<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ODWALLA LOGO]
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended February 27, 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, CA 94019
(Address and zip code of principal executive offices)
(650) 726-1888
(Registrant's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check X whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock, no par value 5,093,651 shares
(Class) (Outstanding at April 2, 1999)
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[ODWALLA LOGO]
ODWALLA, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED FEBRUARY 27, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of August 29, 1998
and February 27, 1999............................................ 3
Consolidated Statements of Operations for the thirteen week
and twenty-six week periods ended February 28, 1998
and February 27, 1999............................................ 4
Consolidated Statements of Cash Flows for the twenty-six weeks
ended February 28, 1998 and February 27, 1999.................... 5
Notes to Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 9
Part II. Other Information
Item 1. Legal Proceedings................................................ 21
Item 6. Exhibits and Reports on Form 8-K................................. 22
</TABLE>
2
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[ODWALLA LOGO]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ODWALLA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 29, FEBRUARY 27,
1998 1999
---------- ------------
<S> <C> <C>
Current assets
Cash and cash equivalents .................................................. $ 3,191 $ 4,060
Short-term investments ..................................................... -- 4,956
Trade accounts receivable, less allowance for doubtful
accounts of $588 and $624 ............................................... 5,491 6,084
Inventories ................................................................ 3,044 2,866
Prepaid expenses and other current assets .................................. 796 1,414
Deferred tax assets ........................................................ 1,164 1,320
-------- --------
Total current assets ................................................. 13,686 20,700
-------- --------
Plant, property and equipment, net ............................................. 13,135 13,092
-------- --------
Other assets
Excess of cost over net assets acquired, net ............................... 1,225 1,171
Covenants not to compete, net .............................................. 606 552
Deferred tax assets ........................................................ 366 438
Other ...................................................................... 332 296
-------- --------
Total other assets ................................................... 2,529 2,457
-------- --------
Total assets ................................................................... $ 29,350 $ 36,249
======== ========
Current liabilities
Accounts payable ........................................................... $ 5,339 $ 6,865
Accrued payroll and related items .......................................... 1,091 950
Line of credit ............................................................. 2,044 2,533
Other accruals ............................................................. 2,963 2,275
Current maturities of capital lease obligations ............................ 159 61
Current maturities of long-term debt ....................................... 421 311
-------- --------
Total current liabilities ............................................ 12,017 12,995
Long-term debt, less current maturities ........................................ 888 798
-------- --------
Total liabilities .............................................................. 12,905 13,793
-------- --------
Shareholders' equity
Preferred stock, no par value, shares authorized, 5,000,000; shares
issued and outstanding, 0 and 1,000,000 ................................. -- 7,300
Common stock, no par value, shares authorized, 15,000,000; shares
issued and outstanding, 5,061,000 and 5,065,000 ......................... 29,499 29,506
Retained earnings (deficit) ................................................ (13,054) (14,350)
-------- --------
Total shareholders' equity ..................................................... 16,445 22,456
-------- --------
Total liabilities and shareholders' equity ..................................... $ 29,350 $ 36,249
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
3
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[ODWALLA LOGO]
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
---------------------------- ----------------------------
FEBRUARY 28, FEBRUARY 27, FEBRUARY 28, FEBRUARY 27,
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales .................................... $ 14,192 $ 16,342 $ 28,342 $ 31,674
Cost of sales ................................ 7,243 9,009 14,353 16,645
-------- -------- -------- --------
Gross profit ............................. 6,949 7,333 13,989 15,029
-------- -------- -------- --------
Operating expenses
Sales and distribution ................... 4,943 5,617 9,792 11,180
Marketing ................................ 694 773 1,269 1,569
General and administrative ............... 1,661 1,826 3,401 3,653
-------- -------- -------- --------
Total operating expenses ........... 7,298 8,216 14,462 16,402
-------- -------- -------- --------
Loss from operations ......................... (349) (883) (473) (1,373)
Other income (expense)
Interest expense, net .................... (50) (74) (65) (144)
Other .................................... 84 (3) 22 (6)
-------- -------- -------- --------
Loss before income taxes ..................... (315) (960) (516) (1,523)
