<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ODWALLA LOGO]
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 29, 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
incorporation or organization) Identification No.)
120 Stone Pine Road, Half Moon Bay, CA 94019
(Address and zip code of principal executive offices)
(650) 726-1888
(Registrant's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check [X] whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
Common Stock, no par value 5,126,763 shares
(Class) (Outstanding at July 2, 1999)
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[ODWALLA LOGO]
ODWALLA, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 29, 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 May 29, 1999.................................................... 3
Consolidated Statements of Operations for the thirteen week
and thirty-nine week periods ended May 30, 1998
and May 29, 1999.................................................... 4
Consolidated Statements of Cash Flows for the thirty-nine weeks
ended May 30, 1998 and May 29, 1999................................. 5
Notes to Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 20
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, MAY 29,
1998 1999
---------- --------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 3,191 $ 4,124
Short-term investments -- 5,035
Trade accounts receivable, less allowance for doubtful
accounts of $588 and $634 5,491 6,280
Inventories 3,044 3,326
Prepaid expenses and other current assets 796 1,162
Deferred tax assets 1,164 1,314
-------- --------
Total current assets 13,686 21,241
-------- --------
Plant, property and equipment, net 13,135 12,262
-------- --------
Other assets
Excess of cost over net assets acquired, net 1,225 1,145
Covenants not to compete, net 606 524
Deferred tax assets 366 505
Other 332 292
-------- --------
Total other assets 2,529 2,466
-------- --------
Total assets $ 29,350 $ 35,969
======== ========
Current liabilities
Accounts payable $ 5,339 $ 6,540
Accrued payroll and related items 1,091 1,458
Line of credit 2,044 2,810
Other accruals 2,963 1,868
Current maturities of capital lease obligations 159 27
Current maturities of long-term debt 421 172
-------- --------
Total current liabilities 12,017 12,875
Long-term debt, less current maturities 888 674
-------- --------
Total liabilities 12,905 13,549
-------- --------
Shareholders' equity
Preferred stock, no par value, shares authorized, 5,000,000; shares issued and
outstanding, 1,000,000 in 1999 -- 7,300
Common stock, no par value, shares authorized, 15,000,000; shares
issued and outstanding, 5,061,000 and 5,127,000 29,499 29,749
Accumulated deficit (13,054) (14,629)
-------- --------
Total shareholders' equity 16,445 22,420
-------- --------
Total liabilities and shareholders' equity $ 29,350 $ 35,969
======== ========
</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 THIRTY-NINE WEEKS ENDED
----------------------- -----------------------
MAY 30, MAY 29, MAY 30, MAY 29,
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 15,446 $ 19,124 $ 43,788 $ 50,798
Cost of sales 7,472 10,076 21,826 26,721
-------- -------- -------- --------
Gross profit 7,974 9,048 21,962 24,077
-------- -------- -------- --------
Operating expenses
Sales and distribution 5,346 6,455 15,137 17,635
Marketing 692 806 2,047 2,375
General and administrative 1,717 2,089 5,032 5,743
-------- -------- -------- --------
Total operating expenses 7,755 9,350 22,216 25,753
-------- -------- -------- --------
Income (loss) from operations 219 (302) (254) (1,676)
Other income (expense)
Interest expense, net (46) (23) (157) (167)
Other (8) (3) 60 (9)
-------- -------- -------- --------
Income (loss) before income taxes 165 (328) (351) (1,852)
Income tax (expense) benefit (25) 49 42 277
-------- -------- -------- --------
Net income (loss) $ 140 $ (279) $ (309) $ (1,575)
======== ======== ======== ========
Net income (loss) per common share,
basic and diluted $ 0.03 $ (0.05) $ (0.06) $ (0.31)
======== ======== ======== ========
Weighted average common shares
outstanding 5,047 5,104 5,043 5,077
======== ======== ======== ========
</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>
THIRTY-NINE
WEEKS ENDED
---------------------
MAY 30, MAY 29,
1998 1999
------- -------
<S> <C> <C>
Cash flows from operating activities
Net loss $ (309) $(1,575)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,721 1,747
Deferred taxes (9) (290)
Gain (loss) from disposal of assets (80) 2
Changes in assets and liabilities:
Trade accounts receivable (801) (788)
Inventories 1,198 (283)
Refundable income taxes 660 --
Prepaid expenses and other current assets (27) (366)
Other noncurrent assets 21 36
Accounts payable (721) 1,202
Accrued payroll and related items 102 367
Other accruals (1,098) (1,095)
------- -------
Net cash provided by (used in) operating activities 657 (1,043)
------- -------
Cash flows from investing activities
Capital expenditures (672) (1,135)
Proceeds from sale of assets 106 426
Proceeds from (purchase of) short-term investments, net 1,008 (5,035)
------- -------
Net cash provided by (used in) investing activities 442 (5,744)
------- -------
Cash flows from financing activities
Principal payments under long-term debt (98) (457)
Net borrowings under line of credit 4 766
Payments of obligations under capital leases (155) (139)
Sale of preferred stock -- 7,300
Sale of common stock 136 250
------- -------
Net cash provided by (used in) financing activities (113) 7,720
------- -------
Net increase in cash and cash equivalents 986 933
Cash and cash equivalents, beginning of period 2,217 3,191
------- -------
Cash and cash equivalents, end of period $ 3,203 $ 4,124
======= =======
</TABLE>
See accompanying notes to consolidated financial statements
5
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ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation. The accompanying consolidated balance sheet of
Odwalla, Inc. and its subsidiary ("Odwalla" or "Company") at May 29, 1999 and
the related consolidated statements of operations and of cash flows for the
thirteen and thirty-nine week periods ended for each of May 30, 1998 and May 29,
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, May 29,
1998 1999
---------- -------
<S> <C> <C>
Cash and cash equivalents:
Cash $1,092 $ 309
Money market funds 2,099 3,815
------ ------
$3,191 $4,124
====== ======
Short-term investments
U.S. Government and Agency securities $1,501
Corporate obligations 3,534
------
$ -- $5,035
====== ======
</TABLE>
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
August 29, May 29,
1998 1999
---------- -------
<S> <C> <C>
Raw materials $1,755 $2,211
Packaging supplies and other 708 186
Finished product 581 929
------ ------
Total $3,044 $3,326
====== ======
</TABLE>
6
<PAGE> 7
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, May 29,
1998 1999
---------- --------
<S> <C> <C>
Land $ 1,046 $ 618
Buildings and building improvements 7,205 7,220
Leasehold improvements 2,490 1,266
Machinery and equipment 7,054 7,515
Vehicles 538 558
Other 3,179 3,532
-------- --------
21,512 20,709
Less accumulated depreciation and amortization (8,377) (8,447)
-------- --------
Plant, property and equipment, net $ 13,135 $ 12,262
======== ========
</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 new classifications in our fiscal 1999 financial statement
presentation, we reclassified certain fiscal 1998 expenses. The main
reclassification was an increase ($153,000 for the quarter ended May 30, 1998
and $384,000 for the thirty-nine weeks ended May 30, 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
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 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 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 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 stockholder. The
dividend is payable June 30, 1999.
8
<PAGE> 9
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 current expectations. 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 that could
affect various aspects of our business are discussed throughout this Form 10-Q,
particularly in the section below titled "Other factors affecting Odwalla's
business." 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
(including single-flavor and blended fruit and vegetable based juice products),
all-natural meal replacement and non-dairy shakes, natural spring water and
all-natural wholesome food bars.
We seek to be the leading nourishment company in our markets 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, creating artful presentation, growing through
geographic and product line expansion, leveraging our information systems,
interacting with consumers and living our vision.
Except for our 100% fresh squeezed citrus line, all juices are
minimally processed, and some are produced on a seasonal basis. We believe our
product line appeals to many consumers due to the superior taste of fresh and
minimally processed beverages and the greater nutritional value compared to
juice from concentrate or with artificial flavors. Our products are currently
sold in Arizona, California, Colorado, Georgia, Illinois, Maryland, Michigan,
Minnesota, Nevada, New Mexico, Oregon, Pennsylvania, Texas, Utah, Virginia,
Washington state, the Washington, D.C. area and Wisconsin.
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. We sell and distribute 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
<PAGE> 10
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 were not 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. Nineteen of these claims and
proceedings have been settled. Settlement of the nineteen 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 business risks. We submitted a claim to our
insurance carriers for product recall costs and for business losses incurred due
to the Recall. The insurance company denied substantially all of our claim and,
on May 21, 1999, we filed a lawsuit against the insurance company to seek
recovery on our business interruption insurance claim filed as a result of the
Recall. The amount and timing of proceeds, if any, from the claim 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 thirty-nine week periods
ended for each of May 30, 1998 and May 29, 1999. These operating results are not
necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
THIRTY-NINE
THIRTEEN WEEKS ENDED WEEKS ENDED
-------------------- --------------------
MAY 30, MAY 29, MAY 30, MAY 29,
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 48.4 52.7 49.8 52.6
----- ----- ----- -----
Gross margin 51.6 47.3 50.2 47.4
Operating expenses
Sales and distribution 34.6 33.8 34.6 34.7
Marketing 4.5 4.2 4.7 4.7
General and administrative 11.1 10.9 11.5 11.3
----- ----- ----- -----
Income (loss) from operations 1.4 (1.6) (0.6) (3.3)
Interest and other income (expense), net (0.4) (0.1) (0.2) (0.3)
Income tax (expense) benefit (0.1) 0.2 0.1 0.5
----- ----- ----- -----
Net income (loss) 0.9% (1.5)% (0.7)% (3.1)%
===== ===== ===== =====
</TABLE>
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
THIRTEEN WEEKS ENDED MAY 29, 1999 AND MAY 30, 1998
NET SALES. Net sales for the third quarter of fiscal 1999 increased
23.8% to $19.1 million compared to $15.4 million in the third quarter of fiscal
1998. Our sales growth rate this quarter was about the same for both our DSD and
our distributor business. 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 percentage increase from the third quarter of fiscal
1998 as we had just begun selling in some of the newer markets at that time. We
also entered a new market, Atlanta, in the third quarter this year. 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. Bar sales rose 60% from
the second quarter of this year, although food bar sales represented less than
5% of our net sales.
