<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ODWALLA LOGO]
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 0-23036
ODWALLA, INC.
(Exact name of registrant as specified in its charter)
California 77-0096788
- ---------------------------------- ----------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
120 Stone Pine Road, Half Moon Bay, CA 94019
(Address and zip code of principal executive offices)
(650) 726-1888
(Registrant's telephone number)
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check [X] whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock, no par value 5,048,619 shares
-------------------------- ----------------
(Class) Outstanding at July 6, 1998)
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ODWALLA, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 30, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of August 31, 1997
and May 30, 1998 ............................................ 3
Consolidated Statements of Operations for the three month
and thirteen week periods ended May 31, 1997 and May 30, 1998
and the nine month and thirty-nine week periods ended
May 31, 1997 and May 30, 1998 ............................... 4
Consolidated Statements of Cash Flows for the nine month and
thirty-nine week periods ended May 31, 1997 and May 30, 1998 5
Notes to Consolidated Financial Statements .................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................... 8
Part II. Other Information
Item 1. Legal Proceedings ........................................... 18
Item 6. Exhibits and Reports on Form 8-K ............................ 20
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ODWALLA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 31, MAY 30,
1997 1998
-------- --------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,217 $ 3,203
Short term investments 1,008 --
Trade accounts receivable, less allowance for doubtful
accounts of $592 and $566 4,610 5,412
Inventories (Note 2) 3,910 2,711
Refundable income taxes 660 --
Prepaid expenses and other 730 757
Deferred tax assets 1,095 1,076
-------- --------
Total current assets 14,230 13,159
-------- --------
Plant, property and equipment, net (Note 3) 13,875 12,994
-------- --------
Other assets
Officer and shareholder loans 117 113
Excess of cost over net assets acquired, net 1,333 1,252
Covenants not to compete, net 738 636
Deferred tax assets 410 438
Other 303 275
-------- --------
Total other assets 2,901 2,714
-------- --------
Total assets $ 31,006 $ 28,867
======== ========
Current liabilities
Accounts payable $ 5,395 $ 4,674
Accrued payroll and related items 1,263 1,365
Line of credit 2,014 2,017
Other accruals 3,947 2,850
Current maturities of capital lease obligations 212 197
Current maturities of long-term debt 99 5
-------- --------
Total current liabilities 12,930 11,108
Capital lease obligations, less current maturities 162 22
Long-term debt, less current maturities 262 258
Other 17 17
-------- --------
Total liabilities 13,371 11,405
-------- --------
Contingencies (Note 5)
Shareholders' equity
Preferred stock, no par value, shares authorized, 5,000,000; no shares
issued and outstanding
Common stock, no par value, shares authorized, 15,000,000; shares
issued and outstanding, 5,024,000 and 5,047,000 29,310 29,445
Retained earnings (deficit) (11,675) (11,983)
-------- --------
Total shareholders' equity 17,635 17,462
-------- --------
Total liabilities and shareholders' equity $ 31,006 $ 28,867
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE THIRTEEN NINE THIRTY-NINE
MONTHS WEEKS MONTHS WEEKS
ENDED ENDED ENDED ENDED
MAY 31, MAY 30, MAY 31, MAY 30,
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 13,685 $ 15,446 $ 39,043 $ 43,788
Cost of sales 7,119 7,472 20,550 21,826
-------- -------- -------- --------
Gross profit 6,566 7,974 18,493 21,962
-------- -------- -------- --------
Operating expenses
Sales and distribution 5,403 5,193 16,972 14,753
Marketing 782 664 2,203 1,918
General and administrative 2,086 1,898 6,414 5,545
Recall and related costs (Note 5) 411 -- 4,352 --
-------- -------- -------- --------
Total operating expenses 8,682 7,755 29,941 22,216
-------- -------- -------- --------
Income (loss) from operations (2,116) 219 (11,448) (254)
Other income (expense)
Interest income (expense), net 13 (46) 158 (157)
Other 10 (8) 1 60
-------- -------- -------- --------
Income (loss) before income taxes (2,093) 165 (11,289) (351)
Income tax expense (benefit) (273) 25 (1,584) (42)
-------- -------- -------- --------
Net income (loss) $ (1,820) $ 140 $ (9,705) $ (309)
======== ======== ======== ========
Net income (loss) per common
share (Note 4) $ (0.36) $ 0.03 $ (1.95) $ (0.06)
======== ======== ======== ========
Weighted average common shares
outstanding 4,993 5,047 4,976 5,043
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
4
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ODWALLA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE THIRTY-NINE
MONTHS WEEKS
ENDED ENDED
MAY 31, MAY 30,
1997 1998
------- -------
<S> <C> <C>
Cash flows from operating activities
Net loss $(9,705) $ (309)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,641 1,721
Deferred taxes (1,583) (9)
(Gain) loss from sale of assets 13 (80)
Changes in assets and liabilities
Trade accounts receivable 409 (801)
Inventories (352) 1,198
Refundable income taxes -- 660
Prepaid expenses and other current assets (107) (27)
Other noncurrent assets 36 21
Accounts payable 698 (721)
Accrued payroll and related items 586 102
Other accrued liabilities 1,188 (1,098)
Income taxes payable (203) --
------- -------
Net cash (used in) provided by operating activities (7,379) 657
------- -------
Cash flows from investing activities
Capital expenditures (2,536) (672)
Proceeds from sale of assets 28 106
Proceeds from short-term investments, net 5,031 1,008
------- -------
Net cash provided by investing activities 2,523 442
------- -------
Cash flows from financing activities
Principal payments under long-term debt (142) (98)
Net borrowings under line of credit 1,986 4
Payments of obligations under capital leases (162) (155)
Sale of common stock 484 136
------- -------
Net cash provided by (used in) financing activities 2,166 (113)
------- -------
Net increase (decrease) in cash and cash equivalents (2,690) 986
Cash and cash equivalents, beginning of period 5,975 2,217
------- -------
Cash and cash equivalents, end of period $ 3,285 $ 3,203
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
5
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ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Change in Accounting Period. Effective September 1, 1997, the Company
changed its reporting period from the twelve months ended August 31 to the 52 or
53 week period ending on the Saturday nearest August 31. This change does not
result in the restatement of any information previously provided and does not
have a material impact on the comparability of the quarterly information
presented herein.
