<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ODWALLA LOGO]
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-23036
ODWALLA, INC.
(Exact name of registrant as specified in its charter)
California 77-0096788
- ------------------------------------------------ ------------------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
120 Stone Pine Road, Half Moon Bay, CA 94019
(Address and zip code of principal executive offices)
(415) 726-1888
(Registrant's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check [X] 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock, no par value 4,981,404 shares
-------------------------- ----------------
(Class) (Outstanding at April 4, 1997)
<PAGE> 2
ODWALLA, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1997
-----------------
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of August 31, 1996 and February 28, 1997 ............ 3
Consolidated Statements of Operations for the three-month and six-month periods
ended February 29, 1996 and February 28, 1997 ...................................... 4
Consolidated Statements of Cash Flows for the six-month periods ended February 29,
1996 and February 28, 1997 ......................................................... 5
Notes to Consolidated Financial Statements.......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 22
Item 6. Exhibits and Reports on Form 8-K.................................................... 23
</TABLE>
2
<PAGE> 3
[ODWALLA LOGO]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
August 31, FEBRUARY 28,
1996 1997
- ---------------------------------------------------------------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 5,975 $ 2,213
Short term investments 6,438 1,417
Trade accounts receivable, less allowance for
doubtful accounts of $306 and $575 5,302 4,283
Inventories (Note 2) 3,294 3,753
Prepaid expenses and other 964 608
Deferred tax asset, net (Note 5) 307 1,617
------- -------
TOTAL CURRENT ASSETS 22,280 13,891
PLANT, PROPERTY AND EQUIPMENT, net (Note 3) 12,641 14,077
OTHER ASSETS
Officer and shareholder loans 117 117
Excess of cost over net assets acquired 1,442 1,387
Covenants not to compete 874 806
Other noncurrent 346 300
------- -------
TOTAL ASSETS $37,700 $30,578
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,308 $ 5,033
Accrued payroll and related items 1,096 1,349
Income taxes payable 281 78
Other accruals 581 1,417
Current maturities of capital lease obligations 210 213
Current maturities of long-term debt 149 133
------- -------
TOTAL CURRENT LIABILITIES 7,625 8,223
CAPITAL LEASE OBLIGATIONS, less current maturities 384 268
LONG-TERM DEBT, less current maturities 90 216
OTHER 27 23
------- -------
TOTAL LIABILITIES 8,126 8,730
------- -------
SHAREHOLDERS' EQUITY
Common stock, no par value, shares authorized, 15,000,000; issued and
outstanding, 4,945,095 and 4,978,469 shares, respectively 28,813 28,974
Retained earnings (deficit) 761 (7,126)
------- -------
TOTAL SHAREHOLDERS' EQUITY 29,574 21,848
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $37,700 $30,578
======= =======
</TABLE>
3
<PAGE> 4
[ODWALLA LOGO]
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- ----------------------
Feb. 29, FEB. 28, Feb. 29, FEB. 28,
1996 1997 1996 1997
------- ------- ------- -------
- ------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $13,579 $11,256 $25,973 $25,357
COST OF SALES 7,248 6,427 14,031 13,431
------- ------- ------- -------
GROSS MARGIN 6,331 4,829 11,942 11,926
------- ------- ------- -------
OPERATING EXPENSES
Sales and distribution 4,707 5,331 9,133 11,570
Marketing 538 743 931 1,421
General and administrative 1,304 2,307 2,426 4,428
Direct recall costs (Note 4) - - - 3,840
------- ------- ------- -------
TOTAL OPERATING EXPENSES 6,549 8,381 12,490 21,259
LOSS FROM OPERATIONS (218) (3,552) (548) (9,333)
OTHER INCOME (EXPENSE), net (11) 4 (32) (1)
INTEREST INCOME (EXPENSE), net 116 56 274 137
------- ------- ------- -------
LOSS BEFORE INCOME TAXES (113) (3,492) (306) (9,197)
INCOME TAX BENEFIT 43 450 116 1,310
------- ------- ------- -------
NET LOSS $ (70) $(3,042) $ (190) $(7,887)
======= ======= ====== =======
NET LOSS PER COMMON SHARE AND
COMMON EQUIVALENT SHARE $(0.01) $(0.61) $(0.04) $(1.59)
------- ------- ------- -------
WEIGHTED AVERAGE COMMON EQUIVALENT AND
COMMON EQUIVALENT SHARES OUTSTANDING 4,919 4,976 4,907 4,967
======= ======= ====== =======
</TABLE>
4
<PAGE> 5
[ODWALLA LOGO]
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six months ended
---------------------
Feb. 29, FEB. 28,
1996 1997
- --------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (190) $ (7,887)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation & amortization 679 1,072
Deferred income taxes (116) (1,310)
Loss on sale of assets -- 13
Changes in assets and liabilities:
Trade accounts receivable (1,463) 1,019
Inventories (244) (459)
Prepaid expenses and other current assets 77 356
Other noncurrent assets (111) 46
Accounts payable (62) (275)
Accrued payroll and related items (64) 253
Other accruals and other liabilities 20 832
Income taxes payable (410) (203)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (1,884) (6,543)
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures (3,250) (2,196)
Sale of short-term investments, net -- 5,021
Proceeds from sale of assets -- 28
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (3,250) 2,853
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments under long-term debt (227) (120)
Payments of obligations under capital leases (43) (113)
Sale of common stock through option exercises 194 161
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (76) (72)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (5,210) (3,762)
CASH AND CASH EQUIVALENTS, beginning of period 11,786 5,975
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 6,576 $ 2,213
======== ========
</TABLE>
5
<PAGE> 6
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated balance sheet of Odwalla, Inc.
and its subsidiary (the "Company") as of February 28, 1997 and the related
consolidated statements of operations and cash flows for each of the three-month
and six-month periods ended February 29, 1996 and February 28, 1997 have not
been audited by independent accountants. However, in the opinion of management,
they include all adjustments necessary for a fair presentation of the financial
position and the results of operations for the periods presented. The statements
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information and
footnote disclosure normally included in financial statements prepared in
conformity with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. The operating results for the
interim periods are not necessarily indicative of results to be expected for an
entire year. The aforementioned statements should be read in conjunction with
the consolidated financial statements for the year ended August 31, 1996
appearing in the Company's 1996 Annual Report on Form 10-K.
