<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 0-23036
ODWALLA, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
California 77-0096788
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
120 Stone Pine Road, Half Moon Bay, CA
94019 (Address and zip code of principal executive offices)
(415) 726-1888
(Registrant's telephone number)
------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check 4whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
<TABLE>
<S> <C>
Common Stock, no par value 5,022,859 shares
(Class) (Outstanding at July 11, 1997)
</TABLE>
1
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ODWALLA, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 31, 1997
INDEX
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Page
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<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets as of August 31, 1996
and May 31, 1997 ........................................................ 3
Consolidated Statements of Operations for the three-month and nine-
month periods ended May 31, 1996 and 1997 ............................... 4
Consolidated Statements of Cash Flows for the nine-month periods
ended May 31, 1996 and 1997.............................................. 5
Notes to Consolidated Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 10
Part II. Other Information
Item 1. Legal Proceedings........................................................ 23
Item 6. Exhibits and Reports on Form 8-K......................................... 24
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2
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PART I - FINANCIAL INFORMATION
ITEM-1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
===============================================================================================
August 31, MAY 31,
1996 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
(UNAUDITED)
ASSETS
CURRENT
Cash and cash equivalents $ 5,975 $ 3,285
Short term investments 6,438 1,407
Trade accounts receivable, less allowance for
doubtful accounts of $306 and $569 5,302 4,893
Inventories (Note 2) 3,294 3,646
Prepaid expenses and other 964 1,071
Deferred tax asset, net (Note 5) 307 1,890
------- -------
TOTAL CURRENT ASSETS 22,280 16,192
PLANT, PROPERTY AND EQUIPMENT, net (Note 3) 12,641 13,931
OTHER ASSETS
Officer and shareholder loans 117 117
Excess of cost over net assets acquired 1,442 1,360
Covenants not to compete 874 772
Other noncurrent 346 288
------- -------
TOTAL ASSETS $37,700 $32,660
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,308 $ 6,006
Accrued payroll and related items 1,096 1,682
Line of credit (Note 6) -- 1,986
Income taxes payable 281 78
Other accruals 581 1,778
Current maturities of capital lease obligations 210 212
Current maturities of long-term debt 149 105
------- -------
TOTAL CURRENT LIABILITIES 7,625 11,847
CAPITAL LEASE OBLIGATIONS, less current maturities 384 222
LONG-TERM DEBT, less current maturities 90 222
OTHER 27 17
------- -------
TOTAL LIABILITIES 8,126 12,308
------- -------
SHAREHOLDERS' EQUITY
Common stock, no par value, shares authorized, 15,000,000; issued
and outstanding, 4,945,095 and 5,021,061 shares, respectively 28,813 29,296
Retained earnings (deficit) 761 (8,944)
------- -------
Total shareholders' equity 29,574 20,352
------- -------
Total liabilities and shareholders' equity $37,700 $32,660
======= =======
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3
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[ODWALLA LOGO]
4
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
================================================================================================
Three Months Ended Nine Months Ended
--------------------- ---------------------
May 31, May 31, May 31, May 31,
1996 1997 1996 1997
-------- -------- -------- --------
- ------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES $ 16,532 $ 13,685 $ 42,505 $ 39,043
COST OF SALES 8,017 7,119 22,048 22,550
-------- -------- -------- --------
GROSS MARGIN 8,515 6,566 20,457 18,493
-------- -------- -------- --------
OPERATING EXPENSES
Sales and distribution 5,436 5,403 14,569 16,972
Marketing 659 782 1,590 2,203
General and administrative 1,636 2,497 4,062 6,926
Direct recall costs (Note 4) -- -- -- 3,840
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 7,731 8,682 20,221 29,941
INCOME (LOSS) FROM OPERATIONS 784 (2,116) 236 (11,448)
OTHER INCOME (EXPENSE), net (23) 10 (55) 1
INTEREST INCOME, net of interest expense 81 13 356 158
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES 842 (2,093) 537 (11,289)
INCOME TAX BENEFIT (EXPENSE) (320) 273 (204) 1,584
-------- -------- -------- --------
NET INCOME (LOSS) $ 522 $ (1,820) $ 333 $ (9,705)
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE AND
COMMON EQUIVALENT SHARE $ 0.10 $ (0.36) $ 0.06 $ (1.95)
-------- -------- -------- --------
WEIGHTED AVERAGE COMMON EQUIVALENT AND
COMMON EQUIVALENT SHARES OUTSTANDING 5,442 4,993 5,408 4,976
======== ======== ======== ========
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5
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<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
=============================================================================================
Nine months ended
-------------------------
May 31, MAY 31,
1996 1997
- ---------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 333 $ (9,705)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation & amortization 1,040 1,641
Deferred income taxes (74) (1,583)
Loss on sale of assets -- 13
Changes in assets and liabilities:
Trade accounts receivable (2,064) 409
Inventories (589) (352)
Prepaid expenses and other current assets 201 (107)
Other noncurrent assets (134) 36
Accounts payable 651 698
Accrued payroll and related items 813 586
Other accruals and other liabilities (4) 1,188
Income taxes payable (133) (203)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 40 (7,379)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (4,295) (2,536)
Sale of short-term investments, net -- 5,031
Proceeds from sale of assets -- 28
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (4,295) 2,523
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line of credit -- 1,986
Principal payments under long-term debt (239) (142)
Proceeds from issuance of long-term debt 225 --
Payments of obligations under capital leases (94) (161)
Sale of common stock through option exercises 283 484
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 175 2,168
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,080) (2,689)
CASH AND CASH EQUIVALENTS, beginning of period 11,786 5,975
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 7,706 $ 3,285
======== ========
</TABLE>
6
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ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying consolidated balance sheet of Odwalla, Inc. and its
subsidiary (the "Company") at May 31, 1997 and the related consolidated
statements of operations and cash flows for each of the three-month and
nine-month periods ended May 31, 1996 and 1997 have not been audited by
independent accountants. However, in the opinion of management, they include all
adjustments necessary for a fair presentation of the financial position and the
results of operations for the periods presented. The statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, certain information and footnote
disclosure normally included in financial statements prepared in conformity with
generally accepted accounting principles have been condensed or omitted pursuant
to such rules and regulations. The operating results for the interim periods are
not necessarily indicative of results to be expected for an entire year. The
aforementioned statements should be read in conjunction with the consolidated
financial statements for the year ended August 31, 1996 appearing in the
Company's 1996 Annual Report on Form 10-K.
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31, MAY 31,
1996 1997
------ ------
<S> <C> <C>
Raw materials $2,467 $2,722
Packaging supplies and other 477 452
Finished product 350 472
------ ------
Total $3,294 $3,646
====== ======
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3. PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment consist of the following (in thousands):
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<CAPTION>
August 31, MAY 31,
1996 1997
-------- --------
<S> <C> <C>
Land $ 411 $ 1,001
Buildings and building
improvements 6,339 6,614
Leasehold improvements 2,287 2,435
Machinery and equipment 5,242 6,214
Vehicles 619 542
Other 2,693 3,156
-------- --------
17,591 19,962
Less accumulated depreciation and
amortization (4,950) (6,031)
-------- --------
$ 12,641 $ 13,931
======== ========
</TABLE>
7
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ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PRODUCT RECALL AND OTHER LEGAL MATTERS
On October 30, 1996, the Company was notified by the State of Washington
Environmental Health Services of an epidemiological link between several cases
of e. coli 0157:h7 bacteria illness and Odwalla's apple juice products. The
Company immediately implemented a voluntary recall (the "Recall") of all Odwalla
products containing apple juice and, on October 31, 1996, expanded the Recall to
include its carrot and vegetable products because such products were processed
on the same production line as the apple juice.
The Company experienced a significant reduction in sales of all of its
products following the Recall. Beginning in early December 1996, the Company
reintroduced all apple juice-based products to the market using flash
pasteurization of its fresh apple juice. In addition, the Company incurred
significant direct Recall costs including: advertising and public relations
costs; legal and professional fees; cost of the product recalled (including the
labor and freight involved in the recall process); destruction of unsold product
and now obsolete packaging supplies; costs of leased sales and distribution
equipment in excess of current volume requirements; costs of reformulating
products; and costs associated with the flash pasteurization process. Direct
Recall costs totaled $3,840,000 in the first quarter of fiscal 1997 and included
approximately $700,000 of estimated direct costs for the remainder of the year.
Approximately $235,000 and $225,000 of these estimated direct costs were
incurred in the second and third quarter, respectively. However, there can be no
assurance that the actual direct costs for the remainder of the year may not
exceed the estimated amount.
In keeping with long-term strategic objectives, the Company plans to
continue to invest in building an infrastructure capable of sustaining growth
and expansion. As a result of the plans for continued growth and infrastructure
development, the Company has not reduced costs commensurate with the reduction
of sales following the Recall. The Company expects the costs associated with the
Recall and disruption in sales will result in continuing operating losses and
will result in a significant loss for fiscal year 1997.
The Company maintains insurance coverage for product recall, product
adulteration, lost income and other first party business risks and intends to
present claims to its insurance carrier under the appropriate policy. In
February 1997, one claim for certain product recall costs was presented to its
insurance carrier. In April 1997, an additional partial claim was presented for
other losses incurred due to the Recall. However, the amount and timing of
proceeds, if any, from the February or April 1997 claims and any future
insurance claims cannot be presently determined. Accordingly, at May 31, 1997,
the Company has not recorded a significant receivable for insurance proceeds
related to these matters.
8
<PAGE> 9
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. PRODUCT RECALL AND OTHER LEGAL MATTERS (CONTINUED)
To date, there are four pending personal injury claims and legal
proceedings seeking monetary damages and other relief related to the Recall
filed against the Company. One of the remaining claims is a class action lawsuit
and three are personal injury lawsuits; however, the Company recently learned
that the pending class action lawsuit would not be certified as a class. Four
other personal injury claims and lawsuits have been settled as of July 11, 1997.
In addition, there was one legal proceeding alleging fraudulent business acts
and practices relating to the recalled products filed against the Company; this
suit was settled in January 1997 and received court approval in March 1997. The
settlement of the four personal injury legal proceedings was covered under the
Company's general liability insurance policy and did not result in any
additional costs to the Company. The Company is currently working with its
insurance carrier and legal counsel to assess the total potential liability to
the Company. However, due to the relatively short period of time since the
Recall, the Company is not presently able to determine whether the ultimate
liability resulting from these and potential future claims will exceed the
coverage available under its applicable insurance policies.
The Company continues to develop and implement plans to regain and build
on its customer base and anticipates that sales levels will improve throughout
the remainder of fiscal year 1997. There can be no assurance sales levels will
continue to improve and, in any event, the anticipated improvement in sales
levels is not expected to offset the effects of the lost sales and direct costs
associated with the Recall. While a significant loss is expected for fiscal year
1997, the Company believes it will have sufficient cash, including its ability
to borrow funds as needed, to fund its operations and capital expenditures
through the end of May 1998. However, this belief is based, in part, on future
sales estimates which are inherently uncertain given the disruption to the
Company's business caused by the Recall.
The Company has been informed that it is the subject of a federal grand
jury investigation concerning events of 1996 and before, including the Recall.
The Company has responded to a subpoena and is cooperating fully with the
government. At this time, the Company cannot predict the outcome of the
investigation.
5. INCOME TAXES
The Company's effective tax benefit rate differs from the federal
statutory rate for the nine months ended May 31, 1997, as follows:
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<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.
9
<PAGE> 10
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LINE OF CREDIT
In May 1997, the Company entered into a Loan and Security Agreement
(Agreement) with a lender which provides for borrowings of up to $5 million. The
actual borrowings cannot in the aggregate exceed 80% to 85% of eligible accounts
receivable (Receivable Line) plus a maximum of $500,000 available for new
capital equipment (Equipment Line). Interest on borrowings under the Agreement
is payable monthly at prime plus 1.5%, which rate was equal to 10% at May 31,
1997. Borrowings under the Equipment Line are subject to interest only for the
initial three months and then monthly interest and principal payments amortized
over a 45 month period. The entire loan matures on May 31, 1999, subject to
renewal as provided in the Agreement. The Company incurred approximately $35,000
of fees in connection with the Agreement and will incur a termination fee
(ranging from 3% to 1% of the committed balance, depending upon the remaining
loan term) if the Agreement is terminated prior to maturity.
The Agreement contains certain restrictions on the Company, including the
ability to borrow additional funds, pay dividends, purchase or otherwise acquire
Company stock, or encumber or sell Company assets. In addition, the interest
rate changes to prime plus 2% if adjusted net worth, as defined in the
Agreement, is less than $14 million. The Company is required to pay interest on
$2 million and, accordingly, borrowed approximately that amount under the
Receivable Line at May 31, 1997.
Simultaneously, the Company entered into a separate Loan Agreement (Loan
Agreement) with another party to provide a $1 million facility under
substantially the same terms noted for the Agreement. Borrowings under the Loan
Agreement mature on May 21, 1998. The Company agreed to issue a warrant for
7,000 shares of its common stock at $12.50 per share (fair market value at issue
date) which expires in May 2002. There were no borrowings under the Loan
Agreement at May 31, 1997.
The Agreement and the Loan Agreement are collateralized by all Company
assets.
7. EARNINGS PER SHARE
Primary income (loss) per common share and common equivalent shares has
been computed using the weighted average number of shares of common stock
outstanding during the period and incremental shares assumed issued for dilutive
common stock equivalents. Fully diluted earnings per share did not differ
materially from primary earnings per share.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" (FASB 128). This Statement supersedes
Accounting Principles Board Opinion No. 15, "Earnings per Share" (APB 15) and
its related interpretations and establishes new accounting standards for the
computation and manner of presentation of the Company's earnings per share. The
Company is required to adopt the provisions of FASB 128 for the quarter ending
February 28, 1998 and earlier application is not permitted. However, upon
adoption the Company may be required to restate previously reported annual and
interim income or loss per share in accordance with the provisions of FASB 128.
