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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[LOGO]
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended August 28, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________ to____________
Commission file number 0-23036
ODWALLA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
California 77-0096788
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
120 Stone Pine Road
Half Moon Bay, California 94019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE)
Registrant's telephone number, including area code: (415) 726-1888
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
Title of each class Name of Exchange on which registered
------------------- ------------------------------------
none none
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock (no par
value)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
[Cover page 1 of 2 pages]
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The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of November 12, 1999, was approximately $21,843,000 (based on the
closing price for shares of the Registrant's common stock as reported by the
Nasdaq National Market for the last trading day prior to that date). Shares of
common stock held by each executive officer, director, and holder of 5% or more
of the outstanding common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On November 12, 1999 approximately 5,125,761 shares of the Registrant's
common stock, no par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
[Cover Page 2 of 2 pages]
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CAUTIONS ABOUT FORWARD LOOKING STATEMENTS
This Form 10-K includes forward-looking statements about future events,
products or future financial performance that haven't happened. For example,
statements like we "expect," we "believe" or we "anticipate" are forward-looking
statements. Investors should be aware that actual results may differ materially
from our expectations because of risks and uncertainties about the future. In
addition, we will not necessarily update the information in this Form 10-K if
any forward-looking statement later turns out to be inaccurate. Details about
risks affecting various aspects of our business are included throughout this
Form 10-K. Investors should read all of these risks carefully, and should pay
particular attention to risks affecting the following areas: availability and
pricing of raw materials (page 3); competition (page 4); our dependence on
significant trade partners (page 5); government regulations that may impact our
business (page 5); the specific risk factors discussed on pages 6 to 8;
remaining legal proceedings (page 9); commitments and contingencies described in
Note 3 to the financial statements.
PART I
ITEM 1. BUSINESS
OVERVIEW
Odwalla began operations in September 1980 and was incorporated in
California in September 1985. Our principal executive offices are located at 120
Stone Pine Road, Half Moon Bay, California, 94019, and our telephone number is
(650) 726-1888. When we refer to "we," "Odwalla" or the "Company" in this Form
10-K, we mean the California corporation (Odwalla, Inc.) and its currently
inactive Canadian subsidiary.
Odwalla's business is to provide easy access to great tasting
nourishment. We are the leading branded all-natural, super-premium refrigerated
juice company in the country, serving selected markets in the Western, Midwest,
Mid-Atlantic and Southeastern regions of the United States. Odwalla's complete
product line consists of more than 25 fresh-squeezed and nutritionally fortified
juices and smoothies (including single-flavor and blended fruit and vegetable
based juice products), all-natural meal replacement and dairy-free shakes,
natural spring water and all-natural food bars. Our beverage product line
appeals to many consumers because of its superior taste of fresh and minimally
processed beverages and greater nutritional value compared to juice from
concentrate or with artificial flavors.
We want to be the leading nourishment company in our existing and future
markets. We seek to achieve this objective by leading the industry in beverage
and other food knowledge, optimizing quality through sourcing and production,
controlling product access and distribution from production through retail,
artful presentation, growing through geographic and product line expansion,
leveraging our information systems, interacting with consumers and living our
vision.
Odwalla's sourcing procedures and production methods enable us to create
products with high nutritional and flavor quality. The distribution of our
products through both our own and other direct-store-delivery ("DSD") systems
allows us to control product quality and presentation, as well as to develop
relationships with trade partners. Odwalla sells and distributes our products to
over 3,800 retail locations, including supermarkets, specialty retailers,
natural food stores, warehouse outlets, convenience stores and food service
operators through our DSD system.
Odwalla is committed to certain values -- nourishing consumers,
shareholders and other stakeholder groups; environmental awareness; and support
for the communities we serve. We believe that our products reflect these values.
PRODUCTS, DISTRIBUTION AND TRADE PARTNERS
Our current product line consists of single-flavor and blended fruit-
and vegetable-based juice products, dairy-free shakes, wholesome food bars and
natural spring water. All of our juices are minimally processed (some produced
on a seasonal basis), except for our current 100% fresh squeezed orange juice,
which we expect will be minimally processed by the end of the second quarter of
fiscal 2000. This decision may result in the loss of some trade partners
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and consumers who choose to purchase fresh citrus products. However, we believe
that heightened food safety concerns expressed by trade partners and consumers,
on-going government regulatory processing and labeling changes (see Government
Regulation, page 5), and our ability to produce super-premium minimally
processed products will offset potential sales declines over a period of time.
Odwalla products are currently sold in Arizona, California, Colorado,
Georgia, Illinois, Louisiana, Maryland, Michigan, Minnesota, Nevada, New Jersey,
New Mexico, North Carolina, Oregon, Pennsylvania, Texas, Utah, Virginia,
Washington state, Washington, D.C. area, and Wisconsin.
On September 1, 1999, we introduced new branded, custom-designed 450
milliliter and 325 milliliter bottles made from recyclable, HDPE plastic. Our
new bottle retains fresh fruit flavor notes better than our previous bottle and
better than the bottles commonly used by our competitors. It also has a
tamper-resistant, screw-on cap, which allows consumers to easily reseal their
beverage while drinking Odwalla on-the-go. The characteristics of the new bottle
also extends the shelf life of our products. We establish shelf life standards
for each product to maintain the flavor and nutritional integrity that consumers
associate with freshly produced fruit and vegetable beverages. The shelf life of
Odwalla's fruit and vegetable-based products is typically between 10 and 20 days
at the retail outlet. Although the cost of the new bottle is approximately 50%
greater than the prior bottle, we anticipate that the ability to lengthen shelf
life and our distribution capabilities will offset the increased cost. Our food
bars have a significantly longer shelf life.
Our policy is to have all products removed from trade partners' shelves
on or before their Odwalla-established expiration date. In addition, because of
our "day of production" quality standards, products reflect the seasonal changes
in fruit varieties in color and taste. Our production methods are designed to
minimize the effect of processing on the fruit juice extracted. Our entire
product line varies due to a significant component of seasonal ingredients,
seasonal product usage, and the addition and deletion of products.
Our products are sold and distributed primarily through our DSD system,
which is serviced by route sales people who deliver and merchandise products to
our trade partners. This DSD system is designed to allow us to optimally manage
delivery schedules, efficiently control product mix, keep store shelves or our
own coolers stocked with fresh products and have a greater influence on
determining in-store location and merchandising of our products.
At most DSD accounts, we are responsible to stock, order and
merchandise our products at the point of sale, and we issue credits to the trade
partner for unsold product. This full service relationship allows us to avoid
paying slotting fees for shelf space as well as other handling fees and to
maintain control over our product merchandising at the point of sale. We provide
a lesser degree of service to certain trade partners who are responsible for
stocking, ordering and merchandising Odwalla products. These trade partners
don't receive credit for unsold products. Consumers can purchase our products at
supermarkets, specialty retail stores, natural food stores, convenience stores,
warehouse outlets and institutional food service trade partners.
We also distribute our products through third party distributors. This
distribution channel, with merchandising support provided by the distributors'
employees and/or our employees, provides an opportunity to expand product
distribution in selected markets and still maintain relationships with trade
partners. We sell directly to the third party distributors and they generally
don't receive credit for unsold product.
RAW MATERIALS
Producing and selling our minimally processed products entails special
requirements in ingredient sourcing, production, distribution and sales in order
to preserve and maximize the freshness and flavor quality of the products. We
source and select fruits and vegetables to meet a variety of established
criteria, including overall quality, flavor profile, variety, ripeness and other
factors. Processing of the fruit and vegetables is 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 our goal of
providing the safest, best tasting and most nutritious beverage and other
products for consumers.
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Odwalla buys ingredients according to stringent specifications. Fruits
and vegetables, in particular, are purchased year-round or seasonally depending
on the type of produce. Because various types of fruit and vegetable crops are
harvested at different times of the year, we obtain and produce different juices
on a seasonal basis. Most of our fruits and vegetables are purchased in the open
market on a negotiated basis. Historically, oranges, apples, carrots and
tangerines are the largest volume commodities we purchase. We have developed an
extensive network of ingredient sourcing relationships over the years and rely
on this network and new sources for the ingredients we need. Beginning in 1998,
we contracted for a substantial portion of our fall apple needs through McAfee
Apple Gardens, a California Central Valley grower using Good Agricultural
Practices, field Hazard Analysis Critical Control Points ("HACCP") plan and
sustainable farming practices. We also farm a small orange ranch in a part of
California to have access to local fresh fruit in the early winter months.
Recently, we began purchasing organic oats as a significant ingredient in our
food bars. All of these key ingredients are subject to volatility in supply,
price and quality that could seriously harm our business and results of
operations. We are subject to the same issues with our other ingredients as
well.
We also source a number of fruits, including tropical fruits, from
foreign suppliers in the form of frozen fruit puree. A puree is whole fruit that
has been processed, finely cut, heat treated, packed in a container and frozen.
A puree is not a concentrate. Purees are combined with the freshly extracted and
flash pasteurized juices of other fruits in a number of our products. The purees
we purchase are heat treated to increase safety and meet government regulations.
Most purees are purchased under annual price contracts.
As with most agricultural products, the supply and price of raw
materials we use can be affected by a number of factors beyond our control,
including frost, drought, flood, hurricane and other natural disasters. Weather
conditions, economic factors affecting growing decisions, various plant diseases
and pests will affect the condition and size of the crop. For example, 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. We understand that the El Nino conditions and other weather
patterns in the winter of 1997-1998 caused temporary shortages of certain
tropical products. Additionally, significant events including the devastation
caused by hurricanes in Honduras, Nicaragua and neighboring countries in 1998
negatively impacts the supply and pricing of certain ingredients.
In December 1998, a freeze damaged citrus crops in the San Joaquin
Valley and other portions of California. This had a significant negative impact
on the cost and yield of fresh citrus products we have used since the freeze.
See Management's Discussion and Analysis of Financial Conditions and Results of
Operations beginning on page 12 for more information.
COMPETITION
In a broad sense, our beverages compete with all beverages available to
consumers and our food bars compete with all food bars currently available. The
natural foods market is highly competitive. It includes national, regional and
local producers and distributors; many of them have greater resources than we
do, and many of them have shelf stable products that can be distributed with
significantly less cost. We believe our niche is easily accessed nourishing
beverages in the refrigerated super premium juice, emerging dairy-free
beverages, all-natural food bar and bottled water categories. We believe our
direct competition in this market niche is currently from nationally, regionally
and locally focused juice producers, certain of which are owned by major
beverage producers, nationally branded meal replacement beverage producers, food
and energy bar companies and premium bottled waters. Our direct competitors in
the juice business are national brands including Just Squeezed, Tropicana,
Minute Maid and Nantucket Nectars. Our juice products compete with regional
brands including Naked Juice (owned by a large international company, Chiquita
Brands International, Inc. ("Chiquita")) in Southern California and Colorado,
Fresh Samantha's in the Northeast, Mid-Atlantic and Southeast sections of the
United States and Fantasia in the Chicago and other Midwest market areas. Juice
and smoothie bars including Jamba Juice are also competitors. In addition, a
number of major supermarkets and other retail outlets squeeze and market their
own brand of fresh juices that compete with the Company's products. A decision
by Chiquita or any other large company to focus on Odwalla's existing markets or
target markets could have a material adverse effect on our business and results
of operations. Our food bar products,
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which have been on the market since August 1998, compete with several more
established companies, including PowerBar, Balance Bar and Clif Bar. While we
believe that we compete favorably with our competitors on factors including
quality, nutritional integrity, food safety, merchandising, service, sales and
distribution, multiple flavor categories, brand name recognition and loyalty,
our products are typically sold at prices higher than most other competing
beverage and bar products. Significant competitive pressure from these or other
companies could negatively impact our sales and results of operations.
DEPENDENCE ON ONE OR A FEW MAJOR TRADE PARTNERS
Safeway, Inc. ("Safeway") is our largest single account and accounted
for 13% of our fiscal 1999 sales. We spend considerable time to maintain a good
relationship with Safeway and other significant accounts, but we can't offer any
assurance that sales to significant accounts will not decrease or that these
trade partners will not choose to replace our products with those of
competitors. The loss of Safeway or other significant accounts or any
significant decrease in the volume of products purchased by their customers in
the future would seriously harm our business and results of operations.
Continuity of trade partner relationships is important, and events that impact
our trade partners, including labor disputes, may have an adverse impact on our
results of operations.
GOVERNMENT REGULATION
The production and sales of beverages are subject to the rules and
regulations of various federal, state and local food and health agencies,
including the U.S. Food and Drug Administration ("FDA") and California State
Food and Drug. On September 8, 1998, the FDA regulations for fresh apple juice
went into effect. The regulations for fresh-squeezed citrus juices were due to
be enacted in June 1999. The FDA's ruling for citrus was to require all fresh
juice processors to show a 5-log reduction in potential pathogens, 99.999%
barrier, supported by a Hazard Analysis Critical Control Point ("HACCP") plan.
All fresh juice processors which could not demonstrate a 5-log reduction were
expected to label their product with a warning label on the bottle to alert
consumers of the presence of unprocessed product. Because all products produced
in our Dinuba, California production facility are manufactured under a HACCP
plan with validated critical control points, we are already in compliance with
the FDA regulations for fresh apple juice and the proposed FDA regulations for
citrus juices, and will not need to use warning labels on unpasteurized juice
products.
However, due to an outbreak of Salmonellosis in another company's orange
juice earlier in 1999, the FDA has reconsidered the effectiveness of the
proposed ruling. Regulators, industry representatives and scientists held a
meeting during the summer of 1999 to discuss what regulation should become
final. FDA officials emphasized their preference for a 5-log reduction in fresh
juice from the time it is extracted until bottled. A validated HACCP plan
currently does not have to include this requirement. The most effective way
presented to meet the newly discussed 5-log reduction in commercial production
is flash pasteurization. The FDA will meet again in early December 1999 to
presumably finalize their views on requirements to achieve a 5-log reduction of
pathogens in orange juice. In November 1999, another processor of
fresh-squeezed, non-pasteurized orange juice enacted a recall due to
Salmonellosis concerns. Based upon discussions with members of the scientific
community and informal discussions with FDA officials, we anticipate that flash
pasteurization will be required.
Odwalla has been performing flash pasteurization for nearly three years.
All fresh-squeezed citrus used in our products blended with other ingredients
(e.g., in our smoothie and nutritional product lines) has been flash
pasteurized. During the past year, we began flash pasteurizing fresh-squeezed
citrus products that are not further blended (e.g., grapefruit juice and our
quencher products). Orange juice is currently the only product we offer as a
non-flash pasteurized product. However, we began offering flash pasteurized
orange juice during the summer of 1999, partially at the request of trade
partners, and the response has been favorable from both trade partners and
consumers. We expect that only flash pasteurized products will be offered by the
end of the second quarter of fiscal 2000. Odwalla is ready for the anticipated
FDA regulations and we don't anticipate significant additional costs to comply
with current FDA regulations.
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We are also subject to various federal, state and local environmental
laws and regulations that limit the discharge, storage, handling and disposal of
a variety of substances and by laws and regulations relating to workplace safety
and worker health, principally the Occupational Safety and Health Administration
Act, as well as similar state laws and regulations. We believe that we comply in
all material respects with these laws and regulations, although we cannot assure
that future compliance with such laws or regulations will not have a material
adverse effect on our results of operations or financial condition. We did not
incur any significant costs in fiscal 1999 to comply with environmental laws.
EMPLOYEES
As of November 12, 1999, Odwalla had approximately 450 employees, 430 of
whom were full-time employees. We don't have any collective bargaining
agreements with our employees, and we believe employee relations are generally
good.
OTHER FACTORS AFFECTING ODWALLA'S BUSINESS
Risks associated with perishable products. Except for natural spring
water and food bars, Odwalla's products are fresh, flash pasteurized or heat
treated and don't contain any preservatives. They have a limited shelf life
because of this. In order to maintain our "day-of-production" quality standards,
we further restrict the shelf life of products through early expiration dates.