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, FEBRUARY 28,
1996 1997
---------- ---------
<S> <C> <C>
Raw materials $ 2,467 $ 2,922
Packaging supplies and other 477 390
Finished product 350 441
---------- ---------
Total $ 3,294 $ 3,753
========== =========
</TABLE>
3. PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
August 31, FEBRUARY 28,
1996 1997
------- -------
<S> <C> <C>
Land $ 411 $ 1,001
Buildings and building
improvements 6,339 6,614
Leasehold improvements 2,287 2,481
Machinery and equipment 5,242 5,816
Vehicles 619 542
Other 2,693 3,151
------- -------
17,591 19,605
Less accumulated depreciation and
amortization (4,950) (5,528)
------- -------
$12,641 $14,077
======= =======
</TABLE>
6
<PAGE> 7
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. 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 bacteria illness and Odwalla's apple juice
products. The Company immediately implemented a voluntary recall (the "Recall")
of all Odwalla products containing apple juice and, on October 31, 1996,
expanded the Recall to include its carrot and vegetable products because such
products were processed on the same production line as the apple juice.
The Company experienced a significant reduction in sales of all of its
products following the Recall. Beginning in early December 1996, the Company
reintroduced all apple juice-based products to the market using flash
pasteurization of its fresh apple juice. In addition, the Company incurred
significant direct Recall costs including: advertising and public relations
costs; legal and professional fees; cost of the product recalled (including the
labor and freight involved in the recall process); destruction of unsold product
and now obsolete packaging supplies; costs of leased sales and distribution
equipment in excess of current volume requirements; costs of reformulating
products; and costs associated with the flash pasteurization process. Direct
Recall costs totaled $3,840,000 in the first quarter of fiscal 1997 and included
approximately $700,000 of estimated direct costs for the remainder of the year.
Approximately $235,000 of these estimated direct costs were incurred in the
second quarter. However, there can be no assurance that the actual direct costs
for the remainder of the year may not exceed the estimated amount.
In keeping with long-term strategic objectives, the Company plans to
continue to invest in building an infrastructure capable of sustaining growth
and expansion. As a result of the plans for continued growth and infrastructure
development, the Company has not reduced costs commensurate with the reduction
of sales following the Recall. The Company expects the costs associated with the
Recall and disruption in sales will result in a significant loss for fiscal year
1997.
The Company maintains insurance coverage for product recall, product
adulteration, lost income and other first party business risks and intends to
present claims to its insurance carriers under the appropriate policies. In
February 1997, one claim for product recall costs was presented to its insurance
carriers. However, the amount and timing of proceeds, if any, from the February
1997 claim and any future insurance claims cannot be presently determined.
To date, there are four pending personal injury claims and legal
proceedings seeking monetary damages and other relief related to the Recall
filed against the Company. Two of the remaining claims are class action lawsuits
and two are personal injury lawsuits. Three personal injury claims and lawsuits
have been settled as of April 4, 1997. In addition, there was one legal
proceeding alleging fraudulent business acts and practices relating to the
recalled products filed against the Company; this suit was settled in January
1997 and received court approval in March 1997. The settlement of the personal
injury legal proceedings was covered under the Company's general liability
insurance policy and did not result in any additional costs to the Company. The
Company is currently working with its insurance carrier and legal counsel to
assess the total potential liability to the Company. However, due to the short
period of time since the Recall, the Company is not able to determine whether
the ultimate liability resulting from these and potential future claims will
exceed the coverage available under its applicable insurance policies. See "Part
II - Item 1. Legal Proceedings."
7
<PAGE> 8
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PRODUCT RECALL (CONTINUED)
The Company is developing plans to regain and build on its customer
base and anticipates that sales levels will improve throughout the remainder of
fiscal year 1997. There can be no assurance sales levels will continue to
improve and, in any event, the anticipated improvement in sales levels is not
expected to offset the effects of the lost sales and direct costs associated
with the Recall. While a significant loss is expected for fiscal year 1997, the
Company believes it will have sufficient cash to fund its operations and capital
expenditures through the end of February 1998. However, this belief is based, in
part, on future sales estimates which are inherently uncertain given the
disruption to the Company's business caused by the Recall.
5. INCOME TAXES
The Company's effective tax benefit rate differs from the federal
statutory rate for the six months ended February 28, 1997, as follows:
<TABLE>
<S> <C>
Federal statutory tax rate 34%
State income tax benefit due to net operating loss carryforward 3
Permanent differences and other (2)
Valuation allowance (21)
---
Effective tax rate 14%
===
</TABLE>
The deferred tax asset valuation allowance was established to reduce
the recorded net deferred tax asset to an amount estimated as more likely than
not to be realized. The deferred tax asset recorded consists principally of the
tax effect of the expected tax losses for fiscal 1997 that will be carried back
to prior years' taxable income as well as the future tax benefits resulting from
tax loss carryforwards. The Company will assess the required valuation allowance
as additional information regarding the impact of the Recall is available.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements relating
to future events or the future financial performance of the Company, which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain important factors, including without limitation those set
forth in this section, in the Company's Annual Report on Form 10-K for the year
ended August 31, 1996, and in other documents the Company files from time to
time with the Securities and Exchange Commission. The following discussion and
analysis should be read in conjunction with the accompanying consolidated
financial statements and notes thereto and the consolidated financial statements
and related notes contained in the Company's Annual Report on Form 10-K.
