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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
ODWALLA
[GRAPHIC]
(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 27, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------
Commission file number 0-23036
ODWALLA, INC.
(Exact name of registrant as specified in its charter)
California 77-0096788
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
120 Stone Pine Road, Half Moon Bay, CA 94019
(Address and zip code of principal executive offices)
(650) 726-1888
(Registrant's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check (check) 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 (check) 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 11,031,985 shares
-------------------------- -----------------
(Class) (Outstanding at July 3, 2000)
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ODWALLA, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MAY 27, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of August 28, 1999
and May 27, 2000.................................................... 3
Consolidated Statements of Operations for the thirteen week and
thirty-nine week periods ended May 29, 1999
and May 27, 2000.................................................... 4
Consolidated Statements of Cash Flows for the thirty-nine week
periods ended May 29, 1999 and May 27, 2000......................... 5
Notes to Consolidated Financial Statements.......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......... 22
Part II. Other Information
Item 1. Legal Proceedings................................................... 23
Item 4. Results of Votes of Security Holders................................ 23
Item 6. Exhibits and Reports on Form 8-K.................................... 24
</TABLE>
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[GRAPHIC]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ODWALLA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 28, MAY 27,
1999 2000
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents .................................................. $ 2,581 $ 3,383
Short-term investments ..................................................... 4,788 2,517
Trade accounts receivable, less allowance for doubtful
accounts of $631 and $743 .............................................. 6,072 10,551
Inventories ................................................................ 3,718 5,285
Prepaid expenses and other current assets .................................. 1,530 3,983
Deferred tax asset, current ................................................ 1,358 577
------------ ------------
Total current assets ................................................ 20,047 26,296
------------ ------------
Plant, property and equipment, net .............................................. 12,877 19,395
------------ ------------
Other assets
Goodwill, net .............................................................. 1,117 31,280
Covenants not to compete, net .............................................. 497 420
Deferred tax asset, non-current ............................................ 520 640
Other noncurrent assets .................................................... 247 542
------------ ------------
Total other assets .................................................. 2,381 32,882
------------ ------------
Total assets .................................................................... $ 35,305 $ 78,573
=========== ===========
Current liabilities
Accounts payable ........................................................... $ 6,876 $ 8,639
Accrued payroll and related items .......................................... 1,142 2,674
Line of credit ............................................................. 2,319 1,950
Other accruals ............................................................. 2,126 3,319
Current maturities of capital lease obligations ............................ 28 218
Current maturities of long-term debt ....................................... 172 221
------------ ------------
Total current liabilities ........................................... 12,663 17,021
Capital lease obligations, less current maturities .............................. 15 378
Long-term debt, less current maturities ......................................... 673 503
Other long-term liabilities ..................................................... -- 533
------------ ------------
Total liabilities ............................................................... 13,351 18,435
---------- ----------
Mandatorily redeemable and convertible preferred stock
Series A, no par value, shares authorized, 5,000,000; shares issued and
outstanding, 1,033,333 at August 28, 1999. Liquidation preference
minimum, $8,600,000 at August 28, 1999 ................................. 7,505 --
------------ ------------
Shareholders' equity
Common stock, no par value, shares authorized, 15,000,000; shares
issued and outstanding, 5,125,000 and 11,032,000 ....................... 29,750 72,948
Additional paid-in capital ................................................. 62 --
Accumulated deficit ........................................................ (15,363) (12,810)
------------- -------------
Total shareholders' equity ...................................................... 14,449 60,138
------------ ------------
Total liabilities and shareholders' equity ...................................... $ 35,305 $ 78,573
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
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[GRAPHIC]
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
--------------------------- ----------------------------
MAY 29, MAY 27, MAY 29, MAY 27,
1999 2000 1999 2000
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales ........................................ $ 19,124 $ 25,682 $ 50,798 $ 60,541
Cost of sales .................................... 10,076 12,688 26,721 31,228
----------- ----------- ---------- ----------
Gross profit ................................. 9,048 12,994 24,077 29,313
---------- ---------- ---------- ---------
Operating expenses
Sales and distribution ....................... 6,455 8,328 17,635 20,827
Marketing .................................... 806 726 2,375 1,858
General and administrative ................... 2,089 2,638 5,743 6,441
---------- ---------- ---------- ---------
Total operating expenses ............. 9,350 11,692 25,753 29,126
---------- ---------- ---------- ---------
Income (loss) from operations .................... (302) 1,302 (1,676) 187
Other income (expense)
Proceeds from insurance settlement, net of
legal fees ................................. -- 5,458 -- 5,458
Series A preferred stock inducement expense .. -- (1,587) -- (1,587)