The restricted shelf life means that we don't have any significant finished
goods inventory and our operating results are highly dependent on our ability to
accurately forecast near term sales in order to adjust fresh fruit and vegetable
sourcing and production. We've historically experienced difficulties in
accurately forecasting product demands and expect that challenge to continue.
When we don't accurately forecast product demand, we are either unable to meet
higher than anticipated demand or we produce excess inventory that cannot be
profitably sold. In addition, most of our trade partners have the right to
return any products that are not sold by their expiration date. Our inability to
meet higher than anticipated demand or excess production or significant amounts
of product returns on any of our products could harm our business and results of
operations.
Cost sensitivity. Our profitability is highly sensitive to increases in
raw materials, labor and other operating costs. Unfavorable trends or
developments concerning factors including inflation, raw material supply, labor
and employee benefit costs, including increases in hourly wage and minimum
unemployment tax rates, rent increases resulting from the rent escalation
provisions in our leases, and the availability of hourly employees may also
adversely affect our results. We've benefited in prior years from relatively
favorable inflation rates and part-time labor supplies in our principal market
areas. However, there is no assurance that these conditions will continue or
that we will have the ability to control costs in the future. In fiscal 1999,
for example, the cost for citrus products increased significantly due to the
citrus crop freeze in California as discussed in Management's Discussion and
Analysis of Financial Conditions and Results of Operations beginning on page 12.
Product liability. Because our 100% fresh-squeezed citrus products and
certain other citrus-based products are not pasteurized, irradiated or
chemically treated, they are highly perishable and contain certain naturally
occurring microorganisms. In addition to the recall (see "Item 3. Legal
Proceedings" on page 9) associated with the E. coli O157:H7 bacteria in 1996,
from time to time we receive complaints from consumers regarding ill effects
allegedly caused by our products. These past claims haven't resulted in any
material liability to date, but there can be no assurance that we won't have
future claims or that any claims associated with the recall in 1996 will not
result in adverse publicity or monetary damages, either of which could seriously
harm our business and results of operations. We currently maintain $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.
Orchard production. Historically, we've depended upon the fruit produced
from the trees of large orchards. These trees may become damaged, diseased or
destroyed as a result of windstorms, pests or fungal disease. Additionally,
there are types of controllable fungal diseases that can affect fruit production
although not fatal to the trees themselves. These types of fungal diseases are
generally controllable with fungicides. However, we can't be sure
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that such control measures will continue to be effective. Any decrease in the
supply of fresh fruit as a result of windstorms, pests or fungal disease could
have a material adverse effect on our business and results of operations.
Geographic concentration. Our 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. Due to this
concentration, natural disasters, including earthquakes, economic downturns and
other conditions affecting Northern California may adversely affect our business
and results of operations.
Concentration of production capacity. Virtually all of our juice
production capacity is located at our Dinuba, California facility. Because we
maintain minimal finished goods inventory as part of our "day-of-production"
production system, we could be unable to continue to produce beverages in the
event that production at or transportation from Dinuba were interrupted by fire,
earthquakes, floods or other natural disasters, work stoppages, regulatory
actions or other causes. Such an interruption would seriously harm our business
and results of operations. Separate companies produce our dairy-free shakes,
meal replacement beverages, spring water and food bars.
Lack of diversification. Odwalla's business is vertically integrated and
centered around essentially one product, all-natural super-premium beverages,
sold primarily through our DSD system. Although we've added dairy-free shakes,
meal replacement beverages, spring water and food bars, and are using more third
party distributors, the risks associated with focus on essentially one product
are exemplified by the material adverse effect on our business and results of
operations that resulted from the recall in October 1996 and from the impact of
the California citrus freeze in December 1998. Any significant decrease in the
consumption of beverages generally or specifically with respect to our products
would have an adverse effect on our business and results of operations.
Risks related to expansion. Continued growth depends in part upon our
ability to expand into new geographic areas, either through internal growth or
by acquisition. Following the 1996 recall, management attention was primarily
focused on restoring production and sales in our then-existing markets and
dealing with legal and other company issues. This diverted our plans for
expansion, for the most part, until fiscal 1998. Due to the extent of our
operating losses in recent years, we currently anticipate limited expansion in
fiscal 2000 beyond existing markets. There can be no assurance that we will
expand into new geographic areas or continue to invest in newer markets or if
such expansion or investment is undertaken that it will be successful or that
such expansion can be accomplished on a profitable basis. Demands on management
and working capital costs associated with the recall as well as the
perishability of our products and current reliance on the personnel-intensive
direct-store-delivery system may limit the ability, or increase the cost of,
expansion into new regions. Furthermore, perceptions of the recall and consumer
tastes vary by region and there can be no assurance that consumers located in
other regions will be receptive to our products.
We've expanded into certain markets, including the Pacific Northwest and
Colorado, through acquisitions of local juice manufacturers. Acquisitions
involve a number of special risks, including the diversion of management's
resources, issues related to the assimilation of the operations and personnel of
the acquired businesses, potential adverse effects on operating results and
amortization of acquired intangible assets. In addition, gross margins may be
negatively impacted to the extent that gross margins on acquired product lines
are lower than Odwalla's average gross margins. If we seek and find attractive
acquisition candidates, we may not be able to complete the transaction on
acceptable terms, to successfully integrate the acquisition into our operations,
or to assure that the acquisition won't have an adverse impact on our
operations.
Any plans to invest in new markets or to consider acquisitions may cause
us to seek additional financing that may be dilutive to current investors or
result in a higher debt-to-equity ratio than would otherwise be the case. Any
financing we obtain may not be on terms favorable to us, even if it is
available.
Competition. Our direct competitors in the juice business are national
brands including Just Squeezed, Tropicana, Minute Maid and Nantucket Nectars.
Our juice products compete with regional brands including Naked Juice (owned by
a large international company, Chiquita Brands International, Inc. ("Chiquita"))
in Southern California and Colorado, Fresh Samantha's in the Northeast,
Mid-Atlantic and Southeast sections of the United States and Fantasia in the
Chicago and other Midwest market areas. Juice and smoothie bars including Jamba
Juice are also
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competitors. In addition, a number of major supermarkets and other retail
outlets squeeze and market their own brand of fresh juices that compete with the
Company's products. A decision by Chiquita or any other large company to focus
on Odwalla's existing markets or target markets could have a material adverse
effect on our business and results of operations. While we believe that we
compete favorably with our competitors on factors including quality, nutritional
integrity, food safety, merchandising, service, sales and distribution, multiple
flavor categories, brand name recognition and loyalty, our products are
typically sold at prices higher than most other competing beverage and bar
products. Significant competitive pressure from these or other companies could
negatively impact our sales and results of operations.
Quarterly fluctuations. Because the fruits and vegetables we use are
purchased in the open market on a negotiated basis, the price and availability
of key ingredients may fluctuate on a quarterly basis. Consumers tend to
establish certain buying patterns, and a disruption of those buying patterns may
result in a decline in sales. Other factors, including expansion into new
markets, consummating an acquisition, costs of integrating acquired operations,
price promotions of certain products, changes by our competitors, and
introduction of new products, can result in fluctuations to sales and costs on a
quarterly basis.
Intellectual property rights. We believe our trademarks, trade dress,
trade secrets and similar intellectual property are critical to Odwalla's
success and we attempt to protect such property with registered and common law
trademarks and copyrights, restrictions on disclosure and other actions to
prevent infringement. We've licensed elements of our distinctive trademarks,
trade dress and similar proprietary rights to third parties in the past and may
continue this practice. While we attempt to ensure that the quality of our brand
is maintained by these third party licenses, we can't be sure that these third
parties will not take actions that might seriously harm the value of our
proprietary rights or the reputation of our products, either of which could have
a material adverse effect on our business. Product package and merchandising
design and artwork are important to the success of Odwalla, and we intend to
take action to protect against imitation of our products and packages and to
protect our trademarks and copyrights as necessary. This action could be
time-consuming, result in costly litigation and divert management personnel.
Furthermore, there can be no assurance that we would be successful in such
action. We don't currently have any patents.
Control by officers and directors. Odwalla's officers, directors and
their affiliates beneficially own, in the aggregate, approximately 23% of the
outstanding shares of common stock. Through their holdings, these shareholders,
acting together, would be able to significantly influence most matters requiring
shareholder approval, including the election of a majority of our Board of
Directors. This control could have the effect of delaying, deferring or
preventing a change of control of the Company.
Dependence on key personnel. Odwalla's success depends to a significant
extent upon the continued service of its senior management, including Stephen
Williamson, our Chairman and Chief Executive Officer, and the loss of services
from any of such key personnel could have a material adverse effect on our
business or results of operations. Furthermore, our continued growth strategy
depends on the ability to identify, recruit and retain key management personnel.
The competition for such employees is intense, and there can be no assurance we
will be successful in such efforts. We are also dependent on our ability to
continue to attract, retain and motivate production, distribution, sales,
communications and other personnel.
Volatility of stock price. Odwalla's common stock price has, at certain
times, experienced significant price volatility. Announcements of developments
related to our business, fluctuations in operating results, 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 us or our competitors, fluctuations in the level of
cooperative development funding, acquisitions, changes in governmental
regulations, developments in patents or other intellectual property rights and
changes in our relationships with trade partners and suppliers could cause the
price of our common stock to fluctuate substantially. In 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 our common stock. Read
"Item 5, Market For Registrant's Common Equity And Related Shareholder Matters."
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ITEM 2. PROPERTIES
Our production facility is in Dinuba, California and consists of
approximately 100,000 square feet of production, office and cold storage space
on a 13-acre parcel of land plus approximately 29 acres of land adjacent to the
production facility. We own this property and believe we carry adequate property
insurance. Our administrative offices are located in Half Moon Bay, California.
We also have distribution centers throughout California and in Phoenix, Arizona;
Denver, Colorado; Atlanta, Georgia; Landover, Maryland; Albuquerque, New Mexico;
Eugene and Portland, Oregon; Austin, Houston and Dallas, Texas; and Seattle,
Washington. We lease all our facilities other than the Dinuba production
facility.
ITEM 3. LEGAL PROCEEDINGS
The following personal injury claims and legal proceedings seek monetary
damages and other relief relating to the recall in 1996, as discussed in Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations":
1. The McGregor Case: A personal injury lawsuit filed in Santa
Clara County Superior Court, San Jose, California on June 2,
1997 and served on June 16, 1997. There is no trial date set.
2. The Nixon Case: A personal injury lawsuit filed in Sacramento
County Municipal Court, Sacramento, California on August 15,
1997. There is no trial date set.
The Company has two additional proceedings allegedly arising out of
product consumption prior to the Recall in 1996:
1. The Lane Case: A personal injury lawsuit filed in King County
Superior Court, Seattle, Washington, and served on or about
April 26, 1999. The case was removed to the United States
District Court in Seattle on May 25, 1999. The case is set for
trial on July 11, 2000.
2. The Shields Case: A personal injury lawsuit filed in King County
Superior Court, Seattle, Washington, and served on or about July
1, 1999. The case is set for trial on January 16, 2001.
The following personal injury claim and legal proceeding has been
settled:
1. The Jackson Case: A personal injury lawsuit filed in King County
Superior Court, Seattle, Washington, and served on or about June
8, 1998. The case was settled on October 27, 1999.
We maintained commercial general liability insurance totaling
$27,000,000 during the period for which the above claims are filed, including
the Recall. We have notified our insurance carrier of these events. At this
time, we are unable to determine the potential liability from the remaining
legal proceedings and claims. The Recall related legal proceedings settled to
date were covered under our commercial general liability insurance policy and
did not result in any additional costs to us.
On May 21, 1999, Odwalla filed a lawsuit in United States District Court
for the Eastern District of California in Fresno, California, against New
Hampshire Insurance Company to seek recovery on our business interruption
insurance claim filed as a result of the Recall. The case does not have a trial
date set.
In early 1997, Odwalla was informed that it was the subject of a federal
grand jury investigation (Eastern District of California) concerning the E. coli
O157:H7 incident and related issues. In July 1998, in connection with this
investigation, we entered into a misdemeanor plea agreement with the U.S.
government, concerning 16 shipments in October 1996 of unpasteurized apple juice
from a single contaminated batch. As part of the plea agreement, Odwalla agreed
to pay, over a period of five years, $1.25 million to the U.S. government and
$250,000
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<PAGE> 11
to three non-profit organizations involved with advancing the cause of food
safety. We also agreed, as part of the conditions attached to a five year term
of unsupervised Court probation, to develop and implement a HACCP plan and to
undertake other measures related to food safety.
We are subject to other legal proceedings and claims that arise in the
course of our business. We currently believe that the ultimate amount of
liability, if any, for any pending actions (either alone or combined) will not
materially affect our financial position, results of operations or liquidity.
However, the ultimate outcome of any litigation is uncertain, and unfavorable
outcomes could have a material negative impact on our results of operations and
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the
fourth quarter of fiscal 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Odwalla's common stock began trading on the Nasdaq SmallCap Market in
December 1993 at the time of our initial public offering. Since May 18, 1995,
our stock has traded on the Nasdaq National Market under the symbol "ODWA." The
following table shows the range of high and low closing sales prices reported on
the Nasdaq National Market for the periods indicated. On November 12, 1999, the
closing price of Odwalla's common stock was $5.563.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AUGUST 28, 1999 HIGH LOW
<S> <C> <C>
Fourth Quarter $ 8.00 $ 6.25
Third Quarter $ 9.00 $ 5.438
Second Quarter $ 8.00 $ 5.875
First Quarter $ 10.625 $ 7.00
FISCAL YEAR ENDED AUGUST 29, 1998
Fourth Quarter $ 12.875 $ 9.00
Third Quarter $ 10.25 $ 7.50
Second Quarter $ 8.75 $ 5.625
First Quarter $ 11.00 $ 7.375
</TABLE>
As of November 12, 1999, there were approximately 307 holders of record
of the Company's common stock.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock. We currently
anticipate that we will retain all future earnings for use in our business, so
we don't anticipate paying any cash dividends in the foreseeable future.
10
<PAGE> 12
ITEM 6. SELECTED FINANCIAL DATA
The following table shows selected consolidated financial information
for Odwalla for the past five fiscal years. To better understand the information
in the table, investors should also read "Management's Discussion and Analysis
of Financial Condition and Results of Operations" beginning on page 12, and the
Consolidated Financial Statements and Notes beginning on page 35.
<TABLE>
<CAPTION>
Year Ended August,
----------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA: (in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales .............................. $ 35,869 $ 59,197 $ 52,630 $ 59,088 $ 68,042
Cost of sales .......................... 18,425 29,889 27,650 29,236 35,542
-------- -------- -------- -------- --------
Gross Profit ........................... 17,444 29,308 24,980 29,852 32,500
Operating expenses:
Sales and distribution ................ 11,588 20,236 22,465 20,282 24,056
Marketing ............................. 891 2,179 2,919 2,696 2,908
General and administrative ............ 3,576 6,206 7,625 6,873 7,647
Recall and related costs .............. -- -- 6,518 1,242 250
-------- -------- -------- -------- --------
Total operating expenses ........... 16,055 28,621 39,527 31,093 34,861
-------- -------- -------- -------- --------
Income (loss) from operations .......... 1,389 687 (14,547) (1,241) (2,361)
Other income (expense), net ............ 108 346 210 (163) (40)
-------- -------- -------- -------- --------
Income (loss) before income taxes ...... 1,497 1,033 (14,337) (1,404) (2,401)
Income tax (expense) benefit ........... (500) (400) 1,901 25 359
-------- -------- -------- -------- --------
Net income (loss) ...................... $ 997 $ 633 $(12,436) $ (1,379) $ (2,042)
======== ======== ======== ======== ========
Basic net income (loss) per share ...... $ 0.24 $ 0.13 $ (2.49) $ (0.27) $ (0.40)
======== ======== ======== ======== ========
Diluted net income (loss) per share .... $ 0.22 $ 0.12 $ (2.49) $ (0.27) $ (0.40)
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
End of Fiscal Year
-------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments ....... $18,496 $12,413 $ 3,225 $ 3,191 $ 7,369
Working capital ............... 17,918 14,655 1,300 1,669 7,384
Total assets .................. 35,481 37,700 31,006 29,350 35,305
Long-term liabilities ......... 736 501 441 888 688
Total shareholders' equity .... 28,499 29,574 17,635 16,445 21,954
</TABLE>
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<PAGE> 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-K includes "forward-looking" statements about future
financial results, future business changes and other events that haven't yet
occurred. For example, statements like we "expect," we "anticipate" or we
"believe" are forward-looking statements. Investors should be aware that actual
results may differ materially from our expressed expectations because of risks
and uncertainties about the future. We will not necessarily update the
information in this Form 10-K if any forward-looking statement later turns out
to be inaccurate. Details about risks affecting various aspects of our business
are discussed throughout this Form 10-K. Investors should read all of these
risks carefully.