The Company does not believe the adoption of FASB 128 will have a material
impact on the computation or manner of presentation of its earnings per share
data as currently or previously presented under APB 15.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements relating to future
events or the future financial performance of the Company, which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
important factors, including without limitation those set forth in this section,
in the Company's Annual Report on Form 10-K for the year ended August 31, 1996,
and in other documents the Company files from time to time with the Securities
and Exchange Commission. The following discussion and analysis should be read in
conjunction with the accompanying consolidated financial statements and notes
thereto and the consolidated financial statements and related notes contained in
the Company's Annual Report on Form 10-K.
OVERVIEW
The Company's net sales are generated by sales to supermarkets, specialty
retail stores, natural food stores, warehouse outlets and institutional food
service trade partners, primarily restaurants. Net sales are net of product
returns and allowances. The Company sells products to most of its trade partners
on a guaranteed basis and takes back expiring or expired product for credit. The
Company's growth has come predominantly from continued penetration in existing
markets, sales of new products and expansion into new markets. Prior to the
Recall discussed below, the Company believes that its sales had been positively
affected by the Company's introduction of new products, higher recognition of
the Company's brand and products, better placement on store shelves, increased
placement of the Company's in-store coolers and increased support for route
sales persons.
A significant portion of the Company's cost of sales is the cost of raw
materials. Although a portion of the cost of certain purees and other raw
materials is fixed on an annual basis, the majority of the Company's fresh fruit
and vegetable purchases are made on the open market. Consequently, the Company
is subject to wide fluctuations in prices for the fruits, vegetables and other
nutritious products it purchases.
The Company distributes its products primarily through its
direct-store-delivery system, which is serviced by route sales people who
deliver products directly to and merchandise products directly in the retail
display shelves of the Company's trade partners, using primarily leased delivery
trucks. This distribution system, although more expensive than using independent
distributors, allows the Company to control the quality of service and product
mix, in-store stocking of the Company's coolers or shelf space and freshness of
products.
The Company has experienced significant quarterly fluctuations in
operating results and anticipates that these fluctuations will continue in
future periods. These fluctuations have been the result of changes in the price
of fruit and vegetables due to seasonality and other factors, new product
introductions, start-up costs associated with new facilities, expansion into new
markets, sales promotions and competition. Excluding the impact of the Recall
discussed in the following paragraphs, future operating results may fluctuate as
a result of these and other factors, including increased energy costs, the
introduction of new products by the Company's competitors, changes in the
Company's customer mix, and overall trends in the economy. The Company's
business is also significantly affected by weather patterns, and unseasonably
cool or rainy weather can adversely impact the Company's sales.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
A significant portion of the Company's expense levels is relatively fixed,
and the timing of increases in expense levels is based in large part on the
Company's forecasts of future sales. If sales are below expectations in any
given period, the adverse impact on results of operations may be magnified by
the Company's inability to adjust spending quickly enough to compensate for the
sales shortfall. The Company also may choose to reduce prices or increase
spending in response to competition, which may have an adverse effect on the
Company's results of operations.
On October 30, 1996, the Company was notified by the State of Washington
Environmental Health Services of an epidemiological link between several cases
of e. coli 0157:h7 and Odwalla's apple juice products. The Company immediately
implemented a voluntary recall of all Odwalla products containing apple juice.
On October 31, 1996, Odwalla expanded the Recall to include its carrot and
vegetable products because such products were processed on the same production
line as the apple juice.
To date, there have been eight personal injury claims and legal
proceedings seeking monetary damages and other relief relating to the Recall
filed against the Company. Four of these proceedings have been settled. In
addition, there was one legal proceeding alleging fraudulent business acts and
practices relating to the recalled products filed against the Company; this
proceeding was also settled. Following the Recall, the Company formed the
Odwalla Nourishment & Food Safety Advisory Council to advise management in
developing new industry leadership and practices in the sourcing, production and
distribution of Nourishing Beverage products. Beginning in early December 1996,
Odwalla began flash pasteurization of fresh apple juice as part of the Company's
Hazard Analysis Critical Control Point Plan and reintroduced all apple
juice-based products to the market. The flash pasteurization process rapidly
heats the juice for a short period of time to a temperature high enough to kill
harmful bacteria yet still retain vitamins, minerals and flavors that diminish
in pasteurization processes at higher temperatures and for longer periods of
time. The Company incurred significant costs related to the Recall, including
advertising and public relations costs, legal and professional fees, cost of the
product recalled (including the labor and freight involved in the recall
process), destruction of unsold product and now obsolete packaging supplies,
costs of leased sales and distribution equipment in excess of current volume
requirements, costs of reformulating products and costs associated with the
flash pasteurization process.
In keeping with long-term strategic objectives, the Company plans to
continue to invest in building an infrastructure capable of sustaining growth
and expansion. In October 1996, the Company entered Texas with the introduction
of beverage products in Austin, Dallas and Houston. As a result of the plans for
continued growth and infrastructure development, the Company has not reduced
costs commensurate with the reduction of sales following the Recall. The Company
expects the costs associated with the Recall and disruption in sales will result
in continuing operating losses and will result in a significant loss for fiscal
year 1997.
The Company maintains insurance coverage for product recall, product
adulteration, lost income and other first party business risks and intends to
present claims to its insurance carriers under the appropriate policies. In
February 1997, one claim for product recall costs was presented to its insurance
carriers. In April 1997, an additional claim was presented for business losses
incurred due to the Recall. However, the amount and timing of proceeds, if any,
from the February or April 1997 claims and any future insurance claims cannot be
presently determined.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
When reviewing the results of operations for the three and nine month
periods ended May 31, 1997, it is important to remember that the months of
September and October, 1996, which represent the first two months of the
periods, continued the net sales growth trend that the Company had reported in
fiscal 1996 and positively impacted the results of operations of each of those
periods. The last seven months of the nine month period reflect the significant
reduction in sales as a result of the Recall.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain
consolidated statements of operations data for the three-month and nine-month
periods ended May 31, 1997. These operating results are not necessarily
indicative of the results for any future period.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
May 31, May 31, May 31, May 31,
1996 1997 1996 1997
----------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 48.5 52.0 51.9 52.6
----- ----- ----- -----
Gross margin 51.5 48.0 48.1 47.4
----- ----- ----- -----
Operating expenses
Sales and distribution 32.9 39.5 34.3 43.5
Marketing 4.0 5.7 3.7 5.6
General and administrative 9.9 18.3 9.5 17.7
Direct recall costs -- -- -- 9.8
----- ----- ----- -----
Income (loss) from operations 4.7 (15.5) 0.6 (29.3)
Interest and income, net of expense 0.4 0.2 0.7 0.4
Income tax benefit (expense) (1.9) 2.0 (0.5) 4.1
----- ----- ----- -----
Net income (loss) 3.2 % (13.3)% 0.8% (24.9)%
===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED MAY 31, 1997 COMPARED TO THE THREE MONTHS ENDED MAY 31, 1996
NET SALES. Net sales for the third quarter were $13.7 million which
represents a 17% decrease from the $16.5 million reported for the third quarter
of fiscal 1996. Although sales increased 22% from the second quarter of fiscal
1997, third quarter sales were less than the corresponding quarter of fiscal
1996 as a result of the Recall. By the end of the third quarter, sales were in
excess of 80% of pre-Recall levels. The Company expects sales in the fourth
quarter of fiscal 1997 to be significantly lower than sales in the fourth
quarter of fiscal 1996.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
COST OF SALES. Cost of sales decreased to $7.1 million in the third
quarter of fiscal 1997 compared to $8.0 million for the same period during
fiscal 1996. Gross margin as a percentage of net sales was 48.0% in the third
quarter of fiscal 1997, a decrease from 51.5% during the third quarter of fiscal
1996. Gross margin decreased primarily due to (a) increases in labor and
operating expenses as a percentage of net sales resulting from the volume
decrease in the current quarter and higher fixed charges due to plant
improvements since the third quarter of fiscal 1996, (b) an increase in product
returns, and (c) slightly higher fruit prices, offset to some extent by better
fruit yield due to improvements installed during late fiscal 1996 at the
production facility in Dinuba, California. The Company anticipates that the
gross margin will increase as a percentage of net sales as volume is restored to
pre-Recall levels; however, there can be no assurance that gross margin as a
percentage of net sales will increase as sales volume increases or that such
increase will approach levels recorded in the third and fourth quarter of fiscal
1996.
SALES AND DISTRIBUTION. Sales and distribution expenses were $5.4 million
in both the third quarter of fiscal 1997 and fiscal 1996, but increased as a
percentage of net sales to 39.5% from 32.9% last year. The increase in sales and
distribution expenses as a percentage of net sales is attributable primarily to
the Recall as the sales and distribution structure in place to support the
expanding sales volume pre-Recall contained certain fixed elements that remain
despite the post-Recall reduced sales volume. In connection with a reduction in
work force in late November 1996, the Company initiated a sales route
restructuring plan (which began its initial test in one market during the third
quarter) and a revised route sales person compensation plan. During the third
quarter, the Company consolidated certain distribution operations and geographic
responsibilities. There can be no assurance that these and other cost control
measures will return sales and distribution costs as a percentage of net sales
to pre-Recall levels. In addition, future decisions regarding growth and
expansion consistent with long-term strategic objectives may increase sales and
distribution costs as a percentage of net sales as compared to their pre-Recall
levels.
MARKETING. Marketing expenses increased to $782,000 in the third quarter
of fiscal 1997 compared to $659,000 in the third quarter of fiscal 1996, and
increased as a percentage of net sales. Marketing costs will continue to
increase in fiscal 1997, in absolute dollars, as a result of the Recall and
planned expanded efforts to continue to enhance stakeholder awareness as well as
increased costs related to new product development, consumer research and
communications. The Company does not expect marketing costs to increase as a
percentage of net sales from the percentage achieved in the third quarter of
fiscal 1997 although there can be no assurance that an increase will not occur.
The increase in marketing costs as a result of the Recall cannot be quantified
at this time and will depend upon the results of on-going consumer research, the
response of consumers to the reintroduced product line, and other factors
affecting the restoration of consumer confidence.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $2.5 million in the third quarter of fiscal 1997 from $1.6 million in the
third quarter of fiscal 1996, and increased as a percentage of net sales,
primarily due to legal fees, additions to the Company's management and
administrative staff and increases in facilities costs. The Company does not
expect general and administrative costs during the remainder of fiscal 1997 to
increase in absolute dollars from the third quarter of fiscal 1997 or to
increase as a percentage of net sales. The Company will continue to invest in
infrastructure, particularly in information systems and research and
development, to provide for sustainable growth and will continue to incur legal
fees in excess of fiscal 1996 levels, however, there can be no assurance that
general and administrative costs will not increase in absolute dollars or as a
percentage of net sales.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
INTEREST. Odwalla had net interest income of $13,000 in the third quarter
of fiscal 1997 compared to $81,000 in the third quarter of fiscal 1996. Gross
interest income of $39,000 in the third quarter of fiscal 1997 resulted
primarily from the Company's investment of the remaining proceeds of its public
offering in May 1995. Gross interest expense of $26,000 in the third quarter of
fiscal 1997 resulted from interest on capital leases and other long-term debt
and, to a lesser extent, to the line of credit borrowing at the end of the
quarter. Gross interest income of $107,000 in the third quarter of fiscal 1996
was offset by interest expense of $26,000. Interest income is expected to
decrease in future periods as the Company utilizes a portion of its cash
equivalents and short-term investments. In addition, interest expense is
expected to increase due to new borrowing arrangements entered into at the end
of the third quarter. See "Liquidity and Capital Resources."
INCOME TAXES. The $273,000 income tax benefit for the third quarter of
fiscal 1997 resulted from the tax benefit associated with the loss for the
quarter. The 13% effective tax benefit rate varies from the federal statutory
tax rate primarily due to the effect of establishing a deferred tax asset
valuation allowance. The Company will assess the valuation allowance as
additional information regarding the impact of the Recall on the Company's
future profitability is available during fiscal 1997. The $320,000 income tax
expense for the third quarter of fiscal 1996 was calculated by applying the
estimated corporate federal and state tax rates to the income for the quarter.
The 38% effective tax rate for the third quarter of fiscal 1996 varied from the
federal statutory tax rate primarily due to California and other state income
taxes.
NINE MONTHS ENDED MAY 31, 1997 COMPARED TO THE NINE MONTHS ENDED MAY 31, 1996
NET SALES. Net sales for the first nine months of fiscal 1997 decreased 8%
to $39.0 million compared to $42.5 million for the same period during fiscal
1996. Net sales growth was approximately 45% for each of September and October
1996 compared to the corresponding months in fiscal 1996. Sales in the last
seven months of the nine month period were significantly reduced from the prior
year period as a result of the Recall. The Company expects sales in the fourth
quarter of fiscal 1997 to be significantly lower than sales in the fourth
quarter in fiscal 1996.
COST OF SALES. Cost of sales decreased to $20.6 million in the first nine
months of fiscal 1997 compared to $22.0 million for the same period during
fiscal 1996. Gross margin as a percentage of net sales was 47.4% in the first
nine months of fiscal 1997, a decrease from 48.1% during the first nine months
last year. Gross margin decreased primarily due to (a) better fruit yield due to
improvements installed during late fiscal 1996 at the production facility in
Dinuba, offset somewhat by (b) increases in labor and operating expenses
resulting from the significant volume decrease during the nine month period, (c)
an increase in product returns compared to the comparable period in 1996, and
(d) slightly higher fruit prices. The Company anticipates that cost of sales
will increase as a percentage of net sales during the fourth quarter of fiscal
1997, compared to the comparable quarter in fiscal 1996.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
SALES AND DISTRIBUTION. Sales and distribution expenses increased to $17.0
million in the first nine months of fiscal 1997 compared to $14.6 million for
the same period during fiscal 1996, and increased as a percentage of net sales.