OVERVIEW
The Company's net sales are generated by sales to supermarkets,
specialty retail stores, natural food stores, warehouse outlets and
institutional food service trade partners, primarily restaurants. Net sales are
net of product returns and allowances. The Company sells products to most of its
trade partners on a guaranteed basis and takes back expiring or expired product
for credit. The Company's growth has come predominantly from continued
penetration in existing markets, sales of new products and expansion into new
markets. Prior to the Recall discussed below, the Company believes that its
sales had been positively affected by the Company's introduction of new
products, higher recognition of the Company's brand and products, better
placement on store shelves, increased placement of the Company's in-store
coolers and increased support for route sales persons.
A significant portion of the Company's cost of sales is the cost of raw
materials. Although a portion of the cost of certain purees and other raw
materials is fixed on an annual basis, the majority of the Company's fresh fruit
and vegetable purchases are made on the open market. Consequently, the Company
is subject to wide fluctuations in prices for the fruits, vegetables and other
nutritious products it purchases.
The Company distributes its products primarily through its
direct-store-delivery system, which is serviced by route sales people who
deliver products directly to and merchandise products directly in the retail
display shelves of the Company's trade partners, using primarily leased delivery
trucks. This distribution system, although more expensive than using independent
distributors, allows the Company to control the quality of service and product
mix, in-store stocking of the Company's coolers or shelf space and freshness of
products.
The Company has experienced significant quarterly fluctuations in
operating results and anticipates that these fluctuations will continue in
future periods. These fluctuations have been the result of changes in the price
of fruit and vegetables due to seasonality and other factors, new product
introductions, start-up costs associated with new facilities, expansion into new
markets, sales promotions and competition. Excluding the impact of the Recall
discussed in the following paragraphs, future operating results may fluctuate as
a result of these and other factors, including increased energy costs, the
introduction of new products by the Company's competitors, changes in the
Company's customer mix, and overall trends in the economy. The Company's
business is also significantly affected by weather patterns, and unseasonably
cool or rainy weather can adversely impact the Company's sales.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
A significant portion of the Company's expense levels is relatively
fixed, and the timing of increases in expense levels is based in large part on
the Company's forecasts of future sales. If sales are below expectations in any
given period, the adverse impact on results of operations may be magnified by
the Company's inability to adjust spending quickly enough to compensate for the
sales shortfall. The Company also may choose to reduce prices or increase
spending in response to competition, which may have an adverse effect on the
Company's results of operations.
On October 30, 1996, the Company was notified by the State of
Washington Environmental Health Services of an epidemiological link between
several cases of E. coli O157:H7 and Odwalla's apple juice products. The Company
immediately implemented a voluntary recall of all Odwalla products containing
apple juice. On October 31, 1996, Odwalla expanded the Recall to include its
carrot and vegetable products because such products were processed on the same
production line as the apple juice.
To date, there have been seven personal injury claims and legal
proceedings seeking monetary damages and other relief relating to the Recall
filed against the Company. Three of these proceedings have been settled. In
addition, there was one legal proceeding alleging fraudulent business acts and
practices relating to the recalled products filed against the Company; this
proceeding was also settled. Following the Recall, the Company formed the
Odwalla Nourishment & Food Safety Advisory Council to advise management in
developing new industry leadership and practices in the sourcing, production and
distribution of Nourishing Beverage products. Beginning in early December 1996,
Odwalla reintroduced all apple juice-based products to the market using a Hazard
Analysis Critical Control Point Plan, which includes the flash pasteurization of
fresh apple juice. The flash pasteurization process rapidly heats the juice for
a short period of time to a temperature high enough to kill harmful bacteria yet
still retain vitamins, minerals and flavors that diminish in pasteurization
processes at higher temperatures and for longer periods of time. The Company
incurred significant costs related to the Recall, including advertising and
public relations costs, legal and professional fees, cost of the product
recalled (including the labor and freight involved in the recall process),
destruction of unsold product and now obsolete packaging supplies, costs of
leased sales and distribution equipment in excess of current volume
requirements, costs of reformulating products and costs associated with the
flash pasteurization process.
In keeping with long-term strategic objectives, the Company plans to
continue to invest in building an infrastructure capable of sustaining growth
and expansion. In October 1996, the Company entered Texas with the introduction
of beverage products in Austin, Dallas and Houston. As a result of the plans for
continued growth and infrastructure development, the Company has not reduced
costs commensurate with the reduction of sales following the Recall. The Company
expects the costs associated with the Recall and disruption in sales will result
in continuing operating losses and will result in a significant loss for fiscal
year 1997.
The Company maintains insurance coverage for product recall, product
adulteration, lost income and other first party business risks and intends to
present claims to its insurance carriers under the appropriate policies. In
February 1997, one claim for product recall costs was presented to its insurance
carriers. However, the amount and timing of proceeds, if any, from the February
1997 claim and future insurance claims is not known at this time.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
When reviewing the results of operations for the three and six month
periods ended February 28, 1997, it is important to remember that the months of
September and October, 1996, which represent the first two months of the
periods, continued the net sales growth trend that the Company had reported in
fiscal 1996 and positively impacted the results of operations of each of those
periods. The last four months of the six month period reflect the significant
reduction in sales as a result of the Recall.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain
consolidated statements of operations data for the three-month and six-month
periods ended February 29, 1996 and February 28, 1997. These operating results
are not necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ------------------
Feb. 29, Feb. 28, Feb. 29, Feb. 28,
1996 1997 1996 1997
-------------------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 53.4 57.1 54.0 53.0
----- ----- ----- -----
Gross margin 46.6 42.9 46.0 47.0
----- ----- ----- -----
Operating expenses
Sales and distribution 34.7 47.4 35.2 45.6
Marketing 4.0 6.6 3.6 5.6
General and administrative 9.6 20.5 9.3 17.5
Direct recall costs -- -- -- 15.1
----- ----- ----- -----
Loss from operations (1.6) (31.6) (2.1) (36.8)
Interest income (expense), net 0.8 0.5 1.0 0.5
Income tax benefit 0.3 4.0 0.4 5.2
----- ----- ----- -----
Net loss (0.5)% (27.0)% (0.7)% (31.1)%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED FEBRUARY 28, 1997 COMPARED TO THE THREE MONTHS ENDED FEBRUARY
29, 1996
NET SALES. Net sales for the second quarter were $11.3 million which
represents a 17% decrease from the $13.6 million reported for the second quarter
of fiscal 1996. Sales were substantially reduced from the first quarter of
fiscal 1997 and the corresponding quarter of fiscal 1996 as a result of the
Recall. By the end of the second quarter, sales were approximately 70% of
pre-Recall levels. The Company expects sales in the third quarter of fiscal 1997
to be significantly lower than sales in the third quarter in fiscal 1996.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
COST OF SALES. Cost of sales decreased to $6.4 million in the second
quarter of fiscal 1997 compared to $7.2 million for the same period during
fiscal 1996. Gross margin as a percentage of net sales was 42.9% in the second
quarter of fiscal 1997, a decrease from 46.6% during the second quarter of
fiscal 1996. Gross margin decreased primarily due to (a) increases in labor and
operating expenses resulting from the significant volume decrease in the current
quarter, (b) an increase in product returns, and (c) slightly higher fruit
prices, offset to some extent by (d) better fruit yield due to improvements
installed during late fiscal 1996 at the production facility in Dinuba. The
Company anticipates that the gross margin will increase as a percentage of net
sales as volume is restored to pre-Recall levels; however, there can be no
assurance that gross margin as a percentage of net sales will increase as sales
volume increases or that such increase will approach levels recorded in the
third and fourth quarter of fiscal 1996.