OVERVIEW
In the Management Discussion and Analysis section of this 10-K we are
providing more detailed information about our operating results and changes in
financial position over the past three years. This section should be read in
conjunction with the Consolidated Financial Statements and related Notes
beginning on page 35.
GENERAL BUSINESS
Net sales in fiscal 1999 increased to $68.0 million, an increase of 15%
from $59.1 million of sales last year, which represents a record sales year for
Odwalla. In fiscal 1999, we had growth in all of our geographic market areas,
expanded our presence in markets we entered in fiscal 1998, and entered the
Atlanta market. Our net loss for the year was $2.0 million or $.40 per share
compared to a loss of $1.4 million or $0.27 per share last year. The most
significant reason for the fiscal 1999 loss is the result of the December 1998
California citrus freeze, which is discussed below.
Our sales strength has come predominantly from continued penetration in
existing markets, sales of new products and expansion into new markets. We
believe that continued recognition of the Odwalla brand and consumer attraction
to our products, new product introductions, better store shelves placement,
increased placement of branded in-store coolers, and increased delivery system
support has contributed to our sales growth.
We experience quarterly fluctuations, sometimes significant, and
anticipate that these fluctuations will continue in future quarters. Some
factors behind the fluctuations include: changes in the price or availability of
raw materials, particularly fruit products, due to seasonality, weather and
other factors; new product introductions; costs of expansion into new markets,
which can continue for many quarters beyond the market entry date; sales
promotions; buying patterns of consumers; competitor product introductions;
overall economic trends influencing consumers. In addition, weather patterns
impacting consumers, including unseasonably cool or rainy weather, can result in
fewer sales to consumers and ultimately lower sales to trade partners and higher
return credits issued if we haven't been able to forecast and adjust for the
change in consumer buying patterns. While the DSD system offers many benefits to
us, it is also an expensive and fairly fixed cost distribution system. We have
invested significantly in our production facility and management team; the
benefit of this investment will result from higher volume of product through the
facility. Conversely, lower volume than expected will result in higher fixed
costs as a percentage of sales. Finally, we may choose to reduce prices or
increase spending in response to competition in some markets, which usually has
a negative short-term effect on our results of operations.
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<PAGE> 14
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain
statements of operations data for fiscal years 1997, 1998 and 1999. These
operating results are not necessarily indicative of the results for any future
period.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST,
------------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 52.5 49.5 52.2
----- ----- -----
Gross margin 47.5 50.5 47.8
Operating expenses
Sales and distribution 42.7 34.3 35.4
Marketing 5.5 4.6 4.3
General and administrative 14.5 11.6 11.2
Recall and related costs 12.4 2.1 0.4
----- ----- -----
Income (loss) from operations (27.6) (2.1) (3.5)
Interest and other income (expense), net .4 (.2) (0.0)
Income tax benefit 3.6 0.0 0.5
----- ----- -----
Net income (loss) (23.6)% (2.3)% (3.0)%
===== ===== =====
</TABLE>
NET SALES. Net sales for fiscal 1999 increased 15% to $68.0 million
compared to $59.1 million in fiscal 1998, and increased 12% in fiscal 1998 from
$52.6 million in fiscal 1997. Our 1999 sales increase, which occurred in all
geographic regions, resulted primarily from (a) growth in existing markets and
accounts and new products and (b) sales volume from new markets. Net sales are
also impacted by our expanded use of third party distributors, which grew at
about the same rate as our own DSD business. Because we sell product to
distributors at a wholesale price lower than the price to retail trade partners,
our increased use of distributors will not produce the same net sales growth
that would occur if the same number of products were sold to retail trade
partners. Total sales in our newest markets, which include the Midwest,
Mid-Atlantic and Atlanta markets, were about 6% of total sales and represent a
significant increase from fiscal 1998 as we had just begun selling in some of
these newer markets at that time. Our food bar business, which was introduced at
the very end of fiscal 1998, was also an important factor in fiscal 1999 as food
bar sales represented just less than 5% of our net sales in fiscal 1999. The
sales increase in fiscal 1998, which occurred in all geographic regions,
resulted primarily from (a) new and returning products and (b) sales volume from
new markets. Net sales in fiscal 1998 were also impacted by our expanded use of
third party distributors.
COST OF SALES. Cost of sales increased to $35.5 million or 52.2% of net
sales in fiscal 1999 compared to $29.2 million or 49.5% of net sales in fiscal
1998. Cost of sales was $27.6 million or 52.5% of net sales in fiscal 1997.
Gross margin decreased from 50.5% in fiscal 1998 to 47.8% in fiscal 1999 after
increasing from 47.5% in fiscal 1997. In late December 1998, the San Joaquin
Valley in central California experienced a citrus freeze that seriously damaged
the navel orange crop. Other parts of California were also affected, but to a
significantly lesser extent. The freeze also impacted the California Valencia
orange crop and other citrus, which extended the impact throughout calendar year
1999. The immediate effect of the freeze was to increase the price of the fresh
citrus we purchase, which continues currently. We also experienced poorer citrus
yields and some delay in fruit maturity. The freeze also caused us to be more
reliant on citrus sources farther from our production facility than in prior
years, which caused an increase in freight cost. Gross margin decreased
primarily due to (a) unfavorable pricing and yield for ingredients, primarily
citrus, and (b) increases in labor, due to poorer yields, and co-packing costs.
The continued use of third party distributors also negatively affected gross
margins. However, we believe that fiscal 1999 would have been profitable except
for the impact of the citrus freeze.
As a result of the citrus freeze, we remain more dependent upon
alternative and more expensive sources of fresh supply than in prior years. We
continue to use our extensive network of grower contacts to continually try to
maintain our supply of fresh ingredients. The effect on orange and other
ingredient costs to Odwalla beyond fiscal 1999 is not yet fully determined, but
we expect to experience higher orange costs until the new crop is available in
13
<PAGE> 15
December 1999 or January 2000. The cost and quality of the new crop is not yet
determined and could differ from current prices.
The increase in gross margin in fiscal 1998 compared to fiscal 1997
resulted primarily from (a) favorable sourcing, pricing and yield for fruit and
other ingredients, and (b) an increase in operating efficiency due to increased
volume. Cost of sales as a percentage of net sales increased significantly
following the recall (see recall and related costs on page 14) due to reduced
production volume, especially from October 30, 1996 through the second quarter
of fiscal 1997, although this increase from historical levels continued through
fiscal 1997.
SALES AND DISTRIBUTION. Sales and distribution expenses were $24.1
million in fiscal 1999 compared to $20.3 million in fiscal 1998, and increased
as a percentage of net sales to 35.4% from 34.3% in fiscal 1998. Sales and
distribution expenses decreased as a percentage of net sales and in dollars in
fiscal 1998 when compared to the 42.7% and $22.5 million in fiscal 1997.
Expenses will continue to be affected as we seek to find the proper mix between
third party distributors and our own DSD system in a given market. The
perishable nature of most of our products and our stringent service standards
can make it difficult to find appropriate distributors in some markets. During
fiscal 1999, we experienced a full year of costs in our newest markets.
Expansion into markets serviced by our DSD system, including the Washington,
D.C. area, requires an investment for some initial period. We also began an
investment in our national sales structure and in our DSD sales and operational
structure. We expect that this investment will result in efficiencies later in
fiscal 2000. We expect to continue to have expansion costs as we enter new
geographic markets.
The fiscal 1998 expense decrease as a percentage of net sales as
compared to fiscal 1997, resulted from increased sales volume supported by a
more fixed cost operations structure, which was offset by national and regional
labor costs and an increase in our expansion efforts compared to fiscal 1997.
MARKETING. Marketing expenses increased 8% to $2.9 million in fiscal
1999 compared to $2.7 million in fiscal 1998, and decreased 8% in fiscal 1998
compared to $2.9 million in fiscal 1997. The increase in absolute dollars in
fiscal 1999 is the result of increased product tastings, both in retail
locations and sponsorships of community events, consultants and product research
and development. In August 1999, Karen Lucas joined Odwalla as Vice President,
Marketing. We expect that marketing expenses will increase during fiscal 2000,
in absolute dollars and also as a percentage of net sales.
The marketing expenditures decreased in absolute dollars and as a
percentage of net sales in fiscal 1998 primarily due to reduced executive
payroll and operating expenses offset by an increase in advertising. We had
increased marketing expenses in absolute dollars and as a percentage of net
sales in fiscal 1997 to reinforce the existing consumer base and attract new
consumers to the brand and products following the recall, expand outside
communications, develop and launch new and newly formulated products and incur
professional services related to consumer research.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$7.6 million in fiscal 1999 or 11.2% of net sales compared to $6.9 million or
11.6% of net sales in fiscal 1998 and $7.6 million or 14.5% of net sales in
fiscal 1997. In fiscal 1999, the increase resulted primarily from increased
payroll in human resources, financial analysis and information technology
personnel, increased recruiting and search firm costs, and consulting fees. In
fiscal 1998, reductions in administrative payroll and consulting fees were the
primary reasons for the decrease from fiscal 1997.
RECALL AND RELATED COSTS. On October 30, 1996, Odwalla was notified by
the State of Washington Environmental Health Services of an epidemiological link
between several cases of E. coli O157:H7 and Odwalla's apple juice products. We
immediately implemented a recall of all Odwalla products containing apple juice.
We experienced a significant decline in sales immediately following the recall
and we weren't able to immediately and significantly modify certain on-going
production, distribution and other costs.
Odwalla also incurred significant direct costs as a result of the
recall, including advertising and public relations costs, legal and professional
fees, cost of the product recalled (including the labor and freight involved in
the recall process), destruction of unsold product in inventory and packaging
supplies, costs of leased sales and
14
<PAGE> 16
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 in fiscal 1997 were $6.5 million,
including a $2.2 million charge to establish a reserve for future professional
fees related to the recall. Under our arrangement with our insurance company, we
pay a portion of the legal fees related to third party claims resulting from the
recall and related claims. The reserve for professional fees is an estimate, and
there can be no assurance that the actual reserved liability established will be
adequate. We reviewed this charge during fiscal 1998 and, except for the
settlement noted below, believed that the reserve established was adequate. In
fiscal 1999, we reviewed available information, including recently filed claims,
and added $250,000 to this reserve. We will continue to assess this liability
and will make appropriate adjustments if circumstances change. Approximately
$1.3 million of this reserve for professional fees remained at August 28, 1999.
Recall and related costs of $1.24 million in fiscal 1998 represent the
present value of the settlement with the U.S. government in connection with the
grand jury investigation begun in fiscal 1997. See Item 3, "Legal Proceedings"
on page 9 for additional information.
INTEREST AND OTHER EXPENSE (INCOME). Odwalla had net interest expense in
fiscal 1999 of $159,000 compared to net interest expense of $206,000 in fiscal
1998 and net interest income of $173,000 in fiscal 1997. Gross interest income
of $278,000, $160,000 and $322,000 in fiscal 1999, 1998 and 1997 resulted
primarily from the remainder of the proceeds of the May 1996 public offering
and, in 1999, the proceeds of the January 1999 Series A Preferred Stock
offering. Gross interest expense of $437,000, $366,000 and $149,000 in fiscal
1999, 1998 and 1997 resulted primarily from interest on the line of credit
established in May 1997, capital lease interest and other debt.
INCOME TAX BENEFIT. The $359,000, $25,000 and $1.9 million income tax
benefit for fiscal 1999, 1998 and 1997 results from the tax benefit associated
with operating losses. The 15% effective tax rate in 1999 and 1998 (after
offsetting the impact of the non-deductible settlement with the U.S. government
discussed previously for 1998) and the 13% effective tax rate in 1997 varies
from the federal statutory tax rate primarily due to the effect of establishing
a deferred tax asset valuation allowance. We recorded a valuation allowance for
a portion of the net deferred tax asset due to uncertainty as to the ultimate
realization of such assets. We will continue to assess the valuation allowance
as additional information regarding the impact of the Recall on the Company's
future profitability is available.
LIQUIDITY AND CAPITAL RESOURCES
At August 28, 1999, we had working capital of $7.4 million compared to
working capital of $1.7 million at August 29, 1998. The increase resulted
primarily from financing activities. At August 28, 1999, the Company had cash,
cash equivalents and short term investments of $7.4 million compared to $3.2
million at the end of fiscal 1998.
Net cash used in operating activities in fiscal 1999 was $1.3 million.
This consisted of the net loss plus depreciation, amortization and an increase
in accounts payable, offset by increases in prepaid expenses, inventory and
accounts receivable and decreases in other accrued expenses. Increases in
accounts payable and accounts receivable are generally due to increased expense
and sales volume compared to the same time period in fiscal 1998. The inventory
increase represents acquisition of frozen raw materials during the summer of
1999. Prepaid expenses increased primarily due to the timing of insurance
payments, advances for future costs and refundable deposits and similar items.
Accrued expenses, which includes the reserve for Recall related professional
fees, decreased primarily as we paid for previously accrued costs.
Net cash used in investing activities for fiscal 1999 was $6.5 million.
This consisted principally of transferring funds to short-term investments and
capital expenditures for production equipment at the Dinuba plant and, to a
lesser extent, computer equipment and coolers. Net cash provided by financing
activities for fiscal 1999 was $7.2 million. This consisted principally of
proceeds from the sale of Series A Preferred Stock and from common stock option
exercises offset by payments of long-term debt and capital lease obligations.
We had purchase commitments for the future delivery of raw materials as
of August 28, 1999, approximately $2.1 million of which are under contracts and
are expected to be completed by August 2000.
15
<PAGE> 17
We've used, and expect to continue to use, both operating and capital
lease financing to obtain refrigeration coolers used in selling our products,
computer and communication equipment, and production assets, primarily
equipment. We are currently discussing additional lease lines with several
companies, although we don't have any commitments from a leasing company and
there can be no assurance that we will obtain the requested commitment. If we
don't obtain adequate lease or other financing, our ability to obtain needed
equipment may negatively impact our operations. At August 28, 1999, we owed
$43,000 for capital lease obligations, primarily related to leasing of
production equipment and delivery vehicles.
On January 7, 1999, we signed an agreement with Catterton-Simon Partners
III, L.P. ("Catterton-Simon"), a Delaware limited partnership, to sell 1,000,000
shares of Odwalla Series A Preferred Stock ("Series A Stock") at $8.00 per
share. The Series A Stock receives an 8% annual dividend which is payable in
either cash or additional Series A Stock, at our election. The dividend is
payable semi-annually. All Series A Stock is convertible on a one-for-one basis
into Odwalla common stock (a) upon a request by Catterton-Simon at any time
after July 6, 1999, and (b) automatically upon the earlier of (i) an acquisition
of Odwalla by another company, either for cash or publicly traded stock, at a
price in excess of $12.00 per share, (ii) the average trading price of Odwalla
common stock exceeding $12.00 per share for 20 consecutive trading days, or
(iii) January 7, 2002. Holders of Series A Stock are entitled to preferential
payment, in the event of any liquidation of Odwalla, in an amount equal to the
greater of $8.00 per share, plus any accrued but unpaid dividends, or the amount
due each holder of common stock. The minimum liquidation preference is $8.6
million at August 28, 1999. Catterton-Simon also received a warrant to purchase
75,000 shares of Odwalla common stock at $10.00 per share. The warrant expires
in seven years. This transaction was funded and closed in February 1999. We also
paid fees and issued a warrant to our financial advisor in connection with this
transaction. The warrant is for 24,806 shares of common stock at an exercise
price approximating $6.45 per share and expires in five years. Total costs of
the transaction approximate $700,000, including the financial advisor fees other
than the warrant described above, reimbursement of certain costs of
Catterton-Simon and other transaction costs. On June 14, 1999, our Board of
Directors declared a stock dividend of 33,333 Series A Preferred Stock shares
for the Series A shareholder. The dividend was paid June 30, 1999.