The increase in sales and distribution expenses as a percentage of net sales is
attributable primarily to the Recall as the sales and distribution structure in
place to support an expanding sales volume was not reduced to correspond with
the reduced sales volume subsequent to the Recall and, to a lesser extent,
increased sales and distribution expenditures to foster growth and strong
partnerships with the trade. In an effort to reduce sales and distribution
expenses post-Recall, in late November, the Company completed a reduction in
force of approximately 50 employees primarily involved in sales and
distribution. In connection with the reduction in force, the Company initiated a
sales route restructuring plan (which began its initial test in one market
during the third quarter) and, on March 1, 1997, a revised route sales person
compensation plan. In the second quarter, the Company decided to consolidate
certain distribution operations and geographic responsibilities, resulting in an
$180,000 charge to operations. The consolidation was substantially implemented
by early May 1997. There can be no assurance that these and other cost control
measures will return sales and distribution costs as a percentage of net sales
to pre-Recall levels. In addition, future decisions regarding growth and
expansion consistent with long-term strategic objectives may increase sales and
distribution costs as a percentage of net sales compared to pre-Recall levels.
MARKETING. Marketing expenses increased to $2.2 million in the first nine
months of fiscal 1997 compared to $1.6 million during the same time period last
year, and increased as a percentage of net sales. Marketing costs increased in
the first nine months of fiscal 1997 and will continue to increase in fiscal
1997, in both absolute dollars and as a percentage of net sales, as a result of
the Recall and efforts to continue to enhance stakeholder awareness as well as
increased professional services related to new product development, consumer
research and communications. The increase in marketing costs as a result of the
Recall cannot be quantified at this time and will depend upon the results of
on-going consumer research, the response of consumers to the reintroduced
product line, and other factors affecting the restoration of consumer
confidence.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $6.9 million in the first nine months of fiscal 1997 from $4.1 million last
year, and increased as a percentage of net sales, primarily due to additions to
the Company's management and administrative staff, and increases in legal
services and facilities costs. General and administrative costs will increase in
fiscal 1997 in both absolute dollars and as a percentage of net sales compared
to fiscal 1996. The Company will continue to invest in infrastructure,
particularly in information systems and research and development, to provide for
sustainable growth.
DIRECT RECALL COSTS. The direct costs of the Recall were $3.8 million in
the first nine months of fiscal 1997. This total, which was reported in the
first quarter, represents the costs directly associated with the Recall,
including: advertising and public relations costs; legal and professional fees;
costs of the product recalled, including the labor and freight involved in the
recall process; destruction of unsold product and now obsolete packaging
supplies; and costs of leased equipment in excess of current volume
requirements; costs of reformulating products; and costs associated with the
flash pasteurization process. Direct recall costs recorded in the first quarter
include approximately $700,000 of estimated direct costs for the remainder of
the year, primarily legal and professional fees. Approximately $460,000 of these
estimated direct costs were incurred in the second and third quarters. However,
there can be no assurance that the actual direct costs for the remainder of the
year will not exceed the estimated amount.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
INTEREST. Odwalla had net interest income of $158,000 in the first nine
months of fiscal 1997 compared to $356,000 in the first nine months of fiscal
1996. Gross interest income of $217,000 in the first nine months of fiscal 1997
resulted primarily from the Company's investment of the proceeds of its public
offering in May 1995. Gross interest expense of $59,000 in the first nine months
of fiscal 1997 resulted primarily from interest on capital leases and other
long-term debt. Gross interest income of $440,000 in the first nine months of
fiscal 1996 was offset by interest expense of $76,000. Interest income is
expected to decrease in future periods as the Company utilizes a portion of its
cash equivalents and short-term investments. In addition, interest expense is
expected to increase due to new borrowing arrangements entered into at the end
of the third quarter. See "Liquidity and Capital Resources."
INCOME TAXES. The $1.6 million income tax benefit for the first nine
months of fiscal 1997 resulted from the tax benefit associated with the loss
resulting from the Recall. The 14% effective tax benefit rate varies from the
federal statutory tax rate primarily due to the effect of establishing a
deferred tax asset valuation allowance. The Company will assess the valuation
allowance as additional information regarding the impact of the Recall on the
Company's future profitability is available during fiscal 1997. The $204,000
income tax expense for the third quarter of fiscal 1996 was calculated by
applying the estimated corporate federal and state tax rates to the income for
the quarter. The 38% effective tax rate for the third quarter of fiscal 1996
varied from the federal statutory tax rate primarily due to California and other
state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations through three primary sources:
private and public sales of equity securities, bank debt and capital lease
financing. At May 31, 1997, the Company had working capital of $4.3 million
compared to working capital of $14.7 million at August 31, 1996. The decrease
resulted primarily from operating losses and $2.5 million of capital
expenditures. At May 31, 1997, the Company had cash, cash equivalents and short
term investments of $4.7 million compared to $12.4 million at August 31, 1996.
Net cash used in operating activities for the first nine months of fiscal
1997 was $7.4 million. This consisted of the net loss plus depreciation and
amortization, decreases in accounts receivable (due to significantly reduced
sales volume following the Recall) and increases in accounts payable and other
accrued expenses offset by increases in the deferred income taxes (due primarily
to tax benefits of the net operating loss) and in inventory due to favorably
priced cash purchases of frozen purees in fiscal 1997 based upon commitments
from fiscal 1996. Net cash provided by investing activities for the first nine
months of fiscal 1997 was $2.5 million, consisting primarily of sale of
short-term investments offset by capital expenditures for production equipment
at the Dinuba plant and, to a lesser extent, computer equipment and coolers. Net
cash provided by financing activities for the first nine months of fiscal 1997
was $2.2 million, consisting primarily of $2.0 million in borrowings under a
line of credit obtained in May 1997 and $484,000 for the sale of common stock
through the exercise of stock warrants and options offset by payments of
long-term debt and capital lease obligations.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
In October 1996, the Company completed two land purchases contracted in
fiscal 1996. The first was for a parcel of land adjacent to the Dinuba
production facility which resulted in payments of $10,000 when the contract was
signed in April 1996 and $205,000 upon closing in October. The second was to
complete an agreement reached in May 1996 to purchase land adjacent to its Half
Moon Bay administrative offices and, upon closing on the land purchase, to
extend its lease on the administrative offices (the "Half Moon Bay
Transaction"). The Company completed the Half Moon Bay Transaction in October
1996 at a cost of $395,000, of which $230,000 represents assumption of the
existing mortgage (interest at 8.75% per annum, monthly principal and interest
payments until maturity in 1999 when the remaining balance of approximately
$220,000 is due) on the property.
At May 31, 1997, the Company had $434,000 outstanding in capital lease
obligations, primarily related to leasing of production equipment, delivery
vehicles and in-store coolers. The Company has used, and expects to continue to
use, capital lease financing as necessary to obtain needed production assets,
primarily equipment. However, as a result of the Recall, the leasing company
used for computer and cooler financing has notified the Company that it has
placed a hold on future lease commitments. The Company is currently exploring
additional leasing or lease financing sources to obtain future commitments for
computer and cooler equipment. There can be no assurance that the Company will
be able to use or continue to use such lease financing and the failure to do so
may have an adverse effect on the Company's business or results of operations.
In May 1997, the Company entered into a Loan and Security Agreement
(Agreement) with a lender which provides for borrowings of up to $5 million. The
actual borrowings cannot in the aggregate exceed 80% to 85% of eligible accounts
receivable (Receivable Line) plus a maximum of $500,000 available for new
capital equipment (Equipment Line). Interest on borrowings under the Agreement
is payable monthly at prime plus 1.5% (10% at May 31, 1997). Borrowings under
the Equipment Line are subject to interest only for the initial three months and
then monthly interest and principal payments amortized over a 45 month period.
The entire loan matures on May 31, 1999, subject to renewal as provided in the
Agreement. The Company incurred approximately $35,000 of fees in connection with
the Agreement and will incur a termination fee (ranging from 1% to 3% of the
committed balance, depending upon the remaining loan term) if the Agreement is
terminated prior to maturity. The Agreement contains certain restrictions,
including the ability to borrow additional funds, pay dividends, purchase or
otherwise acquire Company stock, or encumber or sell Company assets. In
addition, the interest rate changes to prime plus 2% if adjusted net worth, as
defined in the Agreement, is approximately $14 million. The Company is required
to pay interest on $2 million and, accordingly, borrowed approximately that
amount under the Receivable Line at May 31, 1997. Simultaneously, the Company
entered into a separate Loan Agreement (Loan Agreement) with another party to
provide a $1 million facility under substantially the same terms noted for the
Agreement. Borrowings under the Loan Agreement mature on May 21, 1998. The
Company agreed to issue a warrant under the Loan Agreement for 7,000 shares of
common stock at $12.50 per share (fair market value at issue date) which expires
in May 2002. There were no borrowings under the Loan Agreement at May 31, 1997.
The Agreement and the Loan Agreement are collateralized by substantially all
Company assets.
Capital improvements necessary for flash pasteurization and other plant
modifications are currently expected to cost less than $2.5 million in fiscal
1997. The improvements will be largely financed through available cash resources
or debt or, if available, lease financing.
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
The Company anticipates that the increased costs associated with the
Recall, including equipment and plant modifications required for flash
pasteurization and legal and marketing costs, may cause the Company to pursue
additional financing that may be dilutive to current investors or result in a
higher debt-to-equity ratio than would otherwise be the case. There can be no
assurance that such financing will be available on terms favorable to the
Company, if at all. If adequate financing is not available, the Company may be
required to reduce planned expenditures, particularly in the areas of
advertising and marketing, in order to conserve cash.
While the Company expects a significant loss for fiscal year 1997, the
Company believes it will have sufficient cash to fund its operations and capital
expenditures through May 1998. However, this belief is based in part on future
sales estimates and other plans which are inherently uncertain given the
disruption to the Company's business caused by the Recall.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS
POST-RECALL MANAGEMENT. Prior to the Recall, the Company experienced
substantial growth in its revenue, operations and employee base, and underwent
substantial changes in its business that placed significant demands on the
Company's management, working capital and financial and management control
systems. Although the Company will continue to face the demands of a growing
business and expansion in its newer markets, the Company must also address the
challenges and increasing costs and demands on management and working capital
resulting from the Recall, including restoring consumer confidence in its
products, adapting its production processes and procedures to accommodate flash
pasteurization and other new production methods, managing pending and future
legal proceedings and settlement of first and third party claims with its
insurance carriers. All of the foregoing demands and challenges will require the
expenditure of a significant amount of management effort and working capital.
The Company anticipates that the increased costs associated with the Recall,
including equipment and plant modifications required for flash pasteurization
and legal and marketing costs, may require the Company to pursue additional
financing that may be dilutive to current investors or result in a higher
debt-to-equity ratio than would otherwise be the case. There can be no assurance
that such financing will be available on terms favorable to the Company, if at
all.
Although the Company believes that its management, working capital,
existing debt arrangements, financial and management systems and controls will
be adequate to address its current needs, only a short period of time has
elapsed since the Recall and there can be no assurance that its management,
working capital and such systems will be adequate to address future requirements
of the Company's business. The Company's results of operations will be adversely
affected if revenues do not increase sufficiently to compensate for the increase
in operating expenses resulting from the Recall and planned expansion, and there
can be no assurance that it will not adversely affect the Company's ability to
continue to improve and expand its management and financial control systems, to
attract, retain and motivate key employees, and to raise additional capital.
There can be no assurance that the Company will be successful in these regards.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
The Company has experienced significant quarterly fluctuations in
operating results and anticipates that these fluctuations will continue in
future periods. These fluctuations have been the result of changes in the price
of fruit and vegetables due to seasonality and other factors, new product
introductions, start-up costs associated with new facilities, expansion into new
markets, sales promotions and competition. Excluding the impact of the Recall,
future operating results may fluctuate as a result of these and other factors,
including increased energy costs, the introduction of new products by the
Company's competitors, changes in the Company's customer mix, and overall trends
in the economy. The Company's business is also significantly affected by weather
patterns, and unseasonably cool or rainy weather can adversely impact the
Company's sales. A significant portion of the Company's expense levels is
relatively fixed, and the timing of increases in expense levels is based in
large part on the Company's forecasts of future sales. If sales are below
expectations in any given period, the adverse impact on results of operations
may be magnified by the Company's inability to adjust spending quickly enough to
compensate for the sales shortfall. The Company also may choose to reduce prices
or increase spending in response to competition, which may have an adverse
effect on the Company's results of operations.
PRODUCTS, DISTRIBUTION AND TRADE PARTNERS. Odwalla's product line consists
of single-strength and blended fruit- and vegetable-based products and
geothermal natural spring water. In May 1997, Odwalla expanded its product line
with Future Shake - a pasteurized, non-juice based, meal replacement drink
intended to secure a position in the growing category of meal replacement and
nutritionally fortified beverages. Except for flash pasteurization applied to
fresh apple juice, all single-strength products are raw fresh fruit- and
vegetable-based beverage products (some produced on a seasonal basis). Blended
products also contain raw fresh fruit- and vegetable-based beverage products,
and, in some products, flash pasteurized apple juice. These products are
currently sold in California, Washington, Oregon, Colorado, New Mexico, Nevada,
Texas and parts of British Columbia. Because all of Odwalla's products contain
raw fresh fruit or vegetable juices, except for Future Shake, flash-pasteurized
apple juice and geothermal spring water, and do not contain preservatives, the
shelf life of the product is typically limited to between 5 and 18 days at the
retail outlet.
Odwalla strives for consistent "day-of-juicing quality" in its products by
establishing stringent shelf life standards for its products, based primarily on
maintaining the flavor quality and nutrient integrity of its beverages. The
Company believes that its shelf life standards for each drink maintain the fresh
and better tasting qualities that consumers associate with freshly produced
fruit and vegetable beverages. The Company's policy is to have all products
removed from trade partners' shelves on or before their Odwalla-established
expiration date. In addition, because of the Company's "day of juicing" quality
standards, the Company's products reflect the seasonal changes in fruit
varieties and taste. Odwalla's production methods are designed to minimize the
effect of processing on the fruit juice extracted. The Company's product line
includes several different types of Nourishing Beverages and varies over time as
a result of the addition of new products as well as due to a significant
component of seasonal products.