SALES AND DISTRIBUTION. Sales and distribution expenses increased to
$5.3 million in the second quarter of fiscal 1997 compared to $4.7 million for
the same period during fiscal 1996, and increased as a percentage of net sales.
The increase in sales and distribution expenses as a percentage of net sales is
attributable primarily to the Recall as the sales and distribution structure in
place to support the expanding sales volume pre-Recall contained certain fixed
elements that remain despite the post-Recall reduced sales volume. In connection
with the reduction in work force in late November 1997, the Company initiated a
sales route restructuring plan (which is receiving its first test in one market
in April 1997) and a revised route sales person compensation plan. In the second
quarter, the Company decided to consolidate certain distribution operations and
geographic responsibilities, resulting in a $180,000 charge to operations. The
consolidation is to be substantially implemented by early May 1997. There can be
no assurance that these and other cost control measures will return sales and
distribution costs as a percentage of net sales to pre-Recall levels. In
addition, future decisions regarding growth and expansion consistent with
long-term strategic objectives may increase sales and distribution costs as a
percentage of net sales as compared to their pre-Recall levels.
MARKETING. Marketing expenses increased to $743,000 in the second
quarter of fiscal 1997 compared to $538,000 in the second quarter of fiscal
1996, and increased as a percentage of net sales. Marketing costs will continue
to increase in fiscal 1997, in absolute dollars, as a result of the Recall and
planned expanded efforts to continue to enhance stakeholder awareness as well as
increased professional services related to new product development, consumer
research and communications. The Company does not expect marketing costs to
increase as a percentage of net sales from the results for the second quarter of
fiscal 1997 although there can be no assurance that an increase will not occur.
The increase in marketing costs as a result of the Recall cannot be quantified
at this time and will depend upon the results of on-going consumer research, the
response of consumers to the reintroduced product line, and other factors
affecting the restoration of consumer confidence.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $2.3 million in the second quarter of fiscal 1997 from $1.3 million
in the second quarter of fiscal 1996, and increased as a percentage of net
sales, primarily due to additions to the Company's management and administrative
staff and increases in professional services and lease expenses. The Company
expects general and administrative costs in fiscal 1997 to increase in absolute
dollars but to decline as a percentage of net sales. However, there can be no
assurance that general and administrative costs will decrease as a percentage of
net sales. The Company will continue to invest in infrastructure, particularly
in information systems and research and development, to provide for sustainable
growth.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
INTEREST. Odwalla had net interest income of $56,000 in the second
quarter of fiscal 1997 compared to $116,000 in the second quarter of fiscal
1996. Gross interest income of $78,000 in the second quarter of fiscal 1997
resulted primarily from the Company's investment of the proceeds of its public
offering in May 1995. Gross interest expense of $22,000 in the second quarter of
fiscal 1997 resulted from interest on capital leases and other long-term debt.
Gross interest income of $138,000 in the second quarter of fiscal 1996 was
offset by interest expense of $22,000. Interest income is expected to decrease
in future periods as the Company utilizes a portion of its cash equivalents and
short-term investments. See "Liquidity and Capital Resources."
INCOME TAXES. The $450,000 income tax benefit for the second quarter of
fiscal 1997 resulted from the tax benefit associated with the loss for the
quarter. The 13% effective tax benefit rate varies from the federal statutory
tax rate primarily due to the effect of establishing a deferred tax asset
valuation allowance. The Company will assess the valuation allowance as
additional information regarding the impact of the Recall on the Company's
future profitability is available during fiscal 1997. The $43,000 income tax
benefit for the second quarter of fiscal 1996 resulted from the tax benefit of
the loss for that quarter. The effective tax rate of 38% for the second quarter
of fiscal 1996 varied from the federal statutory tax rate primarily due to
California and other state income taxes.
SIX MONTHS ENDED FEBRUARY 28, 1997 COMPARED TO THE SIX MONTHS ENDED FEBRUARY 29,
1996
NET SALES. Net sales for the first six months of fiscal 1997 decreased
2% to $25.4 million compared to $26.0 million for the same period during fiscal
1996. Net sales growth was approximately 45% for each of September and October
1996 compared to the corresponding months in fiscal 1996. Sales in the last four
months of the six month period were significantly reduced from the prior year
period as a result of the Recall. The Company expects sales in the third quarter
of fiscal 1997 to decline significantly from the sales in the third quarter in
fiscal 1996.