COST OF SALES. Cost of sales increased to $10.1 million in the third
quarter of fiscal 1999 compared to $7.5 million for the same period during
fiscal 1998. Gross margin as a percentage of net sales was 47.3% in the third
quarter of fiscal 1999, a decrease from 51.6% in the third quarter of fiscal
1998.
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 freeze also impacted the California Valencia orange crop and other citrus.
The immediate affect of the freeze was to increase the price of the fresh citrus
we purchase. We also experienced poorer citrus yields and some delay in fruit
maturity. We were also 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.
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 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 continue to experience
higher orange costs in the fourth quarter of this fiscal year and possibly into
the first quarter of fiscal 2000. The overall freeze impact may cause an
operating loss for fiscal 1999; the impact beyond fiscal 1999 is not yet
determinable.
SALES AND DISTRIBUTION. Sales and distribution expenses were $6.5
million in the third quarter of fiscal 1999 compared to $5.3 million in the
third quarter of fiscal 1998, and decreased as a percentage of net sales to
33.8% from 34.6% last year. The decrease, as a percentage of net sales, results
from increased sales volume supported by a more fixed cost operations structure,
offset by increased national and regional 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.
Expenses will also 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.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
MARKETING. Marketing expenses increased to $806,000 in the third
quarter of fiscal 1999 compared to $692,000 in the third quarter of fiscal 1998.
Most of the change from last year results from increased product tastings, both
in retail locations and at community events, consultants and product research
and development. 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 $2.1 million in the third quarter of fiscal 1999 from $1.7 million
in the third quarter of fiscal 1998, and decreased as a percentage of net sales
to 10.9% from 11.1% last year. The change was primarily due to an increase in
payroll and related costs, including recruiting fees, as we filled several
positions that were open or not approved in fiscal 1998, and an increase in
collection costs for specific accounts. 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 allow for sustainable
growth.
INTEREST AND OTHER EXPENSE. Odwalla had net interest and other expense
of $26,000 in the third quarter of fiscal 1999 compared to $54,000 in the third
quarter last year. The net interest expense resulted primarily from borrowings
under the line of credit and other existing debt for each quarter. Although
we've invested the net proceeds of the Series A Stock offering funded in
February 1999, as disclosed in the financial statement footnotes, we continued
to incur interest expense primarily due to minimum borrowing requirements under
our existing line of credit agreement and the imputed interest impact of the
fiscal 1998 settlement with the U.S. Government relating to a federal grand jury
investigation of the Recall incident and related issues.
INCOME TAX BENEFIT. The $49,000 income tax benefit for the third
quarter of 1999 resulted from the tax benefit associated with the loss following
the Recall. In the third quarter of fiscal 1998, we recorded a $25,000 income
tax expense. The 15% effective tax rate in both 1999 and 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.
THIRTY-NINE WEEKS ENDED MAY 29, 1999 AND MAY 30, 1998
NET SALES. Net sales for the first thirty-nine weeks of fiscal 1999
increased 16% to $50.8 million compared to $43.8 million in the first
thirty-nine weeks of fiscal 1998. Most of the sales growth was generated in our
existing markets, which were those open at the beginning of fiscal 1998, and the
growth rate was about the same for DSD business as for our distributor business.
In our newest markets, where our sales level was minimal in the first
thirty-nine weeks of fiscal 1998, most of the sales volume increase was from our
own DSD business. We entered a new market, Atlanta, in the third quarter this
year. We implemented a price increase (less than 5%) on many of our beverage
products in February 1999 as a result of the citrus freeze in December 1998. Our
food bar business, which was introduced at the very end of fiscal 1998, was also
an important factor during this thirty-nine week period, although food bar sales
represented less than 5% of our net sales.
COST OF SALES. Cost of sales increased to $26.7 million in the first
thirty-nine weeks of fiscal 1999 compared to $21.8 million for the same period
during fiscal 1998. Gross margin as a percentage of net sales was 47.4% in the
first thirty-nine weeks of fiscal 1999, a decrease from 50.2% when compared to
the first thirty-nine weeks of fiscal 1998.
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
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
above, this trend was significantly reversed in the second and third quarter due
to (a) unfavorable pricing and yield for ingredients, primarily citrus, and (b)
increases in labor, due to poorer yields. On a fiscal 1999 year-to-date basis,
we also experienced an increase in co-packing costs and some impact of
introductory margins on new products. These factors resulted in an overall
decrease on year-to-date gross margin. As discussed above, the continued use of
third party distributors also negatively impacts gross margin.
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 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 in the fourth quarter of this fiscal year and possibly into the
first quarter of fiscal 2000. The overall freeze impact may cause an operating
loss for fiscal 1999; the impact beyond fiscal 1999 is not yet determinable.
SALES AND DISTRIBUTION. Sales and distribution expenses were $17.6
million in the first thirty-nine weeks of fiscal 1999 compared to $15.1 million
in the first thirty-nine weeks of fiscal 1998, and increased as a percentage of
net sales to 34.7% from 34.6% 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 which 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. In both the second
and third quarter of this year, we experienced 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 of fiscal 1999, as a
percentage of net sales, were not offset by benefits from second and third
quarter results.
In both the sales and cost of sales discussions above, we mentioned the
impact that the expanded use of third party distributors could 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 seek 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 our stringent
service standards can make it difficult to find appropriate distributors in some
markets.
MARKETING. Marketing expenses increased to $2.4 million in the first
thirty-nine weeks of fiscal 1999 compared to $2.0 million in the first
thirty-nine weeks of fiscal 1998. Most of the change from last year results from
increased product tastings, both in retail locations and at community events,
consultants and product research and development, 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 $5.7 million in the first thirty-nine weeks of fiscal 1999 from
$5.0 million in the first thirty-nine weeks of fiscal 1998, and decreased as a
percentage of net sales to 11.3% from 11.5% last year. The change was primarily
due to an increase in payroll as several open positions were not filled until
later in fiscal 1998 or in fiscal 1999. 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 $176,000 in the first thirty-nine weeks of fiscal 1999 compared to net other
interest and other expense of $97,000 in the first thirty-nine weeks last year.
The net interest expense resulted primarily from borrowings under the line of
credit and other existing debt. In the same period of last year, net interest
and other expense was offset by an $80,000 gain from an equipment sale.
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<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
INCOME TAX BENEFIT. The $277,000 and $42,000 income tax benefit for the
first thirty-nine weeks of 1999 and 1998 resulted from the tax benefit
associated with the loss following the Recall. The 15% effective tax rate in
1999 and the 12% 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 May 29, 1999, we had working capital of $8.4 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 May 29,
1999, we had cash and cash equivalents and short-term investments of $9.2
million, compared to $3.2 million at August 29, 1998.
Net cash used in operating activities in the first thirty-nine weeks of
fiscal 1999 was $1.0 million. This consisted of the net loss plus depreciation
and amortization and the increase in accounts payable and accrued payroll,
offset by an increase in accounts receivable, inventories and prepaid expenses
and a decrease in other accrued expenses. Net cash used in investing activities
in the first thirty-nine weeks of fiscal 1999 was $5.7 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 thirty-nine weeks of fiscal 1999 was $7.7 million, consisting of net
proceeds from the preferred stock sale offset by scheduled debt and capital
lease payments. In the third quarter, we also sold a vacant real estate parcel
in Half Moon Bay in exchange for the remaining mortgage on that property and
cash. No gain or loss was recorded from the sale, although a provision of the
sales agreement may provide a small gain during the remainder of calendar 1999.
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. During the
third quarter of fiscal 1999, we signed a $1.5 million lease line for equipment
at our Dinuba production facility. We expect to fully utilize the line by the
end of September 1999. 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 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 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. This
warrant is for 24,806 shares of common stock at an
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<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 other than the warrant described above, reimbursement of certain costs of
Catterton-Simon and other transaction costs. On June 14, 1999, the Board of
Directors declared a stock dividend of 33,333 Series A Preferred Stock shares
for Series A stockholder. The dividend is payable June 30, 1999.
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 continuing our steps to identify and address our internal Year
2000 issues and expect to complete this process by the end of August 1999, the
end of our fiscal year. 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, including
suppliers and distributors. We expect to have this process completed by the end
of September 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 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
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
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,
with 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. We began using third party
distributors primarily in our newer geographic markets in fiscal 1998, including
Chicago, Detroit, Minneapolis, Philadelphia and, most recently, the Atlanta
area. 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. For example, the El
Nino conditions and other weather patterns in the winter of 1997-1998 caused
temporary shortages of certain tropical products. Additionally, 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 had 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. All of these adverse weather
conditions could negatively affect our business and results of operations.
RISKS ASSOCIATED WITH PERISHABLE PRODUCTS. Except for natural 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
producers, food and energy bar companies and premium bottled waters. Our direct
competitors in the juice
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<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
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 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.
In late 1998, we began the introduction of food bars. Our food bar products
compete with several more established companies,, including PowerBar, Balance
Bar or 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.
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 "Part II, 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 or earlier periods
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 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 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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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 July 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. However, should the FDA's
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
regulations change to require us to meet additional requirements, our business
and results of operations may be negatively affected by the increased costs of
compliance.
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.
ITEM 3. 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 May 29, 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 in fiscal 1999. We do not engage in foreign currency hedging
activities.
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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. The case is set for trial in January
2000.
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 two additional proceedings allegedly arising out of
product consumption prior to the Recall:
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 does not have a trial date
set.
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 in November 2000.
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.
2. The Fujita Case: A personal injury lawsuit filed in Alameda
Superior Court. The case was settled in April 1999.
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.
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.
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.
21
<PAGE> 22
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Amended and Restated Bylaws, dated as of February 1, 1999.
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 May 29, 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: July 9, 1999 By: /s/ D. STEPHEN C. WILLIAMSON
-------------------------------------
D. Stephen C. Williamson
Chief Executive Officer
(Principal Executive Officer)
Date: July 9, 1999 By: /s/ JAMES R. STEICHEN
-------------------------------------
James R. Steichen
Chief Financial Officer
(Principal Financial and
Accounting Officer)
23
<PAGE> 1
AMENDED AND RESTATED
BYLAWS
OF
ODWALLA, INC.