Income tax benefit ........................... 41 143 67 227
-------- -------- -------- --------
Net loss ..................................... $ (274) $ (817) $ (449) $ (1,296)
======== ======== ======== ========
Net loss per common share .................... $ (0.05) $ (0.16) $ (0.09) $ (0.25)
======== ======== ======== ========
Weighted average common shares
outstanding ............................... 5,047 5,063 5,040 5,063
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
4
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[ODWALLA LOGO]
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
TWENTY-SIX WEEKS ENDED
---------------------------
FEBRUARY 28, FEBRUARY 27,
1998 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net loss .............................................. $ (449) $(1,296)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .................... 1,164 1,151
Deferred taxes ................................... (35) (229)
Gain (loss) from disposal of assets .............. (80) 82
Changes in assets and liabilities
Trade accounts receivable ...................... (312) (593)
Inventories .................................... 378 178
Refundable income taxes ........................ 660 --
Prepaid expenses and other current assets ...... (87) (618)
Other noncurrent assets ........................ (4) 33
Accounts payable ............................... (736) 1,525
Accrued payroll and related items .............. (70) (141)
Other accruals ................................. (871) (689)
------- -------
Net cash used in operating activities .................... (442) (597)
------- -------
Cash flows from investing activities
Capital expenditures .................................. (453) (1,078)
Proceeds from sale of assets .......................... 106 2
Proceeds from (purchase of) short-term investments, net 1,008 (4,956)
------- -------
Net cash provided by (used in) investing activities ...... 661 (6,032)
------- -------
Cash flows from financing activities
Principal payments under long-term debt ............... (92) (201)
Net borrowings under line of credit ................... 11 489
Payments of obligations under capital leases .......... (103) (98)
Sale of preferred stock ............................... -- 7,300
Sale of common stock .................................. 136 8
------- -------
Net cash provided by (used in) financing activities ...... (48) 7,498
------- -------
Net increase in cash and cash equivalents ................ 171 869
Cash and cash equivalents, beginning of period ........... 2,217 3,191
------- -------
Cash and cash equivalents, end of period ................. $ 2,388 $ 4,060
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation. The accompanying consolidated balance sheet of
Odwalla, Inc. and its subsidiary ("Odwalla" or "Company") at February 27, 1999
and the related consolidated statements of operations and of cash flows for each
of the thirteen and twenty-six week periods ended February 28, 1998 and February
27, 1999 have not been audited by independent accountants. However, in
management's opinion, they include all adjustments (which include only normal
recurring adjustments) necessary for a fair presentation of the financial
position and the results of operations for the periods presented. The statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, certain information and footnote disclosure
normally included in financial statements prepared in conformity with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The operating results for the interim periods are not
necessarily indicative of results to be expected for an entire year. The
aforementioned statements should be read in conjunction with the consolidated
financial statements for the year ended August 29, 1998 appearing in Odwalla's
1998 Annual Report on Form 10-K.
2. 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, February 27,
1998 1999
---------- ------------
<S> <C> <C>
Cash and cash equivalents:
Cash ........................................... $ 1,092 $ (42)
Money market funds ............................. 2,099 4,102
------- -------
$ 3,191 $ 4,060
======= =======
Short-term investments
U.S. Government and Agency securities .......... $ 2,475
Corporate obligations .......................... 2,481
-------
$ -- $ 4,956
======= =======
</TABLE>
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
August 29, February 27,
1998 1999
---------- ------------
<S> <C> <C>
Raw materials .............................. $1,755 $2,009
Packaging supplies and other ............... 708 339
Finished product ........................... 581 518
------ ------
Total ...................................... $3,044 $2,866
====== ======
</TABLE>
6
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ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
August 29, February 27,
1998 1999
---------- ------------
<S> <C> <C>
Land ............................................... $ 1,046 $ 1,046
Buildings and building improvements ................ 7,205 7,205
Leasehold improvements ............................. 2,490 1,336
Machinery and equipment ............................ 7,054 7,401
Vehicles ........................................... 538 541
Other .............................................. 3,179 3,528
-------- --------
21,512 21,057
Less accumulated depreciation and amortization ..... (8,377) (7,965)
-------- --------
Plant, property and equipment, net ................. $ 13,135 $ 13,092
======== ========
</TABLE>
5. EARNINGS PER COMMON 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, preferred
shares and warrants under the treasury stock method. We had no dilutive common
equivalent shares during any of the periods presented due to the reported net
loss.