Odwalla's products are sold and distributed primarily through its own
direct-store-delivery ("DSD") system, which is serviced by route sales people
who deliver products directly to and merchandise products directly in the retail
display shelves of the Company's trade partners. This DSD system is designed to
permit Odwalla to optimally manage delivery schedules, efficiently control its
product mix, keep store shelves or its own coolers stocked with fresh products
and have a greater influence on determining in-store location and merchandising
of its products.
20
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
At most of its accounts, Odwalla maintains responsibility for stocking,
ordering and merchandising its products at the point of sales, and Odwalla
credits the trade partner for unsold product. This full service relationship
allows Odwalla to avoid paying slotting fees for shelf space as well as other
handling fees, and it also allows the Company to maintain control over the
merchandising of its products at the point of sales. Odwalla provides a lesser
degree of service to certain trade partners who are responsible for stocking,
ordering and merchandising the Company's products. These trade partners do not
receive credit for unsold products. Outlets that sell Odwalla juices include
supermarkets, specialty retail stores, natural food stores, warehouse outlets
and institutional food service trade partners, primarily restaurants.
RAW MATERIALS. Producing and selling raw fresh and flash-pasteurized
fruit- and vegetable-based beverage products ("Nourishing Beverages") entails
special requirements in fruit sourcing, beverage production, distribution and
sales in order to preserve and maximize their freshness and flavor quality.
Fruits and vegetables must be sourced and selected to meet a variety of
established criteria, including variety, quality, ripeness and other factors.
Transportation and processing of the fruit and vegetables must be performed in a
manner to capture and preserve various qualities of fresh flavors and
consistency. Odwalla has focused on each of these elements in an effort to
achieve its goal of providing the freshest, most flavorful and most enjoyable
Nourishing Beverages for consumers.
Odwalla buys fruits and vegetables according to different schedules and
methods depending on the type of produce. Because various types of fruit and
vegetable crops are harvested at different times of the year, the Company
obtains and produces different juices on a seasonal basis. The Company purchases
most of its fruits and vegetables in the open market on a negotiated basis.
Historically, oranges, apples and carrots are the commodities purchased in
largest volume by the Company. All three are subject to volatility in supply,
price and quality that could materially and adversely affect the Company's
business and results of operations, as could the availability, price and quality
of other ingredients.
Odwalla also obtains a number of fruits, such as tropical fruits, from
foreign suppliers in a frozen fruit puree. A puree is not a concentrate, but is
a whole fruit that has been pureed and frozen for shipment. Purees are heat
treated and combined with freshly extracted juices, including flash pasteurized
apple juice, of other fruits in a number of the Company's products. Purees used
by the Company have not been subjected to any processing methods that could
materially affect the fresh fruit quality. Most purees are purchased under
annual price contracts.
As with most agricultural products, supply and price of raw materials used
by the Company can be affected by a number of factors beyond the control of the
Company, such as frosts, droughts, floods and other natural disasters, other
weather conditions, economic factors affecting growing decisions, various plant
diseases and pests. The Company was not significantly affected by raw material
supply issues in either fiscal 1993 or fiscal 1994. The heavy rains and flooding
that occurred in California in the first and second quarters of fiscal 1995
resulted in higher costs of fruit and lower yields from the California orange
crop in the last quarter of fiscal 1995 and the first quarter of fiscal 1996.
The Company is not currently aware of natural events which should impact the
price of raw materials in the near term.
21
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
COMPETITION. The Company's products compete broadly with all beverages
available to consumers. The beverage market is highly competitive. It includes
national, regional and local producers and distributors, many of whom have
greater resources than the Company, and many of whom have shelf stable products
that can be distributed with significantly less cost. The Company views its
niche as conveniently accessed nourishing beverages and fresh, preservative-free
juices and juice-based beverages. The Company believes its direct competition in
this market niche currently is from regionally or locally focused producers,
certain of which are owned by major beverage producers. In addition, a number of
major supermarkets and other retail outlets squeeze and market their own brand
of fresh juices that compete with the Company's products. A large national
company, Chiquita Brands International, Inc. ("Chiquita"), has entered this
market niche in certain limited geographic areas, both directly and by
acquisition. Although the Company has not experienced significant competition
from Chiquita to date, Odwalla entered the Los Angeles market in September 1995
and is competing directly with Chiquita's products in that market. Chiquita and
other major food and beverage companies may become more active in the Nourishing
Beverage business, either directly or by acquisition of smaller juice companies.
A decision by Chiquita or any other large company to focus on the Company's
existing markets or target markets could have a material adverse effect on the
Company's business and results of operations. While the Company believes that it
competes favorably with its competitors on factors such as quality,
merchandising, service, sales and distribution, multiple flavor categories and
brand name recognition and loyalty, the Company's products are typically sold at
prices higher than most other juice products. There can be no assurance that the
Company will not experience competitive pricing pressure that could adversely
affect its results of operations.
DEPENDENCE ON ONE OR A FEW MAJOR TRADE PARTNERS. In fiscal 1996, the
Company's largest account, Safeway, accounted for approximately 14% of the
Company's sales. The Company puts considerable effort into the maintenance of
this and other significant accounts, but there can be no assurance that sales to
these accounts will not decrease or that these trade partners will not choose to
replace the Company's products with those of competitors. The loss of Safeway or
other significant accounts or any significant decrease in the volume of products
purchased by their customers in the future would materially and adversely affect
the Company's business and results of operations. Continuity of trade partner
relationships is important, and events that impact the Company's trade partners,
such as the Recall and labor disputes, may have an adverse impact on the
Company's results of operations.
GOVERNMENT REGULATION. The production and sales of the Company's beverages
are subject to the rules and regulations of various federal, state and local
food and health agencies, including the FDA. There have been no significant
costs thus far associated with complying with FDA regulations.
In addition to laws relating to food products, the Company is subject to
various federal, state and local environmental laws and regulations that limit
the discharge, storage, handling and disposal of a variety of substances.
Operations of the Company are also governed by laws and regulations relating to
workplace safety and worker health, principally the Occupational Safety and
Health Administration Act, as well as similar state laws and regulations. The
Company believes that it presently complies in all material respects with the
foregoing laws and regulations, although there can be no assurance that future
compliance with such laws or regulations will not have a material adverse effect
on the Company's results of operations or financial condition.
22
<PAGE> 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
PRODUCT LIABILITY. Since the Company's products are not pasteurized
(except for Future Shake and flash pasteurization applied to apple juice),
nuclearly irradiated or chemically treated, they are highly perishable and
contain certain naturally occurring microorganisms. In addition to the Recall
associated with the e. coli 0157:h7 bacteria, the Company has from time to time
received complaints from consumers regarding ill effects allegedly caused by its
products. While such past claims have not resulted in any material liability to
date, there can be no assurance that future claims will not be made or that any
such claim or claims associated with the Recall will not result in adverse
publicity for the Company or monetary damages, either of which could materially
and adversely affect the Company's business and results of operations. The
Company currently maintains $52 million in commercial general liability
insurance, which may not be sufficient to cover the cost of defense or related
damages in the event of a significant product liability claim. See Part II "Item
1. Legal Proceedings."
VOLATILITY OF STOCK PRICE. The price of the Company's Common Stock has
experienced significant price volatility. The Company believes that factors such
as announcements of developments related to the Company's business, fluctuations
in the Company's operating results, failure to meet securities analysts'
expectations, general conditions in the fruit and vegetable industries and the
worldwide economy, announcements of innovations, new products or product
enhancements by the Company or its competitors, fluctuations in the level of
cooperative development funding, acquisitions, changes in governmental
regulations, developments in patents or other intellectual property rights and
changes in the Company's relationships with trade partners and suppliers could
cause the price of the Company's Common Stock to fluctuate substantially. In
addition, in recent years the stock market in general, and the market for small
capitalization stocks in particular, has experienced extreme price fluctuations
which have often been unrelated to the operating performance of affected
companies. Such fluctuations could adversely affect the market price of the
Company's Common Stock.
23
<PAGE> 24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The following personal injury claims and legal proceedings seeking
monetary damages and other relief relating to the Recall are pending against the
Company:
The Curtis Case: A class action lawsuit filed in the United States
District Court, Western District of Washington and served on November
15, 1996. On June 30, 1997, the Magistrate Judge stated that he would
recommend that the United States District Court deny plaintiffs' motion
for class certification.
The Beverly Case: A personal injury lawsuit filed in the United States
District Court, Western District of Washington and served on December
3, 1996.
The Starmack Case: A personal injury lawsuit filed in San Diego County
Superior Court, San Diego, California on January 3, 1997 and served on
January 24, 1997.
The McGregor Case: A personal injury lawsuit filed in Santa Clara Superior
Court, Santa Clara, California on June 2, 1997 and served on June 16,
1997.
The Company maintained commercial general liability insurance totaling
$27,000,000 during the period including the Recall. The Company has notified its
insurance carrier of these events. At this time, no discovery has commenced with
respect to the remaining above-described legal proceedings and the Company is
unable to determine the potential liability on all such lawsuits and claims.
The following personal injury claims and legal proceedings have been
settled:
The Kim Case: A personal injury lawsuit filed in King County Superior
Court, Seattle, Washington, served on November 15, 1996 and settled on
January 9, 1997.
The Webb Case: A personal injury lawsuit filed in King County Superior
Court, Seattle, Washington, served on December 9, 1996 and settled on
January 9, 1997.
The Azizi Case: A personal injury lawsuit filed in Alameda County Superior
Court, Alameda, California and served on November 20, 1996 and settled
on March 25, 1997.
The Ishida/Peterson Case: A class action lawsuit filed in King County
Superior Court, Seattle, Washington and served on November 12, 1996 and
settled on April 29, 1997.
The settlement of the above legal proceedings was covered under the
Company's commercial general liability insurance policy and did not result in
any additional costs to the Company.
24
<PAGE> 25
ITEM 1. LEGAL PROCEEDINGS, continued:
In addition, the Company settled the following claim filed under
California Business and Professions Code Section 17200 et seq. alleging
fraudulent business acts and practices of the Company relating to the recalled
products:
Roderick P. Bushnell v. Odwalla, Inc.: A lawsuit filed in San Francisco
County Superior Court, San Francisco, California and served on November
13, 1996. This lawsuit was settled on January 16, 1997 and received court
approval on March 19, 1997.
The Company has been informed that it is the subject of a federal grand
jury investigation (Eastern District of California) concerning events of 1996
and before, including the Recall. The Company has responded to a subpoena and is
cooperating fully with the government. At this time, the Company cannot predict
the outcome of the investigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
Exhibit 10.13 - Loan and Security Agreement dated May 22, 1997 between the
Registrant and Coast Business Credit.
Exhibit 10.14 - Loan Agreement dated May 22, 1997 between the Registrant
and San Hill Capital LLC.
Exhibit 11.1 - Statement of Computation of Per Share Earnings
Exhibit 27.1 - Financial Data Schedule
B. REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter ended
May 31, 1997.
25
<PAGE> 26
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ODWALLA, INC.
(Registrant)
Date: July 14, 1997 By: /s/ D. STEPHEN C. WILLIAMSON
-------------------------------
D. Stephen C. Williamson
Chief Executive Officer
(Principal Executive Officer)
Date: July 14, 1997 By: /s/ JAMES R. STEICHEN
-------------------------------
James R. Steichen
Chief Financial Officer
(Principal Financial and
Accounting Officer)
26
<PAGE> 27
EXHIBIT INDEX
Exhibit
No. Document
- ------- --------
10.13 - Loan and Security Agreement dated May 22, 1997 between the
Registrant and Coast Business Credit.
10.14 - Loan Agreement dated May 22, 1997 between the Registrant
and San Hill Capital LLC.
11.1 - Statement of Computation of Per Share Earnings
27.1 - Financial Data Schedule
<PAGE> 1
COAST Exhibit 10.13
LOAN AND SECURITY AGREEMENT
BORROWER: ODWALLA, INC.
ADDRESS: 120 STONE PINE ROAD
HALF MOON BAY, CA 94019
DATE: MAY 22, 1997
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between COAST
BUSINESS CREDIT(R), a division of Southern Pacific Thrift & Loan Association
("Coast"), a California corporation, with offices at 12121 Wilshire Boulevard,
Suite 1111, Los Angeles, California 90025, and the borrower(s) named above
(jointly and severally, the "Borrower"), whose chief executive office is located
at the above address ("Borrower's Address"). The Schedule to this Agreement (the
"Schedule") shall for all purposes be deemed to be a part of this Agreement, and
the same is an integral part of this Agreement. (Definitions of certain terms
used in this Agreement are set forth in Section 8 below.)
1. LOANS.
1.1 LOANS. Coast will make loans to Borrower (the "Loans"), in amounts
determined by Coast in its reasonable judgment, up to the amounts (the "Credit
Limit") shown on the Schedule, provided no Default or Event of Default has
occurred and is continuing.
1.2 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Coast's discretion, be charged to Borrower's
loan account, and the same shall thereafter bear interest at the same rate as
the other Loans. Regardless of the amount of Obligations that may be outstanding
from time to time, Borrower shall pay Coast minimum monthly interest during the
term of this Agreement with respect to the Receivable Loans in the amount set
forth on the Schedule (the "Minimum Monthly Interest").
1.3 FEES. Borrower shall pay Coast the fee(s) shown on the Schedule,
which are in addition to all interest and other sums payable to Coast and are
not refundable.
2. SECURITY INTEREST.
2.1 SECURITY INTEREST. To secure the payment and performance of all of
the Obligations when due, Borrower hereby grants to Coast a security interest in
all of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located: All Receivables, Inventory, Investment Property,
Equipment, and General Intangibles (excluding trademarks subject to that certain
Consent To Use Trademark Agreement of even date), including, without limitation,
all of Borrower's Deposit Accounts, and all money, and all property now or at
any time in the future in Coast's possession (including claims and credit
balances), and all proceeds of any of the foregoing (including proceeds of any
insurance policies, proceeds of proceeds, and claims against third parties), all
products of any of the foregoing, and all books and records related to any of
the foregoing (all of the foregoing, together with all other property in which
Coast may now or in the future be granted a lien or security interest, is
referred to herein, collectively, as the "Collateral").