(ADOPTED ON DECEMBER 15, 1993)
(AS AMENDED THROUGH FEBRUARY 1, 1999)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Article I. Offices ....................................................................... 1
Section 1. Principal Office....................................................... 1
Section 2. Other Offices.......................................................... 1
Article II. Corporate Seal.................................................................. 1
Section 3. Corporate Seal......................................................... 1
Article III. Shareholders' Meetings and Voting Rights....................................... 1
Section 4. Place of Meetings...................................................... 1
Section 5. Annual Meetings........................................................ 1
Section 6. Postponement of Annual Meeting......................................... 2
Section 7. Special Meetings....................................................... 2
Section 8. Notice of Meetings..................................................... 2
Section 9. Manner of Giving Notice................................................ 3
Section 10. Quorum and Transaction of Business..................................... 4
Section 11. Adjournment and Notice of Adjourned Meetings........................... 4
Section 12. Waiver of Notice, Consent to Meeting or Approval of Minutes............ 4
Section 13. Action by Written Consent Without a Meeting............................ 5
Section 14. Voting................................................................. 6
Section 15. Persons Entitled to Vote or Consent.................................... 6
Section 16. Proxies................................................................ 7
Section 17. Inspectors of Election................................................. 7
Article IV. Board of Directors.............................................................. 8
Section 18. Powers................................................................. 8
Section 19. Number of Directors.................................................... 8
Section 20. Election of Directors, Term, Qualifications............................ 8
Section 21. Resignations........................................................... 9
Section 22. Removal................................................................ 9
Section 23. Vacancies.............................................................. 9
Section 24. Regular Meetings....................................................... 9
Section 25. Participation by Telephone............................................. 10
Section 26. Special Meetings....................................................... 10
Section 27. Notice of Meetings..................................................... 10
Section 28. Place of Meetings...................................................... 10
Section 29. Action by Written Consent Without a Meeting............................ 10
Section 30. Quorum and Transaction of Business..................................... 10
Section 31. Adjournment............................................................ 11
Section 32. Organization........................................................... 11
Section 33. Compensation........................................................... 11
Section 34. Committees............................................................. 11
</TABLE>
2
<PAGE> 3
<TABLE>
<S> <C>
Article V. Officers ....................................................................... 12
Section 35. Officers............................................................... 12
Section 36. Appointment............................................................ 12
Section 37. Inability to Act....................................................... 12
Section 38. Resignations........................................................... 12
Section 39. Removal................................................................ 12
Section 40. Vacancies.............................................................. 13
Section 41. Chairman of the Board.................................................. 13
Section 42. Chief Executive Officer................................................ 13
Section 43. President.............................................................. 13
Section 44. Vice Presidents........................................................ 13
Section 45. Secretary.............................................................. 14
Section 46. Chief Financial Officer................................................ 14
Section 47. Compensation........................................................... 15
Article VI. Contracts, Loans, Bank Accounts, Checks and Drafts.............................. 15
Section 48. Execution of Contracts and Other Instruments........................... 15
Section 49. Loans.................................................................. 15
Section 50. Bank Accounts.......................................................... 16
Section 51. Checks, Drafts, Etc.................................................... 16
Article VII. Certificates For Shares and Their Transfer..................................... 16
Section 52. Certificate for Shares................................................. 16
Section 53. Transfer on the Books.................................................. 16
Section 54. Lost, Destroyed and Stolen Certificates................................ 17
Section 55. Issuance, Transfer and Registration of Shares.......................... 17
Article VIII. Inspection Of Corporate Records............................................... 17
Section 56. Inspection by Directors................................................ 17
Section 57. Inspection by Shareholders............................................. 17
Section 58. Written Form........................................................... 18
Article IX. Miscellaneous................................................................... 19
Section 59. Fiscal Year............................................................ 19
Section 60. Annual Report.......................................................... 19
Section 61. Record Date............................................................ 19
Section 62. Bylaw Amendments....................................................... 20
Section 63. Construction and Definition............................................ 20
Article X. Indemnification.................................................................. 20
Section 64. Indemnification of Directors, Officers, Employees And
Other Agents......................................................... 20
Article XI. Loans of Officers and Others.................................................... 24
Section 65. Certain Corporate Loans and Guarantees................................. 24
</TABLE>
3
<PAGE> 4
BYLAWS
OF
ODWALLA, INC.
(ADOPTED ON DECEMBER 15, 1993)
(AS AMENDED THROUGH FEBRUARY 1, 1999)
ARTICLE I
OFFICES
SECTION 1. PRINCIPAL OFFICE. The principal executive office of the
corporation shall be located at such place as the Board of Directors may from
time to time authorize. If the principal executive office is located outside
this state, and the corporation has one or more business offices in this state,
the Board of Directors shall fix and designate a principal business office in
the State of California.
SECTION 2. OTHER OFFICES. Additional offices of the corporation shall
be located at such place or places, within or outside the State of California,
as the Board of Directors may from time to time authorize.
ARTICLE II
CORPORATE SEAL
SECTION 3. CORPORATE SEAL. If the Board of Directors adopts a corporate
seal such seal shall have inscribed thereon the name of the corporation and the
state and date of its incorporation. If and when a seal is adopted by the Board
of Directors, such seal may be engraved, lithographed, printed, stamped,
impressed upon, or affixed to any contract, conveyance, certificate for shares
or other instrument executed by the corporation.
ARTICLE III
SHAREHOLDERS' MEETINGS AND VOTING RIGHTS
SECTION 4. PLACE OF MEETINGS. Meetings of shareholders shall be held at
the principal executive office of the corporation, or at any other place, within
or outside the State of California, which may be fixed either by the Board of
Directors or by the written consent of all persons entitled to vote at such
meeting, given either before or after the meeting and filed with the Secretary
of the corporation.
SECTION 5. ANNUAL MEETINGS. The annual meeting of the shareholders of
the corporation shall be held at the hour of nine o'clock a.m. local time, on
the second Friday in December in each year if such date is not a legal holiday
observed by the corporation at its principal executive office, and if it is such
a legal holiday, then on the next succeeding full
1
<PAGE> 5
business day at the same time. At such annual meeting directors shall be elected
and any other business may be transacted which may properly come before the
meeting.
SECTION 6. POSTPONEMENT OF ANNUAL MEETING. The Board of Directors and
the President shall each have authority to hold at an earlier date and/or time,
or to postpone to a later date and/or time, the annual meeting of shareholders.
SECTION 7. SPECIAL MEETINGS.
(a) Special meetings of the shareholders, for any purpose or
purposes, may be called by the Board of Directors, the Chairman of the Board of
Directors, the President, or the holders of shares entitled to cast not less
than ten percent (10%) of the votes at the meeting.
(b) Upon written request to the Chairman of the Board of
Directors, the President, any vice president or the Secretary of the corporation
by any person or persons (other than the Board of Directors) entitled to call a
special meeting of the shareholders, such officer forthwith shall cause notice
to be given to the shareholders entitled to vote, that a meeting will be held at
a time requested by the person or persons calling the meeting, such time to be
not less than thirty-five (35) nor more than sixty (60) days after receipt of
such request. If such notice is not given within twenty (20) days after receipt
of such request, the person or persons calling the meeting may give notice
thereof in the manner provided by law or in these bylaws. Nothing contained in
this Section 7 shall be construed as limiting, fixing or affecting the time or
date when a meeting of shareholders called by action of the Board of Directors
may be held.
SECTION 8. NOTICE OF MEETINGS. Except as otherwise may be required by
law and subject to subsection 7(b) above, written notice of each meeting of
shareholders shall be given to each shareholder entitled to vote at that meeting
(see Section 15 below), by the Secretary, assistant secretary or other person
charged with that duty, not less than ten (10) (or, if sent by third class mail,
thirty (30)) nor more than sixty (60) days before such meeting.
Notice of any meeting of shareholders shall state the date, place
and hour of the meeting and,
(a) in the case of a special meeting, the general nature of
the business to be transacted, and no other business may be transacted at such
meeting;
(b) in the case of an annual meeting, the general nature of
matters which the Board of Directors, at the time the notice is given, intends
to present for action by the shareholders;
(c) in the case of any meeting at which directors are to be
elected, the names of the nominees intended at the time of the notice to be
presented by management for election; and
(d) in the case of any meeting, if action is to be taken on
any of the following proposals, the general nature of such proposal:
2
<PAGE> 6
(1) a proposal to approve a transaction within the
provisions of California Corporations Code, Section 310 (relating to certain
transactions in which a director has a direct or indirect financial interest);
(2) a proposal to approve a transaction within the
provisions of California Corporations Code, Section 902 (relating to amending
the Articles of Incorporation of the corporation);
(3) a proposal to approve a transaction within the
provisions of California Corporations Code, Sections 181 and 1201 (relating to
reorganization);
(4) a proposal to approve a transaction within the
provisions of California Corporations Code, Section 1900 (winding up and
dissolution);
(5) a proposal to approve a plan of distribution within
the provisions of California Corporations Code, Section 2007 (relating to
certain plans providing for distribution not in accordance with the liquidation
rights of preferred shares, if any).
At a special meeting, notice of which has been given in
accordance with this Section 8, action may not be taken with respect to
business, the general nature of which has not been stated in such notice. At an
annual meeting, action may be taken with respect to business stated in the
notice of such meeting, given in accordance with this Section 8, and, subject to
subsection 8(d) above, with respect to any other business as may properly come
before the meeting.
SECTION 9. MANNER OF GIVING NOTICE. Notice of any meeting of
shareholders shall be given either personally or by first-class mail, or, if the
corporation has outstanding shares held of record by 500 or more persons
(determined as provided in California Corporations Code Section 605) on the
record date for such meeting, third-class mail, or telegraphic or other written
communication, addressed to the shareholder at the address of that shareholder
appearing on the books of the corporation or given by the shareholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or is given, notice shall be deemed to have been given if
sent to that shareholder by first-class mail or telegraphic or other written
communication to the corporation's principal executive office, or if published
at least once in a newspaper of general circulation in the county where that
office is located. Notice shall be deemed to have been given at the time when
delivered personally or deposited in the mail or sent by telegram or other means
of written communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the shareholder
at that address, all future notices shall be deemed to have been duly given
without further mailing if these shall be available to the shareholder on
written demand by the shareholder at the principal executive office of the
corporation for a period of one year from the date of the giving of the notice.