6. RECLASSIFICATION
To conform with fiscal 1999 financial statement presentation, we
reclassified certain fiscal 1998 expenses to be comparable to the new
classification. The main reclassification was an increase ($139,000 for the
quarter ended February 28, 1998 and $232,000 for the twenty-six weeks ended
February 28, 1998) in fiscal 1998 sales and distribution costs and a
corresponding decrease in general and administrative expenses.
7
<PAGE> 8
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. PREFERRED STOCK ISSUANCE
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 will receive an 8% annual dividend which is payable in
either cash or additional Series A Stock, at our discretion. 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 dividend, or the amount
due each holder of common stock. 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, reimbursement of certain costs of Catterton-Simon and
other transaction costs.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-Q 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-Q 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-Q. Investors should read all of these
risks carefully. Investors should also refer to Odwalla's Form 10-K for the year
ended August 29, 1998, including our financial statements and related notes
included in that Form 10-K, and other documents that we file from time to time
with the Securities and Exchange Commission in conjunction with the following
discussion and analysis.
OVERVIEW
Odwalla's business is to provide easy access to great tasting
nourishment. We are the leading branded fresh juice and beverage company in the
country, serving selected markets in the western, mid-west and mid-Atlantic
regions of the United States. Odwalla's complete product line consists of more
than 25 fresh-squeezed and nutritionally fortified juices and smoothies,
all-natural meal replacement beverages, geothermal 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.
Our current product line consists of single-flavor and blended fruit and
vegetable based juice products, meal replacement beverages, wholesome food bars
and natural spring water. Except for our 100% fresh squeezed citrus line, all
juices are minimally processed (some produced on a seasonal basis). These
products are currently sold in California, Washington, Oregon, Colorado, New
Mexico, Nevada, Texas, Illinois, Wisconsin, Arizona, Michigan, Minnesota,
Pennsylvania, Maryland and the Washington, D.C. area.
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
almost 3,000 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.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
PRODUCT RECALL
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. 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.
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. Eighteen of these claims and
proceedings have been settled. Settlement of the personal injury legal
proceedings and other Recall damage 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. 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.
Odwalla maintains insurance coverage for product recall, product
adulteration, lost income and other first party business risks. We submitted a
claim to our insurance carriers for product recall costs and for business losses
incurred due to the Recall. The amount and timing of proceeds, if any, from the
claims and any future insurance claims cannot be presently determined.
RESULTS OF OPERATIONS
The following table presents, as a percentage of net sales, certain
statements of operations data for the thirteen and twenty-six week periods ended
February 28, 1998 and February 27, 1999. These operating results are not
necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
FEBRUARY 28, FEBRUARY 27, FEBRUARY 28, FEBRUARY 27,
1998 1999 1998 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales .......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales ...................................... 51.0 55.1 50.6 52.6
----- ----- ----- -----
Gross margin ....................................... 49.0 44.9 49.4 47.4
----- ----- ----- -----
Operating expenses
Sales and distribution ........................... 34.8 34.4 34.5 35.3
Marketing ........................................ 4.9 4.7 4.5 4.9
General and administrative ....................... 11.7 11.2 12.0 11.5
----- ----- ----- -----
Loss from operations ............................... (2.4) (5.4) (1.6) (4.3)
Interest and other income (expense), net ........... 0.2 (0.5) (0.2) (0.5)
Income tax benefit ................................. 0.3 0.9 0.2 0.7
----- ----- ----- -----
Net loss ........................................... (1.9)% (5.0)% (1.6)% (4.1)%
===== ===== ===== =====
</TABLE>
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
THIRTEEN WEEKS ENDED FEBRUARY 27, 1999 AND FEBRUARY 28, 1998
NET SALES. Net sales for the second quarter of fiscal 1999 increased 15%
to $16.3 million compared to $14.2 million in the second quarter of fiscal 1998.