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Coast to enter into this Agreement and to make
Loans, Borrower represents and warrants to Coast as follows, and Borrower
covenants that the following representations will continue to be true, and that
Borrower will at all times comply with all of the following covenants:
3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is
and will continue to be, duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation.
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<PAGE> 2
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
Borrower is and will continue to be qualified and licensed to do business in all
jurisdictions in which any failure to do so would have a material adverse effect
on Borrower. The execution, delivery and performance by Borrower of this
Agreement, and all other documents contemplated hereby (i) have been duly and
validly authorized, (ii) are enforceable against Borrower in accordance with
their terms (except as enforcement may be limited by equitable principles and by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
creditors' rights generally), and (iii) do not violate Borrower's articles or
certificate of incorporation, or Borrower's by-laws, or any law or any material
agreement or instrument which is binding upon Borrower or its property, and (iv)
do not constitute grounds for acceleration of any material indebtedness or
obligation under any material agreement or instrument which is binding upon
Borrower or its property.
3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Coast 30 days' prior written notice before changing its name
or doing business under any other name. Borrower has complied, and will in the
future comply, with all laws relating to the conduct of business under a
fictitious business name.
3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in
the heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Coast at least 30 days prior
written notice before opening any additional place of business, changing its
chief executive office, or moving any of the Collateral to a location other than
Borrower's Address or one of the locations set forth on the Schedule.
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at
all times in the future be, the sole owner of all the Collateral, except for
items of Equipment which are leased by Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. Coast now has, and
will continue to have, a first-priority perfected and enforceable security
interest in all of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend Coast and the Collateral against all claims of
others. None of the Collateral now is or will be affixed to any real property in
such a manner, or with such intent, as to become a fixture unless a fixture
filing in favor of Coast shall exist with respect to such real property. Except
as contemplated in the following sentence, Borrower is not and will not become a
lessee under any real property lease pursuant to which the lessor may obtain any
rights in any of the Collateral and no such lease now prohibits, restrains,
impairs or will prohibit, restrain or impair Borrower's right to remove any
Collateral from the leased premises. Whenever any Collateral is located upon
premises in which any third party has an interest (whether as owner, mortgagee,
beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever
requested by Coast, use its best efforts to cause such third party to execute
and deliver to Coast, in form acceptable to Coast, such waivers and
subordinations as Coast shall specify, so as to ensure that Coast's rights in
the Collateral are, and will continue to be, superior to the rights of any such
third party. Borrower will keep in full force and effect, and will comply with
all the terms of, any lease of real property where any of the Collateral now or
in the future may be located, except in the event Distribution Centers are
closed or relocated, in which case Borrower shall give Coast thirty (30) days
prior written notice of the termination of the applicable lease.
3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in
good working condition, and Borrower will not use the Collateral for any
unlawful purpose. Borrower will immediately advise Coast in writing of any
material loss or damage to the Collateral.
3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial
statements now or in the future delivered to Coast have been, and will be,
prepared in conformity with generally accepted accounting principles (except, in
the case of unaudited financial statements, for the absence of footnotes and
subject to normal year-end adjustments) and now and in the future will fairly
reflect the financial condition of Borrower, at the times and for the periods
therein stated. Between the last date covered by any such statement provided to
Coast and the date hereof, there has been no material adverse change in the
financial condition or business of Borrower. Borrower is now and will continue
to be solvent.
3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has
timely filed, and will timely file, all tax returns and reports required by
foreign, federal, state and local law, and Borrower has timely paid, and will
timely pay, all foreign, federal, state and local
-2-
<PAGE> 3
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
taxes, assessments, deposits and contributions now or in the future owed by
Borrower. Borrower may, however, defer payment of any contested taxes, provided
that Borrower (i) in good faith contests Borrower's obligation to pay the taxes
by appropriate proceedings promptly and diligently instituted and conducted,
(ii) notifies Coast in writing of the commencement of, and any material
development in, the proceedings, and (iii) posts bonds or takes any other steps
required to keep the contested taxes from becoming a lien upon any of the
Collateral. As of the date hereof, Borrower is unaware of any material claims or
adjustments proposed for any of Borrower's prior tax years which could result in
any material additional taxes becoming due and payable by Borrower. Borrower has
paid, and shall continue to pay all amounts necessary to fund all present and
future pension, profit sharing and deferred compensation plans in accordance
with their terms, and Borrower has not and will not withdraw from participation
in, permit partial or complete termination of, or permit the occurrence of any
other event with respect to, any such plan which could result in any liability
of Borrower, including any liability to the Pension Benefit Guaranty Corporation
or its successors or any other governmental agency. Coast may in its reasonable
judgment require Borrower to utilize the services of an outside payroll service
providing for the automatic deposit of all payroll taxes payable by Borrower.
However, Borrower shall immediately provide Coast with any and all documentation
requested by Coast verifying the payment of all taxes, including payroll taxes.
3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all material foreign, federal, state
and local laws and regulations relating to Borrower, including, but not limited
to, those relating to Borrower's ownership of real or personal property, the
conduct and licensing of Borrower's business, and environmental matters.
3.10 LITIGATION. Except as disclosed in the Schedule, there is no
claim, suit, litigation, proceeding or investigation pending or (to best of
Borrower's knowledge) threatened by or against or affecting Borrower in any
court or before any governmental agency (or any basis therefor known to
Borrower) which may result, either separately or in the aggregate, in any
material adverse change in the financial condition or business of Borrower, or
in any material impairment in the ability of Borrower to carry on its business
in substantially the same manner as it is now being conducted. Borrower will
promptly inform Coast in writing of any claim, proceeding, litigation or
investigation in the future threatened or instituted by or against Borrower not
covered by insurance and involving any single claim of $50,000 or more, or
involving $100,000 or more in the aggregate. Borrower shall provide to Coast,
concurrently with its 10Q and 10K filings, a schedule of all lawsuits that are
covered by insurance.
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely
for lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation G of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any "margin stock" or to extend credit to others for the purpose of
purchasing or carrying any "margin stock."
4. RECEIVABLES.
4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and
warrants to Coast as follows: Each Account with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made,
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery, and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business.
4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE.
Borrower represents and warrants to Coast as follows: All statements made and
all unpaid balances appearing in all invoices, instruments and other documents
evidencing the Accounts are and shall be true and correct and all such invoices,
instruments and other documents and all of Borrower's books and records are and
shall be genuine and in all respects what they purport to be. All sales and
other transactions underlying or giving rise to each Account shall fully comply
with all applicable laws and governmental rules and regulations (except as any
non-compliance with any such laws, rules, or regulations is with respect to
non-payment of immaterial sales taxes and Borrower has used all reasonable
efforts and ability to comply). All signatures and endorsements by Borrower on
all documents, instruments, and agreements relating to all Accounts are and
shall be genuine, and all such documents, instruments and agreements are and
shall be legally enforceable in accordance with their terms.
4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall
deliver to Coast transaction reports and loan requests, schedules of
Receivables, and schedules of collections, all on Coast's standard forms;
provided, however, that Borrower's failure to execute and deliver the same shall
not affect or limit Coast's security interest and other rights in all of
Borrower's Receivables, nor shall Coast's failure to advance or lend against a
specific Receivable affect or limit Coast's security
-3-
<PAGE> 4
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
interest and other rights therein. Loan requests received after 10:30 AM will
not be considered by Coast until the next Business Day. If requested by Coast,
Borrower shall furnish Coast with copies (or, at Coast's request, originals) of
all contracts, orders, invoices, and other similar documents, and all original
shipping instructions, delivery receipts, bills of lading, and other evidence of
delivery, for any goods the sale or disposition of which gave rise to such
Receivables, and Borrower warrants the genuineness of all of the foregoing.
Borrower shall also furnish to Coast an aged accounts receivable trial balance
in such form and at such intervals as Coast shall request. In addition, Borrower
shall deliver to Coast the originals of all instruments, chattel paper, security
agreements, guarantees and other documents and property evidencing or securing
any Receivables, upon receipt thereof and in the same form as received, with all
necessary endorsements, all of which shall be with recourse.
4.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect
all Receivables, unless and until an Event of Default has occurred. Borrower
shall hold all payments on, and proceeds of, Receivables in trust for Coast, and
Borrower shall deliver all payments and proceeds from Accounts to Coast within
one Business Day after receipt by Borrower, in their original form, duly
endorsed to Coast, to be applied to the Obligations in such order as Coast shall
determine. If an Event of Default has occurred and is continuing, Coast may, in
its discretion, require that all proceeds of Collateral be deposited by Borrower
into a lockbox account, or such other "blocked account" as Coast may specify,
pursuant to a blocked account agreement in such form as Coast may specify. Coast
or its designee may, at any time, notify Account Debtors that Coast has been
granted a security interest in the Receivables.
4.5. REMITTANCE OF PROCEEDS. All proceeds arising from the disposition
of any Account shall be delivered to Coast within one Business Day after receipt
by Borrower, in their original form, duly endorsed to Coast, to be applied to
the Obligations in such order as Coast shall determine. Borrower agrees that it
will not commingle proceeds of the Accounts with any of Borrower's other funds
or property, but will hold such proceeds separate and apart from such other
funds and property and in an express trust for Coast. Nothing in this Section
limits the restrictions on disposition of Collateral set forth elsewhere in this
Agreement.
4.6 DISPUTES. Borrower shall notify Coast promptly of all material
disputes or claims relating to Accounts. Borrower shall not forgive (completely
or partially), compromise or settle any Accounts for less than payment in full,
or agree to do any of the foregoing, except that Borrower may do so, provided
that: (i) Borrower does so in good faith, in a commercially reasonable manner,
in the ordinary course of business, and in arm's length transactions, which are
reported to Coast on the regular reports provided to Coast; (ii) no Default or
Event of Default has occurred and is continuing; and (iii) taking into account
all such discounts settlements and forgiveness, the total outstanding Loans will
not exceed the Credit Limit. Coast may, at any time after the occurrence of an
Event of Default, settle or adjust disputes or claims directly with Account
Debtors for amounts and upon terms which Coast considers advisable in its
reasonable credit judgment and, in all cases, Coast shall credit Borrower's Loan
account with only the net amounts received by Coast in payment of any
Receivables.
4.7 RETURNS. Provided no Event of Default has occurred and is
continuing, if any Account Debtor returns any Inventory to Borrower other than
in the ordinary course of its business, Borrower shall promptly determine the
reason for such return and promptly issue a credit memorandum to the Account
Debtor in the appropriate amount.
4.8 VERIFICATION. Coast may, from time to time, verify directly with
the respective Account Debtors the validity, amount and other matters relating
to the Accounts, by means of mail, telephone or otherwise, either in the name of
Borrower or Coast or such other name as Coast may choose.
4.9 NO LIABILITY. Coast shall not under any circumstances be
responsible or liable for any shortage or discrepancy in, damage to, or loss or
destruction of, any goods, the sale or other disposition of which gives rise to
a Receivable, or for any error, act, omission, or delay of any kind occurring in
the settlement, failure to settle, collection or failure to collect any
Receivable, or for settling any Receivable in good faith for less than the full
amount thereof, nor shall Coast be deemed to be responsible for any of
Borrower's obligations under any contract or agreement giving rise to a
Receivable. Nothing herein shall, however, relieve Coast from liability for its
own gross negligence or willful misconduct.
//
//
//
//
//
5. ADDITIONAL DUTIES OF THE BORROWER.
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<PAGE> 5
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
5.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply
with the financial and other covenants set forth in the Schedule.
5.2 INSURANCE. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Coast, in such form and amounts as Coast may
reasonably require, and Borrower shall provide evidence of such insurance to
Coast, so that Coast is satisfied that such insurance is, at all times, in full
force and effect. All liability insurance policies of Borrower shall name Coast
as an additional insured, and all property casualty and related insurance
policies of Borrower shall name Coast as a loss payee thereon and Borrower shall
cause a lenders loss payee endorsement in form reasonably acceptable to Coast.
Upon receipt of the proceeds of any such insurance (other than proceeds in
respect of product liability claims and claims filed under policies in effect
prior to April 1997 and reimbursements in connection therewith), Coast shall
apply such proceeds in reduction of the Obligations as Coast shall determine in
its sole discretion, except that, provided no Default or Event of Default has
occurred and is continuing, Coast shall release to Borrower insurance proceeds
with respect to Equipment totaling less than $200,000, which shall be utilized
by Borrower for the replacement of the Equipment with respect to which the
insurance proceeds were paid. Coast may require reasonable assurance that the
insurance proceeds so released will be so used. If Borrower fails to provide or
pay for any insurance, Coast may, but is not obligated to, obtain the same at
Borrower's expense. Borrower shall promptly deliver to Coast copies of all
reports made to insurance companies, except those reports that would be
considered privileged or relate to product liability claims and claims filed
under policies in effect prior to April 1997.
5.3 REPORTS. Borrower, at its expense, shall provide Coast with the
written reports set forth in the Schedule, and such other written reports with
respect to Borrower (including budgets, sales projections, operating plans and
other financial documentation), as Coast shall from time to time reasonably
specify.
5.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times, and
on one Business Day's notice, Coast, or its agents, shall have the right to
inspect, audit and copy Borrower's books and records (other than those books and
records that would be considered privileged relating to product liability
claims) and the Collateral (the "Audits"). Coast shall take reasonable steps to
keep confidential all confidential information obtained in any Audit, but Coast
shall have the right to disclose any such information to its auditors,
regulatory agencies, and attorneys, and pursuant to any subpoena or other legal
process. The Audits shall be conducted every 90 days at Borrower's expense and
the charge for the Audits shall be $750 per person per day (or such higher
amount as shall represent Coast's then current standard charge for the same),
plus reasonable out of pocket expenses. Borrower will not enter into any
agreement with any accounting firm, service bureau or third party to store
Borrower's books or records at any location other than Borrower's Address,
without first notifying Coast of the same and obtaining the written agreement
from such accounting firm, service bureau or other third party to give Coast the
same rights with respect to access to books and records and related rights as
Coast has under this Loan Agreement.