Basis of Presentation. The accompanying consolidated balance sheet of
Odwalla, Inc. and its subsidiary (the "Company") at May 30, 1998 and the related
consolidated statements of operations and of cash flows for each of the
three-month and thirteen-week periods and the nine-month and thirty-nine week
periods ended May 31, 1997 and May 30, 1998 have not been audited by independent
accountants. However, in the opinion of management, they include all adjustments
(which include only normal recurring 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, 1997 appearing in the Company's 1997
Annual Report on Form 10-K.
2. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
August 31, May 30,
1997 1998
--------- ---------
<S> <C> <C>
Raw materials $2,657 $1,770
Packaging supplies and other 420 354
Inventory deposits 329 223
Finished product 504 364
------ ------
Total $3,910 $2,711
====== ======
</TABLE>
3. PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
August 31, May 30,
1997 1998
-------- --------
<S> <C> <C>
Land $ 1,046 $ 1,046
Buildings and building improvements 7,097 7,186
Leasehold improvements 2,441 2,482
Machinery and equipment 6,612 6,964
Vehicles 530 538
Other 2,667 2,679
-------- --------
20,393 20,895
Less accumulated depreciation and amortization (6,518) (7,901)
-------- --------
Plant, property and equipment, net $ 13,875 $ 12,994
======== ========
</TABLE>
6
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ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. EARNINGS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 ("FAS 128"), Earnings Per Share. FAS 128 establishes new
accounting standards for the computation and manner of presentation of the
Company's earnings per share. The Company adopted the provisions of FAS 128 for
the quarter ending February 28, 1998. The adoption of FAS 128 did not have any
impact on other periods presented as the Company has no dilutive common stock
equivalents.
5. RECALL AND RELATED COSTS
On October 30, 1996, the Company was notified by the State of
Washington Environmental Health Services of an epidemiological link between
several cases of E. coli O157:H7 and Odwalla's apple juice products. The Company
immediately implemented a recall (the "Recall") of all Odwalla products
containing apple juice. On October 31, 1996, Odwalla expanded the Recall to
include its carrot and vegetable products because such products were processed
on the same production line as the apple juice. In December 1996, Odwalla
reintroduced all apple juice-based products to the market and, in October 1997,
reintroduced its carrot product.
To date, there have been twenty-one personal injury claims and legal
proceedings filed against the Company seeking monetary damages and other relief
relating to the Recall. There has also been one legal proceeding alleging
fraudulent business acts and practices relating to the recall products.
Seventeen of these claims and proceedings have been settled. In addition, other
claims for damages resulting from the Recall were presented to the Company's
insurance carrier and almost all of those claims have been settled. In addition,
two personal injury legal proceedings have been filed against the Company
seeking monetary damages and other relief relating to alleged product
consumption prior to the Recall; one of those claims has been settled.
Settlement of these personal injury legal proceedings and claims was covered
under the Company's insurance policy. At this time, the Company is unable to
determine the potential liability from the remaining legal proceedings and
claims. However, the Company believes its insurance coverage is adequate to
cover such claims and legal proceedings, but there can be no assurance that the
remaining coverage will be adequate.
In early 1997, the Company was informed that it is the subject of a
federal grand jury investigation concerning events of 1996 and before, including
the E. coli O157:H7 incident. The Company has responded to a subpoena and is
cooperating fully with the government. At this time, the Company is unable to
predict the outcome of the investigation.
The Company incurred significant costs related to the Recall, including
legal and professional fees, cost of the product recalled (including the labor
and freight involved in the recall process), destruction of unsold product and
now obsolete packaging supplies, advertising and public relations costs, costs
of leased sales and distribution equipment in excess of current volume
requirements, costs of reformulating products and costs associated with the
flash-pasteurization process. Total Recall and related costs incurred in fiscal
1997 were $6,518,000, including the $4,352,000 recorded as of May 31, 1997. The
Company will continue to assess whether additional costs should be recorded. No
additional costs were recorded for the thirty-nine weeks ended May 30, 1998.
The Company maintains insurance coverage for product recall, product
adulteration, lost income and other first party business risks. During fiscal
1997 a claim for product recall costs was presented to its insurance carriers as
were additional claims in both fiscal 1997 and 1998 for business losses incurred
due to the Recall. However, the amount and timing of proceeds, if any, from the
claims and any future insurance claims cannot be presently determined.
7
<PAGE> 8
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 those set forth in this section,
in the Company's Annual Report on Form 10-K for the year ended August 31, 1997,
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
Odwalla is the leading brand of fresh-squeezed and nutritionally
fortified juices and smoothies in the United States. The Company also supplies
all-natural meal replacement beverages and geothermal natural spring water.
These products compose what the Company calls "Nourishing Beverages." The
Company's Nourishing Beverages provide the consumer with easy access to natural,
great tasting nutrition. The Company believes that its Nourishing Beverages
appeal to many consumers because of the superior taste of fresh and minimally
processed beverages and the greater nutritional value of Nourishing Beverages
compared to juice from concentrate or with artificial flavors. Except for its
100% fresh squeezed citrus line, all of Odwalla's juices are flash-pasteurized.
These products are currently sold in California, Washington, Oregon, Colorado,
New Mexico, Nevada, Texas, Illinois, Arizona, Michigan, Minnesota and the
Washington, DC area.
