 in 1998 and
1999. The Company earned $26,000, $71,000 and $73,000 under sublease agreements
in 1995, 1996 and 1997.
F-12
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS (CONTINUED)
RELATED PARTY LEASE
The Company's storage facility and offices in Davenport, California,
are leased from a partnership of which Mr. Steltenpohl, the Company's Chairman,
is a significant partner. The lease for this facility expires in July 1998 as to
the storage facility and July 1999 as to the office space. Rent and lease
related expenses paid to the partnership approximated $112,000 during each of
the years ended August 31, 1995, 1996 and 1997. Total accumulated leasehold
improvements at this facility, net of accumulated amortization, approximated
$221,000 and $147,000 at August 31, 1996 and 1997.
OTHER COMMITMENTS
Supply and License Agreement
In January 1995, the Company entered into an exclusive Supply and
License Agreement ("Agreement") whereby Trinity Springs Ltd. ("Trinity")
supplies a product to be bottled, packaged, marketed and distributed by Odwalla.
Under the Agreement, the Company was required to pay a license fee equal to 50%
of the net profits, as defined, on a quarterly basis. The Company agreed to
distribute certain minimum quantities of the product. The Agreement was for five
years and was automatically renewable for unlimited successive five-year terms,
with either party retaining the right not to renew under certain circumstances.
The Company was granted 10% of the then outstanding shares of Trinity in January
1995, although the shares have not been issued to date. The Company was also to
be issued a warrant to purchase 1% of Trinity's outstanding capital stock on
each of the first five anniversary dates of the Agreement. The Agreement became
effective in October 1995. There were no license fees paid in 1996 or 1997.
In March 1997, the Agreement was terminated and replaced with an
Amended and Restated Supply and License Agreement ("Amended Agreement")
appointing Odwalla as a non-exclusive distributor of Trinity water products with
certain annual minimum quantities of the product at defined prices. The Amended
Agreement is for a five-year term with one five-year automatic renewal period.
Raw Material Contracts
As of August 31, 1997, the Company had entered into purchase
commitments for the future delivery of raw materials. Approximately $1.0 million
of commitments are under one-year contracts to be completed through May 1998.
One three-year contract is also open, requiring purchase of $2.5 million of
product, and is to be completed by May 1999.
9. TAXES ON INCOME
The Company recognizes deferred tax liabilities and assets by
applying enacted statutory tax rates applicable to future years for the expected
future tax consequences of temporary differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized.
F-13
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. TAXES ON INCOME (CONTINUED)
Deferred tax assets consist principally of the following (in
thousands):
[Download Table]
AUGUST 31,
--------------------
1996 1997
------- -------
Reserves and accruals $ 369 $ 1,800
Net operating loss carryforward -- 3,200
Tax credits 64 62
Property, plant and equipment (150) (319)
Inventories 22 30
State taxes 35 --
Other (33) 102
------- -------
307 4,875
Less valuation allowance -- (3,370)
------- -------
Net deferred tax asset $ 307 $ 1,505
======= =======
The Company's effective tax rate differs from the federal statutory
rate as follows:
[Download Table]
YEAR ENDED AUGUST 31,
-------------------------
1995 1996 1997
---- ---- ----
Federal statutory tax rate 34% 34% (34)%
State income taxes 6 5 (5)
Deferred tax asset valuation allowance -- -- 25
Benefit of net operating loss carryback -- -- (5)
Reduction of valuation allowance through utilization
of net operating loss carryforward (4) -- --
Permanent differences and other (3) (6) 5
Taxes for prior periods -- 6 1
--- --- ---
33% 39% (13)%
=== === ===
Taxes on income consisted of the following (in thousands):
[Download Table]
YEAR ENDED AUGUST 31,
---------------------------------
1995 1996 1997
------- ------- -------
Current:
Federal $ 390 $ 429 $ (660)
State 90 127 --
------- ------- -------
480 556 (660)
------- ------- -------
Deferred:
Federal 64 (130) (3,970)
State 16 (26) (641)
------- ------- -------
80 (156) (4,611)
------- ------- -------
560 400 (5,271)
Change in valuation allowance (60) -- 3,370
------- ------- -------
$ 500 $ 400 $(1,901)
======= ======= =======
At August 31, 1997, the Company had federal and state net operating
loss carryforwards of $8.4 million and $5.1 million, respectively, which expire
between 2002 and 2017.
F-14
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. TAXES ON INCOME (CONTINUED)
During the year ended August 31, 1997, the Company provided a
valuation allowance against certain of its deferred tax assets due to
uncertainty as to the ultimate realization of such assets.
During the years ended August 31, 1995, 1996 and 1997, the Company
recognized certain tax benefits related to stock option plans in the amount of
$12,000, $42,000 and $1,000. These benefits were recorded as a reduction of
income taxes payable and an increase in common stock.
10. EMPLOYEE BENEFIT PLAN
The Company matches 10% of each employee's contribution to the
401(k) Employee Benefit Plan ("Plan"), as amended in September 1992 by the Board
of Directors. Total contributions to the Plan approximated $24,000, $36,000 and
$46,000 for the years ended August 31, 1995, 1996 and 1997.