In May 1997, we entered into a Loan and Security Agreement ("Security
Agreement") with a lender which provided a revolving line of credit up to $5.0
million. Our borrowings were limited to 85% of eligible accounts receivable
("Receivable Line") plus up to $500,000 for new capital equipment ("Equipment
Line"). Eligible accounts receivable were defined in the Security Agreement and
generally represented all trade accounts receivable less balances that were
delinquent. We paid monthly interest on borrowings at prime plus 1.5%, which was
9.75% at August 28, 1999. During 1999, we borrowed only under the Receivable
Line. If we borrowed under the Equipment Line, we would pay interest only for
the first three months and then pay monthly interest and principal payments
using a 45 month amortization schedule. The Security Agreement contained certain
restrictions, including the ability to borrow additional funds, pay dividends,
purchase or otherwise acquire Company stock, or encumber or sell Company assets.
The interest rate changed to prime plus 2% if our adjusted net worth, as
defined, was less than $14 million. We were required to pay interest on $2
million whether or not we borrowed that amount and, accordingly, we had borrowed
approximately $2.3 million under the Receivable Line at August 28, 1999. All of
our assets were pledged as collateral under the Security Agreement.
In September 1999, we entered into a Revolving Credit Agreement ("Credit
Agreement") with a new lender and paid the balance then outstanding under, and
terminated, the Security Agreement. The Credit Agreement provides a revolving
credit facility up to $5.0 million. The first $2.0 million of borrowings do not
require separate borrowing base reporting. Borrowings over $2.0 million and up
to $5.0 million are limited to 80% of eligible accounts receivable. The Credit
Agreement defines eligible accounts receivable which generally represents all
trade accounts receivable less delinquent balances. Interest is payable monthly
at either the prime interest rate plus 1% or the Eurodollar rate plus 3.5%. The
interest rate to be incurred is selected by Odwalla at the inception of each
loan and may be changed during the period in which the borrowed amount is
outstanding in accordance with provisions included in the Credit Agreement. The
initial term of the Credit Agreement is for three years.
16
<PAGE> 18
All of our assets are pledged as collateral under the Credit Agreement.
We are also required to meet certain covenants, including maintenance of certain
financial, leverage, and debt service coverage ratios, and certain tangible net
worth. The Credit Agreement also contains certain business restrictions,
including the ability to borrow additional funds, limitations on capital
expenditures in excess of certain amounts, restrictions on the payment of cash
dividends, sale or purchase of Company stock, ability to encumber or sell
Company assets, and limitations on other business transactions without prior
approval from the lender.
The increased costs associated with recovering from the impact of the
Recall, our plans to invest in certain new market areas, and general corporate
needs may cause us to seek additional financing that may be dilutive to current
investors or result in a higher debt-to-equity ratio than would otherwise be the
case. Any financing we obtain may not be on terms favorable to us, even if it is
available.
Odwalla maintains insurance coverage for product recall, product
adulteration, lost income and other first party business risks. The claim we
submitted to our insurance carriers for product recall costs and for business
losses incurred due to the Recall was denied for substantially all of the
amounts claimed. On May 21, 1999, Odwalla filed a lawsuit in United States
District Court for the Eastern District of California in Fresno, California,
against New Hampshire Insurance Company to seek recovery on our business
interruption insurance claim. The case does not have a trial date set. The
amount and timing of proceeds, if any, from the claims and any future insurance
claims cannot be presently determined.
Based upon information currently available, we believe that our existing
cash and cash equivalents and our current and anticipated borrowing capability
will be adequate to meet our obligations as they become due in the next twelve
months.
YEAR 2000
Many existing computer systems use only the last two digits to identify
a year. Consequently, as the year 2000 approaches, many systems do not yet
recognize the difference in a year that begins with "20" instead of "19." This,
as well as other date related processing issues, may cause systems to fail or
malfunction unless corrected.
We began taking steps to identify and address our internal Year 2000
issues in 1998. Our internal team, which has executive sponsorship, consists of
both internal and external personnel. We have reviewed certain systems,
including information systems, handheld computer systems, production systems and
non-information systems including phones. We have modified certain systems and
have scheduled modifications on other systems. We have substantially completed
our efforts to address the readiness of key third parties with which we have
relationships, including suppliers and distributors. We expect to have this
process completed by the end of November 1999. While we may obtain assurances
from third parties regarding their Year 2000 readiness, we do not have any plans
to otherwise assess their readiness and do not expect to perform such an
assessment.
While Year 2000 costs incurred to date have not been material, we may
incur additional costs as we complete our readiness. We don't believe that the
additional costs will be material, but we have not completed our assessment and
can't offer assurance regarding the additional costs. We believe we are
dedicating adequate resources toward attaining Year 2000 readiness, but there is
no assurance that we will be successful in our efforts to address all Year 2000
issues. As with all companies, we also rely on other more widely used entities
including government agencies, public utilities and other external forces common
to business and industry. Consequently, if such entities were to experience Year
2000 failures, this could disrupt our ability to conduct ongoing operations.
We have not developed a contingency plan in the event we experience
potential failures. We intend to assess the need for contingency plans, but
can't offer any assurance that we will successfully develop such plans for areas
that might result in significant exposure.
17
<PAGE> 19
The above discussion regarding costs, risks and estimated completion
dates for the Year 2000 is based on our best estimates given information that is
currently available, and is subject to change. As we continue to study this
issue, we may discover that actual results will differ materially from the
estimates noted above.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. It is our policy not to enter into derivative
financial instruments. We do not currently have any significant foreign currency
exposure since we do not transact business in foreign currencies. Due to this,
we did not have significant overall currency exposure at August 28, 1999.
FOREIGN CURRENCY RATE RISK. As almost all of our sales and expenses are
denominated in U.S. dollars, we have experienced only insignificant foreign
exchange gains and losses to date, and we do not expect to incur significant
gains and losses. We do not engage in foreign currency hedging activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by
reference to the consolidated financial statements and supplementary data listed
in Item 14 of Part IV of this report.
All schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or notes
thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
18
<PAGE> 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information about the Company's directors and executive officers
as of November 12, 1999 is listed below:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
D. Stephen C. Williamson 41 Chairman of the Board and Chief Executive Officer
James R. Steichen 49 Senior Vice President, Finance and Chief Financial
Officer
Douglas L. Hrdlicka 56 Senior Vice President, Sales and Distribution
Linda A. Frelka 38 Vice President, Quality Assurance
Theodore R. Leaman III 43 Vice President, Manufacturing
Karen Lucas 35 Vice President, Marketing
Susan M. Kirmayer 41 Vice President, Human Resources
Martin S. Gans(1)(2) 57 Director
Richard L. Grubman(1)(2) 37 Director
Ranzell Nickelson, II 55 Director
Craig H. Sakin(1)(2) 39 Director
Greg A. Steltenpohl 45 Director
</TABLE>
(1) Member of Audit Committee
(2) Member of Compensation Committee
D. STEPHEN C. WILLIAMSON currently serves as Chairman of the Board and
as Chief Executive Officer, a position he has held since June 1996. Prior to
that time, Mr. Williamson served as Co-Chairman of the Board and Co-Chief
Executive Officer from January 1995 to June 1996 and as Chief Financial Officer
of the Company from March 1991 to August 1996. Mr. Williamson also served as the
Company's President from May 1992 until January 1995. Mr. Williamson holds a
B.A. degree in history from the University of California at Berkeley. He is also
Chairman of Avenal Land & Oil Company, a private investment company.
JAMES R. STEICHEN has served as Senior Vice President, Finance since
August 1998 and as Chief Financial Officer since September 1996. From May 1996
to August 1996, Mr. Steichen served as Vice President, Finance and had served as
a consultant to the Company since August 1995. Prior to that, he had been a
partner with BDO Seidman, LLP, a public accounting firm, since December 1990.
Mr. Steichen is a Certified Public Accountant and holds a B.S. degree from the
University of South Dakota.
DOUGLAS L. HRDLICKA has served as Senior Vice President, Sales and
Distribution, since December 1998. In November 1999, Mr. Hrdlicka notified
Odwalla that he would be leaving the Company in December 1999. Mr. Hrdlicka had
previously served as Chief Operating Officer of Manhattan Beverage Company, a
beverage distribution company, from March 1998 to December 1998. From August
1996 to December 1997, Mr. Hrdlicka served as President/Chief Executive Officer
of Big Sky, a beverage distribution company. Previously, Mr. Hrdlicka was a
consultant to Coors Brewing Company from January 1994 to August 1996. Mr.
Hrdlicka received a B.S. in Business from the University of Missouri and an MBA
from William & Mary College.
LINDA A. FRELKA has served as Vice President, Quality Assurance since
September 1997. From October 1987 to August 1997, Ms. Frelka worked at Redi-Cut
Foods, Inc. in several quality assurance roles, most recently as Vice President
from 1995 to 1997. Ms. Frelka has a B.S. degree in Biological Sciences, emphasis
Microbiology, from Northern Illinois University.
THEODORE R LEAMAN III has served as Vice President, Manufacturing since
April 1999. From January 1998 until April 1999, Mr. Leaman was Plant Manager for
Stouffer Foods, a subsidiary of Nestle Corporation. From January
19
<PAGE> 21
1993 until December 1998, Mr. Leaman served as Plant Manger for Contadina,
another Nestle Corporation subsidiary. Mr. Leaman received a B.S. in Industrial
Management from Carnegie-Mellon University.
KAREN LUCAS has served as Vice President, Marketing since August 1999.
From December 1997 to August 1999, Ms. Lucas was Director of Marketing for
Oberto Company. Ms. Lucas was Senior Marketing Manager at Starbucks Corporation
from January 1996 until December 1997 and was Senior Brand Manager, Marketing at
Chiquita Brands International, Inc. from September 1991 to January 1996. Ms.
Lucas has a B.S. degree in Marketing from Miami University.
SUSAN M. KIRMAYER has served as Vice President, Human Resources since
August 1998. From October 1997 until August 1998, Ms. Kirmayer served as
Director, Human Resources. From February 1992 to October 1997, Ms. Kirmayer
served as Director of Human Resources and Administrative Services for Collagen
Corporation. Ms. Kirmayer attended San Jose State University and majored in
Business Administration.
MARTIN S. GANS has served as a director of the Company since December
1992. Mr. Gans served as Executive Vice President and Chief Financial Officer of
Sun World International, Inc. from 1978 until 1987, and he was a partner at
Touche Ross & Co., an accounting firm, from 1972 until 1978. Mr. Gans is a
certified public accountant and holds a B.B.A. from the University of Miami and
an M.B.A. from Northwestern University. Mr. Gans is also a director of Best
Collateral, Inc., International Storage Management, N.V. and LSL
Biotechnologies, Inc.
RANZELL "NICK" NICKELSON, II has served as a director of the Company
since August 1997. Since September 1999, Dr. Nickelson has served as Senior Vice
President at KPR Foods, a division of Foodbrands America which is a subsidiary
of Iowa Beef Processors. Dr. Nickelson served as Director, International Food
Safety at IDEXX Laboratories, Inc. from October 1997 to September 1999. From
1996 to October 1997, he served as President of Red Mesa Microbiology, Inc. From
1991 to 1996, Dr. Nickelson was vice president, Silliker Laboratories Group,
Inc. Dr. Nickelson served as a member of the National Advisory Committee on
Microbiological Criteria for Foods and as Coordinator, Blue Ribbon Task Force on
E. coli O157:H7 for the National Live Stock and Meat Board. Dr. Nickelson holds
a B.S. in Animal Science, a M.S. in Food Technology and a Ph.D. in Microbiology
from Texas A&M University.
RICHARD L. GRUBMAN has served as a director of the Company since August
1997. Mr. Grubman has been a Managing Director of Highfields Capital Management,
LP since April 1998. Prior to this, Mr. Grubman was a Managing Director of
Development Capital, LLC since January 1997 and a general partner of its
affiliate, Corporate Value Partners, LP, since November 1996. Mr. Grubman was
also previously President of Sycamore Capital Management, Inc., a position he
held since January 1996. From December 1992 to November 1995, Mr. Grubman was a
general partner of Lakeview Partners, L.P. During 1992, he was a vice president
of Gollust, Tierney and Oliver, Incorporated. Mr. Grubman holds an A.B. degree
in Art and Archaeology from Princeton University. He is also a director of the
Children's Motility Disorder Foundation.
CRAIG H. SAKIN has served as a director of the Company since February
1999. Mr. Sakin has served as Managing Director of Catterton Partners, a group
of affiliated venture capital funds, since August 1996. From November 1991 to
August 1996, Mr. Sakin was Chairman of Gold Coast Beverage Distributors, a beer
distribution company, and also served as the Chief Executive Officer during this
period. Mr. Sakin holds a B.S. from St. Lawrence University.
GREG A. STELTENPOHL, the founder of the Company, has served as a
director since the Company's inception and served as Chairman of the Board from
June 1996 until November 1998. Mr. Steltenpohl is currently a consultant to
Odwalla and other companies. Mr. Steltenpohl served as Co-Chairman of the Board
and Co-Chief Executive Officer from January 1995 to June 1996. From the
Company's incorporation in December 1985 until January 1995, Mr. Steltenpohl
served as Chairman of the Board and Chief Executive Officer. In addition, Mr.
Steltenpohl served as the Company's President from November 1985 until May 1992.
Mr. Steltenpohl holds a B.S. degree in environmental sciences from Stanford
University.
20
<PAGE> 22
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION AND RELATED INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following Summary Compensation Table sets forth the compensation
earned by the Company's current Chief Executive Officer and the four other most
highly compensated executive officers for services rendered in all capacities to
the Company and its subsidiaries for the fiscal years ended August 31, 1997,
August 29, 1998, and August 28, 1999. The listed individuals shall be
hereinafter referred to as the "Named Officers."
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
Securities
Name and Principal Underlying All Other
Position Years Salary($) Bonus Options(#)(1) Compensation(2)
- -------------------------------- ----- --------- ------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
D. Stephen C. Williamson 1999 $185,000 $ -- 160,000 $ --
Chairman of the Board and 1998 $159,375 $ -- -- $ --
Chief Executive Officer 1997 $139,312 $ -- 70,000 $ --
James R. Steichen 1999 $169,577 $ -- 70,000 $ 1,081
Senior Vice President, Finance 1998 $160,154 $ -- 25,000 $ 1,131
and Chief Financial Officer 1997 $148,761 $ -- 25,100 $ 138
Douglas L. Hrdlicka 1999 $153,462 $ -- 85,000 $ --
Senior Vice President, 1998 $ -- $ -- -- $ --
Sales & Distribution 1997 $ -- $ -- -- $ --
Susan M. Kirmayer 1999 $103,994 $ -- 20,000 $ 868
Vice President, 1998 $ 90,462 $ -- 9,000 $ 727
Human Resources 1997 $ -- $ -- -- $ --
</TABLE>
- -------------------
(1) The options listed in the table were granted under the Company's 1997 Stock
Option Plan.
(2) Represents the Company's matching 401(k) plan contribution.
21
<PAGE> 23
STOCK OPTIONS
The following table contains information concerning the stock options
granted to each of the Named Officers for the 1999 fiscal year. No stock
appreciation rights were granted to those individuals during such year.