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. During the first thirty-nine weeks of fiscal 1998, net sales
increased 12% from the first nine months last year; sales in the third quarter
of fiscal 1998 were up 13% compared to the same quarter last year. The Company's
growth and sales strength has come predominantly from continued penetration in
existing markets, sales of new products and expansion into new markets. The
Company believes that its sales have been positively affected, both through
growth and through a return to near pre-Recall levels, by continued strong
support for the Company's brand and products, new product innovation, including
a new category, and better placement on store shelves.
A significant portion of the Company's cost of sales is the cost of raw
materials. Although a portion of the cost of certain purees and other raw
materials is fixed on an annual basis, the majority of the Company's fresh fruit
and vegetable purchases and other key ingredients are made on the open market.
Consequently, the Company is subject to wide fluctuations in prices for the
fruits, vegetables and other nutritious products and ingredients it purchases.
The Company has historically distributed its products primarily through
its 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, using primarily leased
delivery trucks. This distribution system, although more expensive than using
independent distributors, has allowed the Company to optimally manage delivery
schedules, efficiently control its product mix, keep store shelves or its own
coolers stocked with fresh products and have a greater influence on determining
in-store location and merchandising of its products. At the end of fiscal 1997,
the Company expanded its distribution channel by transferring approximately 40%
of its Northern California trade partner account base (which represented a
significantly smaller percentage of its Northern California sales volume) to an
independent distributor. This distribution channel, with merchandising support
provided by the
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
Company, provides an opportunity to expand product distribution. The Company
expects that future growth and expansion will utilize either both, or a
combination of, the DSD and independent distributor systems, although there can
be no assurance that this will occur or that it will occur on favorable terms.
The Company has historically 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. Future operating results may
fluctuate as a result of these and other factors, including the continued impact
of the Recall, negative press and media reports, increased energy costs, the
introduction of new products by the Company's competitors, changes in the
Company's customer mix, and overall trends in the economy. The Company's
business is also significantly affected by weather patterns, and unseasonably
cool or rainy weather can adversely impact the Company's sales. A significant
portion of the Company's expense levels is relatively fixed, and the timing of
increases in expense levels is based in large part on the Company's forecasts of
future sales. If sales are below expectations in any given period, the adverse
impact on results of operations may be magnified by the Company's inability to
adjust spending quickly enough to compensate for the sales shortfall. The
Company also may choose to reduce prices or increase spending in response to
competition, which may have an adverse effect on the Company's results of
operations.
On October 30, 1996, the Company was notified by the State of
Washington Environmental Health Services of an epidemiological link between
several cases of E. coli O157:H7 and Odwalla's apple juice products. The Company
immediately implemented a 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. In December 1996, Odwalla reintroduced all apple
juice-based products to the market and, in October 1997, reintroduced its carrot
product. Although the Company experienced a significant reduction in sales
following the Recall, as of May 30, 1998, the Company's sales have returned to
near their pre-Recall level.
To date, there have been twenty-one personal injury claims and legal
proceedings filed against the Company seeking monetary damages and other relief
relating to the Recall. There has also been one legal proceeding alleging
fraudulent business acts and practices relating to the recall products.
Seventeen of these claims and proceedings have been settled. In addition, other
claims for damages resulting from the Recall were presented to the Company's
insurance carrier and almost all of those claims have been settled. In addition,
two personal injury legal proceedings have been filed against the Company
seeking monetary damages and other relief relating to alleged product
consumption prior to the Recall; one of those claims has been settled.
Settlement of these personal injury legal proceedings and claims was covered
under the Company's insurance policy. At this time, the Company is unable to
determine the potential liability from the remaining legal proceedings and
claims. However, the Company believes its insurance coverage is adequate to
cover such claims and legal proceedings, but there can be no assurance that the
remaining coverage will be adequate. In early 1997, the Company was informed
that it is the subject of a federal grand jury investigation concerning events
of 1996 and before, including the E. coli O157:H7 incident. The Company has
responded to a subpoena and is cooperating fully with the government. At this
time, the Company is unable to predict the outcome of the investigation. The
response to the legal proceedings and the grand jury investigation has required
a significant amount of management time and has caused the Company to incur
significant legal fees. The Company expects these matters will continue to
require significant management time in the future.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
The Company incurred significant costs related to the Recall, including
legal and professional fees, cost of the product recalled (including the labor
and freight involved in the recall process), destruction of unsold product and
now obsolete packaging supplies, advertising and public relations costs, costs
of leased sales and distribution equipment in excess of current volume
requirements, costs of reformulating products and costs associated with the
flash-pasteurization process. Total Recall and related costs incurred in fiscal
1997 were $6,518,000. The Company maintains insurance coverage for product
recall, product adulteration, lost income and other first party business risks.
During fiscal 1997, a claim for product recall costs was presented to its
insurance carriers as were additional claims in both fiscal 1997 and 1998 for
business losses incurred due to the Recall. However, the amount and timing of
proceeds, if any, from the claims and any future insurance claims cannot be
presently determined.
When reviewing the results of operations for the three-month and
thirteen-week periods and the nine-month and thirty-nine week periods ended May
31, 1997 and May 30, 1998, it is important to note that the months of September
and October, 1996 continued the net sales growth trend that the Company had
reported in fiscal 1996 and positively impacted the results of operations for
the first nine months of fiscal 1997.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain
statements of operations data for the three-month and thirteen-week periods and
the nine-month and thirty-nine week periods ended May 31, 1997 and May 30, 1998.
These operating results are not necessarily indicative of the results for any
future period.