11. SHAREHOLDERS' EQUITY
Warrants. The underwriters of the Company's initial public offering
in December 1993 were issued warrants to purchase 105,000 shares of common stock
at $7.20 per share. These warrants expire in September 1998 and are currently
outstanding.
Stock Option Plans. Under the Stock Option Plan, incentive stock
options ("Incentive Options") may be granted to employees and nonstatutory stock
options ("Nonstatutory Options") may be granted to employees, directors or
consultants. In December 1994, the Board of Directors adopted the 1994
Non-Employee Directors' Stock Option Plan ("Directors' Plan") and, in January
1995, the shareholders approved this plan. Incentive Options may be granted at
an exercise price not less than 100% of fair market value on the grant date;
Nonstatutory Options may be granted at an exercise price not less than 85% of
fair market value on the grant date. The options generally vest one-sixtieth per
month from the grant date, although approximately 85,000 outstanding
Nonstatutory Options vested immediately on the grant date. Directors' Plan
options may be granted at an exercise price not less than 100% of fair market
value and generally vest quarterly over a five-year period. In general, options
terminate ten years from date of grant.
In April 1997, the 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.
The Discretionary Program allows the Company 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 the Company 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.
F-15
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY (CONTINUED)
The activity under the above plans was as follows:
[Download Table]
SHARES OPTIONS OPTION PRICE
AVAILABLE OUTSTANDING PER SHARE
-------- ------- ------- -----
Balance at September 1, 1994 277,095 469,815 $ 3.33-$6.60
Additional shares reserved 282,000 --
Options granted (272,648) 272,648 $ 7.83-$8.62
Options exercised -- (11,709) $ 3.33-$7.83
Options canceled 29,690 (29,690) $ 3.33-$3.97
-------- --------
Balance at August 31, 1995 316,137 701,064 $ 3.33-$8.62
Additional shares reserved 266,500 --
Options granted (270,906) 270,906 $20.25-$22.28
Options exercised -- (59,625) $ 3.33-$20.25
Options canceled 46,471 (46,471) $ 3.90-$20.25
-------- --------
Balance at August 31, 1996 358,202 865,874 $ 3.33-$22.28
Additional shares reserved 450,000 --
Options granted (533,329) 533,329 $10.25-$13.75
Options exercised -- (78,163) $ 3.33-$10.25
Options canceled 422,205 (422,205) $ 3.33-$22.28
-------- --------
Balance at August 31, 1997 697,078 898,835 $ 3.33-$13.75
======== ========
The Company applies APB 25 and related interpretations in
accounting for its stock option plans. No compensation cost has been recognized
for its stock option plans because grants have been made at exercise prices at
or above fair market value of the common stock.
All options granted under the Company's stock option plans during
fiscal 1996 and 1997 have been granted with an exercise price equal to or
greater than the fair market value on the date of grant. Had the fair value of
the options been calculated in accordance with FAS 123, net income (loss) would
have been $242,000 and $(13,293,000) and net income (loss) per share would have
been $0.04 and $(2.66) for the years ended August 31, 1996 and 1997.
For purposes of calculating compensation cost under FAS 123, the
minimum fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in fiscal 1996 and 1997: dividend yield of 0% for
all years; expected volatility of 5.1% for all years; risk-free interest rates
of 6.1% and 6.0%; and, expected lives of 5 years for all years.
There were 408,113 and 457,569 options exercisable at August 31,
1996 and 1997. The weighted average exercise price of options exercisable at
August 31, 1996 and 1997 was $8.35 and $8.54 per share. At August 31, 1997, a
total of approximately 1,648,475 shares of Common Stock have been reserved for
issuance under the Company's stock option plans.
F-16
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about options
outstanding at August 31, 1997:
[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 - $6.66 349,955 7.5 $ 5.04 266,866 $ 4.99
$7.75 - $10.25 303,322 6.5 $ 9.48 121,752 $ 8.77
$10.625 - $13.75 245,558 9.3 $ 12.37 68,951 $ 13.30
--------- ------- ---------
898,835 7.7 $ 8.54 457,569 $ 7.25
========= =======
12. INTEREST INCOME (EXPENSE)
Interest income (expense) consisted of the following (in thousands):
[Download Table]
YEAR ENDED AUGUST 31,
---------------------------
1995 1996 1997
----- ----- -----
Interest income $ 237 $ 635 $ 322
Interest expense (146) (94) (149)
----- ----- -----
Net interest income $ 91 $ 541 $ 173
===== ===== =====
No amounts of interest expense were capitalized in 1995, 1996 or
1997.
13. SIGNIFICANT CUSTOMER AND CREDIT CONCENTRATION
One customer, Safeway, Inc., represented approximately 16%, 14% and
12% of sales in fiscal 1995, 1996, and 1997. Although a significant portion of
the Company's customers are concentrated in Northern California, trade accounts
receivable are generally diversified due to the large number of entities
comprising the Company's customer base.