<TABLE>
<CAPTION>
Potential Realizable
Individual Grant Value at Assumed
--------------------------------------- Annual Rates of
Number of Percent of Total Stock
Securities Options Price Appreciation
Underlying Granted Exercise for Option Term(4)
Options to Employees in Price Expiration ---------------------------
Name Granted Fiscal Year ($/Share)(3) Date 5% 10%
---------- --------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
D. Stephen C. Williamson ..... 50,000(1) 11.14% $ 7.18 12/18/08 $ 172,715 $ 487,787
110,000(2) 24.51% $ 7.70 6/14/09 $ 407,249 $1,150,182
James R. Steichen ............ 30,000(1) 6.68% $ 6.53 12/18/08 $ 123,219 $ 312,262
40,000(2) 8.91% $ 7.00 6/14/09 $ 176,090 $ 446,248
Douglas L. Hrdlicka .......... 75,000(1) 16.71% $ 6.53 12/18/08 $ 308,048 $ 780,655
10,000(2) 2.23% $ 7.00 6/14/09 $ 44,023 $ 111,562
Susan M. Kirmayer ............ 20,000(2) 4.46% $ 7.00 6/14/09 $ 88,045 $ 223,124
</TABLE>
- ----------
(1) The options were granted under the Company's 1997 Stock Option Plan on
December 18, 1998, with a vesting commencement date of December 18,
1998, except Mr. Hrdlicka's vesting commencement date which is December
16, 1998. The options granted have a maximum term of 10 years, all
measured from the grant date, subject to earlier termination upon the
optionee's cessation of service with the Company. All options will vest
as to 1/36th of the shares each month, except that the options granted
to Mr. Hrdlicka will vest as to 1/48th of the shares each month.
(2) The options were granted under the Company's 1997 Stock Option Plan on
June 14, 1999, with a vesting commencement date of the same date. The
options granted have a maximum term of 10 years, all measured from the
grant date, subject to earlier termination upon the optionee's cessation
of service with the Company. All options will vest as to 1/36th of the
shares each month.
(3) The exercise price may be paid in cash, in shares of common stock valued
at fair market value on the exercise date or through a cashless exercise
procedure involving a same-day sale of the purchased shares. The Company
may also finance the option exercise by loaning the optionee sufficient
funds to pay the exercise price for the purchased shares and the Federal
and state income and employment tax liability incurred by the optionee
in connection with such exercise.
(4) There is no assurance provided to the option holder or any other holder
of the Company's securities that the actual stock price appreciation
over the five- or 10-year option term will be at the 5% and 10% assumed
annual rates of compounded stock price appreciation.
22
<PAGE> 24
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning option holdings
for the 1999 fiscal year by each of the Named Officers. There were no option
exercises during fiscal 1999. No stock appreciation rights were exercised during
such year or were outstanding at the end of the year.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised in-the-Money Options at
Options at FY-End FY-End(1)
-------------------------- --------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
D. Stephen C. Williamson 156,054 178,946 $30,000 $ --
James R. Steichen 37,044 83,056 $ 3,127 $10,943
Douglas L. Hrdlicka 13,054 71,946 $ 5,862 $29,313
Susan M. Kirmayer 6,361 22,639 $ -- $ --
</TABLE>
- -----------
(1) Based on the fair market value of the shares at the end of the 1999
fiscal year ($7.00 per share) less the option exercise price payable for
those shares.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT
AND CHANGE-IN-CONTROL AGREEMENTS
None of the Company's executive officers have employment agreements with
the Company, and their employment may be terminated at any time at the
discretion of the Board of Directors. Pursuant to the express provisions of the
1997 Stock Option Plan, the outstanding options under the Plan held by the Chief
Executive Officer and the Company's other executive officers will terminate if
not assumed in connection with any acquisition of the Company by merger or asset
sale.
DIRECTOR COMPENSATION
The Company's non-employee directors currently receive $10,000 per year,
in addition to reimbursement for certain expenses incurred in connection with
attendance at Board and committee meetings.
Under the Automatic Option Grant Program of the 1997 Stock Incentive
Plan (the "1997 Option Plan"), each individual who first becomes a non-employee
Board member, whether through election by the shareholders or appointment by the
Board, is automatically granted, at the time of such initial election or
appointment, a non-statutory option to purchase 5,000 shares of common stock,
provided such individual was not previously in the Company's employ. In
addition, on the date of each annual meeting, each individual who is to continue
to serve as a non-employee Board member, whether or not that individual is
standing for re-election to the Board at that particular annual meeting, will
automatically be granted at that meeting a non-statutory option to purchase
3,000 shares of common stock, provided such individual has served as a
non-employee Board member for at least six (6) months. There is no limit on the
number of such 3,000-share option grants any one non-employee Board member may
receive over his or her period of Board service, and non-employee Board members
who have previously served in the Company's employ will be fully eligible for
one or more 3,000-share option grants.
Each option granted under the Automatic Option Grant Program is subject
to the following terms and conditions:
a) The exercise price per share will be equal to 100% of the fair market
value per share of common stock on the automatic grant date.
b) Each option will have a maximum term equal to the lesser of (i) ten (10)
years measured from the grant date or (ii) twelve (12) months following
termination of Board service.
23
<PAGE> 25
c) Each option will be immediately exercisable for all the option shares,
but any purchased shares will be subject to repurchase by the Company,
at the exercise price paid per share, upon the optionee's cessation of
Board service prior to vesting in those shares.
d) The shares subject to each initial 5,000 share grant will vest in four
successive equal annual installments over the optionee's period of Board
service, with the first such installment to vest upon the completion of
one (1) year of Board service, measured from the automatic grant date.
All of the shares subject to each annual 3,000 share grant will vest
upon the optionee's completion of one (1) year of Board service,
measured from the automatic grant date.
e) The shares subject to each outstanding automatic option grant will
immediately vest should the optionee die or become permanently disabled
while a Board member or should any of the following events occur while
the optionee continues in Board service: (i) an acquisition of the
Company by merger or asset sale; (ii) the successful completion of a
hostile tender offer for more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities; or (iii)
a change in the majority of the Board occasioned by one or more
contested elections for Board membership.
f) Upon the successful completion of a hostile tender offer for securities
possessing more than fifty percent (50%) of the total combined voting
power of the Company's outstanding securities, each outstanding
automatic option grant may be surrendered to the Company for a cash
distribution per surrendered option share in an amount equal to the
excess of (i) the greater of (a) the fair market value per share of
common stock on the date the option is surrendered to the Company in
connection with a hostile tender offer or (b) the highest price per
share of common stock paid in such hostile tender offer over (ii) the
exercise price payable per share.
Under the Automatic Option Grant Program described above, the following
options were granted to non-employee directors under the 1997 Stock Option Plan:
Mr. Gans, Mr. Grubman and Mr. Nickelson were each granted 3,000 shares of the
Company's common stock at an exercise price of $6.75 per share; Mr. Sakin was
granted 5,000 shares of the Company's common stock at an exercise price of $6.75
per share.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board of Directors was
formed on October 26, 1993, and is currently comprised of Mr. Grubman, Mr. Gans
and Mr. Sakin. None of these individuals were at any time during fiscal 1999, or
at any other time, an officer or employee of the Company. No executive officer
of the Company serves as a member of the board of directors or compensation
committee of any other entity that has one or more executive officers serving as
a member of the Company's Board of Directors or Compensation Committee.
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors, subject to review
by the full Board, is responsible for the establishment of remuneration
arrangements for senior management and the administration of compensation and
employee benefit plans. In addition, the Compensation Committee sets the base
salary of the Company's executive officers, approves individual bonus programs
for executive officers, and administers the Company's stock option plans under
which grants may be made to executive officers and other key employees. The
following is a summary of policies of the Compensation Committee that affect the
compensation paid to executive officers, as reflected in the tables and text set
forth elsewhere in this document.
GENERAL COMPENSATION POLICY. The objectives of the Company's executive
compensation program are to motivate and retain current executives and to
attract future ones. The Company's executive compensation program is designed
to: (1) provide a direct and substantial link between Company performance and
executive pay, (2) consider
24
<PAGE> 26
individual performance and accomplishments and compensate accordingly, and (3)
determine the Company's position in the specialty beverage and food labor
markets and be competitive in those labor markets. The Company's intent is to
position its executive pay levels at the median of U.S. specialty beverage and
food companies. The Committee also considers geographic location and companies
that may compete with the Company in recruiting executive talent.
FACTORS. The principal factors which the Compensation Committee
considered in establishing the components of each executive officer's
compensation package for the 1999 fiscal year are summarized below. The
Compensation Committee may, however, in its discretion apply entirely different
factors in setting executive compensation for future years.
BASE SALARY. The base salary for each officer is set on the basis of
personal performance, the Compensation Committee's assessment of salary levels
in effect for comparable positions with the Company's principal competitors, and
internal comparability considerations. The weight given to each of these factors
may vary from individual to individual, and the Compensation Committee did not
rely upon any specific compensation surveys for comparative compensation
purposes. Instead, the Compensation Committee made its decisions as to the
appropriate market level of base salary for each executive officer on the basis
of its understanding of the salary levels in effect at companies with which the
Company competes for executive talent. Base salaries will be reviewed on an
annual basis, and adjustments will be made in accordance with the factors
indicated above.
LONG-TERM INCENTIVE COMPENSATION. Long-term incentives are provided
through stock option grants. The grants are designed to align the interests of
the executive officers with those of the shareholders, and to provide each
officer with a significant incentive to manage the Company from the perspective
of an owner with an equity stake in the business. The stock option plan
encourages long term retention and provides rewards to executives and other
eligible employees commensurate with growth in shareholder value. It is the
Committee's practice to grant options to purchase shares at the market price on
the date of grant with a term of up to ten years. The options granted to the
Company's executive officers during fiscal 1999 will vest from the date of grant
in thirty-six or forty-eight equal monthly installments. Accordingly, the
options will provide a return to the executive officer only if he or she remains
in the Company's employ and the market price of the underlying shares of common
stock appreciates.
The number of shares subject to each option grant is set at a level
intended to create a meaningful opportunity for stock ownership based on the
officer's current position with the Company, the base salary associated with
that position, the size of comparable awards made to individuals in similar
positions within the industry, the individual's potential for increased
responsibility and promotion over the option term, and the individual's personal
performance in recent periods. The Committee also takes into account the number
of unvested options held by the executive offer in order to maintain an
appropriate level of equity incentive for that individual. However, the
Committee does not adhere to any specific guidelines as to the relative option
holdings of the Company's executive officers.
CEO COMPENSATION. The compensation payable to Mr. Williamson, the
Company's Chief Executive Officer, was determined by the Compensation Committee.
Mr. Williamson's base salary was set at a level which the Board believed would
be competitive with the base salary levels in effect for chief executive
officers at similarly-sized companies within the industry. For the 1999 fiscal
year, Mr. Williamson's compensation package was set by the Compensation
Committee on the basis of the compensation policy summarized in this report.
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m). Section 162(m) of
the Internal Revenue Code, enacted in 1993, generally disallows a tax deduction
to publicly-held companies for compensation paid to certain executive officers,
to the extent that compensation exceeds $1.0 million per officer in any year.
The compensation paid to the Company's executive officers for the 1999 fiscal
year did not exceed the $1.0 million limit per officer, and it is not expected
the compensation to the Company's executive officers for the 1999 fiscal year
will exceed that limit. In addition, the Company's 1997 Stock Option Plan is
structured so that any compensation deemed paid to an executive officer in
connection with the exercise of his or her outstanding options under the 1997
Stock Option Plan will qualify as performance-based compensation which will not
be subject to the $1.0 million limitation.
Submitted by the Compensation Committee of the Company's Board
of Directors:
25
<PAGE> 27
Richard Grubman, Board Member and Compensation Committee
Chairman
Martin S. Gans, Board Member and Compensation Committee Member
Craig H. Sakin, Board Member and Compensation Committee Member
PERFORMANCE GRAPH
The following graph compares the cumulative total shareholder return on
the common stock of the Company with that of the Standard & Poor's 500 Index and
the Standard & Poor's Foods Index. The comparison for each of the periods
assumes that $100 was invested on August 31, 1994 in the Company's common stock
including reinvestment of dividends. These indices, which reflect formulas for
dividend reinvestment and weighing of individual stocks, do not necessarily
reflect returns that could be achieved by individual investors.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN AMONG ODWALLA, INC.,
THE NASDAQ STOCK MARKET (U.S.) INDEX AND THE RUSSELL 2000 INDEX
[PERFORMANCE GRAPH]
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
--------------------------------------------
8/94 8/95 8/96 8/97 8/98 8/99
<S> <C> <C> <C> <C> <C> <C>
ODWALLA, INC. 100 240 218 150 120 96
NASDAQ STOCK MARKET (U.S.) 100 135 152 212 200 371
RUSSELL 2000 100 121 134 173 142 180
</TABLE>
* $100 invested 8/31/94 in stock or index - including reinvestment of dividends.
Fiscal year ending August 31.
Notwithstanding anything to the contrary set forth in any of the
Company's previous filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate future
filings, the preceding Compensation Committee Report on Executive Compensation
and the preceding Performance Graph shall not be incorporated by reference into
any such filings; nor shall such Report or graph be incorporated by reference
into any future filings.
26
<PAGE> 28
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and persons who own
more than ten percent of a registered class of the Company's equity securities,
to file with the SEC initial reports of ownership and reports of changes in
ownership of common stock and other equity securities of the Company. Officers,
directors and greater than ten percent shareholders are required by SEC
regulations to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required during the fiscal year ended August 28, 1999, all Section
16(a) filing requirements applicable to its officers, directors and greater than
ten percent beneficial owners for fiscal 1999 were complied with on a timely
basis with the exception of the following late filings: (a) Mr. Williamson,
Chief Executive Officer, inadvertently failed to file a Form 4 in a timely
manner to report one transaction in April 1999; (b) Mr. Leaman, inadvertently
failed to file a Form 3 in a timely manner upon becoming an executive officer of
the Company; (c) Mr. Sakin, inadvertently failed to file a Form 3 in a timely
manner upon becoming a director of the Company; (d) Mr. Hrdlicka, inadvertently
failed to file a Form 3 in a timely manner upon becoming an executive officer of
the Company.
27
<PAGE> 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of the Company's common stock as of November 12, 1999, by (i) each
director and Named Officer and (ii) all those known by the Company to be
beneficial owners of more than five percent of its common stock.
<TABLE>
<CAPTION>
Beneficial Ownership(1) Beneficial Ownership(1)
Common Stock only Full Voting Rights(2)
------------------------ ------------------------
Number of Percent of Number of Percent of
BENEFICIAL OWNER Shares(3) Total(4) Shares Total
---------------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Catterton-Simon Partners III, L.P.(5) .... -- -- 1,108,333 17.78%
9 Greenwich Office Park
Greenwich, CT 06830
D. Stephen C. Williamson(6) .............. 787,883 14.85% 787,883 12.43%
c/o Odwalla, Inc.
120 Stone Pine Road
Half Moon Bay, CA 94019
Greg A. Steltenpohl(7) ................... 686,900 13.04% 686,900 10.9%
c/o Odwalla, Inc.
120 Stone Pine Road
Half Moon Bay, CA 94019
Martin S. Gans(8) ........................ 89,547 1.73% 89,547 1.44%
Richard Grubman(9) ....................... 31,326 * 31,326 *
Ranzell Nickelson, II(10) ................ 13,333 * 13,333 *
Craig H. Sakin(11) ....................... -- --
James R. Steichen(12) .................... 50,378 * 50,378 *
Douglas L. Hrdlicka(13) .................. 20,417 * 20,417 *
Susan M. Kirmayer(14) .................... 10,133 * 10,133 *
Directors and executive officers as
a group (12 persons)(15) ................ 1,705,805 30.27% 1,705,805 30.27%
</TABLE>
- -----------
* Less than one percent
(1) This table is based upon information supplied by officers, directors and
principal shareholders and Schedules 13D and 13G filed with the SEC.
Unless otherwise indicated in the footnotes to this table and subject to
community property laws applicable, the Company believes that each of
the shareholders named in this table has sole voting and investment
power with respect to the shares indicated as beneficially owned.