COST OF SALES. Cost of sales decreased to $13.4 million in the first
six months of fiscal 1997 compared to $14.0 million for the same period during
fiscal 1996. Gross margin as a percentage of net sales was 47.0% in the first
six months of fiscal 1997, an increase from 46.0% during the first six months
last year. Gross margin increased primarily due to (a) better fruit yield due to
improvements installed during late fiscal 1996 at the production facility in
Dinuba, offset somewhat by (b) increases in labor and operating expenses
resulting from the significant volume decrease in the last four months of the
six month period, (c) an increase in product returns compared to the comparable
period in 1996, and (d) slightly higher fruit prices. The Company anticipates
that cost of sales will increase as a percentage of net sales during the third
and fourth quarter of fiscal 1997, compared to comparable prior periods in
fiscal 1996, due to reduced production levels and production costs of the
flash-pasteurized products that were reintroduced to the market in early
December 1996.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
SALES AND DISTRIBUTION. Sales and distribution expenses increased to
$11.6 million in the first six months of fiscal 1997 compared to $9.1 million
for the same period during fiscal 1996, and increased as a percentage of net
sales. The increase in sales and distribution expenses as a percentage of net
sales is attributable primarily to the Recall as the sales and distribution
structure in place to support the expanding sales volume was not reduced to
correspond with the reduced sales volume subsequent to the Recall and, to a
lesser extent, an infrastructure increase to foster growth and strong
partnerships with the trade. In an effort to reduce sales and distribution
expenses post-Recall, in late November, the Company completed a reduction in
force of approximately 50 employees primarily involved in sales and
distribution. In connection with the reduction in force, the Company initiated a
sales route restructuring plan (which is receiving its first test in one market
in April 1997) and, on March 1, 1997, a revised route sales person compensation
plan. In the second quarter, the Company decided to consolidate certain
distribution operations and geographic responsibilities, resulting in a $180,000
charge to operations. The consolidation is to be substantially implemented by
early May 1997. There can be no assurance that these and other cost control
measures will return sales and distribution costs as a percentage of net sales
to pre-Recall levels. In addition, future decisions regarding growth and
expansion consistent with long-term strategic objectives may increase sales and
distribution costs as a percentage of net sales compared to pre-Recall levels.
MARKETING. Marketing expenses increased to $1.4 million in the first
six months of fiscal 1997 compared to $931,000 during the same time period last
year, and increased as a percentage of net sales. Marketing costs increased in
the first six months of fiscal 1997 and will continue to increase in fiscal
1997, in both absolute dollars and as a percentage of net sales, as a result of
the Recall and planned expanded efforts to continue to enhance stakeholder
awareness as well as increased professional services related to new product
development, consumer research and communications. The increase in marketing
costs as a result of the Recall cannot be quantified at this time and will
depend upon the results of on-going consumer research, the response of consumers
to the reintroduced product line, and other factors affecting the restoration of
consumer confidence.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $4.4 million in the first six months of fiscal 1997 from $2.4
million last year, and increased as a percentage of net sales, primarily due to
additions to the Company's management and administrative staff and increases in
professional services and lease expense. General and administrative costs will
increase in fiscal 1997 in both absolute dollars and as a percentage of net
sales. The Company will continue to invest in infrastructure, particularly in
information systems and research and development, to provide for sustainable
growth.
DIRECT RECALL COSTS. The direct costs of the Recall were $3.8 million
in the first six months of fiscal 1997. This total, which was reported in the
first quarter, represents the costs directly associated with the Recall,
including: advertising and public relations costs; legal and professional fees;
costs of the product recalled, including the labor and freight involved in the
recall process; destruction of unsold product and now obsolete packaging
supplies; and costs of leased equipment in excess of current volume
requirements; costs of reformulating products; and costs associated with the
flash pasteurization process. Direct recall costs recorded in the first quarter
include approximately $700,000 of estimated direct costs for the remainder of
the year, primarily legal and professional fees. Approximately $235,000 of these
estimated direct costs were incurred in the second quarter. However, there can
be no assurance that the actual direct costs for the remainder of the year may
not exceed the estimated amount.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
INTEREST. Odwalla had net interest income of $137,000 in the first six
months of fiscal 1997 compared to $274,000 in the first six months of fiscal
1996. Gross interest income of $176,000 in the first six months of fiscal 1997
resulted primarily from the Company's investment of the proceeds of its public
offering in May 1995. Gross interest expense of $39,000 in the first six months
of fiscal 1997 resulted from interest on capital leases and other long-term
debt. Gross interest income of $324,000 in the first six months of fiscal 1996
was offset by interest expense of $50,000. Interest income is expected to
decrease in future periods as the Company utilizes a portion of its cash
equivalents and short-term investments. See "Liquidity and Capital Resources."
INCOME TAXES. The $1.3 million income tax benefit for the first six
months of fiscal 1997 resulted from the tax benefit associated with the loss
resulting from the Recall. The 14% effective tax benefit rate varies from the
federal statutory tax rate primarily due to the effect of establishing a
deferred tax asset valuation allowance. The Company will assess the valuation
allowance as additional information regarding the impact of the Recall on the
Company's future profitability is available during fiscal 1997. The $116,000
income tax benefit for the first six months of fiscal 1996 resulted from the tax
benefit of the loss for that period effective tax rate of 38% for the first six
months of fiscal 1996 varied from the federal statutory tax rate primarily due
to California and other state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through three primary sources:
private and public sales of equity securities, bank debt and capital lease
financing. At February 28, 1997, the Company had working capital of $5.7 million
compared to working capital of $14.7 million at August 31, 1996. The decrease
resulted primarily from operating losses and $2.2 million of capital
expenditures. At February 28, 1997, the Company had cash, cash equivalents and
short term investments of $3.6 million compared to $12.4 million at August 31,
1996.