<TABLE>
<CAPTION>
THREE THIRTEEN NINE THIRTY-NINE
MONTHS WEEKS MONTHS WEEKS
ENDED ENDED ENDED ENDED
MAY 31, MAY 30, MAY 31, MAY 30,
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 52.0 48.4 52.6 49.8
-------- -------- -------- --------
Gross margin 48.0 51.6 47.4 50.2
-------- -------- -------- --------
Operating expenses
Sales and distribution 39.5 33.6 43.5 33.7
Marketing 5.7 4.3 5.6 4.4
General and administrative 15.3 12.3 16.5 12.7
Recall and related costs 3.0 0.0 11.1 0.0
-------- -------- -------- --------
Income (loss) from operations (15.5) 1.4 (29.3) (0.6)
Interest and other (income) expense, net (0.2) 0.4 (0.3) 0.2
Income tax expense (benefit) (2.0) 0.1 (4.1) (0.1)
-------- -------- -------- --------
Net income (loss) (13.3)% 0.9% (24.9)% (0.7)%
======== ======== ======== ========
</TABLE>
THIRTEEN WEEKS ENDED MAY 30, 1998 COMPARED TO THE THREE MONTHS ENDED MAY 31,
1997
NET SALES. Net sales for the third quarter of fiscal 1998 increased
12.9% to $15.4 million compared to $13.7 million in the third quarter of fiscal
1997. Net sales of the Company's Nourishing Beverage products were offset by a
slight decline in peel and by-product sales. Nourishing Beverage products are
sold to third party distributors at a lower price than to retail trade partners,
as the individual third party distributors incur the distribution costs. As the
Company expands the use of such distributors, net sales growth comparisons to
fiscal 1997 may be slightly impacted due to this price structure difference. The
Company believes that the increase from the third quarter in fiscal 1997
demonstrates strength of the brand in existing markets despite the impact of the
Recall and, particularly in some markets, the negative impact of news media. In
the third quarter, all geographic markets experienced growth compared to the
third quarter of fiscal 1997.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
COST OF SALES. Cost of sales increased to $7.5 million in the third
quarter of fiscal 1998 compared to $7.1 million for the same period during
fiscal 1997. Gross margin as a percentage of net sales was 51.6% in the third
quarter of fiscal 1998, an increase from 48.0% when compared to the third
quarter of fiscal 1997. Gross margin increased primarily due to (a) more
favorable fruit pricing and yield on most raw products, (b) decreases in
operating expenses as a percentage of net sales resulting from process changes
and the cost of plant improvements since the third quarter of fiscal 1997,
offset to some extent by (c) an increase in labor costs, and (d) the change from
two-sided to three-sided labels on many of the Company's products.
SALES AND DISTRIBUTION. Sales and distribution expenses were $5.2
million in the third quarter of fiscal 1998 compared to $5.4 million in the
third quarter of fiscal 1997, and decreased as a percentage of net sales to
33.6% from 39.5% last year. The reduction, in both absolute dollars and as a
percentage of net sales, results from consolidation of certain distribution
operations and geographic responsibilities, sales route restructuring, selective
use of third party distributors, and other cost control measures implemented
late last year. 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 decreased to $664,000 in the third
quarter of fiscal 1998 compared to $782,000 in the third quarter of fiscal 1997,
and decreased as a percentage of net sales. Marketing activities in the third
quarter of fiscal 1998 included advertising of the quencher line of products,
including the introduction of a new quencher product. Marketing expenses may
increase in absolute dollars and as a percentage of net sales during the
remainder of fiscal 1998, partly due to the launch of a new product and
activities in geographic expansion markets, although there can be no assurance
that an increase will occur.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased to $1.9 million in the third quarter of fiscal 1998 from $2.1 million
in the third quarter of fiscal 1997, and decreased as a percentage of net sales.
The change was primarily due to a decrease in payroll. The Company does not
expect general and administrative costs for the remainder of fiscal 1998 to
increase significantly in absolute dollars when compared to the third quarter of
fiscal 1998. However, there can be no assurance that general and administrative
costs will not increase significantly in absolute dollars. 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 not directly related to the Recall in excess of fiscal 1997
levels.
RECALL AND RELATED COSTS. Recall and related costs were $411,000 in the
third quarter of fiscal 1997. This total represents the costs directly
associated with the Recall. In the fourth quarter of fiscal 1997, changes in
recall related matters and further analysis of the Company's claim for business
losses resulting from the Recall indicated that significant additional
professional fees were expected to be incurred. Accordingly, the Company
recorded a $2.2 million charge to operations to establish a liability for future
professional fees related to the Recall. However, there can be no assurance that
the actual liability established is adequate. At the end of the third quarter of
fiscal 1998, the Company determined that no further adjustment to this liability
was necessary at this time. However, the Company will continue to assess this
liability and will make appropriate adjustments if circumstances change.
INTEREST AND OTHER EXPENSE (INCOME). Odwalla had net interest and other
expense of $23,000 in the third quarter of fiscal 1998 compared to income of
$54,000 in the third quarter last year. Other income in this line item results
from the sale of excess equipment. The net interest expense in fiscal 1998
results primarily from borrowings under the line of credit and other existing
debt; the net interest income in fiscal 1997 resulted from investment income
offset slightly by the interest expense of debt incurred prior to the line of
credit established in late May 1997.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
INCOME TAX EXPENSE (BENEFIT). The $25,000 income tax expense for the
third quarter of fiscal 1998 represents taxes using anticipated tax rates. The
$273,000 income tax benefit for the third quarter of fiscal 1997 result from the
tax benefits associated with operating losses. The effective tax benefit rate
varies from the federal statutory tax rate primarily due to the effect of
establishing a deferred tax asset valuation allowance. The Company has provided
the valuation allowance for a portion of its net deferred tax assets due to
uncertainty as to the ultimate realization of such assets. The Company will
continue to assess the valuation allowance as additional information regarding
the Company's future profitability is available.