(2) These columns include both common stock as described in Note 4, Series A
Preferred Stock, and a warrant to purchase 75,000 shares of common stock
held by Catterton-Simon Partners III, L.P. These columns represent total
voting rights at November 12, 1999, adjusted as required by rules
promulgated by the SEC (see Note 4 below), including the one-to-one
voting rights present in the Series A Preferred Stock.
(3) This column includes only common stock outstanding at November 12, 1999.
(4) Beneficial ownership is determined in accordance with the rules of the
SEC and generally includes voting or investment power with respect to
securities. Shares of the Company's common stock, subject to options
currently exercisable or exercisable within 60 days of November 12,
1999, are deemed outstanding for
28
<PAGE> 30
computing the percentage of the person holding such options, but aren't
deemed outstanding for computing the percentage of any other person.
Percentage of ownership is based on 5,125,761 shares of common stock
outstanding on November 12, 1999.
(5) Includes the Series A Preferred Stock and the warrant to purchase 75,000
shares of common stock held by Catterton-Simon Partners III, L.P., a
Delaware limited partnership.
(6) Includes 41,250 shares of common stock held by Alexandra Bowes, Mr.
Williamson's wife, and 194,851 shares held by Willy Juice Partners, a
limited partnership of which Mr. Williamson is the general partner. Mr.
Williamson disclaims beneficial ownership of shares held by Willy Juice
Partners, except to the extent of his pecuniary interest therein. Also
includes 179,666 shares of common stock subject to options exercisable
within 60 days of November 12, 1999.
(7) Includes 214,453 shares of common stock held by Bonnie Bassett
Steltenpohl, Mr. Steltenpohl's wife, and 11,539 shares held by the
Estate of Benita Johnson, of which Mr. Steltenpohl is the executor. Also
includes 140,545 shares of common stock subject to options exercisable
within 60 days of November 12, 1999.
(8) Includes 50,889 shares of common stock subject to options exercisable
within 60 days of November 12, 1999.
(9) Includes 27,778 shares of common stock subject to options exercisable
within 60 days of November 12, 1999 plus Mr. Grubman's interest in 1,548
shares of common stock held by Willy Juice Partners.
(10) Includes 13,333 shares of common stock subject to options exercisable
within 60 days of November 12, 1999.
(11) Excludes both 1,033,333 shares of Series A Preferred Stock and the
warrant to purchase 75,000 shares of common stock held by
Catterton-Simon Partners III, L.P., a Delaware limited partnership. Mr.
Sakin disclaims beneficial ownership of the shares and warrant held by
Catterton-Simon Partners III, L.P. Mr. Sakin is a manager of
Catterton-Simon Managing Partners III, L.L.C., the general partner of
Catterton-Simon Partners III, L.P. See Note 5.
(12) Includes 50,378 shares of common stock subject to options exercisable
within 60 days of November 12, 1999.
(13) Includes 20,417 shares of common stock subject to options exercisable
within 60 days of November 12, 1999.
(14) Includes 9,833 shares of common stock subject to options exercisable
within 60 days of November 12, 1999.
(15) Includes 508,727 shares of common stock subject to options exercisable
within 60 days of November 12, 1999, and excludes the Series A Preferred
Stock and warrants held by Catterton-Simon Partners III, L.P. of which
Mr. Sakin disclaims beneficial ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In November 1998, Mr. Steltenpohl entered into a two-year consulting
agreement with the Company under which he will receive up to $300,000 during the
term of the agreement.
Mr. Steltenpohl is a 50 percent owner of the Davenport property at which
certain marketing offices and warehouse facilities were located (the "Davenport
Property"). The Company leased the Davenport Property at a monthly rent of
$9,320 pursuant to a lease that was to expire in July 1999. The Company entered
into an agreement to terminate the lease for this facility as of September 30,
1998 for a $10,000 cash payment and certain equipment valued at approximately
$13,000. The Company believes that the rental terms, and subsequent early
termination, of the Davenport Property lease were fair and reasonable and no
less favorable than those that would be available to the Company in a
transaction with an unaffiliated lessor.
29
<PAGE> 31
The Company's Board of Directors authorized the Company to enter into a
consulting arrangement with a consulting company of which Dr. Nickelson is the
President and subsequently with Dr. Nickelson directly. The contract was
approved by a majority of disinterested directors and was entered into on
standard industry terms. Payments to Dr. Nickelson under this arrangement were
less than $10,000 in fiscal 1999.
30
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of independent accountants.......................................35
Consolidated Balance Sheets, August 29, 1998 and August 28, 1999........36
Consolidated Statements of Operations, three years in the period ended
August 28, 1999.....................................................37
Consolidated Statements of Changes in Shareholders' Equity, three years
in the period ended August 28, 1999.................................38
Consolidated Statements of Cash Flows, three years in the period ended
August 28, 1999.....................................................39
Notes to Consolidated Financial Statements..............................40
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1* Amended and Restated Articles of Incorporation of the
Registrant.
3.2*** Amended and Restated Bylaws of the Registrant.
4.1* Reference is made to Exhibits 3.1 and 3.2.
4.2## Stock and Warrant Purchase Agreement dated January 7, 1999,
together with certain exhibits thereto.
10.1** Form of Indemnity Agreement entered into between the Registrant
and its directors and officers.
10.2* Registrant's 1993 Stock Option Plan, as amended (and related
stock option grant forms).
10.6** Promissory Note dated March 1, 1993 between the Registrant and
Greg A. Steltenpohl.
10.7** Promissory Note dated March 1, 1993 between the Registrant and
Bonnie Bassett Steltenpohl.
10.9* Registrant's 1994 Non-Employee Directors' Stock Option Plan (and
related stock option grant forms).
10.13# Loan and Security Agreement dated May 22, 1997 between the
Registrant and Coast Business Credit.
10.15 Revolving Credit Agreement dated September 3, 1999 between the
Registrant and Imperial Bank
21.1 Subsidiaries of the Registrant
23.1 Consent of independent accountants
27.1 Financial Data Schedule
</TABLE>
- ----------
* Incorporated by reference to Registrant's Report on Form 10-KSB for the
fiscal year ended August 31, 1994, as filed with the SEC.
** Incorporated by reference to Registrant's Registration Statement on Form
SB-2, SEC File No. 33-71530-LA, as filed with the SEC on November 9,
1993, as amended.
*** Incorporated by reference to Registrant's Report on Form 10-Q for the
fiscal quarter ended May 29, 1999.
# Incorporated by reference to Registrant's Report on Form 10-Q for the
fiscal quarter ended May 31, 1997.
## Incorporated by reference to Registrant's Report on Form 10-Q for the
fiscal quarter ended November 28, 1998.
(b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the quarter
ended August 28, 1999.
31
<PAGE> 33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Odwalla, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Odwalla, Inc. and its subsidiary at August 28, 1999 and August 29, 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended August 28, 1999, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
October 26, 1999
32
<PAGE> 34
ODWALLA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 28,
1998 1999
---------- ----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 3,191 $ 2,581
Short term investments -- 4,788
Trade accounts receivable, less allowance for doubtful
accounts of $588 and $631 5,491 6,072
Inventories 3,044 3,718
Prepaid expenses and other current assets 796 1,530
Deferred tax asset, current 1,164 1,358
-------- --------
Total current assets 13,686 20,047
-------- --------
Plant, property and equipment, net 13,135 12,877
-------- --------
Other assets
Goodwill, net 1,225 1,117
Covenants not to compete, net 606 497
Deferred tax asset, non-current 366 520
Other noncurrent assets 332 247
-------- --------
Total other assets 2,529 2,381
-------- --------
Total assets $ 29,350 $ 35,305
======== ========
Current liabilities
Accounts payable $ 5,339 $ 6,876
Accrued payroll and related items 1,091 1,142
Line of credit 2,044 2,319
Other accruals 2,963 2,126
Current maturities of capital lease obligations 159 28
Current maturities of long-term debt 421 172
-------- --------
Total current liabilities 12,017 12,663
Capital lease obligations, less current maturities 6 15
Long-term debt, less current maturities 882 673
-------- --------
Total liabilities 12,905 13,351
-------- --------
Commitments and contingencies (Note 3)
Mandatorily redeemable and convertible preferred stock
Series A, no par value, shares authorized, 5,000,000; shares issued and
outstanding, 1,033,333 in 1999. Liquidation preference minimum,
$8,600,000 at August 28, 1999 -- 7,505
Shareholders' equity
Common stock, no par value, shares authorized, 15,000,000; shares
issued and outstanding, 5,061,000 and 5,125,000 29,499 29,750
Additional paid-in capital -- 62
Accumulated deficit (13,054) (15,363)
-------- --------
Total shareholders' equity 16,445 14,449
-------- --------
Total liabilities and shareholders' equity $ 29,350 $ 35,305
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE> 35
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net sales $ 52,630 $ 59,088 $ 68,042
Cost of sales 27,650 29,236 35,542
-------- -------- --------
Gross profit 24,980 29,852 32,500
-------- -------- --------
Operating expenses
Sales and distribution 22,465 20,282 24,056
Marketing 2,919 2,696 2,908
General and administrative 7,625 6,873 7,647
Recall and related costs 6,518 1,242 250
-------- -------- --------
Total operating expenses 39,527 31,093 34,861
-------- -------- --------
Loss from operations (14,547) (1,241) (2,361)
Other (expense) income, net 210 (163) (40)
-------- -------- --------
Loss before income taxes (14,337) (1,404) (2,401)
Income tax benefit 1,901 25 359
-------- -------- --------
Net loss (12,436) (1,379) (2,042)
Preferred stock dividend -- -- (267)
-------- -------- --------
Net loss applicable to common shareholders $(12,436) $ (1,379) $ (2,309)
======== ======== ========
Basic net loss applicable to common shareholders per share $ (2.49) $ (0.27) $ (0.45)
======== ======== ========
Shares used in per share amounts 4,988 5,045 5,098
======== ======== ========
Diluted net loss applicable to common shareholders per share $ (2.49) $ (0.27) $ (0.45)
======== ========
Shares used in per share amounts 4,988 5,045 5,098
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
34
<PAGE> 36
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock
----------------------- Additional Accumulated
Shares Amount Paid-in Capital deficit Total
-------- -------- --------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance, September 1, 1996 4,945 $ 28,813 $ 761 $ 29,574
Exercise of common stock options,
including related tax benefits 79 497 -- 497
Net loss for the year -- -- (12,436) (12,436)
-------- -------- -------- --------
Balance, August 31, 1997 5,024 29,310 (11,675) 17,635
Exercise of common stock options 37 189 -- 189
Net loss for the year -- -- (1,379) (1,379)
-------- -------- -------- --------
Balance, August 29, 1998 5,061 29,499 (13,054) 16,445
Exercise of common stock options 64 251 -- 251
Issuance of stock warrants in connection with
preferred stock -- -- $ 62 -- 62
Preferred Stock dividend -- -- -- (267) (267)
Net loss for the year -- -- -- (2,042) (2,042)
-------- -------- -------- -------- --------
Balance, August 28, 1999 5,125 $ 29,750 $ 62 $(15,363) $ 14,449
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
35
<PAGE> 37
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(12,436) $ (1,379) $ (2,042)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation 1,936 2,084 2,130
Amortization 273 251 220
US government settlement -- 1,242 --
Deferred taxes (1,198) (25) (348)
Gain on sale of assets (25) (50) (141)
Changes in assets and liabilities
Trade accounts receivable 692 (881) (581)
Inventories (615) 866 (675)
Refundable income taxes (660) 660 --
Prepaid expenses and other current assets 234 (67) (734)
Other noncurrent assets 16 77 81
Accounts payable 87 (57) 1,537
Accrued payroll and related items 167 (172) 51
Other accrued liabilities 3,357 (1,001) (837)
Income taxes payable (281) -- --
-------- -------- --------
Net cash provided by (used in) operating activities (8,453) 1,548 (1,339)
-------- -------- --------
Cash flows from investing activities
Capital expenditures (3,016) (1,422) (2,401)
(Purchase) proceeds from short-term investments, net 5,430 1,008 (4,788)
Proceeds from sale of assets 145 130 673
-------- -------- --------
Net cash provided by (used in) investing activities 2,559 (284) (6,516)
-------- -------- --------
Cash flows from financing activities
Principal payments under long-term debt (153) (301) (457)
Net borrowings under line of credit 2,014 31 274
Payments of obligations under capital leases (222) (209) (123)
Issuance of mandatorily redeemable and convertible
preferred stock -- -- 7,300
Issuance of common stock 497 189 251
-------- -------- --------
Net cash provided by (used in) financing activities 2,136 (290) 7,245
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (3,758) 974 (610)
Cash and cash equivalents, beginning of period 5,975 2,217 3,191
-------- -------- --------
Cash and cash equivalents, end of period $ 2,217 $ 3,191 $ 2,581
======== ======== ========
Cash paid during the year for:
Interest $ 123 $ 315 $ 437
Income taxes $ 203 $ 1 $ 2
</TABLE>
Noncash investing and financing activities: During 1997, we purchased property
in Half Moon Bay by assuming a $230,000 mortgage and $45,000 of assessment
bonds. In 1998, we entered into a settlement with the US government, as
discussed in Note 3, which requires us to pay $1.5 million over a five-year
period.
See accompanying notes to consolidated financial statements.
36
<PAGE> 38
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company. Odwalla's business is to provide easy access to great
tasting nourishment. We are the leading branded all-natural, super-premium juice
company in the country, serving selected markets in the Western, Midwest,
Mid-Atlantic and Southeastern regions of the United States. Odwalla's complete
product line consists of more than 25 fresh-squeezed and nutritionally fortified
juices and smoothies (including single-flavor and blended fruit and vegetable
based juice products), all-natural meal replacement and dairy-free shakes,
natural spring water and all-natural food bars.
Basis of presentation and principles of consolidation. The accompanying
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiary, Odwalla Canada, Inc. We have eliminated all significant
intercompany balances and transactions. Beginning September 1, 1997, we changed
our annual reporting periods to the 52 or 53 week period ending on the Saturday
nearest August 31. The change doesn't materially impact the comparability of
information presented in these financial statements. All references to years
refer to the Company's fiscal year. In these financial statements, our fiscal
years ended August 31, 1997, August 29, 1998 and August 28, 1999.
Use of estimates. To comply with generally accepted accounting
principles, we make estimates and use assumptions that affect the amounts
reported in the financial statements and disclosures made in the accompanying
notes. Our most significant estimates are related to the collectibility of
accounts receivable, reserves for products to be returned, reserves for
inventory that may not be useable and reserves for legal fees related to claims
and litigation. We also use estimates to determine the carrying value of
goodwill and purchased intangibles. Actual results may differ from our
estimates.
Cash, cash equivalents and short term investments. We consider all
investments with an initial maturity of three months or less at the date of
purchase to be cash equivalents. Both cash equivalents and short term
investments are considered available-for-sale securities and are reported at
amortized cost, which approximates fair value. The following schedule summarizes
the estimated fair value of our cash, cash equivalents and short-term
investments (in thousands):
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 28,
1998 1999
--------- ---------
<S> <C> <C>
Cash and cash equivalents:
Cash $ 1,092 $ 249
Cash equivalents 2,099 2,332
--------- ---------
$ 3,191 $ 2,581
========= =========
Short term investments
U.S. government securities $ - $ 4,788
========= =========
</TABLE>
Interest earned on cash, cash equivalents and short-term investments was
$159,000 and $278,000 in 1998 and 1999.
37
<PAGE> 39
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories. Inventories are valued at the lower of cost (first-in,
first-out) or market (net realizable value). Our inventories consist of the
following (in thousands):
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 28,
1998 1999
---------- ----------
<S> <C> <C>
Raw materials $1,755 $2,433
Packaging supplies and other 485 629
Inventory deposits 223 --
Finished product 581 656
------ ------
Total $3,044 $3,718
====== ======
</TABLE>
Plant, property, equipment and depreciation. Plant, property and
equipment are stated at the lower of cost or, if impaired, the fair value at
date of impairment. We calculate depreciation and amortization using the
straight-line method over the estimated useful lives of the assets. For
leasehold improvements, the amortization period is the shorter of the estimated
useful life or the remaining lease term. Amortization of assets under capital
leases is based upon the shorter of the lease term or useful life of the leased
asset and is included with depreciation expense.