5.5 NEGATIVE COVENANTS. Borrower shall not, without Coast's prior
written consent, which consent will not be unreasonably withheld, do any of the
following:
(i) merge or consolidate with another corporation or entity, except in a
transaction in which (A) the shareholders of the Borrower hold at least 50% of
the common stock and all other capital stock of the surviving corporation
immediately after such merger or consolidation, and (B) the Borrower is the
surviving corporation;
(ii) acquire any assets, except (A) in the ordinary course of business, or
(B) in a transaction or a series of transactions not involving the payment of an
aggregate amount in excess of $500,000;
(iii) enter into any other material transaction outside the ordinary course
of business;
(iv) sell or transfer any Collateral, except for the sale of finished
Inventory in the ordinary course of Borrower's business, and except for the sale
of obsolete or unneeded Equipment in the ordinary course of business;
(v) store any Inventory except in the ordinary course of business or other
Collateral with any warehouseman or other third party;
(vi) make any loans of any money or other assets, except (A) advances to
customers or suppliers in the ordinary course of business, (B) travel advances,
employee relocation loans and other employee loans and advances in the ordinary
course of business (C) loans to employees, officers and directors for the
purpose of purchasing equity securities of the Borrower , (D) other loans to
employees up to an aggregate of $50,000, and (E) other loans to officers up to
an aggregate of $100,000;
(vii) except for coolers imported from Canada pursuant to a vendor's
arranged credit facility of up to $1,000,000, incur any debts, outside the
ordinary course of business, which would have a material, adverse effect on
Borrower or on the prospect of repayment of the Obligations;
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<PAGE> 6
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
(viii) guarantee or otherwise become liable with respect to the obligations
of another party or entity;
(x) pay or declare any dividends on Borrower's stock (except for dividends
payable solely in stock of Borrower);
(ix) redeem, retire, purchase or otherwise acquire, directly or indirectly,
any of Borrower's stock, except that Borrower may repurchase stock owned by
employees, directors and consultants of Borrower pursuant to terms of
employment, consulting or other stock restriction agreements at such time as any
such employee, director or consultant terminates his or her affiliation with the
Borrower, for an aggregate purchase price not to exceed $100,000 in any fiscal
year;
(x) make any change in Borrower's capital structure which would have a
material adverse effect on Borrower or on the prospect of repayment of the
Obligations; or
(xi) dissolve or elect to dissolve.
Transactions permitted by the foregoing provisions of this Section are only
permitted if no Default or Event of Default would occur as a result of such
transaction.
5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding
be instituted by or against Coast with respect to any Collateral or relating to
Borrower, Borrower shall, without expense to Coast, make available Borrower and
its officers, employees and agents and Borrower's books and records, to the
extent that Coast may deem them reasonably necessary in order to prosecute or
defend any such suit or proceeding.
5.7 INDEMNITY. Borrower hereby agrees to indemnify Coast and hold Coast
harmless from and against any and all claims, debts, liabilities, demands,
obligations, actions, causes of action, penalties, reasonable costs and expenses
(including reasonable attorneys' fees), of every nature, character and
description, which Coast may sustain or incur based upon or arising out of any
of the Obligations, any actual or alleged failure to collect and pay over any
withholding or other tax relating to Borrower or its employees, any relationship
or agreement between Coast and Borrower, any actual or alleged failure of Coast
to comply with any writ of attachment or other legal process relating to
Borrower or any of its property, or any other matter, cause or thing whatsoever
occurred, done, omitted or suffered to be done by Coast relating to Borrower or
the Obligations (except any such amounts sustained or incurred as the result of
the gross negligence or willful misconduct of Coast). Notwithstanding any
provision in this Agreement to the contrary, the indemnity agreement set forth
in this Section shall survive any termination of this Agreement and shall for
all purposes continue in full force and effect.
5.8 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
Coast, to execute all documents and take all actions, as Coast, may deem
reasonably necessary or useful in order to perfect and maintain Coast's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
6. TERM.
6.1 MATURITY DATE. This Agreement shall continue in effect until the
maturity date set forth on the Schedule (the "Maturity Date"); provided that the
Maturity Date shall automatically be extended, and this Agreement shall
automatically and continuously renew, for successive additional terms of one
year each, unless one party gives written notice to the other, not less than one
hundred twenty days prior to the next Maturity Date, that such party elects to
terminate this Agreement effective on the next Maturity Date.
6.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (i) by Borrower, effective three Business Days after
written notice of termination is given to Coast; or (ii) by Coast at any time
after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Coast under this
Section 6.2, Borrower shall pay to Coast a termination fee (the "Early
Termination Fee") in the amount shown on the Schedule. The Early Termination Fee
shall be due and payable on the effective date of termination and thereafter
shall bear interest at a rate equal to the rate applicable to the Receivable
Loans.
6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether or
not all or any part of such Obligations are otherwise then due and payable.
Without limiting the generality of the foregoing, if on the Maturity Date, or on
any earlier effective date of termination, there are any outstanding Letters of
Credit issued by Coast or issued by another institution based upon an
application, guarantee, indemnity or similar agreement on the part of Coast,
then on such date Borrower shall provide to Coast cash collateral in an amount
equal to the face amount of all such Letters of Credit plus all interest, fees
and cost due or to become due in connection therewith, to secure all of the
Obligations relating to said Letters of Credit, pursuant to Coast's then
standard form cash pledge agreement. Notwithstanding any termination of this
Agreement, all of Coast's security interests in all of the Collateral and all of
the terms and provisions of this
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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Agreement shall continue in full force and effect until all Obligations have
been paid and performed in full; provided that, without limiting the fact that
Loans are subject to the discretion of Coast, Coast may, in its sole discretion,
refuse to make any further Loans after termination. No termination shall in any
way affect or impair any right or remedy of Coast, nor shall any such
termination relieve Borrower of any Obligation to Coast, until all of the
Obligations have been paid and performed in full. Upon payment and performance
in full of all the Obligations and termination of this Agreement, Coast shall
promptly deliver to Borrower termination statements, requests for reconveyances
and such other documents as may be required to fully terminate Coast's security
interests.
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement, and Borrower shall
give Coast immediate written notice thereof: (a) Any material warranty,
representation, statement, report or certificate made or delivered to Coast by
Borrower or any of Borrower's officers, employees or agents, now or in the
future, shall be untrue or misleading in a material respect; or (b) Borrower
shall fail to pay when due any Loan or any interest thereon or any other
monetary Obligation and such failure shall continue for a period of five (5)
days after written notice; or (c) the total Loans and other Obligations
outstanding at any time shall exceed the Credit Limit and such excess shall not
be paid to Coast within five (5) days after written notice; or (d) Borrower
shall fail to deliver the proceeds of Accounts to Coast as provided in Section
4.5 above, or shall fail to give Coast access to its books and records or
Collateral as provided in Section 5.4 above, or shall breach any negative
covenant set forth in Section 5.5 above; or (e) Borrower shall fail to comply
with the financial covenants (if any) set forth in the Schedule or shall fail to
perform any other non-monetary Obligation which by its nature cannot be cured;
or (f) Borrower shall fail to perform any other non-monetary Obligation, which
failure is not cured within the later of 30 Business Days after the date due or
within five (5) days after written notice; or (g) Any levy, assessment,
attachment, seizure, lien or encumbrance (other than a Permitted Lien) is made
on all or any part of the Collateral which is not cured within 10 days after the
occurrence of the same; or (h) any default or event of default occurs under any
obligation secured by a Permitted Lien, which is not cured within any applicable
cure period or waived in writing by the holder of the Permitted Lien and such
holder has accelerated the maturity of such obligation; or (i) Borrower breaches
any material contract or obligation, which has or may reasonably be expected to
have a material adverse effect on Borrower's business or financial condition; or
(j) Dissolution, termination of existence, insolvency or business failure of
Borrower; or appointment of a receiver, trustee or custodian, for all or any
part of the property of, assignment for the benefit of creditors by, or the
commencement of any proceeding by Borrower under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect; or (k) the
commencement of any proceeding against Borrower or any guarantor of any of the
Obligations under any reorganization, bankruptcy, insolvency, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, now or in the future in effect, which is not cured by the
dismissal thereof within 60 days after the date commenced; or (l) revocation or
termination of, or limitation or denial of liability upon, any guaranty of the
Obligations or any attempt to do any of the foregoing, or commencement of
proceedings by any guarantor of any of the Obligations under any bankruptcy or
insolvency law; or (m) revocation or termination of, or limitation or denial of
liability upon, any pledge of any certificate of deposit, securities or other
property or asset of any kind pledged by any third party to secure any or all of
the Obligations, or any attempt to do any of the foregoing, or commencement of
proceedings by or against any such third party under any bankruptcy or
insolvency law; or (n) Borrower makes any payment on account of any indebtedness
or obligation which has been subordinated to the Obligations, other than as
permitted in the applicable subordination agreement, or if any Person who has
subordinated such indebtedness or obligations terminates or in any way limits
his subordination agreement; or (o) any person or two or more persons acting in
concert shall have acquired after the date of this Agreement, beneficial
ownership of 25% or more of the outstanding voting stock of Borrower and the
power to elect a majority of Borrower's board of directors; or (p) Borrower
shall generally not pay its debts as they become due, or Borrower shall conceal,
remove or transfer any part of its property, with intent to hinder, delay or
defraud its creditors, or make or suffer any transfer of any of its property
which may be fraudulent under any bankruptcy, fraudulent conveyance or similar
law; or (q) there shall be a material adverse change in Borrower's business or
financial condition. ; Coast may cease making any Loans hereunder during any of
the above cure periods, and thereafter if an Event of Default has occurred.
7.2 REMEDIES. Upon the occurrence, and during the continuance, of any
Event of Default, Coast, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by Borrower), may do
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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any one or more of the following: (a) Cease making Loans or otherwise extending
credit to Borrower under this Agreement or any other document or agreement; (b)
Accelerate and declare all or any part of the Obligations to be immediately due,
payable, and performable, notwithstanding any deferred or installment payments
allowed by any instrument evidencing or relating to any Obligation; (c) Take
possession of any or all of the Collateral wherever it may be found, and for
that purpose Borrower hereby authorizes Coast without judicial process to enter
onto any of Borrower's premises without interference to search for, take
possession of, keep, store, or remove any of the Collateral, and remain on the
premises or cause a custodian to remain on the premises in exclusive control
thereof, without charge for so long as Coast deems it reasonably necessary in
order to complete the enforcement of its rights under this Agreement or any
other agreement; provided, however, that should Coast seek to take possession of
any of the Collateral by Court process, Borrower hereby irrevocably waives: (i)
any bond and any surety or security relating thereto required by any statute,
court rule or otherwise as an incident to such possession; (ii) any demand for
possession prior to the commencement of any suit or action to recover possession
thereof; and (iii) any requirement that Coast retain possession of, and not
dispose of, any such Collateral until after trial or final judgment; (d) Require
Borrower to assemble any or all of the Collateral and make it available to Coast
at places designated by Coast which are reasonably convenient to Coast and
Borrower, and to remove the Collateral to such locations as Coast may deem
advisable; (e) Complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Coast shall have the right to use Borrower's premises,
vehicles, hoists, lifts, cranes, equipment and all other property without
charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its
condition at the time Coast obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale (Coast shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as Coast deems reasonable, or on Coast's premises, or elsewhere and the
Collateral need not be located at the place of disposition; further, Coast may
directly or through any affiliated company purchase or lease any Collateral at
any such public disposition, and if permissible under applicable law, at any
private disposition and sale or other disposition of Collateral shall not
relieve Borrower of any liability Borrower may have if any Collateral is
defective as to title or physical condition or otherwise at the time of sale);
(g) Demand payment of, and collect any Receivables and General Intangibles
comprising Collateral and, in connection therewith, Borrower irrevocably
authorizes Coast to endorse or sign Borrower's name on all collections,
receipts, instruments and other documents, to take possession of and open mail
addressed to Borrower and remove therefrom payments made with respect to any
item of the Collateral or proceeds thereof, and, in Coast's sole discretion, to
grant extensions of time to pay, compromise claims and settle Receivables and
the like for less than face value; (h) Offset against any sums in any of
Borrower's general, special or other Deposit Accounts with Coast; and (i) Demand
and receive possession of any of Borrower's federal and state income tax returns
and the books and records utilized in the preparation thereof or referring
thereto. All reasonable attorneys' fees, expenses, costs, liabilities and
obligations incurred by Coast with respect to the foregoing shall be due from
the Borrower to Coast on demand. Coast may charge the same to Borrower's loan
account, and the same shall thereafter bear interest at the same rate as is
applicable to the Receivable Loans. Without limiting any of Coast's rights and
remedies, from and after the occurrence of any Event of Default, the interest
rate applicable to the Obligations shall be increased by an additional three
percent per annum.
7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and
Coast agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable: (i) Notice of the sale is given to
Borrower at least seven days prior to the sale, and, in the case of a public
sale, notice of the sale is published at least seven days before the sale in a
newspaper of general circulation in the county where the sale is to be
conducted; (ii) Notice of the sale describes the collateral in general,
non-specific terms; (iii) The sale is conducted at a place designated by Coast,
with or without the Collateral being present; (iv) The sale commences at any
time between 8:00 a.m. and 6:00 p.m.; (v) Payment of the purchase price in cash
or by cashier's check or wire transfer is required; (vi) With respect to any
sale of any of the Collateral, Coast may (but is not obligated to) direct any
prospective purchaser to ascertain directly from Borrower any and all
information concerning the same. Coast shall be free to employ other methods of
noticing and selling the Collateral, in its discretion, if they are commercially
reasonable.