THIRTY-NINE WEEKS ENDED MAY 30, 1998 COMPARED TO THE NINE MONTHS ENDED MAY 31,
1997
NET SALES. Net sales for the first three quarters of fiscal 1998
increased 12.2% to $43.8 million compared to $39.0 million in the first three
quarters of fiscal 1997. Net sales of the Company's Nourishing Beverage
products, which increased 13.5% from the same period last year, were offset by a
small decline in peel and by-product sales. Nourishing Beverage products are
sold to third party distributors at a lower price than to retail trade partners,
as the third party distributors incur the distribution costs. The Company
believes that the increase from the first three quarters in fiscal 1997, which
included two of the highest sales months in the Company's history, demonstrates
strength of the brand in existing markets despite the impact of the Recall and
the negative impact of news media. However, sales volume has not returned to
pre-Recall levels and the Company is unable to determine when sales will return
to such levels.
COST OF SALES. Cost of sales increased to $21.8 million in the first
three quarters of fiscal 1998 compared to $20.6 million for the same period
during fiscal 1997. Gross margin as a percentage of net sales was 50.2% in the
first three quarters of fiscal 1998, an increase from 47.4% during the first
three quarters of fiscal 1997. Gross margin increased primarily due to (a)
favorable fruit pricing and yield on most ingredients, (b) decreases in
operating expenses as a percentage of net sales resulting from process changes
and the cost of plant improvements since the first three quarters of fiscal
1997, offset to some extent by (c) a slight increase in labor costs, and (d) the
change from two-sided to three-sided labels on many of the Company's products.
SALES AND DISTRIBUTION. Sales and distribution expenses were $14.8
million in the first three quarters of fiscal 1998 compared to $17.0 million in
the first three quarters of fiscal 1997, and decreased as a percentage of net
sales to 33.7% from 43.5% last year and 37.3% in the fourth quarter of fiscal
1997. The reduction, in both absolute dollars and as a percentage of net sales,
results from consolidation of certain distribution operations and geographic
responsibilities, sales route restructuring, selective use of third party
distributors, and other cost control measures implemented in fiscal 1997.
MARKETING. Marketing expenses decreased to $1.9 million in the first
three quarters of fiscal 1998 compared to $2.2 million in the first three
quarters of fiscal 1997, and decreased as a percentage of net sales. Marketing
activities in the first three quarters of fiscal 1998 included reintroduction of
the Company's carrot product, with minimal outside resources, advertising the
seasonal introduction of tangerine juice and the quencher line and the launch of
new products. Marketing expenses are expected to increase in absolute dollars
and as a percentage of net sales in the fourth quarter of fiscal 1998, partly
due to geographic expansion support and the launch of a new product, as the
Company works to reinforce the existing consumer base and attract new consumers
to the brand and Nourishing Beverages, expand outside communications, develop
and launch new products, and expand consumer research, although there can be no
assurance that an increase will occur.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased to $5.5 million in the first three quarters of fiscal 1998 from $6.4
million in the first three quarters of fiscal 1997, and decreased as a
percentage of net sales. The change was primarily due to a decrease in payroll
and outside professional services. The Company does not expect general and
administrative costs for the remainder of fiscal 1998 to increase significantly
in absolute dollars when compared to the third quarter of fiscal 1998. However,
there can be no assurance that general and administrative costs will not
increase significantly in absolute dollars. The
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
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 not directly related to the Recall in excess of
fiscal 1997 levels.
RECALL AND RELATED COSTS. Recall and related costs were $4.4 million in
the first three quarters of fiscal 1997. This total represents the costs
directly associated with the Recall, including: advertising and public relations
costs; legal and professional fees; costs of the product recalled, including the
labor and freight involved in the recall process; destruction of unsold product
and obsolete packaging supplies; costs of leased equipment in excess of volume
requirements; costs of reformulating products; and costs associated with the
flash-pasteurization process. In the fourth quarter of fiscal 1997, changes in
Recall related matters and further analysis of the Company's claim for business
losses resulting from the Recall indicated that significant additional
professional fees were expected to be incurred. Accordingly, the Company
recorded a $2.2 million charge to operations to establish a liability for future
professional fees related to the Recall. However, there can be no assurance that
the actual liability established is adequate. The Company determined that no
further adjustment to this liability was necessary at May 30, 1998. However, the
Company will continue to assess this liability and will make appropriate
adjustments if circumstances change.
INTEREST AND OTHER EXPENSE (INCOME). Odwalla had net interest and other
expense of $97,000 in the first three quarters of fiscal 1998 compared to net
interest and other income of $159,000 in the first three quarters last year.
Other income in fiscal 1998 includes $80,000 from the sale of excess equipment.
The net interest expense in fiscal 1998 results primarily from borrowings under
the line of credit and other existing debt; the net interest income in fiscal
1997 resulted from investment income offset slightly by the interest expense of
debt incurred prior to the line of credit established in late May 1997.
INCOME TAX EXPENSE (BENEFIT). The $42,000 income tax benefit for the
first three quarters of fiscal 1998 and the $1.6 million income tax benefit for
the first three quarters of fiscal 1997 results from the tax benefit associated
with the operating loss. The effective tax benefit rate varies from the federal
statutory tax rate primarily due to the effect of establishing a deferred tax
asset valuation allowance. The Company has provided the valuation allowance for
a portion of its net deferred tax assets due to uncertainty as to the ultimate
realization of such assets. The Company will continue to assess the valuation
allowance as additional information regarding the Company's future profitability
is available.
LIQUIDITY AND CAPITAL RESOURCES
At May 30, 1998, the Company had working capital of $2.0 million
compared to working capital of $1.3 million at August 31, 1997. At May 30, 1998,
the Company had cash, cash equivalents and short term investments of $3.2
million, which is the same as at August 31, 1997.