An affidavit of mailing of any notice or report in accordance
with the provisions of this Section 9, executed by the Secretary, Assistant
Secretary or any transfer agent, shall be prima facie evidence of the giving of
the notice.
3
<PAGE> 7
SECTION 10. QUORUM AND TRANSACTION OF BUSINESS.
(a) At any meeting of the shareholders, a majority of the
shares entitled to vote, represented in person or by proxy, shall constitute a
quorum. If a quorum is present, the affirmative vote of the majority of shares
represented at the meeting and entitled to vote on any matter shall be the act
of the shareholders, unless the vote of a greater number or voting by classes is
required by law or by the Articles of Incorporation, and except as provided in
subsection (b) below.
(b) The shareholders present at a duly called or held
meeting of the shareholders at which a quorum is present may continue to do
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, provided that any action taken (other
than adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
(c) In the absence of a quorum, no business other than
adjournment may be transacted, except as described in subsection (b) above.
SECTION 11. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting
of shareholders may be adjourned from time to time, whether or not a quorum is
present, by the affirmative vote of a majority of shares represented at such
meeting either in person or by proxy and entitled to vote at such meeting.
In the event any meeting is adjourned, it shall not be necessary
to give notice of the time and place of such adjourned meeting pursuant to
Sections 8 and 9 of these bylaws; provided that if any of the following three
events occur, such notice must be given:
(a) announcement of the adjourned meeting's time and place
is not made at the original meeting which it continues or
(b) such meeting is adjourned for more than forty-five (45)
days from the date set for the original meeting or
(c) a new record date is fixed for the adjourned meeting.
At the adjourned meeting, the corporation may transact any
business that might have been transacted at the original meeting.
SECTION 12. WAIVER OF NOTICE, CONSENT TO MEETING OR APPROVAL OF
MINUTES.
(a) Subject to subsection (b) of this Section, the
transactions of any meeting of shareholders, however called and noticed, and
wherever held, shall be as valid as though made at a meeting duly held after
regular call and notice, if a quorum is present either in person or by proxy,
and if, either before or after the meeting, each of the persons entitled to vote
but not present in person or by proxy signs a written waiver of notice or a
consent to holding of the meeting or an approval of the minutes thereof.
4
<PAGE> 8
(b) A waiver of notice, consent to the holding of a meeting
or approval of the minutes thereof need not specify the business to be
transacted or transacted at nor the purpose of the meeting; provided that in the
case of proposals described in subsection (d) of Section 8 of these bylaws, the
general nature of such proposals must be described in any such waiver of notice
and such proposals can only be approved by waiver of notice, not by consent to
holding of the meeting or approval of the minutes.
(c) All waivers, consents and approvals shall be filed with
the corporate records or made a part of the minutes of the meeting.
(d) A person's attendance at a meeting shall constitute
waiver of notice of and presence at such meeting, except when such person
objects at the beginning of the meeting to transaction of any business because
the meeting is not lawfully called or convened and except that attendance at a
meeting is not a waiver of any right to object to the consideration of matters
that are required by law or these bylaws to be in such notice (including those
matters described in subsection (d) of Section 8 of these bylaws), but are not
so included if such person expressly objects to consideration of such matter or
matters at any time during the meeting.
SECTION 13. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action
that may be taken at any meeting of shareholders may be taken without a meeting
and without prior notice if written consents setting forth the action so taken
are signed by the holders of the outstanding shares having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted.
Directors may not be elected by written consent except by
unanimous written consent of all shares entitled to vote for the election of
directors; provided that any vacancy on the Board of Directors (other than a
vacancy created by removal) which has not been filled by the board of directors
may be filled by the written consent of a majority of outstanding shares
entitled to vote for the election of directors.
Any written consent may be revoked pursuant to California
Corporations Code Section 603(c) prior to the time that written consents of the
number of shares required to authorize the proposed action have been filed with
the Secretary. Such revocation must be in writing and will be effective upon its
receipt by the Secretary.
If the consents of all shareholders entitled to vote have not
been solicited in writing, and if the unanimous written consent of all such
shareholders shall not have been received, the Secretary shall give prompt
notice of any corporate action approved by the shareholders without a meeting to
those shareholders entitled to vote on such matters who have not consented
thereto in writing. This notice shall be given in the manner specified in
Section 9 of these bylaws. In the case of approval of (i) a transaction within
the provisions of California Corporations Code, Section 310 (relating to certain
transactions in which a director has an interest), (ii) a transaction within the
provisions of California Corporations Code, Section 317 (relating to
indemnification of agents of the corporation), (iii) a transaction within the
provisions of California Corporations Code, Sections 181 and 1201 (relating to
reorganization), and (iv) a plan of distribution within the provisions of
California Corporations Code, Section 2007 (relating to certain plans providing
for distribution not in accordance with the liquidation rights of
5
<PAGE> 9
preferred shares, if any), the notice shall be given at least ten (10) days
before the consummation of any action authorized by that approval.
SECTION 14. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of Section 15
of these bylaws, subject to the provisions of Sections 702 through 704 of the
California Corporations Code (relating to voting shares held by a fiduciary, in
the name of a corporation, or in joint ownership). Voting at any meeting of
shareholders need not be by ballot; provided, however, that elections for
directors must be by ballot if balloting is demanded by a shareholder at the
meeting and before the voting begins.
Until such time as this corporation becomes a listed corporation
within the meaning of Section 301.5 of the California Corporations Code, every
person entitled to vote at an election for directors may cumulate the votes to
which such person is entitled, i.e., such person may cast a total number of
votes equal to the number of directors to be elected multiplied by the number of
votes to which such person's shares are entitled, and may cast said total number
of votes for one or more candidates in such proportions as such person thinks
fit; provided, however, no shareholder shall be entitled to so cumulate such
shareholder's votes unless the candidates for which such shareholder is voting
have been placed in nomination prior to the voting and a shareholder has given
notice at the meeting, prior to the vote, of an intention to cumulate votes. In
any election of directors, the candidates receiving the highest number of votes,
up to the number of directors to be elected, are elected.
Except as may be otherwise provided in the Articles of
Incorporation or by law, and subject to the foregoing provisions regarding the
accumulation of votes, each shareholder shall be entitled to one vote for each
share held; provided, however, that the right to cumulative voting provided for
above shall be eliminated at such time as this corporation becomes a listed
corporation within the meaning of Section 301.5 of the California Corporations
Code.
Any shareholder may vote part of such shareholder's shares in
favor of a proposal and refrain from voting the remaining shares or vote them
against the proposal, other than elections to office, but, if the shareholder
fails to specify the number of shares such shareholder is voting affirmatively,
it will be conclusively presumed that the shareholder's approving vote is with
respect to all shares such shareholder is entitled to vote.
No shareholder approval, other than unanimous approval of those
entitled to vote, will be valid as to proposals described in subsection 8(d) of
these bylaws unless the general nature of such business was stated in the notice
of meeting or in any written waiver of notice.
SECTION 15. PERSONS ENTITLED TO VOTE OR CONSENT. The Board of Directors
may fix a record date pursuant to Section 61 of these bylaws to determine which
shareholders are entitled to notice of and to vote at a meeting or consent to
corporate actions, as provided in Sections 13 and 14 of these bylaws. Only
persons in whose name shares otherwise entitled to vote stand on the stock
records of the corporation on such date shall be entitled to vote or consent.
If no record date is fixed:
(a) The record date for determining shareholders entitled
to notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day
6
<PAGE> 10
next preceding the day notice is given or, if notice is waived, at the close of
business on the business day next preceding the day on which the meeting is
held;
(b) The record date for determining shareholders entitled
to give consent to corporate action in writing without a meeting, when no prior
action by the Board of Directors has been taken, shall be the day on which the
first written consent is given;
(c) The record date for determining shareholders for any
other purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto, or the sixtieth (60th) day
prior to the date of such other action, whichever is later.
A determination of shareholders of record entitled to notice of
or to vote at a meeting of shareholders shall apply to any adjournment of the
meeting unless the Board of Directors fixes a new record date for the adjourned
meeting; provided, however, that the Board of Directors shall fix a new record
date if the meeting is adjourned for more than forty-five (45) days from the
date set for the original meeting.
Shares of the corporation held by its subsidiary or subsidiaries
(as defined in California Corporations Code, Section 189(b)) are not entitled to
vote in any matter.
SECTION 16. PROXIES. Every person entitled to vote or execute consents
may do so either in person or by one or more agents authorized to act by a
written proxy executed by the person or such person's duly authorized agent and
filed with the Secretary of the corporation; provided that no such proxy shall
be valid after the expiration of eleven (11) months from the date of its
execution unless otherwise provided in the proxy. The manner of execution,
suspension, revocation, exercise and effect of proxies is governed by law.
SECTION 17. INSPECTORS OF ELECTION. Before any meeting of shareholders,
the Board of Directors may appoint any persons, other than nominees for office,
to act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the chairman of the meeting may, and on
the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (1) or three (3). If inspectors are appointed at a meeting on the request of
one or more shareholders or proxies, the majority of shares represented in
person or by proxy shall determine whether one (1) or three (3) inspectors are
to be appointed. If any person appointed as inspector fails to appear or fails
or refuses to act, the chairman of the meeting may, and upon the request of any
shareholder or a shareholder's proxy shall, appoint a person to fill that
vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the
voting power of each, the shares represented at the meeting, the existence of a
quorum, and the authenticity, validity, and effect of proxies;
(b) Receive votes, ballots, or consents;
(c) Hear and determine all challenges and questions in any
way arising in connection with the right to vote;
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<PAGE> 11
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the
election or vote with fairness to all shareholders.