We experienced most of that growth in our DSD business in all market categories,
and particularly in our newest markets. We also experienced growth in our
distributor business, both in existing markets and in our expansion markets
where our volume was minimal in the second quarter of fiscal 1998. 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. Our food bar business, which was introduced at the very end of
fiscal 1998, was also an important factor this quarter although food bar sales
represented less than 5% of our net sales. We did not enter any new geographic
markets in the second quarter of fiscal 1999.
COST OF SALES. Cost of sales increased to $9.0 million in the second
quarter of fiscal 1999 compared to $7.2 million for the same period during
fiscal 1998. Gross margin as a percentage of net sales was 44.9% in the second
quarter of fiscal 1999, a decrease from 49.0% when compared to the second
quarter of fiscal 1998.
As we have previously mentioned, we didn't expect fruit pricing to be as
favorable in the second quarter of fiscal 1999 as previous winter quarters due
to weather conditions affecting Florida oranges. In late December, 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 impact on the California Valencia crop,
much of which is produced in the San Joaquin Valley, isn't yet known. The
immediate affect of the freeze was to raise the price of the fresh citrus we
purchase. We also experienced poorer citrus yields and some delay in fruit
maturity. We are also more reliant on citrus sources further from our production
facility than in prior years, which causes an increase in freight cost. Gross
margin decreased primarily due to (a) unfavorable pricing and yield for
ingredients, primarily citrus, (b) introductory margins on new product, and (c)
increases in labor, due to poorer yields, and co-packing costs. The continued
use of third party distributors also negatively affected gross margins.
As a result of the citrus freeze, we are now more dependent upon
alternative and more expensive sources of fresh supply than in prior years. We
will continue to use our extensive network of grower contacts to seek to obtain
a continual supply of fresh ingredients. The affect on orange and other
ingredient costs to Odwalla is not yet fully determined, but we may experience
higher orange costs for the remainder of the fiscal year and possibly into the
early fall.
In an attempt to partially offset the increased costs, we implemented a
price increase on many of our beverage products in February 1999. At this time,
we aren't able to determine either the extent to which consumers will accept the
price increase or the degree by which the price increase will offset the
expected costs of increased raw materials. The overall freeze impact may cause
an operating loss beyond the second quarter and for fiscal 1999.
SALES AND DISTRIBUTION. Sales and distribution expenses were $5.6
million in the second quarter of fiscal 1999 compared to $4.9 million in the
second quarter of fiscal 1998, and decreased as a percentage of net sales to
34.4% from 34.8% last year. The decrease, as a percentage of net sales, results
from increased sales volume supported by a more fixed cost operations structure,
offset to some extent by increased labor costs and an increase in our expansion
efforts compared to last year. Future decisions regarding growth and expansion
consistent with long-term strategic objectives may increase sales and
distribution costs as a percentage of net sales as compared to their pre-Recall
levels. In both the sales and cost of sales discussions above, we mentioned the
impact that the expanded use of third party distributors would have on each line
item. We continue to look for efficiencies in this part of our business.
However, expansion into markets serviced by our DSD system, such as the
Washington, D.C. area, will require an investment for some initial period.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
Expenses will also be affected as we experiment to find the proper mix
between third party distributors and our DSD system in a given market. The
perishable nature of most of our products and the stringent service standards
established can make it difficult to find responsible distributors in some
markets.
In late December 1998, Mr. Doug Hrdlicka joined Odwalla as Senior Vice
President, Sales and Operations. Mr. Hrdlicka has many years of sales and
operations experience, including DSD and other distributor operations. Mr.
Hrdlicka proposed some changes to the existing sales and distribution
organizational structure which will, on a short-term basis, increase payroll in
this area. We do not expect to realize the benefits of these additional costs
until late in Fiscal 1999, if at all during this fiscal year.