Net cash provided by operating activities for the thirty-nine weeks
ended May 30, 1998 was $657,000. This consisted of the net loss plus
depreciation and amortization, decreases in inventory and refundable income
taxes offset by increases in accounts receivable and decreases in accounts
payable and other accrued expenses. Net cash provided by investing activities
for the thirty-nine weeks was $442,000, consisting primarily of sale of
short-term investments and excess assets offset by capital expenditures,
primarily for production equipment at the Dinuba plant. Net cash used in
financing activities for the thirty-nine weeks was $113,000, consisting
primarily of payments of long-term debt and capital lease obligations offset by
the sale of common stock through the exercise of stock options.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
At May 30, 1998, the Company had $219,000 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. The Company obtained a $500,000 operating lease line for
coolers in the second quarter of fiscal 1998, all of which was utilized by the
end of June, 1998, and the Company is currently exploring additional leasing or
lease financing sources to obtain future commitments for computer equipment.
There can be no assurance that the Company will be able to obtain such lease
financing and the failure to do so may have an adverse effect on the Company's
business or results of operations.
The Company currently believes that it has identified internal Year
2000 issues and is undertaking changes necessary to become Year 2000 compliant.
This process is not expected to have a material impact on operations or future
operating costs and is expected to be substantially completed prior to calendar
year 1999.
The Company anticipates that the increased costs associated with
recovering from the impact of the Recall may cause the Company to pursue
additional financing that may be dilutive to current investors or result in a
higher debt-to-equity ratio than would otherwise be the case. There can be no
assurance that such financing will be available on terms favorable to the
Company, if at all.
Based upon information currently available, the Company believes that
its current borrowing capability under the Agreement and Loan Agreement will be
adequate to meet its obligations as they become due through May 1999.
CERTAIN FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS
OPERATIONS. 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, 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 return to pre-Recall
levels, including planned expansion, and there can be no assurance that
post-Recall events 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.
PRODUCTS, DISTRIBUTION AND TRADE PARTNERS. Odwalla strives for
consistent "day-of-juicing quality" in its products. Shelf life standards for
its products are based primarily on maintaining the flavor quality and nutrient
integrity of its beverages. The shelf life of Odwalla's fruit and vegetable
based products is typically limited at the retail outlet. The Company believes
that its shelf life standards for each product maintain the flavor and
nutritional integrity that consumers associate with freshly produced fruit and
vegetable beverages. The Company's policy is to have all products removed from
trade partners' shelves on or before their Odwalla-established expiration date.
In addition, because of the Company's "day of juicing" quality standards, the
Company's products reflect the seasonal changes in fruit varieties in color and
taste. Odwalla's production methods are designed to minimize adverse effects of
processing. The Company's product line includes several different types of
Nourishing Beverages and varies over time as a result of seasonal and new
products.
At most of its DSD accounts, Odwalla maintains responsibility for
stocking, ordering and merchandising its products at the point of sale, 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 presentation of its products. 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.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
The Company also uses third party distributors in certain geographic
locations and for certain trade partners. This distribution channel, with
merchandising support provided by the Company, provides an opportunity to expand
product distribution, increase DSD efficiency, and still maintain direct
relationships with trade partners. In fiscal 1998, through the end of the third
quarter, expansion into the Chicago, Detroit, Minneapolis and Arizona markets
began with the use of a third party distributor. Odwalla sells directly to the
third party distributors under these arrangements. Third party distributors
generally do not receive credit for unsold product beyond certain introductory
periods, if any.
RAW MATERIALS. Producing and selling Nourishing Beverages entails
special requirements in fruit sourcing, beverage production, distribution and
sales in order to preserve and maximize their freshness and flavor quality.
Fruits and vegetables must be sourced and selected to meet established criteria,
including variety, quality, ripeness and other factors. Transportation and
processing of the fruit and vegetables must be performed in a manner that
preserves fresh flavors and consistency. Odwalla has focused on each of these
elements in an effort to achieve its goal of providing the safest, best tasting
and most nutritious Nourishing Beverages for consumers.
Odwalla buys fruits and vegetables according to stringent
specifications. Fruits and vegetables are purchased using different schedules
and methods depending on the type of produce. Because various types of fruit and
vegetable crops are harvested at different times of the year, the Company
obtains and produces different juices on a seasonal basis. The Company purchases
most of its fruits and vegetables in the open market on a negotiated basis.
Historically, oranges, apples and carrots are the commodities purchased in
largest volume by the Company. All three are subject to volatility in supply,
price and quality that could materially and adversely affect the Company's
business and results of operations, as could the availability, price and quality
of other ingredients.
Odwalla also obtains a number of fruits, such as tropical fruits, from
foreign suppliers in the form of frozen fruit puree. A puree is whole fruit that
has been finely cut and fresh-frozen for shipment. A puree is not a concentrate.
Purees are combined with the fresh, flash-pasteurized juices of other fruits in
a number of the Company's products. Purees used by the Company are heat-treated
to ensure safety. Most purees are purchased under annual price contracts.
As with most agricultural products, supply and price of raw materials
used by the Company can be affected by a number of factors beyond the control of
the Company, such as frosts, droughts, floods and other natural disasters, other
weather conditions, economic factors affecting growing decisions, various plant
diseases and pests. The heavy rains and flooding that occurred in California in
the first and second quarters of fiscal 1995 resulted in higher costs of fruit
and lower yields from the California orange crop in the last quarter of fiscal
1995 and the first quarter of fiscal 1996. The Company is aware that the
occurrence of significant El Nino conditions and other weather patterns may have
an adverse effect on the prices and availability of selected agricultural
products. To date in fiscal 1998, weather conditions have significantly impacted
pricing and, initially, availability on one agricultural product.
RISKS ASSOCIATED WITH PERISHABLE PRODUCTS. With the exception of its
geothermal spring water and meal replacement beverages, the Company's products
are either fresh or flash-pasteurized and do not contain any preservatives.