ARTICLE IV
BOARD OF DIRECTORS
SECTION 18. POWERS. Subject to the provisions of law or any limitations
in the Articles of Incorporation or these bylaws, as to action required to be
approved by the shareholders or by the outstanding shares, the business and
affairs of the corporation shall be managed and all corporate powers shall be
exercised, by or under the direction of the Board of Directors. The Board of
Directors may delegate the management of the day-to-day operation of the
business of the corporation to a management company or other person, provided
that the business and affairs of the corporation shall be managed and all
corporate powers shall be exercised under the ultimate direction of the Board of
Directors.
SECTION 19. NUMBER OF DIRECTORS. The authorized number of directors of
the corporation shall be not less than a minimum of five (5) nor more than a
maximum of nine (9) (which maximum number in no case shall be greater than two
times said minimum, minus one) and the number of directors presently authorized
is six (6). The exact number of directors shall be set within these limits from
time to time (a) by approval of the Board of Directors, or (b) by the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute at least a majority of the required quorum) or by the written
consent of shareholders pursuant to Section 13 hereinabove.
Any amendment of these bylaws changing the maximum or minimum
number of directors may be adopted only by the affirmative vote of a majority of
the outstanding shares entitled to vote; provided, an amendment reducing the
minimum number of directors to less than five (5), cannot be adopted if votes
cast against its adoption at a meeting or the shares not consenting to it in the
case of action by written consent are equal to more than 16-2/3 percent of the
outstanding shares entitled to vote.
No reduction of the authorized number of directors shall remove
any director prior to the expiration of such director's term of office.
SECTION 20. ELECTION OF DIRECTORS, TERM, QUALIFICATIONS. The directors
shall be elected at each annual meeting of shareholders to hold office until the
next annual meeting. Each director, including a director elected or appointed to
fill a vacancy, shall hold office either until the expiration of the term for
which elected or appointed and until a successor has been elected
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<PAGE> 12
and qualified, or until his death, resignation or removal. Directors need not be
shareholders of the corporation.
SECTION 21. RESIGNATIONS. Any director of the corporation may resign
effective upon giving written notice to the Chairman of the Board, the
President, the Secretary or the Board of Directors of the corporation, unless
the notice specifies a later time for the effectiveness of such resignation. If
the resignation specifies effectiveness at a future time, a successor may be
elected pursuant to Section 23 of these bylaws to take office on the date that
the resignation becomes effective.
SECTION 22. REMOVAL. The Board of Directors may declare vacant the
office of a director who has been declared of unsound mind by an order of court
or who has been convicted of a felony.
The entire Board of Directors or any individual director may be
removed from office without cause by the affirmative vote of a majority of the
outstanding shares entitled to vote on such removal; provided, however, that
unless the entire Board is removed, no individual director may be removed when
the votes cast against such director's removal, or not consenting in writing to
such removal, would be sufficient to elect that director if voted cumulatively
at an election at which the same total number of votes cast were cast (or, if
such action is taken by written consent, all shares entitled to vote were voted)
and the entire number of directors authorized at the time of such director's
most recent election were then being elected.
SECTION 23. VACANCIES. A vacancy or vacancies on the Board of Directors
shall be deemed to exist in case of the death, resignation or removal of any
director, or upon increase in the authorized number of directors or if
shareholders fail to elect the full authorized number of directors at an annual
meeting of shareholders or if, for whatever reason, there are fewer directors on
the Board of Directors than the full number authorized. Such vacancy or
vacancies may be filled by a majority of the remaining directors, though less
than a quorum, or by a sole remaining director. The shareholders may elect a
director at any time to fill any vacancy not filled by the directors. Any such
election by written consent, other than to fill a vacancy created by removal,
requires the consent of a majority of the outstanding shares entitled to vote.
Any such election by written consent to fill a vacancy created by removal
requires the consent of all of the outstanding shares entitled to vote.
If, after the filling of any vacancy by the directors, the
directors then in office who have been elected by the shareholders constitute
less than a majority of the directors then in office, any holder or holders of
an aggregate of five percent (5%) or more of the shares outstanding at that time
and having the right to vote for such directors may call a special meeting of
shareholders to be held to elect the entire Board of Directors. The term of
office of any director shall terminate upon such election of a successor.
SECTION 24. REGULAR MEETINGS. Immediately after each annual meeting of
shareholders, and at such place fixed by the Board of Directors, or if no such
place is fixed, at the place of the annual meeting, the Board of Directors shall
hold a regular meeting for the purposes of organization, the appointment of
officers and the transaction of other business. Other regular meetings of the
Board of Directors shall be held at such times, places and dates as fixed in
these bylaws or by the Board of Directors; provided, however, that if the date
for such a meeting falls on a legal holiday, then the meeting shall be held at
the same time on the next succeeding
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<PAGE> 13
full business day. Regular meetings of the Board of Directors held pursuant to
this Section 24 may be held without notice.
SECTION 25. PARTICIPATION BY TELEPHONE. Members of the Board of
Directors may participate in a meeting through use of conference telephone or
similar communications equipment, so long as all members participating in such
meeting can hear one another. Such participation constitutes presence in person
at such meeting.
SECTION 26. SPECIAL MEETINGS. Special meetings of the Board of
Directors for any purpose may be called by the Chairman of the Board or the
President or any vice president or the Secretary of the corporation or any two
(2) directors.
SECTION 27. NOTICE OF MEETINGS. Notice of the date, time and place of
all meetings of the Board of Directors, other than regular meetings held
pursuant to Section 24 above, shall be delivered personally, orally or in
writing, or by telephone or telegraph to each director, at least forty-eight
(48) hours before the meeting, or sent in writing to each director by
first-class mail, charges prepaid, at least four (4) days before the meeting.
Such notice may be given by the Secretary of the corporation or by the person or
persons who called a meeting. Such notice need not specify the purpose of the
meeting. Notice of any meeting of the Board of Directors need not be given to
any director who signs a waiver of notice of such meeting, or a consent to
holding the meeting or an approval of the minutes thereof, either before or
after the meeting, or who attends the meeting without protesting prior thereto
or at its commencement such director's lack of notice. All such waivers,
consents and approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
SECTION 28. PLACE OF MEETINGS. Meetings of the Board of Directors may
be held at any place within or without the state which has been designated in
the notice of the meeting or, if not stated in the notice or there is no notice,
designated in the bylaws or by resolution of the Board of Directors.
SECTION 29. ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action
required or permitted to be taken by the Board of Directors may be taken without
a meeting, if all members of the Board of Directors individually or collectively
consent in writing to such action. Such written consent or consents shall be
filed with the minutes of the proceedings of the Board of Directors. Such action
by written consent shall have the same force and effect as a unanimous vote of
such directors.
SECTION 30. QUORUM AND TRANSACTION OF BUSINESS. A majority of the
authorized number of directors shall constitute a quorum for the transaction of
business. Every act or decision done or made by a majority of the authorized
number of directors present at a meeting duly held at which a quorum is present
shall be the act of the Board of Directors, unless the law, the Articles of
Incorporation or these bylaws specifically require a greater number. A meeting
at which a quorum is initially present may continue to transact business,
notwithstanding withdrawal of directors, if any action taken is approved by at
least a majority of the number of directors constituting a quorum for such
meeting. In the absence of a quorum at any meeting of the Board of Directors, a
majority of the directors present may adjourn the meeting, as provided in
Section 31 of these bylaws.
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SECTION 31. ADJOURNMENT. Any meeting of the Board of Directors, whether
or not a quorum is present, may be adjourned to another time and place by the
affirmative vote of a majority of the directors present. If the meeting is
adjourned for more than twenty-four (24) hours, notice of such adjournment to
another time or place shall be given prior to the time of the adjourned meeting
to the directors who were not present at the time of the adjournment.
SECTION 32. ORGANIZATION. The Chairman of the Board shall preside at
every meeting of the Board of Directors, if present. If there is no Chairman of
the Board or if the Chairman is not present, a Chairman chosen by a majority of
the directors present shall act as chairman. The Secretary of the corporation
or, in the absence of the Secretary, any person appointed by the Chairman shall
act as secretary of the meeting.
SECTION 33. COMPENSATION. Directors and members of committees may
receive such compensation, if any, for their services, and such reimbursement
for expenses, as may be fixed or determined by the Board of Directors.
SECTION 34. COMMITTEES. The Board of Directors may, by resolution
adopted by a majority of the authorized number of directors, designate one or
more committees, each consisting of two (2) or more directors, to serve at the
pleasure of the Board of Directors. The Board of Directors, by a vote of the
majority of authorized directors, may designate one or more directors as
alternate members of any committee, to replace any absent member at any meeting
of such committee. Any such committee shall have authority to act in the manner
and to the extent provided in the resolution of the Board of Directors, and may
have all the authority of the Board of Directors in the management of the
business and affairs of the corporation, except with respect to:
(a) the approval of any action for which shareholders'
approval or approval of the outstanding shares also is required by the
California Corporations Code;
(b) the filling of vacancies on the Board of Directors or
any of its committees;
(c) the fixing of compensation of directors for serving on
the Board of Directors or any of its committees;
(d) the adoption, amendment or repeal of these bylaws;
(e) the amendment or repeal of any resolution of the Board
of Directors which by its express terms is not so amendable or repealable;
(f) a distribution to shareholders, except at a rate or in
a periodic amount or within a price range determined by the Board of Directors;
or
(g) the appointment of other committees of the Board of
Directors or the members thereof.
Any committee may from time to time provide by resolution for
regular meetings at specified times and places. If the date of such a meeting
falls on a legal holiday, then the meeting shall be held at the same time on the
next succeeding full business day. No
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notice of such a meeting need be given. Such regular meetings need not be held
if the committee shall so determine at any time before or after the time when
such meeting would otherwise have taken place. Special meetings may be called at
any time in the same manner and by the same persons as stated in Sections 26 and
27 of these bylaws for meetings of the Board of Directors. The provisions of
Sections 25, 28, 29, 30, 31 and 32 of these bylaws shall apply to committees,
committee members and committee meetings as if the words "committee" and
"committee member" were substituted for the word "Board of Directors", and
"director", respectively, throughout such sections.