Net cash used in operating activities for the first six months of
fiscal 1997 was $6.5 million. This consisted of the net loss plus depreciation
and amortization, decreases in accounts receivable (due to significantly reduced
sales volume following the Recall) and increases in other accrued expenses
offset by increases in the deferred income tax asset (due primarily to tax
benefits of the net operating loss) and in inventory due to favorably priced
cash purchases of frozen purees in the first half of fiscal 1997 based upon
commitments from fiscal 1996. Net cash provided by investing activities for the
first six months of fiscal 1997 was $2.9 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 used in financing activities for the first six months of
fiscal 1997 was $72,000, consisting primarily of $161,000 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.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
In October 1996, the Company completed two land purchases contracted in
fiscal 1996. The first was for a parcel of land adjacent to the Dinuba
production facility which resulted in payments of $10,000 when the contract was
signed in April 1996 and $205,000 upon closing in October. The second was to
complete an agreement reached in May 1996 to purchase land adjacent to its Half
Moon Bay administrative offices and, upon closing on the land purchase, to
extend its lease on the administrative offices. The Company completed the
transaction in October 1996 at a cost of $395,000, of which $230,000 represents
assumption of the existing mortgage (interest at 8.75% per annum, monthly
principal and interest payments until maturity in 1999 when the remaining
balance of approximately $220,000 is due) on the property.
At February 28, 1997, the Company had $481,000 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.
The Company is currently negotiating a line of credit with a financial
institution. However, there can be no assurance that the Company will be able to
obtain such a credit facility at favorable terms, if at all, and the failure to
do so may have a material adverse effect on the Company's business or results of
operations.
Capital improvements necessary for flash pasteurization and other plant
modifications are currently expected to cost less than $2 million in fiscal
1997. The improvements will be largely financed through available cash resources
or, if available, debt or lease financing.
The Company anticipates that the increased costs associated with the
Recall, including equipment and plant modifications required for flash
pasteurization and legal and marketing costs, may cause the Company to pursue
additional financing that may be dilutive to current investors or result in a
higher debt-to-equity ratio than would otherwise be the case. There can be no
assurance that such financing will be available on terms favorable to the
Company, if at all. If adequate financing is not available, the Company may be
required to reduce planned expenditures, particularly in the areas of
advertising and marketing, in order to conserve cash.
While the Company expects a significant loss for fiscal year 1997, the
Company believes it will have sufficient cash to fund its operations and capital
expenditures through February 1998. However, this belief is based in part on
future sales estimates and other plans which are inherently uncertain given the
disruption to the Company's business caused by the Recall.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
CERTAIN FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS
POST-RECALL MANAGEMENT. Prior to the Recall, the Company experienced
substantial growth in its revenue, operations and employee base, and underwent
substantial changes in its business that placed significant demands on the
Company's management, working capital and financial and management control
systems. Although the Company will continue to face the demands of a growing
business and expansion in its newer markets, the Company must also address the
challenges and increasing costs and demands on management and working capital
resulting from the Recall, including restoring consumer confidence in its
products, adapting its production processes and procedures to accommodate flash
pasteurization and other new production methods, managing pending and future
legal proceedings and settlement of first and third party claims with its
insurance carriers. All of the foregoing demands and challenges will require the
expenditure of a significant amount of management effort and working capital.
The Company anticipates that the increased costs associated with the Recall,
including equipment and plant modifications required for flash pasteurization
and legal and marketing costs, may require the Company to pursue additional
financing that may be dilutive to current investors or result in a higher
debt-to-equity ratio than would otherwise be the case. There can be no assurance
that such financing will be available on terms favorable to the Company, if at
all.
Although the Company believes that its management, working capital,
financial and management systems and controls will be adequate to address its
current needs, only a short period of time has elapsed since the Recall and
there can be no assurance that its management, working capital and such systems
will be adequate to address future requirements of the Company's business. The
Company's results of operations will be adversely affected if revenues do not
increase sufficiently to compensate for the increase in operating expenses
resulting from the Recall and planned expansion, and there can be no assurance
that it will not adversely affect the Company's ability to continue to improve
and expand its management and financial control systems, to attract, retain and
motivate key employees, and to raise additional capital. There can be no
assurance that the Company will be successful in these regards.
The Company has experienced significant quarterly fluctuations in
operating results and anticipates that these fluctuations will continue in
future periods. These fluctuations have been the result of changes in the price
of fruit and vegetables due to seasonality and other factors, new product
introductions, start-up costs associated with new facilities, expansion into new
markets, sales promotions and competition. Excluding the impact of the Recall,
future operating results may fluctuate as a result of these and other factors,
including increased energy costs, the introduction of new products by the
Company's competitors, changes in the Company's customer mix, and overall trends
in the economy. The Company's business is also significantly affected by weather
patterns, and unseasonably cool or rainy weather can adversely impact the
Company's sales. A significant portion of the Company's expense levels is
relatively fixed, and the timing of increases in expense levels is based in
large part on the Company's forecasts of future sales. If sales are below
expectations in any given period, the adverse impact on results of operations
may be magnified by the Company's inability to adjust spending quickly enough to
compensate for the sales shortfall. The Company also may choose to reduce prices
or increase spending in response to competition, which may have an adverse
effect on the Company's results of operations.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
PRODUCTS, DISTRIBUTION AND TRADE PARTNERS. Odwalla's current product
line consists of single-strength and blended fruit- and vegetable-based products
and geothermal natural spring water. Except for flash pasteurization applied to
fresh apple juice, all single-strength products are fresh fruit- and
vegetable-based beverage products (some produced on a seasonal basis). Blended
products also contain fresh fruit- and vegetable-based beverage products, and,
in some products, flash pasteurized apple juice. These products are currently
sold in California, Washington, Oregon, Colorado, New Mexico, Nevada, Texas and
parts of British Columbia. Because all of Odwalla's products contain fresh fruit
or vegetable juices, except for flash-pasteurized apple juice and geothermal
spring water, and do not contain preservatives, the shelf life of the product is
typically limited to between 5 and 16 days at the retail outlet.
Odwalla strives for consistent "day-of-juicing quality" in its products
by establishing stringent shelf life standards for its products, based primarily
on maintaining the flavor quality and nutrient integrity of its beverages. The
Company believes that its shelf life standards for each drink maintain the fresh
and better tasting qualities that consumers associate with freshly produced
fruit and vegetable beverages. The Company's policy is to have all products
removed from trade partners' shelves on or before their Odwalla-established
expiration date. In addition, because of the Company's "day of juicing" quality
standards, the Company's products reflect the seasonal changes in fruit
varieties and taste. Odwalla's production methods are designed to minimize the
effect of processing on the fruit juice extracted. The Company's product line
includes several different types of Nourishing Beverages and varies over time as
a result of the addition of new products as well as due to a significant
component of seasonal products.