MARKETING. Marketing expenses increased to $773,000 in the second
quarter of fiscal 1999 compared to $694,000 in the second quarter of fiscal
1998. Most of the change from last year results from increased product tastings,
both in retail locations and at community events, and in consumer and other
communications. We expect marketing expenses to increase in both dollars and as
a percentage of net sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $1.8 million in the second quarter of fiscal 1999 from $1.7 million
in the second quarter of fiscal 1998, and decreased as a percentage of net sales
to 11.2% from 11.7% last year. The change was primarily due to an increase in
payroll as several open positions were not filled until later in fiscal 1998. We
don't expect general and administrative costs for the remainder of fiscal 1999
to increase significantly in absolute dollars when compared to the prior year.
However, there can be no assurance that general and administrative costs will
not increase significantly in absolute dollars. We will continue to invest in
infrastructure, particularly in information systems and research and
development, to provide for sustainable growth.
INTEREST AND OTHER EXPENSE. Odwalla had net interest and other expense
of $77,000 in the second quarter of fiscal 1999 compared to net other interest
and other income of $34,000 in the second quarter last year. The net interest
expense results primarily from borrowings under the line of credit and other
existing debt for this quarter. In the same quarter last year, interest expense
was offset by a gain from equipment sale.
INCOME TAX BENEFIT. The $143,000 and $41,000 income tax benefit for the
second quarters of 1999 and 1998 results from the tax benefit associated with
the loss following the Recall. The 15% effective tax rate in 1999 and the 13%
effective tax benefit rate in 1998 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 our future profitability is available.
TWENTY-SIX WEEKS ENDED FEBRUARY 27, 1999 AND FEBRUARY 28, 1998
NET SALES. Net sales for the first half of fiscal 1999 increased 12% to
$31.7 million compared to $28.3 million in the first half of fiscal 1998. We
experienced most of that growth in our DSD business in all market categories,
and particularly in our newest markets. We also experienced growth in our
distributor business, both in existing markets and in our expansion markets
where our volume was minimal in the first half of fiscal 1998. As noted above,
we implemented a price increase on many of our beverage products in February
1999, although this had minimal impact on fiscal 1999 sales to date. Our food
bar business, which was introduced at the very end of fiscal 1998, was also an
important factor this quarter although food bar sales represented less than 5%
of our net sales. We did not enter any new geographic markets in the first half
of fiscal 1999.
COST OF SALES. Cost of sales increased to $16.6 million in the first
half of fiscal 1999 compared to $14.3 million for the same period during fiscal
1998. Gross margin as a percentage of net sales was 47.4% in the first half of
fiscal 1999, a decrease from 49.4% when compared to the first half of fiscal
1998.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
In the first quarter of fiscal 1999, we had a higher gross margin
compared to the prior quarter that was significantly influenced by favorable
pricing and yield for fruit and other beverage ingredients. As noted above, this
trend was significantly reversed in the second quarter while increases in labor
and co-packing costs and the impact of introductory margins on new product
continued. These factors resulted in an overall decrease on year-to-date gross
margin. The continued use of third party distributors also negatively affected
gross margins.
As a result of the citrus freeze discussed above, we are now more
dependent upon alternative and more expensive sources of fresh supply than in
prior years. We will continue to use our extensive network of grower contacts to
seek to obtain a continual supply of fresh ingredients. The affect on orange and
other ingredient costs to Odwalla is not yet fully determined, but we may
experience higher orange costs for the remainder of the fiscal year and possibly
into the early fall. At this time, we aren't able to determine either the extent
to which consumers will accept the price increase mentioned above or the degree
by which the price increase will offset the expected costs of increased raw
materials. The overall freeze impact may cause an operating loss beyond the
first half and for fiscal 1999.
SALES AND DISTRIBUTION. Sales and distribution expenses were $11.2
million in the first half of fiscal 1999 compared to $9.8 million in the first
half of fiscal 1998, and increased as a percentage of net sales to 35.3% from
34.5% last year. In the first quarter of fiscal 1999, sales and distribution
expenses were 36.3% of net sales compared to 34.3% in the first quarter of
fiscal 1998 and we explained that this increase resulted from expansion efforts
and an increase in both sales and operations support that had been in place for
a higher sales volume than we achieved in the first quarter. As noted above, in
the second quarter we enjoyed an increased sales volume supported by a more
fixed cost operations structure, offset to some extent by increased labor costs
and an increase in our expansion efforts compared to last year. The higher than
expected costs in the first quarter, as a percentage of net sales, were not
offset by benefits from second quarter results.