ARTICLE V
OFFICERS
SECTION 35. OFFICERS. The corporation shall have a Chairman of the
Board, a Chief Executive Officer, a President, a Secretary, a Chief Financial
Officer and such other officers with such titles and duties as the Board of
Directors may determine. Any two or more offices may be held by the same person.
The Board of Directors, in its discretion, may appoint more than one person to
any office, in which case each such person individually shall have the duties
and powers of such office, unless the Board of Directors has specified a
different arrangement.
SECTION 36. APPOINTMENT. All officers shall be chosen and appointed by
the Board of Directors; provided, however, the Board of Directors may empower
the Chief Executive Officer of the corporation to appoint such officers, other
than Chairman of the Board, President, Secretary or Chief Financial Officer, as
the business of the corporation may require. All officers shall serve at the
pleasure of the Board of Directors, subject to the rights, if any, of an officer
under a contract of employment.
SECTION 37. INABILITY TO ACT. In the case of absence or inability to
act of any officer of the corporation or of any person authorized by these
bylaws to act in such officer's place, the Board of Directors may from time to
time delegate the powers or duties of such officer to any other officer, or any
director or other person whom it may select, for such period of time as the
Board of Directors deems necessary.
SECTION 38. RESIGNATIONS. Any officer may resign at any time upon
written notice to the corporation, without prejudice to the rights, if any, of
the corporation under any contract to which such officer is a party. Such
resignation shall be effective upon its receipt by the Chairman of the Board,
the Chief Executive Officer, the President, the Secretary or the Board of
Directors, unless a different time is specified in the notice for effectiveness
of such resignation. The acceptance of any such resignation shall not be
necessary to make it effective unless otherwise specified in such notice.
SECTION 39. REMOVAL. Any officer may be removed from office at any
time, with or without cause, but subject to the rights, if any, of such officer
under any contract of employment, by the Board of Directors or by any committee
to whom such power of removal has been duly delegated, or, with regard to any
officer who has been appointed by the Chief Executive Officer pursuant to
Section 36 above, by the Chief Executive Officer or any other officer upon whom
such power of removal may be conferred by the Board of Directors.
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SECTION 40. VACANCIES. A vacancy occurring in any office for any cause
may be filled by the Board of Directors, in the manner prescribed by this
Article V for initial appointment to such office.
SECTION 41. CHAIRMAN OF THE BOARD. The Chairman of the Board, if there
be such an officer, shall, if present, preside at all meetings of the Board of
Directors and shall exercise and perform such other powers and duties as may be
assigned from time to time by the Board of Directors or prescribed by these
bylaws. If neither a President nor a Chief Executive Officer is appointed, the
Chairman of the Board is the general manager and chief executive officer of the
corporation, and shall exercise all powers of the Chief Executive Officer
described in Section 42 below.
SECTION 42. CHIEF EXECUTIVE OFFICER. Subject to such supervisory
powers, if any, as may be given by the Board of Directors to the Chairman of the
Board, if there be such an officer, the Chief Executive Officer shall, subject
to the control of the Board of Directors, have general supervision, direction
and control of the business, strategic direction and affairs of the corporation.
The Chief Executive Officer may sign and execute, in the name of the
corporation, any instrument authorized by the Board of Directors, except when
the signing and execution thereof shall have been expressly delegated by the
Board of Directors or by these bylaws to some other officer or agent of the
corporation. The Chief Executive Officer shall have all the general powers and
duties of management usually vested in the chief executive officer of a
corporation, and shall have such other powers and duties as may be prescribed
from time to time by the Board of Directors or these bylaws. The Chief Executive
Officer shall have discretion to prescribe the duties of other officers and
employees of the corporation in a manner not inconsistent with the provisions of
these bylaws and the directions of the Board of Directors.
SECTION 43. PRESIDENT. The President shall, subject to the control of
the Board of Directors, report to the Chief Executive Officer and have general
supervision, direction and control of the business and departmental officers of
the corporation. The President may sign and execute, in the name of the
corporation, any instrument authorized by the Board of Directors, except when
the signing and execution thereof shall have been expressly delegated by the
Board of Directors or by these bylaws to some other officer or agent of the
corporation. The President shaft have all the general powers and duties of
management usually vested in the president of a corporation, and shall have such
other powers and duties as may be prescribed from time to time by the Board of
Directors, the Chief Executive Officer or these bylaws. The President shall have
discretion to prescribe the duties of other departmental officers and employees
of the corporation in a manner not inconsistent with the provisions of these
bylaws and the directions of the Board of Directors or the Chief Executive
Officer.
SECTION 44. VICE PRESIDENTS. In the absence or disability of the
President, in the event of a vacancy in the office of President, or in the event
such officer refuses to act, the Vice President shall perform all the duties of
the President and, when so acting, shall have all the powers of, and be subject
to all the restrictions on, the President. If at any such time the corporation
has more than one vice president, the duties and powers of the President shall
pass to each vice president in order of such vice president's rank as fixed by
the Board of Directors or, if the vice presidents are not so ranked, to the vice
president designated by the Board of Directors. The vice presidents shall have
such other powers and perform such other duties as may be prescribed for them
from time to time by the Board of Directors or pursuant to Sections 35 and 36 of
these bylaws or otherwise pursuant to these bylaws.
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SECTION 45. SECRETARY. The Secretary shall:
(a) Keep, or cause to be kept, minutes of all meetings of
the corporation's shareholders, Board of Directors, and committees of the Board
of Directors, if any. Such minutes shall be kept in written form.
(b) Keep, or cause to be kept, at the principal executive
office of the corporation, or at the office of its transfer agent or registrar,
if any, a record of the corporation's shareholders, showing the names and
addresses of all shareholders, and the number and classes of shares held by
each. Such records shall be kept in written form or any other form capable of
being converted into written form.
(c) Keep, or cause to be kept, at the principal executive
office of the corporation, or if the principal executive office is not in
California, at its principal business office in California, an original or copy
of these bylaws, as amended.
(d) Give, or cause to be given, notice of all meetings of
shareholders, directors and committees of the Board of Directors, as required by
law or by these bylaws.
(e) Keep the seal of the corporation, if any, in safe
custody.
(f) Exercise such powers and perform such duties as are
usually vested in the office of secretary of a corporation, and exercise such
other powers and perform such other duties as may be prescribed from time to
time by the Board of Directors or these bylaws.
If any assistant secretaries are appointed, the assistant
secretary, or one of the assistant secretaries in the order of their rank as
fixed by the Board of Directors or, if they are not so ranked, the assistant
secretary designated by the Board of Directors, in the absence or disability of
the Secretary or in the event of such officer's refusal to act or if a vacancy
exists in the office of Secretary, shall perform the duties and exercise the
powers of the Secretary and discharge such duties as may be assigned from time
to time pursuant to these bylaws or by the Board of Directors.
SECTION 46. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall:
(a) Be responsible for all functions and duties of the
treasurer of the corporation.
(b) Keep and maintain, or cause to be kept and maintained,
adequate and correct books and records of account for the corporation.
(c) Receive or be responsible for receipt of all monies due
and payable to the corporation from any source whatsoever; have charge and
custody of, and be responsible for, all monies and other valuables of the
corporation and be responsible for deposit of all such monies in the name and to
the credit of the corporation with such depositories as may
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be designated by the Board of Directors or a duly appointed and authorized
committee of the Board of Directors.
(d) Disburse or be responsible for the disbursement of the
funds of the corporation as may be ordered by the Board of Directors or a duly
appointed and authorized committee of the Board of Directors.
(e) Render to the Chief Executive Officer and the Board of
Directors a statement of the financial condition of the corporation if called
upon to do so.
(f) Exercise such powers and perform such duties as are
usually vested in the office of chief financial officer of a corporation, and
exercise such other powers and perform such other duties as may be prescribed by
the Board of Directors or these bylaws.
If any assistant financial officer is appointed, the assistant
financial officer, or one of the assistant financial officers, if there are more
than one, in the order of their rank as fixed by the Board of Directors or, if
they are not so ranked, the assistant financial officer designated by the Board
of Directors, shall, in the absence or disability of the Chief Financial Officer
or in the event of such officer's refusal to act, perform the duties and
exercise the powers of the Chief Financial Officer, and shall have such powers
and discharge such duties as may be assigned from time to time pursuant to these
bylaws or by the Board of Directors.
SECTION 47. COMPENSATION. The compensation of the officers shall be
fixed from time to time by the Board of Directors, and no officer shall be
prevented from receiving such compensation by reason of the fact that such
officer is also a director of the corporation.
ARTICLE VI
CONTRACTS, LOANS, BANK ACCOUNTS, CHECKS AND DRAFTS
SECTION 48. EXECUTION OF CONTRACTS AND OTHER INSTRUMENTS. Except as
these bylaws may otherwise provide, the Board of Directors or its duly appointed
and authorized committee may authorize any officer or officers, agent or agents,
to enter into any contract or execute and deliver any instrument in the name of
and on behalf of the corporation, and such authorization may be general or
confined to specific instances. Except as so authorized or otherwise expressly
provided in these bylaws, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or in any amount.
SECTION 49. LOANS. No loans shall be contracted on behalf of the
corporation and no negotiable paper shall be issued in its name, unless and
except as authorized by the Board of Directors or its duly appointed and
authorized committee. When so authorized by the Board of Directors or such
committee, any officer or agent of the corporation may effect loans and advances
at any time for the corporation from any bank, trust company or other
institution, or from any firm, corporation or individual, and for such loans and
advances may make, execute and deliver promissory notes, bonds or other
evidences of indebtedness of the corporation and, when authorized as aforesaid,
may mortgage, pledge, hypothecate or transfer any and all stocks, securities and
other property, real or personal, at any time held by the corporation, and to
that
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end endorse, assign and deliver the same as security for the payment of any and
all loans, advances, indebtedness, and liabilities of the corporation. Such
authorization may be general or confined to specific instances.