Estimated useful lives that we use are as follows:
<TABLE>
<S> <C>
Buildings and building improvements .............. 7 to 35 years
Leasehold improvements............................ 3 to 15 years
Machinery and equipment........................... 3 to 15 years
Vehicles.......................................... 5 years
Other............................................. 3 to 7 years
</TABLE>
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 28,
1998 1999
---------- ----------
<S> <C> <C>
Land $ 1,046 $ 618
Buildings and building improvements 7,205 7,220
Leasehold improvements 2,490 1,397
Machinery and equipment 7,054 7,370
Vehicles 538 625
Other 3,179 4,395
-------- --------
21,512 21,625
Less accumulated depreciation and amortization (8,377) (8,748)
-------- --------
Plant, property and equipment, net $ 13,135 $ 12,877
======== ========
</TABLE>
Goodwill and covenants not to compete. We record goodwill when the cost
of net assets we acquire exceeds their fair value. Goodwill is amortized on a
straight-line basis over a 15-year period. We regularly perform reviews to
determine if the carrying value of the assets is impaired. The reviews look for
the existence of facts or circumstances, either internal or external, which
indicate the carrying value of the asset cannot be recovered. No such impairment
has been indicated to date. If there is impairment in the future, we will
measure the amount of the loss based on
38
<PAGE> 40
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
undiscounted expected future cash flows from the impaired assets. The cash flow
calculations would be based on management's best estimates, using appropriate
assumptions and projections at the time.
We entered into covenants not to compete when we acquired certain
businesses. The cost is amortized on a straight-line basis over the life of the
agreements, currently 5 to 10 years.
Goodwill and covenants not to compete consisted of the following (in
thousands):
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 28,
1998 1999
---------- ----------
<S> <C> <C>
Goodwill $ 1,620 $ 1,620
Accumulated amortization (395) (503)
------- -------
Net $ 1,225 $ 1,117
======= =======
Covenants not to compete $ 1,100 $ 990
Accumulated amortization (494) (493)
------- -------
Net $ 606 $ 497
======= =======
</TABLE>
Concentration of credit risk. Odwalla operates a multi-faceted business,
both manufacturing and distribution. Many circumstances could have an
unfavorable impact on our operating results. Examples include unfavorable
weather impact on raw materials, changes in government regulations, changes in
consumer demands or the emergence of significant competitors. A significant
portion of our business and our customers are currently concentrated in Northern
California.
We are also subject to risks related to our significant trade accounts
receivable, although our customer base is generally diversified in each of our
market areas due to the number of accounts that we service. We perform ongoing
evaluations of customer credit to reduce the risk associated with accounts
receivable. We maintain reserves for estimated credit losses, based on specific
customers, historical trends and other information, and those losses have
historically been within our expectations.
One customer represented approximately 12%, 13% and 13% of sales in
1997, 1998, and 1999.
Revenue recognition. We recognize sales when products are delivered to
our customers. Most of our sales are through our own direct-store-delivery or
DSD system. We usually guarantee that sales through our DSD system will be sold
to consumers and we record a reserve for products estimated to be returned. Most
of our sales to independent distributors are not guaranteed.
Earnings per share. Basic earnings per share is computed using the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period. Common
equivalent shares consist of the shares issuable upon the exercise of stock
options and warrants under the treasury stock method.
39
<PAGE> 41
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the computation of basic and diluted earnings per
share, in thousands except per share data:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Basic:
Weighted average common shares outstanding 4,988 5,045 5,098
Net loss $(12,436) $ (1,379) $ (2,042)
Net loss attributable to common shareholders $(12,436) $ (1,379) $ (2,309)
Per share amount, attributable to common shareholders $ (2.49) $ (0.27) $ (0.45)
Diluted:
Weighted average common shares outstanding 4,988 5,045 5,098
Shares used in per share amounts 4,988 5,045 5,098
Net loss $(12,436) $ (1,379) $ (2,042)
Net loss attributable to common shareholders $(12,436) $ (1,379) $ (2,309)
Per share amount, attributable to common shareholders $ (2.49) $ (0.27) $ (0.45)
</TABLE>
We had no dilutive common equivalent shares during fiscal 1997, 1998 or
1999 due to the reported net loss.
Reclassifications. To conform with new classifications in our fiscal
1999 financial statement presentation, we reclassified certain prior year
expenses. The primary reclassification was an increase ($419,000 for fiscal 1997
and $396,000 for the fiscal 1998) in sales and distribution costs and a
corresponding decrease in general and administrative expenses.
2. DEBT
LINE OF CREDIT
In May 1997, we entered into a Loan and Security Agreement ("Security
Agreement") with a lender which provided a revolving line of credit up to $5.0
million. Our borrowings were limited to 85% of eligible accounts receivable
("Receivable Line") plus up to $500,000 for new capital equipment ("Equipment
Line"). Eligible accounts receivable were defined in the Security Agreement and
generally represented all trade accounts receivable less balances that were
delinquent. We paid monthly interest on borrowings at prime plus 1.5%, which was
9.75% at August 28, 1999. During 1999, we borrowed only under the Receivable
Line. If we borrowed under the Equipment Line, we would pay interest only for
the first three months and then pay monthly interest and principal payments
using a 45 month amortization schedule.
The Security Agreement contained certain restrictions, including the
ability to borrow additional funds, pay dividends, purchase or otherwise acquire
Company stock, or encumber or sell Company assets. The interest rate changed to
prime plus 2% if our adjusted net worth, as defined, was less than $14 million.
We were required to pay interest on $2 million whether or not we borrowed that
amount and, accordingly, we had borrowed approximately $2.3 million under the
Receivable Line at August 28, 1999. All of our assets were pledged as collateral
under the Security Agreement.
Also in May 1997, we entered into a separate Loan Agreement ("Loan
Agreement") with another party to provide a $1.0 million facility under the same
terms noted for the Security Agreement. The Loan Agreement expired in May 1998.
We also issued a warrant for 7,000 shares of common stock at $12.50 per share
(fair market
40
<PAGE> 42
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
value at issue date) under the Loan Agreement. The fair value of
the warrant, which expires in May 2002, is not significant to these financial
statements.
In September 1999, we entered into a Revolving Credit Agreement ("Credit
Agreement") with a new lender and paid the balance then outstanding under, and
terminated, the Security Agreement. The Credit Agreement provides a revolving
credit facility up to $5.0 million. The first $2.0 million of borrowings do not
require separate borrowing base reporting. Borrowings over $2.0 million and up
to $5.0 million are limited to 80% of eligible accounts receivable. The Credit
Agreement defines eligible accounts receivable which generally represents all
trade accounts receivable less delinquent balances. Interest is payable monthly
at either the prime interest rate plus 1% or the Eurodollar rate plus 3.5%. The
interest rate to be incurred is selected by Odwalla at the inception of each
loan and may be changed during the period in which the borrowed amount is
outstanding in accordance with provisions included in the Credit Agreement. The
initial term of the Credit Agreement is for three years.
All of our assets are pledged as collateral under the Credit Agreement.
We are also required to meet certain covenants, including maintenance of certain
financial, leverage, and debt service coverage ratios, and certain tangible net
worth. The Credit Agreement also contains certain business restrictions,
including the ability to borrow additional funds, limitations on capital
expenditures in excess of certain amounts, restrictions on the payment of cash
dividends, sale or purchase of Company stock, ability to encumber or sell
Company assets, and limitations on other business transactions without prior
approval from the lender.
LONG-TERM DEBT
As part of our plea agreement with the U.S. government discussed in Note
3, we agreed to pay $1.5 million over a five-year period, without interest.
Generally accepted accounting principles require that we impute interest, which
means that we record the obligation on a discounted basis and charge the income
statement with interest expense (in this situation, at 9.5% per year) over the
five-year period. The discounted amount recorded in July 1998 was $1,242,000.
The U.S. government may file a lien on all of our assets under the plea
agreement but, if they do, has agreed to allow the Security Agreement holder
(subsequently modified to substitute the Credit Agreement holder) to retain
priority interest in our assets.
In October 1996, we assumed a $230,000 mortgage and $45,000 of Half Moon
Bay assessment bonds when we purchased land adjacent to our Half Moon Bay
administrative offices. Mortgage terms include interest at 8.75% per annum and
monthly principal and interest payments until maturity in 1999 when the
remaining balance of approximately $220,000 was due. The Half Moon Bay
assessment bonds bear interest at 7% per annum and require annual principal and
interest payments to 2006. In 1999, we sold this property and were relieved of
both the mortgage and assessment bond obligations.
The carrying value of debt approximates its fair value except that we
carry the value of the U.S. government debt at cost less imputed interest, as
discussed above, as there is no reasonable way to evaluate this non-interest
bearing obligation.
41
<PAGE> 43
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes long-term debt (in thousands):
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 28,
1998 1999
---------- ----------
<S> <C> <C>
Mortgage on Half Moon Bay property $ 221 $ --
U.S. government obligation 1040 845
Bonds on Half Moon Bay property 42 --
------ ------
1,303 845
Less current portion 421 172
------ ------
$ 882 $ 673
====== ======
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
OPERATING AND CAPITAL LEASES
Odwalla leases office space, branch distribution facilities, equipment
and vehicles under various operating leases, including the related party lease
described below. These leases expire at various dates through 2007 and many
facility leases contain renewal options. Most property leases require us to pay
utilities, property taxes and common maintenance costs. Total operating lease
rent expense was $5.5 million, $5.5 million and $5.6 million for the years ended
in 1997, 1998 and 1999. Odwalla also leases some furniture, equipment and
vehicles under capital leases expiring through 2001.
The following table lists property under capital leases by major classes
(in thousands):
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 28,
1998 1999
---------- ----------
<S> <C> <C>
Machinery and equipment $ 971 $ 183
Vehicles 140 108
Other 84 41
------- -------
1,195 332
Less accumulated amortization (638) (267)
------- -------
Net leased equipment under capital leases $ 557 $ 65
======= =======
</TABLE>
42
<PAGE> 44
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future net minimum lease payments under existing capital and operating
leases as of August 28, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING IN AUGUST LEASES LEASES
- --------------------- -------- ---------
<S> <C> <C>
2000 $ 31 $ 4,999
2001 15 3,675
2002 -- 1,605
2003 -- 1,268
2004 -- 889
Thereafter -- 753
-------- --------
46 $ 13,189
Less amount representing interest (3) ========
--------
Present value of net minimum lease payments 43
Less current maturities (28)
--------
Long-term portion $ 15
========
</TABLE>
We occasionally sublease portions of our leased facilities to third
parties under short-term agreements. We earned $73,000, $54,000 and $26,000
under sublease agreements in 1997, 1998 and 1999.
RELATED PARTY LEASE
Our storage facility and offices in Davenport, California, were leased
from a partnership of which Mr. Steltenpohl, a member of our Board of Directors,
is a significant partner. We entered into an agreement to terminate our lease
for this facility as of September 30, 1998, which represented an early
termination, for a $10,000 cash payment and certain equipment valued at
approximately $13,000. We paid approximately $112,000 in rent for this facility
in both 1997 and 1998.
RAW MATERIAL CONTRACTS
We had purchase commitments for the future delivery of raw materials as
of August 28, 1999, approximately $2.1 million of which are under contracts and
are expected to be completed by August 2000.
RECALL AND RELATED COSTS
On October 30, 1996, Odwalla was notified by the State of Washington
Environmental Health Services of an epidemiological link between several cases
of E. coli O157:H7 and Odwalla's apple juice products. We immediately
implemented a recall (the "Recall") of all Odwalla products containing apple
juice.
Twenty-two personal injury claims and legal proceedings have been filed
against Odwalla seeking monetary damages and other relief relating to the
Recall. There was also one legal proceeding alleging fraudulent business acts
and practices relating to the recall products. Twenty of these claims and
proceedings have been settled. In addition, approximately 600 other claims for
damages resulting from the Recall were presented to our insurance carrier and
approximately 595 of those claims have been settled. We also received two claims
in fiscal 1999 allegedly arising out of product consumption prior to the Recall.
Settlement of the personal injury legal proceedings and claims was covered under
our insurance policy. At this time, we are unable to determine the potential
liability from the remaining legal proceedings and claims. We believe our
insurance coverage is adequate to cover such claims and legal proceedings, but
the ultimate outcome of any litigation is uncertain and we cannot be certain
that insurance coverage will be adequate.
43
<PAGE> 45
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Litigation can also have an adverse impact on a company, regardless of
the outcome, due to defense costs, diversion of management resources and other
factors.
In early 1997, Odwalla was informed that it was the subject of a federal
grand jury investigation (Eastern District of California) concerning the E. coli
O157:H7 incident and related issues. In July 1998, in connection with the
investigation, we entered into a misdemeanor plea agreement with the U.S.
government, concerning 16 shipments in October 1996 of unpasteurized apple juice
from a single contaminated batch. As part of the plea agreement, Odwalla agreed
to pay, over a period of five years, $1.25 million to the U.S. government and
$250,000 to three non-profit organizations involved with advancing the cause of
food safety. We also agreed, as part of the conditions attached to a five-year
term of unsupervised Court probation, to develop and implement a HACCP plan and
to undertake other measures related to food safety. The net present value of the
payments of $1.24 million was recorded as a Recall and related cost in fiscal
1998.
Odwalla also incurred significant direct costs as a result of the
Recall, including advertising and public relations costs, legal and professional
fees, cost of the product recalled (including the labor and freight involved in
the recall process), destruction of unsold product in inventory and packaging
supplies, costs of leased sales and distribution equipment in excess of current
volume requirements, costs of reformulating products and costs associated with
the flash pasteurization process. Total Recall and related costs in fiscal 1997
were $6.5 million, including a $2.2 million charge to establish a liability for
future professional fees related to the Recall. Under our arrangement with our
insurance company, we pay a portion of the legal fees related to third party
claims resulting from the Recall and related claims. The reserve for
professional fees is an estimate, and there can be no assurance that the actual
reserved liability established will be adequate. We reviewed this charge during
fiscal 1998 and, except for the settlement noted below, believed that the
reserve established was adequate. In fiscal 1999, we reviewed available
information, including recently filed claims, and added $250,000 to this
reserve. We will continue to assess this liability and will make appropriate
adjustments if circumstances change. Approximately $1.3 million of this reserve
for professional fees remained at August 28, 1999.
Odwalla maintains insurance coverage for product recall, product
adulteration, lost income and other first party business risks. The claim we
submitted to our insurance carriers for product recall costs and for business
losses incurred due to the Recall was denied for substantially all of the
amounts claimed. On May 21, 1999, Odwalla filed a lawsuit in United States
District Court for the Eastern District of California in Fresno, California,
against New Hampshire Insurance Company to seek recovery on our business
interruption insurance claim. The case does not have a trial date set. The
amount and timing of proceeds, if any, from the claims and any future insurance
claims cannot be presently determined.
4. MANDATORILY REDEEMABLE AND CONVERTIBLE PREFERRED STOCK
Series A Preferred Stock. On January 7, 1999, we signed an agreement
with Catterton-Simon Partners III, L.P. ("Catterton-Simon"), a Delaware limited
partnership, to sell 1,000,000 shares of Odwalla Series A Preferred Stock
("Series A Stock") at $8.00 per share. The Series A Stock receives an 8% annual
dividend which is payable in either cash or additional Series A Stock, at our
election. The dividend is payable semi-annually. All Series A Stock is
convertible on a one-for-one basis into Odwalla common stock (a) upon a request
by Catterton-Simon at any time after July 6, 1999, and (b) automatically upon
the earlier of (i) an acquisition of Odwalla by another company, either for cash
or publicly traded stock, at a price in excess of $12.00 per share, (ii) the
average trading price of Odwalla common stock exceeding $12.00 per share for 20
consecutive trading days, or (iii) January 7, 2002. Holders of Series A Stock
are entitled to preferential payment, in the event of any liquidation of
Odwalla, in an amount equal to the greater of $8.00 per share, plus any accrued
but unpaid dividends, or the amount due each holder of common stock. The minimum
liquidation preference was $8.6 million at August 28, 1999. Catterton-Simon also
received a warrant to
44
<PAGE> 46
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purchase 75,000 shares of Odwalla common stock at $10.00 per share. The warrant
expires in seven years. This transaction was funded and closed in February 1999.