Future decisions regarding growth and expansion consistent with
long-term strategic objectives may increase sales and distribution costs as a
percentage of net sales as compared to their pre-Recall levels. In both the
sales and cost of sales discussions above, we mentioned the impact that the
expanded use of third party distributors would have on each line item. We
continue to look for efficiencies in this part of our business. However,
expansion into markets serviced by our DSD system will require an investment for
some initial period. Expenses will also be affected as we experiment to find the
proper mix between third party distributors and our DSD system in a given
market. The perishable nature of most of our products and the stringent service
standards established can make it difficult to find responsible distributors in
some markets.
MARKETING. Marketing expenses increased to $1.6 million in the first
half of fiscal 1999 compared to $1.3 million in the first half of fiscal 1998.
Most of the change from last year results from increased product tastings, both
in retail locations and at community events, and in consumer and other
communications. We expect marketing expenses to increase in both dollars and as
a percentage of net sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $3.6 million in the first half of fiscal 1999 from $3.4 million in
the first half of fiscal 1998, and decreased as a percentage of net sales to
11.5% from 12.0% last year. The change was primarily due to an increase in
payroll as several open positions were not filled until later in fiscal 1998. We
don't expect general and administrative costs for the remainder of fiscal 1999
to increase significantly in absolute dollars when compared to the prior year.
However, there can be no assurance that general and administrative costs will
not increase significantly in absolute dollars. We will continue to invest in
infrastructure, particularly in information systems and research and
development, to provide for sustainable growth.
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<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
INTEREST AND OTHER EXPENSE. Odwalla had net interest and other expense
of $150,000 in the first half of fiscal 1999 compared to net other interest and
other expense of $43,000 in the first half last year. The net interest expense
results primarily from borrowings under the line of credit and other existing
debt for this quarter. In the same half of last year, net interest and other
expense was offset by an $80,000 gain from an equipment sale.
INCOME TAX BENEFIT. The $227,000 and $67,000 income tax benefit for the
first half of 1999 and 1998 results from the tax benefit associated with the
loss following the Recall. The 15% effective tax rate in 1999 and the 13%
effective tax benefit rate in 1998 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 our future profitability is available.
LIQUIDITY AND CAPITAL RESOURCES
At February 27, 1999, we had working capital of $7.7 million compared to
working capital of $1.7 million at August 29, 1998. The increase resulted
primarily from cash provided by the sale of Series A Preferred Stock, described
below, offset by capital asset purchases and normal debt payments. At February
27, 1999, we had cash and cash equivalents and short-term investments of $9.0
million, compared to $3.2 million August 29, 1998.
Net cash used in operating activities in the first half of fiscal 1999
was $597,000. This consisted of the net loss plus depreciation and amortization
and the increase in accounts payable, offset by an increase in accounts
receivable and decreases in payroll and other accrued expenses. Net cash used in
investing activities in the first half of fiscal 1999 was $6.0 million,
consisting primarily of short-term investments following the preferred stock
sale and capital expenditures for production equipment at the Dinuba plant and,
to a lesser extent, computer equipment. Net cash provided by financing
activities in the first half of fiscal 1999 was $7.5 million, consisting of net
proceeds from the preferred stock sale offset by scheduled debt and capital
lease payments.
We've used, and expect to continue to use, both operating and capital
lease financing to obtain 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
haven't completed a transaction with a leasing company and there can be no
assurance that we will finalize the proposed transaction. If we don't obtain
adequate lease or other financing, our ability to obtain needed equipment may
negatively affect our operations.
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 will receive an 8% annual dividend which is payable in
either cash or additional Series A Stock, at our discretion. 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 dividend, or the amount
due each holder of common stock. 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
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
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, reimbursement of certain costs of Catterton-Simon and other transaction
costs.
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 are currently taking steps to identify and address our internal Year
2000 issues. Our 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 such as phones. We have modified certain systems and
have scheduled modifications on other systems. We are now beginning to address
the readiness of key third parties with which we have relationships. 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 will
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
such as 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.