SECTION 50. BANK ACCOUNTS. The Board of Directors or its duly appointed
and authorized committee from time to time may authorize the opening and keeping
of general and/or special bank accounts with such banks, trust companies or
other depositories as may be selected by the Board of Directors, its duly
appointed and authorized committee or by any officer or officers, agent or
agents, of the corporation to whom such power may be delegated from time to time
by the Board of Directors. The Board of Directors or its duly appointed and
authorized committee may make such rules and regulations with respect to said
bank accounts, not inconsistent with the provisions of these bylaws, as are
deemed advisable.
SECTION 51. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
the payment of money, notes, acceptances or other evidences of indebtedness
issued in the name of the corporation shall be signed by such officer or
officers, agent or agents, of the corporation, and in such manner, as shall be
determined from time to time by resolution of the Board of Directors or its duly
appointed and authorized committee. Endorsements for deposit to the credit of
the corporation in any of its duly authorized depositories may be made, without
countersignature, by the Chief Executive Officer or the President or any vice
president or the Chief Financial Officer or any assistant financial officer or
by any other officer or agent of the corporation to whom the Board of Directors
or its duly appointed and authorized committee, by resolution, shall have
delegated such power or by hand-stamped impression in the name of the
corporation.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 52. CERTIFICATE FOR SHARES. Every holder of shares in the
corporation shall be entitled to have a certificate signed in the name of the
corporation by the Chairman or Vice Chairman of the Board or the President or a
Vice President and by the Chief Financial Officer or an assistant financial
officer or by the Secretary or an assistant secretary, certifying the number of
shares and the class or series of shares owned by the shareholder. Any or all of
the signatures on the certificate may be facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if such person were an officer, transfer
agent or registrar at the date of issue.
In the event that the corporation shall issue any shares as only
partly paid, the certificate issued to represent such partly paid shares shall
have stated thereon the total consideration to be paid for such shares and the
amount paid thereon.
SECTION 53. TRANSFER ON THE BOOKS. Upon surrender to the Secretary or
transfer agent (if any) of the corporation of a certificate for shares of the
corporation duly endorsed, with reasonable assurance that the endorsement is
genuine and effective, or accompanied by proper evidence of succession,
assignment or authority to transfer and upon compliance with applicable federal
and state securities laws and if the corporation has no statutory duty to
inquire into
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adverse claims or has discharged any such duty and if any applicable law
relating to the collection of taxes has been complied with, it shall be the duty
of the corporation, by its Secretary or transfer agent, to cancel the old
certificate, to issue a new certificate to the person entitled thereto and to
record the transaction on the books of the corporation.
SECTION 54. LOST, DESTROYED AND STOLEN CERTIFICATES. The holder of any
certificate for shares of the corporation alleged to have been lost, destroyed
or stolen shall notify the corporation by making a written affidavit or
affirmation of such fact. Upon receipt of said affidavit or affirmation, the
Board of Directors, or its duly appointed and authorized committee or any
officer or officers authorized by the Board so to do, may order the issuance of
a new certificate for shares in the place of any certificate previously issued
by the corporation and which is alleged to have been lost, destroyed or stolen.
However, the Board of Directors or such authorized committee, officer or
officers may require the owner of the allegedly lost, destroyed or stolen
certificate, or such owner's legal representative, to give the corporation a
bond or other adequate security sufficient to indemnify the corporation and its
transfer agent and/or registrar, if any, against any claim that may be made
against it or them on account of such allegedly lost, destroyed or stolen
certificate or the replacement thereof. Said bond or other security shall be in
such amount, on such terms and conditions and, in the case of a bond, with such
surety or sureties as may be acceptable to the Board of Directors or to its duly
appointed and authorized committee or any officer or officers authorized by the
Board of Directors to determine the sufficiency thereof. The requirement of a
bond or other security may be waived in particular cases at the discretion of
the Board of Directors or its duly appointed and authorized committee or any
officer or officers authorized by the Board of Directors so to do.
SECTION 55. ISSUANCE, TRANSFER AND REGISTRATION OF SHARES. The Board of
Directors may make such rules and regulations, not inconsistent with law or with
these bylaws, as it may deem advisable concerning the issuance, transfer and
registration of certificates for shares of the capital stock of the corporation.
The Board of Directors may appoint a transfer agent or registrar of transfers,
or both, and may require all certificates for shares of the corporation to bear
the signature of either or both.
ARTICLE VIII
INSPECTION OF CORPORATE RECORDS
SECTION 56. INSPECTION BY DIRECTORS. Every director shall have the
absolute right at any reasonable time to inspect and copy all books, records,
and documents of every kind of the corporation and any of its subsidiaries and
to inspect the physical properties of the corporation and any of its
subsidiaries. Such inspection may be made by the director in person or by agent
or attorney, and the right of inspection includes the right to copy and make
extracts.
SECTION 57. INSPECTION BY SHAREHOLDERS.
(a) INSPECTION OF CORPORATE RECORDS.
(1) A shareholder or shareholders holding at least five
(5%) percent in the aggregate of the outstanding voting shares of the
corporation or who hold at least one percent of such voting shares and have
filed a Schedule 14B with the United States
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Securities and Exchange Commission relating to the election of directors of the
corporation shall have an absolute right to do either or both of the following:
(i) Inspect and copy the record of shareholders'
names and addresses and shareholdings during usual business hours upon five (5)
business days' prior written demand upon the corporation; or
(ii) Obtain from the transfer agent, if any, for
the corporation, upon five business days' prior written demand and upon the
tender of its usual charges for such a list (the amount of which charges shall
be stated to the shareholder by the transfer agent upon request), a list of the
shareholders' names and addresses who are entitled to vote for the election of
directors and their shareholdings, as of the most recent record date for which
it has been compiled or as of a date specified by the shareholder subsequent to
the date of demand.
(2) The record of shareholders shall also be open to
inspection and copying by any shareholder or holder of a voting trust
certificate at any time during usual business hours upon written demand on the
corporation, for a purpose reasonably related to such holder's interest as a
shareholder or holder of a voting trust certificate.
(3) The accounting books and records and minutes of
proceedings of the shareholders and the Board of Directors and of any committees
of the Board of Directors of the corporation and of each of its subsidiaries
shall be open to inspection, copying and making extracts upon written demand on
the corporation of any shareholder or holder of a voting trust certificate at
any reasonable time during usual business hours, for a purpose reasonably
related to such holder's interests as a shareholder or as a holder of such
voting trust certificate.
(4) Any inspection, copying and making of extracts
under this subsection (a) may be done in person or by agent or attorney.
(b) INSPECTION OF BYLAWS. The original or a copy of these
bylaws shall be kept as provided in Section 45 of these bylaws and shall be open
to inspection by the shareholders at all reasonable times during office hours.
If the principal executive office of the corporation is not in California, and
the corporation has no principal business office in the state of California, a
current copy of these bylaws shall be furnished to any shareholder upon written
request.
SECTION 58. WRITTEN FORM. If any record subject to inspection pursuant
to Section 57 above is not maintained in written form, a request for inspection
is not complied with unless and until the corporation at its expense makes such
record available in written form.
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ARTICLE IX
MISCELLANEOUS
SECTION 59. FISCAL YEAR. Unless otherwise fixed by resolution of the
Board of Directors, the fiscal year of the corporation shall end on the 31st day
of August in each calendar year.
SECTION 60. ANNUAL REPORT.
(a) Subject to the provisions of Section 60(b) below, the
Board of Directors shall cause an annual report to be sent to each shareholder
of the corporation in the manner provided in Section 9 of these bylaws not later
than one hundred twenty (120) days after the close of the corporation's fiscal
year. Such report shall include a balance sheet as of the end of such fiscal
year and an income statement and statement of changes in financial position for
such fiscal year, accompanied by any report thereon of independent accountants
or, if there is no such report, the certificate of an authorized officer of the
corporation that such statements were prepared without audit from the books and
records of the corporation. When there are more than 100 shareholders of record
of the corporation's shares, as determined by Section 605 of the California
Corporations Code, additional information as required by Section 1501(b) of the
California Corporations Code shall also be contained in such report, provided
that if the corporation has a class of securities registered under Section 12 of
the United States Securities Exchange Act of 1934, that Act shall take
precedence. Such report shall be sent to shareholders at least fifteen (15) (or,
if sent by third-class mail, thirty-five (35)) days prior to the next annual
meeting of shareholders after the end of the fiscal year to which it relates.
(b) If and so long as there are fewer than 100 holders of
record of the corporation's shares, the requirement of sending of an annual
report to the shareholders of the corporation is hereby expressly waived.
SECTION 61. RECORD DATE. The Board of Directors may fix a time in the
future as a record date for the determination of the shareholders entitled to
notice of or to vote at any meeting or entitled to receive payment of any
dividend or other distribution or allotment of any rights or entitled to
exercise any rights in respect of any change, conversion or exchange of shares
or entitled to exercise any rights in respect of any other lawful action. The
record date so fixed shall not be more than sixty (60) days nor less than ten
(10) days prior to the date of the meeting nor more than sixty (60) days prior
to any other action or event for the purpose of which it is fixed. If no record
date is fixed, the provisions of Section 15 of these bylaws shall apply with
respect to notice of meetings, votes and consents and the record date for
determining shareholders for any other purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolutions relating
thereto, or the sixtieth (60th) day prior to the date of such other action or
event, whichever is later.
Only shareholders of record at the close of business on the
record date shall be entitled to notice and to vote or to receive the dividend,
distribution or allotment of rights or to exercise the rights, as the case may
be, notwithstanding any transfer of any shares on the books of the corporation
after the record date, except as otherwise provided in the Articles of
Incorporation, by agreement or by law.
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SECTION 62. BYLAW AMENDMENTS. Except as otherwise provided by law or
Section 19 of these bylaws, these bylaws may be amended or repealed by the Board
of Directors or by the affirmative vote of a majority of the outstanding shares
entitled to vote, including, if applicable, the affirmative vote of a majority
of the outstanding shares of each class or series entitled by law or the
Articles of Incorporation to vote as a class or series on the amendment or
repeal or adoption of any bylaw or bylaws; provided, however, after issuance of
shares, a bylaw specifying or changing a fixed number of directors or the
maximum or minimum number or changing from a fixed to a variable board or vice
versa may only be adopted by approval of the outstanding shares as provided
herein.