14. RELATED PARTY TRANSACTIONS
The Company incurred consulting fees of $35,000 and $29,000 during
1996 and 1997 by utilizing a company which is owned by one of the Company's
former directors. The Company also retained a current board member for
consulting services and incurred fees of $40,000 in 1997. The Company recorded
executive recruitment fees of $37,000 and $74,000 during 1995 and 1996 by
utilizing a company of which one of the Company's former directors is a partner.
F-17
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company performs ongoing credit evaluations of its customers and
establishes an allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and other information.
The following summarizes the activity in the allowance for doubtful accounts for
the three years ended August 31, 1997 (in thousands):
[Download Table]
YEAR ENDED AUGUST 31,
---------------------------
1995 1996 1997
----- ----- -----
Allowance for doubtful accounts, beginning of year $ 98 $ 166 $ 306
Bad debt expense for the year 112 398 659
Allowance established at time of Grant's
acquisition 20 -- --
Accounts receivable written off during the year (64) (258) (373)
----- ----- -----
Allowance for doubtful accounts, end of year $ 166 $ 306 $ 592
===== ===== =====
16. RECALL AND RELATED COSTS
On October 30, 1996, the Company was notified by the State of
Washington Environmental Health Services of an epidemiological link between
several cases of E. coli O157:H7 and Odwalla's apple juice products. The Company
immediately implemented a recall (the "Recall") of all Odwalla products
containing apple juice. On October 31, 1996, Odwalla expanded the Recall to
include its carrot and vegetable products because such products were processed
on the same production line as the apple juice. Beginning in early December
1996, Odwalla began flash pasteurization of fresh apple juice as part of the
Company's Hazard Analysis Critical Control Point Plan ("HACCP Plan") and
reintroduced all apple juice-based products to the market. Although the Company
experienced a significant reduction in sales following the Recall, as of August
31, 1997, the Company's sales have returned to near their pre-Recall level.
To date, there have been seventeen personal injury claims and legal
proceedings filed against the Company seeking monetary damages and other relief
relating to the Recall. There has also been one legal proceeding alleging
fraudulent business acts and practices relating to the recall products. Seven of
these claims and proceedings have been settled. In addition, approximately 585
other claims for damages resulting from the Recall were presented to the
Company's insurance carrier and approximately 570 of those claims have been
settled. Settlement of these personal injury legal proceedings and claims was
covered under the Company's insurance policy. At this time, the Company is
unable to determine the potential liability from the remaining legal proceedings
and claims. However, the Company believes its insurance coverage is adequate to
cover such claims and legal proceedings, but there can be no assurance that the
remaining coverage will be adequate.
In early 1997, the Company was informed that it is the subject of a
federal grand jury investigation concerning events of 1996 and before, including
the E. coli O157:H7 incident. The Company has responded to a subpoena and is
cooperating fully with the government. At this time, the Company cannot predict
the outcome of the investigation. The response to the legal proceedings and the
grand jury investigation has required a significant amount of management time
during the year, and has caused the Company to incur significant legal fees.
F-18
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. RECALL AND RELATED COSTS (CONTINUED)
The Company incurred significant costs related to the Recall,
including legal and professional fees, cost of the product recalled (including
the labor and freight involved in the recall process), destruction of unsold
product and now obsolete packaging supplies, advertising and public relations
costs, costs of leased sales and distribution equipment in excess of current
volume requirements, costs of reformulating products and costs associated with
the flash pasteurization process. Total Recall and related costs incurred in
fiscal 1997 were $6,518,000. This includes $2,334,000 of accrued professional
fees at August 31, 1997, which represents the Company's estimate of future legal
costs related to the Recall.
The Company maintains insurance coverage for product recall, product
adulteration, lost income and other first party business risks. During fiscal
1997, a claim for product recall costs was presented to its insurance carriers
as was an additional claim for business losses incurred due to the Recall.
However, the amount and timing of proceeds, if any, from the claims and any
future insurance claims cannot be presently determined.
The Company has taken many actions following the Recall to restore
sales and control costs. While the Company incurred a significant loss during
fiscal year 1997, the Company believes it will have sufficient cash and
borrowing capacity to fund its operations and capital expenditures through the
end of fiscal year 1998. However, this belief is based to some degree on
estimates which are inherently uncertain given the disruption to the Company's
business caused by the Recall.
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
[Download Table]
Net income
Net Gross Net income (loss) per
Sales Profit (loss) share
-------- -------- -------- -----------
1996
1st Quarter $ 12,395 $ 5,612 $ (119) $ (0.02)
2nd Quarter 13,579 6,331 (70) (0.01)
3rd Quarter 16,532 8,515 522 0.10
4th Quarter 16,691 8,850 300 0.06
-------- -------- -------- -----------
$ 59,197 $ 29,308 $ 633 $ 0.12
======== ======== ======== ===========
1997
1st Quarter $ 14,101 $ 7,097 $ (4,844) $ (0.98)
2nd Quarter 11,257 4,830 (3,042) (0.61)
3rd Quarter 13,685 6,566 (1,820) (0.36)
4th Quarter 13,587 6,487 (2,730) (0.54)
-------- -------- -------- -----------
$ 52,630 $ 24,980 $(12,436) $ (2.49)
======== ======== ======== ===========
F-19
Dates Referenced Herein and Documents Incorporated by Reference
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