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.
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<PAGE> 16
OTHER FACTORS AFFECTING ODWALLA'S BUSINESS
PRODUCTS, DISTRIBUTION AND TRADE PARTNERS. Our current product line
consists of single-flavor and blended fruit- and vegetable-based juice products,
meal replacement beverages, wholesome food bars and natural spring water. Except
for our 100% fresh squeezed citrus line, all juices are minimally processed
(some produced on a seasonal basis). We strive for consistent
"day-of-production" quality in all 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. 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.
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. We also distribute our products through third party
distributors. Although we have used distributors to some extent for several
years (primarily in geographic regions outside of our then base geographic
markets and to comply with certain trade partner requests), we began actively
exploring this channel at the very end of fiscal 1997. This distribution
channel, with merchandising support provided by our employees, provides an
opportunity to expand product distribution, increase DSD efficiency, and still
maintain relationships with trade partners. During fiscal 1998, we began using
third party distributors primarily in the Chicago, Detroit, Philadelphia,
Minneapolis and Phoenix markets. 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 products freshness and flavor
quality. 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.
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 and carrots 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. We 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 materially and adversely affect 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, such as tropical fruits,
from foreign suppliers in the form of frozen fruit puree.
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<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
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, such
as 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. 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.
Weather conditions reduced the Florida projected orange harvest for the
1998-1999 season. The La Nina weather pattern in the western part of North and
Central America in the 1998-1999 winter season is having an adverse effect on
the prices and availability of fruits and vegetables in addition to the impact
of the citrus freeze during December 1998 previously discussed.
RISKS ASSOCIATED WITH PERISHABLE PRODUCTS. Except for geothermal spring
water, meal replacement beverages 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 have a material negative effect on 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 such as inflation, raw material supply, labor
and employee benefit costs (including increases in hourly wage and minimum
unemployment tax rates), rent increases resulting from the rent escalation
provisions in 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 in recent years. However, there is no assurance that these conditions will
continue or that we will have the ability to control costs in the future.
DEPENDENCE ON ONE OR A FEW MAJOR TRADE PARTNERS. Safeway, Inc.
("Safeway") is our largest single account and accounted for 13% of our fiscal
1998 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 materially and
adversely affect our business and results of operations. Continuity of trade
partner relationships is important, and events that impact our trade partners,
such as labor disputes, may have an adverse impact on our results of operations.
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 super premium juice, emerging meal
replacement beverage, 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
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<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
producers, food and energy bar companies and premium bottled waters. Our direct
competitors in the juice business are national brands such as Just Squeezed,
Tropicana, Minute Maid and Nantucket Nectars. Our juice products compete with
regional brands such as Naked Juice (owned by Chiquita Brands International,
Inc. ("Chiquita")) in Southern California and Colorado, Fresh Samantha's in the
Northeast and Mid-Atlantic sections of the United States and Fantasia in the
Chicago and other Midwest market areas. Juice and smoothie bars such as 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. In late 1998,
we began the introduction of food bars. Our food bar products will compete with
several more established companies, such as PowerBar, Balance Bar or Clif Bar.
While we believe that we compete favorably with our competitors on factors such
as 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.
PRODUCT LIABILITY. Because our 100% fresh-squeezed citrus products and
certain other citrus-based products are not pasteurized or chemically treated,
they are highly perishable and contain certain naturally occurring
microorganisms. In addition to the Recall (see "Item 1. Legal Proceedings" on
page 21) 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 materially and adversely affect 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 that such
control measures will continue to be efficacious. Any decrease in the supply of
fresh fruit as a result of windstorms, pests or fungal disease could have a
material adverse effect on 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 occurrences, 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 fresh 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 materially and adversely
affect our business and results of operations. Separate companies produce our
meal replacement beverages, water and food bars.
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<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
LACK OF DIVERSIFICATION. Odwalla's business is vertically integrated and
centered around essentially one product, fresh beverages, sold primarily through
our DSD system. Although we've added meal replacement beverages, 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. 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. 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 new markets, such as the Pacific Northwest
and Colorado, through acquisitions of local juice manufacturers. Acquisitions
involve a number of special risks, including the diversion of management's
resources, issues related to the assimilation of the operations and personnel of
the acquired businesses, potential adverse effects on operating results and
amortization of acquired intangible assets. In addition, gross margins may be
negatively affected 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.