SECTION 63. CONSTRUCTION AND DEFINITION. Unless the context requires
otherwise, the general provisions, rules of construction, and definitions
contained in the California Corporations Code shall govern the construction of
these bylaws.
Without limiting the foregoing, "shall" is mandatory and "may" is
permissive.
ARTICLE X
INDEMNIFICATION
SECTION 64. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER
AGENTS.
(a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall
indemnify its directors and executive officers to the fullest extent not
prohibited by the California General Corporation Law; provided, however, that
the corporation may limit the extent of such indemnification by individual
contracts with its directors and executive officers; and, provided, further,
that the corporation shall not be required to indemnify any director or
executive officer in connection with any proceeding (or part thereof) initiated
by such person or any proceeding by such person against the corporation or its
directors, officers, employees or other agents unless (i) such indemnification
is expressly required to be made by law, (ii) the proceeding was authorized by
the board of directors of the corporation or (iii) such indemnification is
provided by the corporation, in its sole discretion, pursuant to the powers
vested in the corporation under the California General Corporation Law.
(b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The
corporation shall have the power to indemnify its other officers, employees and
other agents as set forth in the California General Corporation Law.
(c) DETERMINATION BY THE CORPORATION. Promptly after
receipt of a request for indemnification hereunder (and in any event within 90
days thereof) a reasonable, good faith determination as to whether
indemnification of the director or executive officer is proper under the
circumstances because such director or executive officer has met the applicable
standard of care shall be made by:
(1) a majority vote of a quorum consisting of directors
who are not parties to such proceeding;
20
<PAGE> 24
(2) if such quorum is not obtainable, by independent
legal counsel in a written opinion; or
(3) approval or ratification by the affirmative vote of
a majority of the shares of this corporation represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute at least a majority of the required quorum) or by written
consent of a majority of the outstanding shares entitled to vote; where in each
case the shares owned by the person to be indemnified shall not be considered
entitled to vote thereon.
(d) GOOD FAITH.
(1) For purposes of any determination under this bylaw,
a director or executive officer shall be deemed to have acted in good faith and
in a manner he reasonably believed to be in the best interests of the
corporation and its shareholders, and, with respect to any criminal action or
proceeding, to have had no reasonable cause to believe that his conduct was
unlawful, if his action is based on information, opinions, reports and
statements, including financial statements and other financial data, in each
case prepared or presented by:
(i) one or more officers or employees of the
corporation whom the director or executive officer believed to be reliable and
competent in the matters presented;
(ii) counsel, independent accountants or other
persons as to matters which the director or executive officer believed to be
within such person's professional competence; and
(iii) with respect to a director, a committee of
the Board upon which such director does not serve, as to matters within such
committee's designated authority, which committee the director believes to merit
confidence; so long as, in each case, the director or executive officer acts
without knowledge that would cause such reliance to be unwarranted.
(2) The termination of any proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
equivalent shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in the best
interests of the corporation and its shareholders or that he had reasonable
cause to believe that his conduct was unlawful.
(3) The provisions of this paragraph (d) shall not be
deemed to be exclusive or to limit in any way the circumstances in which a
person may be deemed to have met the applicable standard of conduct set forth by
the California General Corporation Law.
(e) EXPENSES. The corporation shall advance, prior to the
final disposition of any proceeding, promptly following request therefor, all
expenses incurred by any director or executive officer in connection with such
proceeding upon receipt of an undertaking by or on behalf of such person to
repay said amounts if it shall be determined ultimately that such person is not
entitled to be indemnified under this bylaw or otherwise.
21
<PAGE> 25
Notwithstanding the foregoing, unless otherwise determined
pursuant to paragraph (f) of this bylaw, no advance shall be made by the
corporation if a determination is reasonably and promptly made by the Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to the proceeding (or, if no such quorum exists, by independent legal
counsel in a written opinion) that the facts known to the decision-making party
at the time such determination is made demonstrate clearly and convincingly that
such person acted in bad faith or in a manner that such person did not believe
to be in the best interests of the corporation and its shareholders.
(f) ENFORCEMENT. Without the necessity of entering into an
express contract, all rights to indemnification and advances to directors and
executive officers under this bylaw shall be deemed to be contractual rights and
be effective to the same extent and as if provided for in a contract between the
corporation and the director or executive officer. Any right to indemnification
or advances granted by this bylaw to a director or executive officer shall be
enforceable by or on behalf of the person holding such right in the forum in
which the proceeding is or was pending or, if such forum is not available or a
determination is made that such forum is not convenient, in any court of
competent jurisdiction if (i) the claim for indemnification or advances is
denied, in whole or in part, or (ii) no disposition of such claim is made within
ninety (90) days of request therefor. The claimant in such enforcement action,
if successful in whole or in part, shall be entitled to be paid also the expense
of prosecuting his claim. The corporation shall be entitled to raise as a
defense to any such action that the claimant has not met the standards of
conduct that make it permissible under the California General Corporation Law
for the corporation to indemnify the claimant for the amount claimed. Neither
the failure of the corporation (including its board of directors, independent
legal counsel or its shareholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he has met the applicable standard of conduct set
forth in the California General Corporation Law, nor an actual determination by
the corporation (including its board of directors, independent legal counsel or
its shareholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that claimant
has not met the applicable standard of conduct.
(g) NON-EXCLUSIVITY OF RIGHTS. To the fullest extent
permitted by the corporation's Articles of Incorporation and the California
General Corporation Law, the rights conferred on any person by this bylaw shall
not be exclusive of any other right that such person may have or hereafter
acquire under any statute, provision of the Articles of Incorporation, bylaws,
agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding office. The corporation is specifically authorized to enter into
individual contracts with any or all of its directors, officers, employees or
agents respecting indemnification and advances, to the fullest extent permitted
by the California General Corporation Law and the corporation's Articles of
Incorporation.
(h) SURVIVAL OF RIGHTS. The rights conferred on any person
by this bylaw shall continue as to a person who has ceased to be a director or
executive officer and shall inure to the benefit of the heirs, executors and
administrators of such a person.
22
<PAGE> 26
(i) INSURANCE. The corporation, upon approval by the board
of directors, may purchase insurance on behalf of any person required or
permitted to be indemnified pursuant to this bylaw.
(j) AMENDMENTS. Any repeal or modification of this bylaw
shall only be prospective and shall not affect the rights under this bylaw in
effect at the time of the alleged occurrence of any action or omission to act
that is the cause of any proceeding against any agent of the corporation.
(k) EMPLOYEE BENEFIT PLANS. The corporation shall indemnify
the directors and officers of the corporation who serve at the request of the
corporation as trustees, investment managers or other fiduciaries of employee
benefit plans to the fullest extent permitted by the California General
Corporation Law.
(l) SAVING CLAUSE. If this bylaw or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the corporation shall nevertheless indemnify each director and executive officer
to the fullest extent permitted by any applicable portion of this bylaw that
shall not have been invalidated, or by any other applicable law.
(m) CERTAIN DEFINITIONS. For the purposes of this bylaw,
the following definitions shall apply:
(1) The term "PROCEEDING" shall be broadly construed
and shall include, without limitation, the investigation, preparation,
prosecution, defense, settlement and appeal of any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative,
arbitrative or investigative.
(2) The term "EXPENSES" shall be broadly construed and
shall include, without limitation, court costs, attorneys' fees, witness fees,
fines, amounts paid in settlement or judgment and any other costs and expenses
of any nature or kind incurred in connection with any proceeding, including
expenses of establishing a right to indemnification under this bylaw or any
applicable law.
(3) The term the "CORPORATION" shall include, in
addition to the resulting corporation, any constituent corporation (including
any constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees or agents, so that any person who
is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this bylaw with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
(4) References to a "DIRECTOR," "OFFICER," "EMPLOYEE"
or "AGENT" of the corporation shall include, without limitation, situations
where such person is or was serving at the request of the corporation as a
director, officer, employee, trustee or agent of another corporation,
partnership, joint venture, trust or other enterprise.
23
<PAGE> 27
ARTICLE XI
LOANS OF OFFICERS AND OTHERS
SECTION 65. CERTAIN CORPORATE LOANS AND GUARANTIES. If the corporation
has outstanding shares held of record by 100 or more persons on the date of
approval by the Board of Directors, the corporation may make loans of money or
property to, or guarantee the obligations of, any officer of the corporation or
its parent or any subsidiary, whether or not a director of the corporation or
its parent or any subsidiary, or adopt an employee benefit plan or plans
authorizing such loans or guaranties, upon the approval of the Board of
Directors alone, by a vote sufficient without counting the vote of any
interested director or directors, if the Board of Directors determines that such
a loan or guaranty or plan may reasonably be expected to benefit the
corporation. Notwithstanding the foregoing, the corporation shall have the power
to make loans permitted by the California Corporations Code.
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ODWALLA
INC.'s FINANCIAL STATEMENT FOR THE THIRTY NINE WEEKS ENDED MAY 29, 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> 9-MOS
<FISCAL-YEAR-END> AUG-28-1999
<PERIOD-START> AUG-30-1998
<PERIOD-END> MAY-29-1999
<CASH> 4,124
<SECURITIES> 5,035
<RECEIVABLES> 6,914
<ALLOWANCES> 634
<INVENTORY> 3,326
<CURRENT-ASSETS> 21,241
<PP&E> 20,709
<DEPRECIATION> 8,447
<TOTAL-ASSETS> 35,969
<CURRENT-LIABILITIES> 12,875
<BONDS> 674
0
7,300
<COMMON> 29,749
<OTHER-SE> (14,629)
<TOTAL-LIABILITY-AND-EQUITY> 35,969
<SALES> 50,798
<TOTAL-REVENUES> 50,798
<CGS> 26,721
<TOTAL-COSTS> 26,721
<OTHER-EXPENSES> 25,753
<LOSS-PROVISION> 293
<INTEREST-EXPENSE> 214
<INCOME-PRETAX> (1,852)
<INCOME-TAX> (277)
<INCOME-CONTINUING> (1,575)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,575)
<EPS-BASIC> (.31)
<EPS-DILUTED> (.31)
</TABLE>