Odwalla's products are sold and distributed primarily through its own
direct-store-delivery ("DSD") system, which is serviced by route sales people
who deliver products directly to and merchandise products directly in the retail
display shelves of the Company's trade partners. This DSD system is designed to
permit Odwalla to optimally manage delivery schedules, efficiently control its
product mix, keep store shelves or its own coolers stocked with fresh products
and have a greater influence on determining in-store location and merchandising
of its products.
At most of its accounts, Odwalla maintains responsibility for
stocking, ordering and merchandising its products at the point of sales, and
Odwalla credits the trade partner for unsold product. This full service
relationship allows Odwalla to avoid paying slotting fees for shelf space as
well as other handling fees, and it also allows the Company to maintain control
over the merchandising of its products at the point of sales. Odwalla provides a
lesser degree of service to certain trade partners who are responsible for
stocking, ordering and merchandising the Company's products. These trade
partners do not receive credit for unsold products. Outlets that sell Odwalla
juices include supermarkets, specialty retail stores, natural food stores,
warehouse outlets and institutional food service trade partners, primarily
restaurants.
RAW MATERIALS. Producing and selling fresh and flash-pasteurized fruit-
and vegetable-based beverage products ("Nourishing Beverages") entails special
requirements in fruit sourcing, beverage production, distribution and sales in
order to preserve and maximize their freshness and flavor quality. Fruits and
vegetables must be sourced and selected to meet a variety of established
criteria, including variety, quality, ripeness and other factors. Transportation
and processing of the fruit and vegetables must be performed in a manner to
capture and preserve various qualities of fresh flavors and consistency. Odwalla
has focused on each of these elements in an effort to achieve its goal of
providing the freshest, most flavorful and most enjoyable Nourishing Beverages
for consumers.
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
Odwalla buys fruits and vegetables according to different schedules and
methods depending on the type of produce. Because various types of fruit and
vegetable crops are harvested at different times of the year, the Company
obtains and produces different juices on a seasonal basis. The Company purchases
most of its fruits and vegetables in the open market on a negotiated basis.
Historically, oranges, apples and carrots are the commodities purchased in
largest volume by the Company. All three are subject to volatility in supply,
price and quality that could materially and adversely affect the Company's
business and results of operations, as could the availability, price and quality
of other ingredients.
Odwalla also obtains a number of fruits, such as tropical fruits, from
foreign suppliers in a frozen fruit puree. A puree is not a concentrate, but is
a whole fruit that has been pureed and frozen for shipment. Purees are combined
with freshly extracted juices, including flash pasteurized apple juice, of other
fruits in a number of the Company's products. Purees used by the Company have
not been subjected to any processing methods that could materially affect the
fresh fruit quality. Most purees are purchased under annual price contracts.
As with most agricultural products, supply and price of raw materials
used by the Company can be affected by a number of factors beyond the control of
the Company, such as frosts, droughts, floods and other natural disasters, other
weather conditions, economic factors affecting growing decisions, various plant
diseases and pests. The Company was not significantly affected by raw material
supply issues in either fiscal 1993 or fiscal 1994. The heavy rains and flooding
that occurred in California in the first and second quarters of fiscal 1995
resulted in higher costs of fruit and lower yields from the California orange
crop in the last quarter of fiscal 1995 and the first quarter of fiscal 1996.
The Company is not currently aware of natural events which should impact the
price of raw materials in the near term.
COMPETITION. The Company's products compete broadly with all beverages
available to consumers. The beverage market is highly competitive. It includes
national, regional and local producers and distributors, many of whom have
greater resources than the Company, and many of whom have shelf stable products
that can be distributed with significantly less cost. The Company views its
niche as conveniently accessed nourishing beverages and fresh, preservative-free
juices and juice-based beverages. The Company believes its direct competition in
this market niche currently is from regionally or locally focused producers,
certain of which are owned by major beverage producers. In addition, a number of
major supermarkets and other retail outlets squeeze and market their own brand
of fresh juices that compete with the Company's products. A large national
company, Chiquita Brands International, Inc. ("Chiquita"), has entered this
market niche in certain limited geographic areas, both directly and by
acquisition. Although the Company has not experienced significant competition
from Chiquita to date, Odwalla entered the Los Angeles market in September 1995
and is competing directly with Chiquita's products in that market. Chiquita and
other major food and beverage companies may become more active in the Nourishing
Beverage business, either directly or by acquisition of smaller juice companies.
A decision by Chiquita or any other large company to focus on the Company's
existing markets or target markets could have a material adverse effect on the
Company's business and results of operations. While the Company believes that it
competes favorably with its competitors on factors such as quality,
merchandising, service, sales and distribution, multiple flavor categories and
brand name recognition and loyalty, the Company's products are typically sold at
prices higher than most other juice products. There can be no assurance that the
Company will not experience competitive pricing pressure that could adversely
affect its results of operations.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
DEPENDENCE ON ONE OR A FEW MAJOR TRADE PARTNERS. In fiscal 1996, the
Company's largest account, Safeway, accounted for approximately 14% of the
Company's sales. The Company puts considerable effort into the maintenance of
this and other significant accounts, but there can be no assurance that sales to
these accounts will not decrease or that these trade partners will not choose to
replace the Company's products with those of competitors. The loss of Safeway or
other significant accounts or any significant decrease in the volume of products
purchased by their customers in the future would materially and adversely affect
the Company's business and results of operations. Continuity of trade partner
relationships is important, and events that impact the Company's trade partners,
such as the Recall and labor disputes, may have an adverse impact on the
Company's results of operations.