We also paid fees and issued a warrant to our financial advisor in
connection with this transaction. The warrant is for 24,806 shares of common
stock at an exercise price approximating $6.45 per share and expires in five
years. Total costs of the transaction approximate $700,000, including the
financial advisor fees other than the warrant described above, reimbursement of
certain costs of Catterton-Simon and other transaction costs.
On June 14, 1999, our Board of Directors declared a stock dividend of
33,333 Series A Preferred Stock shares for the Series A shareholder. The
dividend was paid June 30, 1999.
5. SHAREHOLDERS' EQUITY
Warrants. The underwriters of Odwalla's initial public offering in
December 1993 were issued warrants to purchase 105,000 shares of common stock at
$7.20 per share. These warrants expired in December 1998. We also issued two
warrants in connection with the Series A Preferred Stock financing described
above. One warrant was issued for 75,000 shares of common stock at $10.00 per
share expiring in February 2006. The other warrant was issued for 24,806 shares
of common stock at $6.45 per share expiring in February 2004.
Stock Option Plans. Under the 1993 Stock Option Plan, incentive stock
options could be granted to employees and nonstatutory stock options could be
granted to employees, directors or consultants. In December 1994, the Board of
Directors adopted the 1994 Non-Employee Directors' Stock Option Plan
("Directors' Plan") and, in January 1995, the shareholders approved this plan.
Incentive options may be granted at an exercise price not less than 100% of fair
market value on the grant date; nonstatutory options may be granted at an
exercise price not less than 85% of fair market value on the grant date. The
options generally vest one-sixtieth per month from the grant date, although
approximately 85,000 outstanding nonstatutory options vested immediately on the
grant date. Directors' Plan options may be granted at an exercise price not less
than 100% of fair market value and generally vest quarterly over a five-year
period. In general, options terminate ten years from date of grant.
In April 1997, Odwalla's shareholders approved the 1997 Stock Incentive
Plan ("1997 Plan") which replaced both the Stock Option Plan and the Directors'
Plan. The 1997 Plan consists of three programs: (i) a Discretionary Option Grant
Program ("Discretionary Program"), (ii) a Stock Issuance Program ("Stock
Program"), and (iii) an Automatic Option Grant Program ("Automatic Program"). A
total of 1,648,475 shares of common stock are reserved for issuance under the
1997 Plan, which includes all outstanding options under the Stock Option Plan
and Directors' Plan.
The Discretionary Program allows us to issue both incentive and
non-qualified stock options, at an exercise price not less than 100% of fair
market value on the grant date, which expire ten years or less from the grant
date; vesting is generally in a series of installments measured from the grant
date. The Stock Program allows us to issue common stock directly for cash,
promissory note or for past services with no cash payment; vesting may be
immediate or in one or more installments. The Automatic Program awards 5,000
shares of common stock to each non-employee Board member upon initial election
or appointment and 3,000 shares of common stock at each annual shareholders
meeting. Awards under the Automatic Program are made at an exercise price equal
to the closing fair market value of the Company's common stock on the award
date, will have a maximum term of ten years from the grant date and vest in
annual installments over a four year period at the 5,000 share award level and
after one year for the 3,000 share award level. Under all programs of the 1997
Plan, accelerated vesting provisions apply in certain situations.
45
<PAGE> 47
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The activity under the above plans was as follows:
<TABLE>
<CAPTION>
SHARES AVAILABLE OPTIONS OPTION PRICE WEIGHTED AVERAGE
FOR GRANT OUTSTANDING PER SHARE PRICE PER SHARE
---------------- ----------- ------------ ----------------
<S> <C> <C> <C> <C>
Balance at September 1, 1996 358,202 865,874 $3.33-$22.28 $ 10.30
Additional shares reserved 450,000 --
Options granted (533,329) 533,329 $10.25-$13.75 $ 11.49
Options exercised -- (78,163) $3.33-$10.25 $ 6.11
Options canceled 422,205 (422,205) $3.33-$22.28 $ 16.64
------- ---------
Balance at August 31, 1997 697,078 898,835 $3.33-$13.75 $ 8.59
Options granted (491,915) 491,915 $7.88-$12.50 $ 10.36
Options exercised -- (35,182) $3.90-$10.62 $ 5.38
Options canceled 114,919 (114,919) $3.33-$13.75 $ 10.51
------- ---------
Balance at August 29, 1998 320,082 1,240,649 $3.33-$13.75 $ 9.18
Options granted (448,750) 448,750 $5.44-$10.06 $ 6.74
Options exercised -- (66,070) $3.33-$3.90 $ 3.89
Options canceled 195,476 (195,476) $3.33-$13.75 $ 10.42
------- ---------
Balance at August 28, 1999 66,808 1,427,853 $3.33-$13.75 $ 8.56
======= =========
</TABLE>
We follow Accounting Principles Board Opinion 25 ("APB 25"), "Accounting
for Stock Issued to Employees," in accounting for stock-based compensation.
Accordingly, we are not required to record compensation expense when stock
options are granted to employees, as long as the exercise price is not less than
the fair market value of the stock when the option is granted. All options that
we have granted were at exercise prices at or above fair market value of the
common stock. In October 1995, the FASB issued SFAS 123, "Accounting for
Stock-Based Compensation." Although SFAS 123 allows us to continue to follow the
present APB 25 guidelines, we are required to disclose pro forma net income
(loss) and net income (loss) per share as if we had adopted the new statement.
The pro forma impact of applying SFAS 123 in fiscal 1997, 1998 and 1999 is not
likely to be representative of the pro forma impact in future years.
We have elected to use the Black-Scholes model to estimate the fair
value of options granted. This valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. This model requires the input of highly subjective
assumptions including the expected stock price volatility. Because our employee
stock options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can materially
affect this estimate, we believe the Black-Scholes model does not necessarily
provide a reliable single measure of fair value of our employee stock options.
Inputs used for the valuation model are as follows for 1997, 1998 and 1999:
dividend yield of 0% for all years; expected volatility of 5.1%, 5.2% and 4.5%
for all years; risk-free interest rates of 6.0%, 6.1% and 5.4%; and expected
lives approximating 5 years for all years.
Had the fair value of the options been calculated in accordance with FAS
123, net income (loss) would have been $(13,293,000), $(1,786,000) and
$(2,367,000) and net income (loss) per share would have been $(2.66), $(0.35)
and $(0.46) for fiscal 1997, 1998 and 1999.
46
<PAGE> 48
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There were 457,569, 682,498 and 790,940 options exercisable at the end
of fiscal 1997, 1998 and 1999. The weighted average exercise price of options
exercisable at the end of 1997, 1998 and 1999 was $8.54, $8.05 and $8.70 per
share. At August 28, 1999, a total of approximately 1,648,475 shares of common
stock have been reserved for issuance under the Company's stock option plans.
The following table summarizes information about options outstanding at
August 28, 1999:
<TABLE>
<CAPTION>
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (years) Price Exercisable Price
- ---------------- ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$3.33 - $7.00 514,544 7.4 $ 6.12 271,439 $ 5.68
$7.184 - $10.625 722,901 8.1 $ 9.43 400,247 $ 9.74
$11.28 - $13.75 190,408 3.3 $ 11.83 110,254 $ 12.07
----------- ---------
1,427,853 7.2 $ 8.56 790,940 $ 8.70
=========== =========
</TABLE>
6. EMPLOYEE BENEFIT PLAN
Odwalla matches 10% of each employee's contribution to our 401(k)
Employee Benefit Plan ("Plan"). Odwalla contributions to the Plan approximated
$46,000, $45,000 and $52,000 in 1997, 1998 and 1999.
7. TAXES ON INCOME
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. We provide a
valuation allowance against certain deferred tax assets due to the uncertainty
of whether we will ultimately realize their benefit.
Deferred tax assets consist principally of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 29, AUGUST 28,
1998 1999
---------- ----------
<S> <C> <C>
Reserves and accruals $ 1,475 $ 901
Net operating loss carryforward 3,613 4,873
Tax credits 61 62
Property, plant and equipment (237) (234)
Inventories 28 25
Other -- 293
------- -------
4,940 5,920
Less valuation allowance (3,410) (4,042)
------- -------
Net deferred tax asset $ 1,530 $ 1,878
======= =======
</TABLE>
47
<PAGE> 49
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's effective tax rate differs from the federal statutory rate
as follows:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Federal statutory tax rate (34)% (34)% (34)%
State income taxes (5) (5) (5)
Deferred tax asset valuation allowance 25 12 25
Benefit of net operating loss carryback (5) -- --
Permanent differences and other 5 25 (1)
Taxes for prior periods 1 -- --
----- ----- -----
(13)% (2)% (15)%
===== ===== =====
</TABLE>
The permanent differences in fiscal 1998 results primarily from the
settlement with the U.S. government described previously.
Taxes on income consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ (660) $ -- $ --
State -- -- --
------- ------- -------
(660) -- --
------- ------- -------
Deferred:
Federal (3,970) (68) (860)
State (641) 3 (131)
------- ------- -------
(4,611) (65) (991)
------- ------- -------
(5,271) (65) (991)
Change in valuation allowance 3,370 40 632
------- ------- -------
$(1,901) $ (25) $ (359)
======= ======= =======
</TABLE>
At August 29, 1999, we had federal and state net operating loss
carryforwards of $12.7 million and $14.5 million, respectively, which expire
between 2002 and 2018.
During 1997, we recognized tax savings from deductions associated with
our stock option plans in the amount of $1,000. There were no tax savings in
1998 and 1999. These benefits are recorded as an increase in shareholders'
equity.
8. RELATED PARTY TRANSACTIONS
We retained a current board member for consulting services and incurred
fees of $40,000, $27,500 and $9,000 in 1997, 1998 and 1999. Odwalla incurred
consulting fees of $29,000 during 1997 by utilizing a company owned by one of
our former directors.
48
<PAGE> 50
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. OTHER (EXPENSE) INCOME, NET
Other (expense) income consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Interest income $ 322 $ 160 $ 278
Interest expense (149) (366) (437)
Other 37 43 119
----- ----- -----
$ 210 $(163) $ (40)
===== ===== =====
</TABLE>
Included in other income for 1999 is a gain of $145,000 on the sale of
land adjacent to our administrative offices in Half Moon Bay, California.
10. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following summarizes activity in the allowance for doubtful accounts
for the years shown (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Allowance for doubtful accounts, beginning of year $ 306 $ 592 $ 588
Bad debt expense for the year 659 258 360
Accounts receivable written off during the year (373) (262) (317)
----- ----- -----
Allowance for doubtful accounts, end of year $ 592 $ 588 $ 631
===== ===== =====
</TABLE>
11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Net income (loss) Basic and diluted
attributable net income (loss)
Net Gross Net income to common attributable to common
Sales Profit (loss) shareholders shareholders per share
1997 ---------------- ----------------------
- ----
<S> <C> <C> <C> <C> <C>
1st Quarter $ 14,101 $ 7,097 $ (4,844) $ (4,844) $(0.98)
2nd Quarter 11,257 4,830 (3,042) (3,042) (0.61)
3rd Quarter 13,685 6,566 (1,820) (1,820) (0.36)
4th Quarter 13,587 6,487 (2,730) (2,730) (0.54)
-------- -------- -------- --------
$ 52,630 $ 24,980 $(12,436) $(12,436) $(2.49)
======== ======== ======== ======== ======
</TABLE>
49
<PAGE> 51
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1998
- ----
<S> <C> <C> <C> <C> <C>
1st Quarter $ 14,150 $ 7,039 $ (175) $ (175) $ (0.03)
2nd Quarter 14,192 6,949 (274) (274) (0.05)
3rd Quarter 15,446 7,974 140 140 0.03
4th Quarter 15,300 7,889 (1,070) (1,070) (0.21)
-------- -------- -------- --------
$ 59,088 $ 29,852 $ (1,379) $ (1,379) $ (0.27)
======== ======== ======== ======== ========
1999
1st Quarter $ 15,332 $ 7,696 $ (479) $ (479) $ (0.09)
2nd Quarter 16,342 7,333 (817) (817) (0.16)
3rd Quarter 19,124 9,048 (279) (279) (0.05)
4th Quarter 17,244 8,419 (467) (734) (0.14)
-------- -------- -------- --------
$ 68,042 $ 32,500 $ (2,042) $ (2,309) $ (0.45)
======== ======== ======== ======== ========
</TABLE>
50
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on November 19, 1999.
ODWALLA, INC.
By /s/ D. STEPHEN C. WILLIAMSON
-----------------------------
D. Stephen C. Williamson
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints D. Stephen C. Williamson and James R.
Steichen, as his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Report on Form 10-K, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ D. STEPHEN C. WILLIAMSON Chairman of the Board and November 19, 1999
- ---------------------------- Chief Executive Officer
D. Stephen C. Williamson (Principal Executive Officer)
/s/ GREG A. STELTENPOHL Director November 19, 1999
- ----------------------------
Greg A. Steltenpohl
/s/ RICHARD GRUBMAN Director November 19, 1999
- ----------------------------
Richard Grubman
/s/ RANZELL NICKELSON, II Director November 19, 1999
- ----------------------------
Ranzell Nickelson, II
/s/ MARTIN S. GANS Director November 19, 1999
- ----------------------------
Martin S. Gans
/s/ CRAIG H. SAKIN Director November 19, 1999
- ----------------------------
Craig Sakin
/s/ JAMES R. STEICHEN Senior Vice President, Finance November 19, 1999
- ---------------------------- and Chief Financial Officer
James R. Steichen (Principal Financial and
Accounting Officer)
</TABLE>
<PAGE> 53
ODWALLA, INC.
FORM 10-K
EXHIBIT INDEX
Exhibit Number Exhibit Title
- -------------- -------------
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
<PAGE> 1
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
Odwalla Canada, Inc., a corporation formed in British Columbia, Canada.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-78752, 33-90162, 333-03426 and 333-34117) of
Odwalla, Inc. of our report dated October 26, 1999, appearing on page 35 of this
Form 10-K.
PricewaterhouseCoopers LLP
San Francisco, California
November 24, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ODWALLA
INC'S FINANCIAL STATEMENTS FOR THE YEAR ENDED AUGUST 28, 1999 AS FILED ON FORM
10K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FILING ON FORM
10K.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-28-1999
<PERIOD-START> AUG-30-1998
<PERIOD-END> AUG-28-1999
<EXCHANGE-RATE> 1
<CASH> 2,581
<SECURITIES> 4,788
<RECEIVABLES> 6,703
<ALLOWANCES> 631
<INVENTORY> 3,718
<CURRENT-ASSETS> 20,047
<PP&E> 21,625
<DEPRECIATION> 8,748
<TOTAL-ASSETS> 35,305
<CURRENT-LIABILITIES> 12,663
<BONDS> 688
7,505
0
<COMMON> 29,750
<OTHER-SE> (15,301)
<TOTAL-LIABILITY-AND-EQUITY> 35,305
<SALES> 68,042
<TOTAL-REVENUES> 68,042
<CGS> 35,542
<TOTAL-COSTS> 35,542
<OTHER-EXPENSES> 34,861
<LOSS-PROVISION> 360
<INTEREST-EXPENSE> 437
<INCOME-PRETAX> (2,401)
<INCOME-TAX> (359)
<INCOME-CONTINUING> (2,042)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,042)
<EPS-BASIC> (.45)
<EPS-DILUTED> (.45)
</TABLE>