Because of this they have a limited shelf life. In order to maintain its "day of
juicing" quality standards, the Company further restricts the shelf life of its
products through early expiration dates. As a result, since the Company is not
able to hold any significant finished goods inventory, its results of operations
are highly dependent on its ability to accurately forecast its near term sales
in order to adjust fresh fruit and vegetable sourcing and production.
Historically, forecasting product demand has been difficult, and in light of the
Recall, the Company expects it to continue as a challenge. Failure to accurately
forecast product demand could result in the Company either being unable to meet
higher than anticipated demand or producing excess inventory that cannot be
profitably sold. In addition, most of the Company's trade partners have the
right to return any products that are not sold by their
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
expiration date. The inability to meet higher than anticipated demand or excess
production or significant amounts of product returns could have a material
adverse effect on the Company's business and results of operations.
COMPETITION. In a broad sense, the Company's products compete with all
beverages available to consumers. The beverage market is highly competitive. It
includes national, regional and local producers and distributors, many of whom
have greater resources than the Company, and many of whom have shelf stable
products that can be distributed with significantly less cost. The Company views
its niche as easily accessed nourishing beverages in the super premium juice,
emerging meal replacement beverage and bottled water categories. The Company
believes its current direct competition in this market niche is from nationally,
regionally and locally focused juice producers, certain of which are owned by
major beverage producers and nationally branded meal replacement beverage and
premium bottled water producers. The Company also views juice and smoothie bars
as competition. In addition, a number of major supermarkets and other retail
outlets squeeze and market their own brand of fresh juices that compete with the
Company's products. A large international company, Chiquita Brands
International, Inc. ("Chiquita"), is engaged in this market niche in certain
geographic areas. Odwalla entered the Los Angeles market in September 1995 and
is competing directly with Chiquita's products in that market and in Colorado.
Chiquita and other major food and beverage companies are becoming more active in
the Nourishing Beverage business. A decision by such companies to focus on the
Company's existing markets or target markets could have a material adverse
effect on the Company's business and results of operations. While the Company
believes that it competes favorably with its competitors on factors such as
quality, nutritional value, food safety, merchandising, service, sales and
distribution, flavor categories, brand name recognition and loyalty, the
Company's products are typically sold at prices higher than most other competing
products. There can be no assurance that the Company will not experience
competitive pricing pressure that could adversely affect its results of
operations.
DEPENDENCE ON ONE OR A FEW MAJOR TRADE PARTNERS. In fiscal 1997, the
Company's largest account, Safeway, accounted for approximately 12% of the
Company's sales. The Company puts considerable effort into the maintenance of
this and other significant accounts, but there can be no assurance that sales to
these accounts will not decrease or that these trade partners will not choose to
replace the Company's products with those of competitors. The loss of Safeway or
other significant accounts or any significant decrease in the volume of products
purchased by their customers in the future would materially and adversely affect
the Company's business and results of operations. Continuity of trade partner
relationships is important, and events that impact the Company's trade partners,
such as the Recall and labor disputes, may have an adverse impact on the
Company's results of operations.
GOVERNMENT REGULATION. The production and sales of the Company's
beverages are subject to the rules and regulations of various federal, state and
local food and health agencies, including the FDA. In August, 1997, the FDA
outlined their long term strategy for regulation of the fresh juice industry in
their Notice of Intent. The FDA intends to mandate HACCP for the fresh juice
industry as it has done in the meat, fish and poultry industries. As an interim
measure, the FDA recommended that, in the absence of a HACCP plan, fresh juice
companies should place warning labels on unpasteurized juice. Because the
Company's products are produced at its Dinuba production facility under a HACCP
plan which yields at least a five-log reduction in potential pathogens, Odwalla
believes it is already in full compliance with the FDA's proposed regulations.
The Company does not anticipate significant additional costs associated with FDA
regulatory compliance.
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
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS, continued:
compliance with such laws or regulations will not have a material adverse effect
on the Company's results of operations or financial condition. The Company has
not incurred any significant costs in complying with environmental laws.
PRODUCT LIABILITY. All of Odwalla's juice products are highly
perishable. In addition to the Recall associated with the E. coli O157:H7
bacteria, the Company has from time to time received complaints from consumers
regarding ill effects allegedly caused by its products. While such past claims
have not resulted in any material liability to date, there can be no assurance
that future claims will not be made or that any such claim or claims associated
with the Recall will not result in adverse publicity for the Company or monetary
damages, either of which could materially and adversely affect the Company's
business and results of operations. The Company currently maintains $52,000,000
in product liability insurance, which may not be sufficient to cover the cost of
defense or related damages in the event of a significant product liability claim
related to the Recall or otherwise. See Part II "Item 1.
Legal Proceedings."
GEOGRAPHIC CONCENTRATION. The Company's wholesale accounts and retail
trade partners have their largest concentration in Northern California, with
most located in the metropolitan areas surrounding the San Francisco Bay. As
such, the Company's business and results of operations may be adversely affected
by natural occurrences, economic downturns and other conditions affecting
Northern California.
VOLATILITY OF STOCK PRICE. The price of the Company's Common Stock has,
at certain times, experienced significant price volatility. The Company believes
that factors such as announcements of developments related to the Company's
business, fluctuations in the Company's operating results, failure to meet
securities analysts' expectations, general conditions in the fruit and vegetable
industries and the worldwide economy, announcements of innovations, new products
or product enhancements by the Company or its competitors, fluctuations in the
level of cooperative development funding, acquisitions, changes in governmental
regulations, developments in patents or other intellectual property rights and
changes in the Company's relationships with trade partners and suppliers could
cause the price of the Company's Common Stock to fluctuate substantially. In
addition, in recent years the stock market in general, and the market for small
capitalization stocks in particular, has experienced extreme price fluctuations
which have often been unrelated to the operating performance of affected
companies. Such fluctuations could adversely affect the market price of the
Company's Common Stock.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The following personal injury claims and legal proceedings seeking
monetary damages and other relief relating to the Recall are pending against the
Company:
1. The McGregor Case: A personal injury lawsuit filed in Santa Clara
County Superior Court, Santa Clara, California on June 2, 1997 and
served on June 16, 1997. There is no trial date currently set.