GOVERNMENT REGULATION. The production and sales of the Company's
beverages are subject to the rules and regulations of various federal, state and
local food and health agencies, including the FDA. There have been no
significant costs thus far associated with complying with FDA regulations.
In addition to laws relating to food products, the Company is subject
to various federal, state and local environmental laws and regulations that
limit the discharge, storage, handling and disposal of a variety of substances.
Operations of the Company are also governed by laws and regulations relating to
workplace safety and worker health, principally the Occupational Safety and
Health Administration Act, as well as similar state laws and regulations. The
Company believes that it presently complies in all material respects with the
foregoing laws and regulations, although there can be no assurance that future
compliance with such laws or regulations will not have a material adverse effect
on the Company's results of operations or financial condition.
PRODUCT LIABILITY. Since the Company's products are not pasteurized
(except for flash pasteurization applied to apple juice), nuclearly irradiated
or chemically treated, they are highly perishable and contain certain naturally
occurring microorganisms. In addition to the Recall associated with the E. coli
O157:H7 bacteria, the Company has from time to time received complaints from
consumers regarding ill effects allegedly caused by its products. While such
past claims have not resulted in any material liability to date, there can be no
assurance that future claims will not be made or that any such claim or claims
associated with the Recall will not result in adverse publicity for the Company
or monetary damages, either of which could materially and adversely affect the
Company's business and results of operations. The Company currently maintains
$52 million in commercial general liability insurance, which may not be
sufficient to cover the cost of defense or related damages in the event of a
significant product liability claim. See Part II "Item 1. Legal Proceedings."
20
<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
VOLATILITY OF STOCK PRICE. The price of the Company's Common Stock has
experienced significant price volatility. The Company believes that factors such
as announcements of developments related to the Company's business, fluctuations
in the Company's operating results, failure to meet securities analysts'
expectations, general conditions in the fruit and vegetable industries and the
worldwide economy, announcements of innovations, new products or product
enhancements by the Company or its competitors, fluctuations in the level of
cooperative development funding, acquisitions, changes in governmental
regulations, developments in patents or other intellectual property rights and
changes in the Company's relationships with trade partners and suppliers could
cause the price of the Company's Common Stock to fluctuate substantially. In
addition, in recent years the stock market in general, and the market for small
capitalization stocks in particular, has experienced extreme price fluctuations
which have often been unrelated to the operating performance of affected
companies. Such fluctuations could adversely affect the market price of the
Company's Common Stock.
21
<PAGE> 22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The following personal injury claims and legal proceedings seeking
monetary damages and other relief relating to the Recall are pending against the
Company:
1. The Ishida/Peterson Case: A class action lawsuit filed in King
County Superior Court, Seattle, Washington and served on
November 12, 1996. During the second quarter of fiscal 1997,
Ms. Ishida was replaced by another class representative, Mrs.
Peterson.
2. The Curtis Case: A class action lawsuit filed in the United
States District Court, Western District of Washington and
served on November 15, 1996.
3. The Beverly Case: A personal injury lawsuit filed in the
United States District Court, Western District of Washington
and served on December 3, 1996.
4. The Starmack Case: A personal injury lawsuit filed in San
Diego County Superior Court, San Diego, California on January
3, 1997, has been served and the Company has filed its answer.
The Company currently maintained commercial general liability insurance
totaling $27,000,000 during the period including the Recall. The Company has
notified its insurance carrier of these events. At this time, no discovery has
commenced with respect to the remaining above-described legal proceedings and
the Company is unable to determine the potential liability on all such lawsuits
and claims.
The following personal injury claims and legal proceedings have been
settled:
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 Azzizi Case: A personal injury lawsuit filed in Alameda
County Superior Court, Alameda, California and served on
November 20, 1996 and settled on March 25, 1997.
The 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 following claim was filed under California Business
and Professions Code Section 17200 et seq. alleging fraudulent business acts and
practices of the Company relating to the recalled products:
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.
22
<PAGE> 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit 11.1 - Statement of Computation of Per Share Earnings
Exhibit 27.1 - Financial Data Schedule
B. REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter
ended February 28, 1997.
23
<PAGE> 24
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ODWALLA, INC.
(Registrant)
Date: April 11, 1997 By: /s/ D. STEPHEN C. WILLIAMSON
-------------------------------
D. Stephen C. Williamson
Chief Executive Officer
(Principal Executive Officer)
Date: April 11, 1997 By: /s/ JAMES R. STEICHEN
-------------------------------
James R. Steichen
Chief Financial Officer
(Principal Financial and
Accounting Officer)
24
<PAGE> 1
EXHIBIT 11.1
ODWALLA, INC.
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ---------------------
Feb. 29, Feb. 28, Feb. 29, Feb. 28,
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average shares of
common stock outstanding
for the period 4,919,000 4,976,000 4,907,000 4,967,000
Weighted average common
share equivalents (1) -- -- -- --
--------- --------- --------- ---------
Shares used in computing
net earnings per share 4,919,000 4,976,000 4,907,000 4,967,000
========= ========= ========= =========
</TABLE>
(1) The effect of common stock equivalents is not presented as it would be
anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from (a)
Odwalla, Inc.'s financial statements for the six months ended February 28, 1997
as filed on Form 10-Q and is qualified in its entirety by reference to such (b)
filing on Form 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> FEB-28-1997
<EXCHANGE-RATE> 1
<CASH> 2,213
<SECURITIES> 1,417
<RECEIVABLES> 4,858
<ALLOWANCES> 575
<INVENTORY> 3,753
<CURRENT-ASSETS> 13,891
<PP&E> 19,605
<DEPRECIATION> 5,528
<TOTAL-ASSETS> 30,578
<CURRENT-LIABILITIES> 8,223
<BONDS> 484
0
0
<COMMON> 28,974
<OTHER-SE> (7,126)
<TOTAL-LIABILITY-AND-EQUITY> 30,578
<SALES> 25,357
<TOTAL-REVENUES> 25,357
<CGS> 13,431
<TOTAL-COSTS> 13,431
<OTHER-EXPENSES> 21,259
<LOSS-PROVISION> 400
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