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"). On September
8, 1998, the FDA regulations for fresh apple juice went into effect. The
regulations for fresh-squeezed citrus juices are scheduled to go into effect in
May 1999. The FDA's guidelines for fresh juice require producers to achieve at
least a 5-log reduction in potential pathogens (99.999% barrier). Pasteurization
is one way for juice producers to meet the requirement. We currently Flash
Pasteurize our apple juice and are in compliance with the FDA regulations. For
juice producers who choose not to use pasteurization, the FDA has mandated
either a HACCP plan that achieves the required 5-log reduction or a warning
label on the bottle to alert consumers of the presence of unprocessed produce.
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 new FDA regulations and will not need to use
warning labels on unpasteurized juice products. For our 100% fresh-squeezed
citrus juices (orange, grapefruit, tangerine, lemon and lime), we've designed a
process that has been scientifically validated to achieve the FDA-required 5-log
reduction without pasteurizing. Because our process meets the FDA's new
requirements, and our own quality assurance standards, Odwalla continues to
offer our 100% fresh-squeezed, unpasteurized citrus juice without a warning
label. We don't anticipate significant additional costs to comply with current
FDA regulations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued.
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.
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<PAGE> 21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The following personal injury claims and legal proceedings seeking
monetary damages and other relief relating to the Recall are pending against
Odwalla, as discussed in Item 2 "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 Jackson Case: A personal injury lawsuit filed in King County
Superior Court, Seattle, Washington, and served on or about June
8, 1998. The case is set for trial on October 25, 1999.
3. 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 one additional proceeding allegedly arising out of
product consumption prior to the Recall:
1. The Fujita Case: A personal injury lawsuit filed in Alameda
Superior Court. The case has no trial date and discovery has
commenced.
The following personal injury claims and legal proceedings have been
settled:
1. The Sawchuk Case: A personal injury lawsuit filed in the United
States District Court for the Northern District of California
and served on or about October 10, 1997. The case was settled on
April 7, 1999 subject to final court approval.
We maintained commercial general liability insurance totaling
$27,000,000 during the period 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.
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, we entered into a misdemeanor
plea agreement with the United States, 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.
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.
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<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- ------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
b. REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter
ended February 27, 1999.
22
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ODWALLA, INC.
(Registrant)
Date: April 9, 1999 By: /s/ D. STEPHEN C. WILLIAMSON
-------------------------------
D. Stephen C. Williamson
Chief Executive Officer
(Principal Executive Officer)
Date: April 9, 1999 By: /s/ JAMES R. STEICHEN
------------------------
James R. Steichen
Chief Financial Officer
(Principal Financial and
Accounting Officer)
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ODWALLA,
INC. FINANCIAL STATEMENTS FOR THE TWENTY-SIX WEEKS ENDED FEBRUARY 27, 1999 AS
FILED ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FILING
ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> AUG-28-1999
<PERIOD-START> AUG-30-1998
<PERIOD-END> FEB-27-1999
<CASH> 4,060
<SECURITIES> 4,956
<RECEIVABLES> 6,708
<ALLOWANCES> 624
<INVENTORY> 2,866
<CURRENT-ASSETS> 20,700
<PP&E> 21,057
<DEPRECIATION> 7,965
<TOTAL-ASSETS> 36,249
<CURRENT-LIABILITIES> 12,995
<BONDS> 798
0
7,300
<COMMON> 29,506
<OTHER-SE> (14,350)
<TOTAL-LIABILITY-AND-EQUITY> 36,249
<SALES> 31,674
<TOTAL-REVENUES> 31,674
<CGS> 16,645
<TOTAL-COSTS> 16,645
<OTHER-EXPENSES> 16,402
<LOSS-PROVISION> 120
<INTEREST-EXPENSE> 212
<INCOME-PRETAX> (1,523)
<INCOME-TAX> (227)
<INCOME-CONTINUING> (1,296)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,296)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