2. The Sawchuk Case: A personal injury lawsuit filed in the United
States District Court for the Northern District of California and
served on or about October 10, 1997. The case is set for trial in
June, 1999.
3. The Shaffer Case: A personal injury lawsuit filed in King County
Superior Court and served on or about October 13, 1997. The case
is set for trial on March 8, 1999.
4. The Jackson Case: A personal injury lawsuit filed in King County
Superior Court and served on or about June 8, 1998. The case is
set for trial on October 25, 1999.
In addition, the Company has one additional proceeding allegedly
arising out of product consumption prior to the Recall:
1. The Fujita Case: A personal injury lawsuit filed in Alameda
Superior Court. The case has no trial date and discovery has
commenced.
The Company maintained commercial general liability insurance totaling
$27,000,000 during the period including the Recall. The Company has notified its
insurance carrier of these events. At this time, the Company is unable to
determine the potential liability on all such lawsuits and claims.
The following personal injury claims and legal proceedings have been
settled:
1. The Maris Case: A personal injury case in Denver District Court
filed on or about November 3, 1997, served on November 18, 1997
and settled shortly thereafter.
2. The Starmack Case: A personal injury lawsuit filed in San Diego
County Superior Court, San Diego, California on January 3, 1997
and served on January 24, 1997. The case was settled on December
22, 1997.
3. 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.
4. 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.
5. 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.
6. 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.
18
<PAGE> 19
7. The Ali Case: A personal injury lawsuit filed in Los Angeles
County Superior Court, Los Angeles, California on October 10, 1997
and served on October 27, 1997. This case settled on November 20,
1997.
8. The Curtis Case: A class action lawsuit filed in the United States
District Court, Western District of Washington and served on
November 15, 1996. On July 7, 1997, the United States District
Court denied the plaintiffs' motion for class certification. On
November 20, 1997, the Court granted the plaintiffs motion to
dismiss the case without prejudice.
9. The Fisher Case: A personal injury case filed in Los Angeles
Superior Court in November, 1997 was settled on November 19, 1997.
10. The Litchmann Case: A personal injury case being filed in Los
Angeles County Superior Court. The case was dismissed in December
1997.
11. The Cate Case: A personal injury case filed in Sonoma Superior
Court on October 27, 1997. The case was settled in March 1998 and
dismissed.
12. The Miller Case: A personal injury case filed in Alameda County
Superior Court. The case was settled in March 1998 and dismissed.
13. 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 Federal case was dismissed and a
companion case was filed in King County Superior Court. The case
has settled and will be dismissed.
14. The Hiatt Case: A personal injury lawsuit filed in the United
States District Court, Western District of Washington and served
on August 14, 1997. The case has settled and will be dismissed.
15. The Dimock Case: A personal injury lawsuit filed in the United
States District Court, Western District of Washington and served
on August 14, 1997. The case has settled and will be dismissed.
16. The Berman Case: A personal injury lawsuit filed in the King
County Superior Court and served on or about September 20, 1997.
The case has settled and will be dismissed.
17. The Wright Case: A personal injury case being filed in King County
Superior Court. The case has settled and will be dismissed.
In addition, the Company settled one proceeding allegedly arising out
of product consumption prior to the Recall:
1. The Evonc Case: A personal injury case filed in San Mateo Superior
Court on September 30, 1997 and served on December 23, 1997. The
case was settled in June, 1998 and will be dismissed.
The settlement of the above legal proceedings was covered under the
Company's commercial general liability insurance policy and did not result in
any additional costs to the Company.
In addition, the Company settled the following claim filed under
California Business and Professions Code Section 17200 et seq. alleging
fraudulent business acts and practices of the Company relating to the recalled
products:
19
<PAGE> 20
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 was 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 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 30, 1998.
20
<PAGE> 21
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 8, 1998 By: /s/ D. STEPHEN C. WILLIAMSON
-------------------------------
D. Stephen C. Williamson
Chief Executive Officer
(Principal Executive Officer)
Date: July 8, 1998 By: /s/ JAMES R. STEICHEN
-------------------------------
James R. Steichen
Chief Financial Officer
(Principal Financial and
Accounting Officer)
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ODWALLA,
INC. FINANCIAL STATEMENTS FOR THE THIRTY-NINE WEEKS ENDED MAY 30, 1998, AS FILED
ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FILING ON
FORM 10-Q.
</LEGEND>
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<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-29-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> MAY-30-1998
<EXCHANGE-RATE> 1
<CASH> 3,203
<SECURITIES> 0
<RECEIVABLES> 5,978
<ALLOWANCES> 566
<INVENTORY> 2,711
<CURRENT-ASSETS> 13,159
<PP&E> 20,895
<DEPRECIATION> 7,901
<TOTAL-ASSETS> 28,867
<CURRENT-LIABILITIES> 11,108
<BONDS> 263
0
0
<COMMON> 29,445
<OTHER-SE> (11,983)
<TOTAL-LIABILITY-AND-EQUITY> 28,867
<SALES> 43,788
<TOTAL-REVENUES> 43,788
<CGS> 21,826
<TOTAL-COSTS> 21,826
<OTHER-EXPENSES> 22,216
<LOSS-PROVISION> 61
<INTEREST-EXPENSE> 157
<INCOME-PRETAX> (351)
<INCOME-TAX> 42
<INCOME-CONTINUING> (309)
<DISCONTINUED> 0
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<NET-INCOME> (309)
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