7.4 POWER OF ATTORNEY. Upon the occurrence, and during the continuance,
of any Event of Default, without limiting Coast's other rights and remedies,
Borrower grants to Coast an irrevocable power of
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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attorney coupled with an interest, authorizing and permitting Coast (acting
through any of its employees, attorneys or agents) at any time, at its option,
but without obligation, with or without notice to Borrower, and at Borrower's
expense, to do any or all of the following, in Borrower's name or otherwise, but
Coast agrees to exercise the following powers in a commercially reasonable
manner: (a) Execute on behalf of Borrower any documents that Coast may, in its
sole discretion, deem advisable in order to perfect and maintain Coast's
security interest in the Collateral, or in order to exercise a right of Borrower
or Coast, or in order to fully consummate all the transactions contemplated
under this Agreement, and all other present and future agreements; (b) Execute
on behalf of Borrower any document exercising, transferring or assigning any
option to purchase, sell or otherwise dispose of or to lease (as lessor or
lessee) any real or personal property which is part of Coast's Collateral or in
which Coast has an interest; (c) Execute on behalf of Borrower, any invoices
relating to any Receivable, any draft against any Account Debtor and any notice
to any Account Debtor, any proof of claim in bankruptcy, any Notice of Lien,
claim of mechanic's, materialman's or other lien, or assignment or satisfaction
of mechanic's, materialman's or other lien; (d) Take control in any manner of
any cash or non-cash items of payment or proceeds of Collateral; endorse the
name of Borrower upon any instruments, or documents, evidence of payment or
Collateral that may come into Coast's possession; (e) Endorse all checks and
other forms of remittances received by Coast; (f) Pay, contest or settle any
lien, charge, encumbrance, security interest and adverse claim in or to any of
the Collateral, or any judgment based thereon, or otherwise take any action to
terminate or discharge the same; (g) Grant extensions of time to pay, compromise
claims and settle Receivables and General Intangibles for less than face value
and execute all releases and other documents in connection therewith; (h) Pay
any sums required on account of Borrower's taxes or to secure the release of any
liens therefor, or both; (i) Settle and adjust, and give releases of, any
insurance claim that relates to any of the Collateral and obtain payment
therefor; (j) Instruct any third party having custody or control of any books or
records belonging to, or relating to, Borrower to give Coast the same rights of
access and other rights with respect thereto as Coast has under this Agreement;
and (k) Take any action or pay any sum required of Borrower pursuant to this
Agreement and any other present or future agreements. Any and all reasonable
sums paid and any and all reasonable costs, expenses, liabilities, obligations
and attorneys' fees incurred by Coast with respect to the foregoing shall be
added to and become part of the Obligations, and shall be payable on demand.
Coast may charge the foregoing to Borrower's loan account and the foregoing
shall thereafter bear interest at the same rate applicable to the Receivable
Loans. In no event shall Coast's rights under the foregoing power of attorney or
any of Coast's other rights under this Agreement be deemed to indicate that
Coast is in control of the business, management or properties of Borrower.
7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any
sale of the Collateral shall be applied by Coast first to the reasonable costs,
expenses, liabilities, obligations and attorneys' fees incurred by Coast in the
exercise of its rights under this Agreement, second to the interest due upon any
of the Obligations, and third to the principal of the Obligations, in such order
as Coast shall determine in its sole discretion. Any surplus shall be paid to
Borrower or other persons legally entitled thereto; Borrower shall remain liable
to Coast for any deficiency. If, Coast, in its sole discretion, directly or
indirectly enters into a deferred payment or other credit transaction with any
purchaser at any sale of Collateral, Coast shall have the option, exercisable at
any time, in its sole discretion, of either reducing the Obligations by the
principal amount of purchase price or deferring the reduction of the Obligations
until the actual receipt by Coast of the cash therefor.
7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set
forth in this Agreement, Coast shall have all the other rights and remedies
accorded a secured party under the Code and under all other applicable laws, and
under any other instrument or agreement now or in the future entered into
between Coast and Borrower, and all of such rights and remedies are cumulative
and none is exclusive. Exercise or partial exercise by Coast of one or more of
its rights or remedies shall not be deemed an election, nor bar Coast from
subsequent exercise or partial exercise of any other rights or remedies. The
failure or delay of Coast to exercise any rights or remedies shall not operate
as a waiver thereof, but all rights and remedies shall continue in full force
and effect until all of the Obligations have been fully paid and performed.
8. Definitions. AS USED IN THIS AGREEMENT, THE FOLLOWING TERMS HAVE THE
FOLLOWING MEANINGS:
"Account" has the meaning set forth in Section 9106 of the Code.
"Account Debtor" means the obligor on an Account.
"Adjusted Net Worth" means stockholders' equity plus debt subordinated
to Coast less goodwill and non-compete agreements.
"Affiliate" means, with respect to any Person, a relative, partner,
director or officer, of such Person, or
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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any parent or subsidiary of such Person, or any Person controlling, controlled
by or under common control with such Person.
"Business Day" means a day on which Coast is open for business.
"Code" means the Uniform Commercial Code as adopted and in effect in
the State of California from time to time.
"Collateral" has the meaning set forth in Section 2.1 above.
"Default" means any event which with notice or passage of time or both,
would constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the
Code.
"Dilution" means all non-cash reductions, excluding dated Inventory,
however, including but not limited to credit memos, discounts, journal entries
and advertising allowances, in the total amount of Accounts, expressed as a
percentage of Accounts.
"Eligible Receivables" means Accounts arising in the ordinary course of
Borrower's business from the sale of goods or rendition of services, which
Coast, in its good faith business judgment, shall deem eligible for borrowing,
based on such considerations as Coast may from time to time deem appropriate.
"Equipment" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and
other tangible personal property (other than Inventory) of every kind and
description used in Borrower's operations or owned by Borrower and any interest
in any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions or improvements to any of the foregoing,
wherever located.
"Event of Default" means any of the events set forth in Section 7.1 of
this Agreement.
"General Intangibles" means all general intangibles of Borrower,
whether now owned or hereafter created or acquired by Borrower, including,
without limitation, all choses in action, causes of action, corporate or other
business records, Deposit Accounts, inventions, designs, drawings, blueprints,
patents, patent applications, trademarks and the goodwill of the business
symbolized thereby, names, trade names, trade secrets, goodwill, copyrights,
registrations, licenses, franchises, customer lists, security and other
deposits, rights in all litigation presently or hereafter pending for any cause
or claim (whether in contract, tort or otherwise), and all judgments now or
hereafter arising therefrom, all claims of Borrower against Coast, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation life
insurance, key man insurance, credit insurance, liability insurance, property
insurance and other insurance), tax refunds and claims, computer programs,
discs, tapes and tape files, claims under guaranties, security interests or
other security held by or granted to Borrower, all rights to indemnification and
all other intangible property of every kind and nature (other than Receivables).
"Inventory" means all of Borrower's now owned and hereafter acquired
goods, merchandise or other personal property, wherever located, to be furnished
under any contract of service or held for sale or lease (including without
limitation all raw materials, work in process, finished goods and goods in
transit, and including without limitation all farm products), and all materials
and supplies of every kind, nature and description which are or might be used or
consumed in Borrower's business or used in connection with the manufacture,
packing, shipping, advertising, selling or finishing of such goods, merchandise
or other personal property, and all warehouse receipts, documents of title and
other documents representing any of the foregoing.
"Investment Property" has the meaning set forth in Section 9115 of the
Code.
"Maximum Dollar Amount" has the meaning set forth in Section 1 of the
Schedule.
"Obligations" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Coast, whether evidenced by this Agreement or any note
or other instrument or document, whether arising from an extension of credit,
opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by operation of law and any participation by Coast in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, audit fees, letter of credit fees, collateral
monitoring fees, closing fees, facility fees, termination fees, minimum interest
charges and any other sums chargeable to Borrower under this Agreement or under
any other present or future instrument or agreement between Borrower and Coast.
"Permitted Liens" means the following: (i) purchase money security
interests in specific items of Equipment, including but not limited to coolers
supplied by a Canadian vendor; (ii) leases of specific items of Equipment; (iii)
liens for taxes not yet payable; (iv) additional security interests and liens
set forth in the Schedule or consented to in writing by Coast, which consent
shall not be unreasonably withheld; (v) security interests being terminated
substantially concurrently with this Agreement; (vi) liens of materialmen,
mechanics,
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warehousemen, carriers, or other similar liens arising in the ordinary course of
business and securing obligations which are not delinquent; (vii) liens incurred
in connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not materially increase
so as to have an adverse effect on Borrower or on the prospect of repayment of
the Obligations; (viii) liens in favor of customs and revenue authorities which
secure payment of customs duties in connection with the importation of goods.
Coast will have the right to require, as a condition to its consent under
subparagraph (iv) above, that the holder of the additional security interest or
lien sign an intercreditor agreement reasonably acceptable to Coast, and which
agreement acknowledges that the security interest is subordinate to the security
interest in favor of Coast, and agree not to take any action to enforce its
subordinate security interest so long as any Obligations remain outstanding, and
that Borrower agree that any uncured default in any obligation secured by the
subordinate security interest shall also constitute an Event of Default under
this Agreement.
"Person" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Receivables" means all of Borrower's now owned and hereafter acquired
Accounts (whether or not earned by performance), and all letters of credit,
contract rights, chattel paper, instruments, securities, documents and all other
forms of obligations at any time owing to Borrower, all guaranties and other
security therefore, all merchandise returned to or repossessed by Borrower, and
all rights of stoppage in transit and all other rights or remedies of an unpaid
vendor, lienor or secured party.
Other Terms. All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with generally accepted accounting principles, consistently applied. All other
terms contained in this Agreement, unless otherwise indicated, shall have the
meanings provided by the Code, to the extent such terms are defined therein.
9. GENERAL PROVISIONS.
9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Coast (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Coast on account of the Obligations three Business Days after receipt
by Coast of immediately available funds, and, for purposes of the foregoing, any
such funds received after 10:30 AM on any day shall be deemed received on the
next Business Day. Coast shall not, however, be required to credit Borrower's
account for the amount of any item of payment which is unsatisfactory to Coast
in its sole discretion, and Coast may charge Borrower's loan account for the
amount of any item of payment which is returned to Coast unpaid.
9.2 APPLICATION OF PAYMENTS. All payments with respect to the
Obligations may be applied, and in Coast's good faith discretion reversed and
re-applied, to the Obligations, in such order and manner as Coast shall
determine in its good faith discretion.
9.3 CHARGES TO ACCOUNTS. Coast may, in its discretion, require that
Borrower pay monetary Obligations in cash to Coast, or charge them to Borrower's
Loan account, in which event they will bear interest at the same rate applicable
to the Loans. Coast may also, in its discretion, charge any monetary Obligations
to Borrower's Deposit Accounts maintained with Coast.
9.4 MONTHLY ACCOUNTINGS. Coast shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Coast), unless Borrower
notifies Coast in writing to the contrary within forty-five days after each
account is rendered, describing the nature of any alleged errors or omissions.
9.5 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, or certified mail return receipt
requested, addressed to Coast or Borrower at the addresses shown in the heading
to this Agreement, or at any other address designated in writing by one party to
the other party. Notices to Coast shall be directed to the Commercial Finance
Division, to the attention of the Division Manager or the Division Credit
Manager. All notices shall be deemed to have been given upon delivery in the
case of notices personally delivered, or at the expiration of one Business Day
following delivery to the private delivery service, or two Business Days
following the deposit thereof in the United States mail, with postage prepaid.
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9.6 SEVERABILITY. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
9.7 INTEGRATION. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and Coast and supersede
all prior and contemporaneous negotiations and oral representations and
agreements, all of which are merged and integrated in this Agreement. There are
no oral understandings, representations or agreements between the parties which
are not set forth in this Agreement or in other written agreements signed by the
parties in connection herewith.
9.8 WAIVERS. The failure of Coast at any time or times to require
Borrower to strictly comply with any of the provisions of this Agreement or any
other present or future agreement between Borrower and Coast shall not waive or
diminish any right of Coast later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect any other
default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Coast shall be deemed to have been waived
by any act or knowledge of Coast or its agents or employees, but only by a
specific written waiver signed by an authorized officer of Coast and delivered
to Borrower. Borrower waives demand, protest, notice of protest and notice of
default or dishonor, notice of payment and nonpayment, release, compromise,
settlement, extension or renewal of any commercial paper, instrument, account,
General Intangible, document or guaranty at any time held by Coast on which
Borrower is or may in any way be liable, and notice of any action taken by
Coast, unless expressly required by this Agreement.
9.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Coast, nor any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Coast shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower
or any other party through the ordinary negligence of Coast, or any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Coast, but nothing herein shall relieve Coast from
liability for its own gross negligence or willful misconduct.
9.10 AMENDMENT. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of Coast.
9.11 TIME OF ESSENCE. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement.
9.12 ATTORNEYS FEES, COSTS AND CHARGES. Borrower shall reimburse Coast
for all reasonable attorneys' fees and all filing, recording, search, title
insurance, appraisal, audit, and other reasonable costs incurred by Coast,
pursuant to, or in connection with, or relating to this Agreement (whether or
not a lawsuit is filed), including, but not limited to, any reasonable
attorneys' fees and costs Coast incurs in order to do the following: prepare and
negotiate this Agreement and the documents relating to this Agreement; obtain
legal advice in connection with this Agreement or Borrower; enforce, or seek to
enforce, any of its rights; prosecute actions against, or defend actions by,
Account Debtors; commence, intervene in, or defend any action or proceeding;
initiate any complaint to be relieved of the automatic stay in bankruptcy; file
or prosecute any probate claim, bankruptcy claim, third-party claim, or other
claim; examine, audit, copy, and inspect any of the Collateral or any of
Borrower's books and records; protect, obtain possession of, lease, dispose of,
or otherwise enforce Coast's security interest in, the Collateral; and otherwise
represent Coast in any litigation relating to Borrower. If either Coast or
Borrower files any lawsuit against the other predicated on a breach of this
Agreement, the prevailing party in such action shall be entitled to recover its
reasonable costs and attorneys' fees, including (but not limited to) reasonable
attorneys' fees and costs incurred in the enforcement of, execution upon or
defense of any order, decree, award or judgment. Borrower shall also pay Coast's
standard charges for returned checks and for wire transfers, in effect from time
to time. All attorneys' fees, costs and charges to which Coast may be entitled
pursuant to this Paragraph may be charged by Coast to Borrower's loan account
and shall thereafter bear interest at the same rate as the Receivable Loans.
9.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and Coast; provided,
however, that Borrower may not assign or transfer any of its rights under this
Agreement without the prior written consent of Coast, and any prohibited
assignment shall be void. No consent by Coast to any
-12-
<PAGE> 13
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
assignment shall release Borrower from its liability for the Obligations.
9.14 PUBLICITY. Coast is hereby authorized, at its expense, to issue
appropriate press releases and to cause a tombstone to be published announcing
the consummation of this transaction and the aggregate amount thereof.
9.15 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.16 LIMITATION OF ACTIONS. Any claim or cause of action by Borrower
against Coast, its directors, officers, employees, agents, accountants or
attorneys, based upon, arising from, or relating to this Loan Agreement, or any
other present or future document or agreement, or any other transaction
contemplated hereby or thereby or relating hereto or thereto, or any other
matter, cause or thing whatsoever, occurred, done, omitted or suffered to be
done by Coast, its directors, officers, employees, agents, accountants or
attorneys, shall be barred unless asserted by Borrower by the commencement of an
action or proceeding in a court of competent jurisdiction by the filing of a
complaint within one year after the first act, occurrence or omission upon which
such claim or cause of action, or any part thereof, is based, and the service of
a summons and complaint on an officer of Coast, or on any other person
authorized to accept service on behalf of Coast, within thirty (30) days
thereafter. Borrower agrees that such one-year period is a reasonable and
sufficient time for Borrower to investigate and act upon any such claim or cause
of action. The one-year period provided herein shall not be waived, tolled, or
extended except by the written consent of Coast in its sole discretion. This
provision shall survive any termination of this Agreement or any other present
or future agreement.
9.17 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used
in this Agreement for convenience. Borrower and Coast acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Coast or Borrower under any rule
of construction or otherwise.
9.18 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts
and transactions hereunder and all rights and obligations of Coast and Borrower
shall be governed by the laws of the State of California. As a material part of
the consideration to Coast to enter into this Agreement, Borrower (i) agrees
that all actions and proceedings relating directly or indirectly to this
Agreement shall, at Coast's option, be litigated in courts located within
California, and that the exclusive venue therefor shall be Los Angeles County;
(ii) consents to the jurisdiction and venue of any such court and consents to
service of process in any such action or proceeding by personal delivery or any
other method permitted by law; and (iii) waives any and all rights Borrower may
have to object to the jurisdiction of any such court, or to transfer or change
the venue of any such action or proceeding.
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9.19 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND COAST EACH HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT
OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR BORROWER, IN ALL
OF THE FOREGOING
-13-
<PAGE> 14
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
BORROWER:
ODWALLA, INC.
BY_______________________________
D. STEPHEN C. WILLIAMSON
TITLE: CHIEF EXECUTIVE OFFICER
BY_______________________________
JAMES R. STEICHEN
TITLE: CHIEF FINANCIAL OFFICER
COAST:
COAST BUSINESS CREDIT, A DIVISION OF
SOUTHERN PACIFIC THRIFT & LOAN ASSOCIATION
BY_______________________________
SUSAN G. DUDAS
TITLE: VICE PRESIDENT
-14-
<PAGE> 1
Exhibit 10.14
LOAN AGREEMENT
$1,000,000 Menlo Park, California
Date: May 22, 1997
The undersigned Odwalla, Inc. ("Borrower"), for value received, hereby
promises to pay to SAND HILL CAPITAL LLC ("Sand Hill") at such place as Sand
Hill may specify, in lawful money of the United States of America, the principal
amount of One Million Dollars ($1,000,000), plus interest on the principal
amount hereof from time to time outstanding at a floating rate equal to the
lesser of the maximum lawful rate or the reference rate quoted by Bank of
America NT&SA plus One and One Half Percent (1.5%) per annum; provided that if
Borrower's Adjusted Net Worth (as defined below) is less than Fourteen Million
Dollars ($14,000,000), the loan shall bear interest at a per annum rate equal to
such reference rate plus Two Percent (2%). Interest shall be payable on the
twenty-first day of each month, beginning June 21, 1997, and continuing through
May 21, 1998 (the "Maturity Date"), on which day the entire principal balance
and all accrued interest shall be immediately due and payable.
1. Payments. The advance made by Sand Hill to Borrower pursuant to this
Agreement and all payments shall be recorded by Sand Hill on the books and
records of Sand Hill, which shall be deemed correct absent manifest error. The
failure of Sand Hill to record any prepayment or payment made on account of the
principal balance hereof shall not limit or otherwise affect the obligation of
Borrower under this Agreement to pay the principal, interest and other amounts
due and payable under this Agreement.
All payments on this Agreement shall be applied first to fees and
expenses, then to interest and then to principal. Any principal or interest
payments on this Agreement outstanding after the occurrence and during the
continuance of a default under this Agreement shall bear interest at a rate
equal to Five Percent above the rate otherwise applicable under this Agreement.
2. Secured Agreement. To secure repayment of all obligations evidenced
by this Agreement and performance of all of Borrower's obligations hereunder,
Borrower grants Sand Hill a security interest in the property described in
Exhibit A attached hereto (the "Collateral"). Borrower shall take such actions
as Sand Hill shall reasonably request from time to time to perfect or continue
the security interest granted hereunder. Borrower shall not dispose of its
property except in the ordinary course of business or encumber any part of its
property without Sand Hill's prior written consent.
3. Representations and Warranties. Borrower represents to Sand Hill as
follows: (a) Borrower is not in default under any agreement under which Borrower
owes any money, or any agreement, the violation or termination of which could
have a material adverse effect on Borrower; (b) Borrower has taken all action
necessary to authorize the execution, delivery and performance of this
Agreement; (c) except for the security interest granted to Coast Business Credit
under a Loan and Security Agreement (the "Coast Agreement") and except for
purchase money security interests on particular items of equipment (other than
equipment financed by Sand Hill), there are no liens, security interests or
other encumbrances on the Collateral; (d) the execution and performance of this
Agreement do not conflict with, or constitute a default under, any agreement to
which Borrower is party or by which Borrower is bound; (e) the information
provided to Sand Hill on or prior to the date of this Agreement is true and
correct in all material respects; (f) all financial statements and other
information provided to Sand Hill fairly present Borrower's financial condition,
and there has not been a material adverse change in the financial condition of
Borrower since the date of the most recent of the financial statements submitted
to Sand Hill; (g) Borrower is in compliance with all material laws and orders
applicable to it; and (h) no representation or other statement made by Borrower
to Sand Hill contains any untrue statement of a material fact or omits to state
a material fact necessary to make any statements made to Sand Hill not
misleading at the time of such representation or statement.
4. Covenants. (a) Borrower will provide Sand Hill: audited financial
statements prepared in accordance with GAAP as soon as available after the end
of Borrower's fiscal year; monthly company-prepared
1
<PAGE> 2
financial statements within 30 days after the end of each month; and such other
financial information as Sand Hill may reasonably request from time to time.
(b) Borrower will maintain insurance on the Collateral that includes
a lender's loss payable endorsement in favor of Sand Hill as an additional loss
payee. Borrower will maintain insurance in a form acceptable to Sand Hill
relating to the Collateral and Borrower's business in amounts and of a type that
are customary to businesses similar to Borrower's.
(c) Borrower will maintain its corporate existence and good standing
and will maintain in force all licenses and agreements, the loss of which could
reasonably be expected to have a material adverse effect on Borrower's business.
Borrower will comply with all laws and orders, the violation of which could
reasonably be expected to have a material adverse effect on Borrower's business.
(d) Borrower will not merge or consolidate with any person or
entity, or make any investments, or dispose of any substantial portion of its
assets, in each case outside the ordinary course of Borrower's business without
Sand Hill's prior written consent.
(e) Borrower will maintain a balance of stockholders' equity plus
subordinated debt acceptable to Sand Hill less goodwill and non-compete
agreements ("Adjusted Net Worth") of not less than Twelve Million Dollars
($12,000,000).
(f) Borrower will comply with all of the terms of the Coast
Agreement.
5. Fees and Expenses. Borrower shall pay Sand Hill a facility fee of
Five Thousand Dollars ($5,000) on the date of this Agreement, and shall
reimburse Sand Hill for all costs and expenses, including reasonable attorneys
fees incurred in the preparation of this Agreement and the other documents
executed in connection with this Agreement. Borrower shall also deliver a
warrant to purchase stock to Sand Hill in a form acceptable to Sand Hill.
Borrower shall indemnify Sand Hill for any losses or claims incurred in
connection with this Agreement or the transactions contemplated hereby. Borrower
shall pay all costs that Sand Hill incurs in enforcing this Agreement or
exercising any rights with respect to the Collateral, including without
limitation reasonable attorneys fees and expenses.
6. Events of Default; Remedies. A breach of any representation made
under this Agreement, or an Event of Default under the Coast Agreement, or
Borrower's failure (i) to pay any part of the principal, interest or other
amount due hereunder on the date due and payable or (ii) to comply with any
agreement or covenant set forth in this Agreement, or (iii) to comply with the
terms of any material contract to which Borrower is a party or any agreement
pursuant to which Borrower has incurred indebtedness (including the Coast
Agreement), or (iv) to comply with any law to which Borrower is subject, shall
constitute a default under this Agreement and, with respect to any default under
clauses (ii), (iii) or (iv) that is capable of being cured, Borrower has failed
to cure such default within five (5) days of the sooner of the date that an
executive officer of Borrower knew or should reasonably have been expected to
know of such default or the date on which Sand Hill gives Borrower notice of
such default. Upon the occurrence and continuance of a default hereunder, all
unpaid principal, accrued interest and other amounts owing hereunder shall, at
the option of Sand Hill, be immediately collectible by or on behalf of Sand
Hill, and Sand Hill may exercise all of the rights of a secured party under the
California Uniform Commercial Code. Sand Hill shall have a right to dispose of
the Collateral in any commercially reasonable manner, and shall have a
royalty-free license to use any name, trademark, advertising matter or any
property of a similar nature to complete production of, advertisement for, and
disposition of any Collateral. Sand Hill shall have a license to enter into,
occupy and use Borrower's premises and the Collateral without charge to exercise
any of Sand Hill's rights or remedies under this Agreement.
7. Waivers; Indemnity. Borrower waives presentment and demand for
payment, notice of dishonor, protest and notice of protest of this Agreement,
and shall pay all costs of collection when incurred, including reasonable
attorneys' fees, costs and expenses. Borrower shall indemnify and hold Sand Hill
harmless from any
2
<PAGE> 3
claim, obligation or liability (including without limitation reasonable
attorneys fees and expenses) arising out of this Agreement or the transactions
contemplated hereby.
8. JURY WAIVER. SAND HILL AND BORROWER EACH WAIVES ANY RIGHT TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF THIS AGREEMENT OR ANY OF
THE TRANSACTIONS CONTEMPLATED HEREIN.
9. Miscellaneous. This Agreement can not be amended orally. All prior
agreements are superseded by this Agreement. Borrower may not assign any
obligation hereunder without Sand Hill's consent. Sand Hill may assign or grant
a participation of any interest in this Agreement without Borrower's consent.
This Agreement may be executed in two or more counterparts, each of which shall
be deemed an original, but all of which shall constitute one instrument.
ODWALLA, INC.
By: _____________________________________
Title: __________________________________
SAND HILL CAPITAL LLC
By: _____________________________________
Title: __________________________________
3
<PAGE> 4
EXHIBIT A
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor vehicles
and trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower and Borrower's books
relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of
credit, certificates of deposit, instruments and chattel paper now owned or
hereafter acquired and Borrower's books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work thereof, whether published or unpublished, now owned or hereafter acquired;
all trade secret rights, including all rights to unpatented inventions,
know-how, operating manuals, license rights and agreements and confidential
information, now owned or hereafter acquired; all mask work or similar rights
available for the protection of semiconductor chips, now owned or hereafter
acquired; all claims for damages by way of any past, present and future
infringement of any of the foregoing; and
(g) Any and all claims, rights and interests in any of the above and
all substitutions for, additions and accessions to and proceeds thereof.
4
<PAGE> 1
EXHIBIT 11.1
ODWALLA, INC.
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
------------------------ ------------------------
May 31, May 31, May 31, May 31,
1996 1997 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average shares of
common stock outstanding
for the period 4,930,000 4,993,000 4,914,000 4,976,000
Weighted average common
share equivalents (1) 512,000 -- 494,000 --
--------- --------- --------- ---------
Shares used in computing
net earnings per share 5,442,000 4,993,000 5,408,000 4,976,000
========= ========= ========= =========
</TABLE>
(1) The effect of common stock equivalents is not presented for 1997 as it
would be anti-dilutive.
27
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ODWALLA INC.
FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED ON MAY 31, 1997, AS FILED ON FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FILING ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 3,285
<SECURITIES> 1,407
<RECEIVABLES> 5,462
<ALLOWANCES> 569
<INVENTORY> 3,646
<CURRENT-ASSETS> 16,192
<PP&E> 19,962
<DEPRECIATION> 6,031
<TOTAL-ASSETS> 32,660
<CURRENT-LIABILITIES> 11,847
<BONDS> 461
0
0
<COMMON> 29,296
<OTHER-SE> (8,944)
<TOTAL-LIABILITY-AND-EQUITY> 32,660
<SALES> 39,043
<TOTAL-REVENUES> 39,043
<CGS> 20,550
<TOTAL-COSTS> 20,550
<OTHER-EXPENSES> 29,941
<LOSS-PROVISION> 478
<INTEREST-EXPENSE> 59
<INCOME-PRETAX> (11,289)
<INCOME-TAX> (1,584)
<INCOME-CONTINUING> (9,705)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,705)
<EPS-PRIMARY> (1.95)
<EPS-DILUTED> (1.95)
</TABLE>