Interest expense, net ........................ (23) (90) (167) (137)
Other ........................................ (3) 35 (9) 31
----------- ---------- ----------- ---------
Income (loss) before income taxes ................ (328) 5,118 (1,852) 3,952
Income tax benefit (expense) ..................... 49 (1,006) 277 (831)
---------- ----------- ---------- ----------
Net income (loss) ................................ (279) 4,112 (1,575) 3,121
Preferred stock dividend ......................... -- (142) -- (568)
---------- ----------- ---------- ----------
Net income (loss) applicable to common
shareholders ................................. $ (279) $ 3,970 $ (1,575) $ 2,553
=========== ========== =========== =========
Basic net income (loss) applicable to
common shareholders per share ................ $ (0.05) $ 0.59 $ (0.31) $ 0.45
========== ========== =========== =========
Shares used in per share amounts ................. 5,104 6,710 5,077 5,654
========== ========== ========== =========
Diluted net income (loss) applicable to
common shareholders per share ................ $ (0.05) $ 0.58 $ (0.31) $ 0.45
========== ========== =========== =========
Shares used in per share amounts ................. 5,104 6,796 5,077 5,704
========== ========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements
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[GRAPHIC]
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
---------------------------
MAY 29, MAY 27,
1999 2000
---------- ----------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) ................................................... $ (1,575) $ 3,121
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ................................. 1,747 2,293
Deferred taxes ................................................ (290) 821
Preferred stock inducement expense ............................ -- 1,587
Gain from disposal of assets .................................. 2 --
Changes in assets and liabilities:
Trade accounts receivable .................................. (788) (1,770)
Inventories ................................................ (283) (179)
Prepaid expenses and other current assets .................. (366) (2,367)
Other noncurrent assets .................................... 36 (130)
Accounts payable ........................................... 1,202 (2,168)
Accrued payroll and related items .......................... 367 691
Other accruals ............................................. (1,095) (536)
Other long-term liabilities ................................ -- 523
---------- --------
Net cash provided by (used in) operating activities .................... (1,043) 1,886
----------- --------
Cash flows from investing activities
Capital expenditures ................................................ (1,135) (3,852)
Proceeds from sale of assets ........................................ 426 --
Net cash costs of Fresh Samantha acquisition ........................ -- (1,100)
Proceeds from sale (purchase) of short-term investments ............. (5,035) 2,271
------------ --------
Net cash used in investing activities .................................. (5,744) (2,681)
----------- ---------
Cash flows from financing activities
Principal payments under long-term debt and capital leases .......... (596) (209)
Net borrowings (payments) under line of credit ...................... 766 (369)
Payment of debt acquired from Fresh Samantha ........................ -- (3,827)
Sale of preferred stock ............................................. 7,300 -
Sale of common stock ................................................ 250 6,002
---------- --------
Net cash provided by financing activities .............................. 7,720 1,597
---------- --------
Net increase in cash and cash equivalents .............................. 933 802
Cash and cash equivalents, beginning of period ......................... 3,191 2,581
---------- --------
Cash and cash equivalents, end of period ............................... $ 4,124 $ 3,383
========== ========
</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 subsidiaries ("Odwalla" or "Company") at May 27, 2000 and
the related consolidated statements of operations and of cash flows for the
thirteen week and thirty-nine week periods ended for each of May 29, 1999 and
May 27, 2000 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 28, 1999 appearing in Odwalla's
1999 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.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
August 28, May 27,
1999 2000
---------- --------------
<S> <C> <C>
Raw materials .................................... $ 2,433 $ 3,144
Packaging supplies and other ..................... 629 1,048
Finished product ................................. 656 1,093
---------- ------------
$ 3,718 $ 5,285
========== ============
</TABLE>
4. PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
August 28, May 27,
1999 2000
----------- --------------
<S> <C> <C>
Land ............................................. $ 618 $ 618
Buildings and building improvements .............. 7,220 7,244
Leasehold improvements ........................... 1,397 2,270
Machinery and equipment .......................... 7,485 11,588
Vehicles ......................................... 625 1,065
Data processing equipment ........................ 2,294 3,526
Other ............................................ 1,986 3,708
---------- ------------
21,625 30,019
Less accumulated depreciation and amortization ... (8,748) (10,624)
---------- ------------
$ 12,877 $ 19,395
========== ============
</TABLE>
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ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 and warrants
under the treasury stock method. In loss periods, basic and dilutive loss per
share is identical since the impact of equivalent shares is anti-dilutive.
The following table shows the computation of basic and diluted earnings
per share, in thousands except per share data:
<TABLE>
<CAPTION>
THIRTY-NINE
THIRTEEN WEEKS ENDED WEEKS ENDED
--------------------- --------------------
MAY 29, MAY 27, MAY 29, MAY 27,
-------- ------- -------- -------
1999 2000 1999 2000
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Basic:
Weighted average common shares outstanding .. 5,104 6,710 5,077 5,654
Net income (loss) ........................... $ (279) $ 4,112 $(1,575) $ 3,121
Net income (loss) attributable to common
shareholders ............................... $ (279) $ 3,970 $(1,575) $ 2,553
Per share amount, attributable to common
shareholders .............................. $ (0.05) $ 0.59 $ (0.31) $ 0.45
Diluted:
Weighted average common shares outstanding .. 5,104 6,710 5,077 5,654
Shares used in per share amounts ............ 5,104 6,796 5,077 5,704
Net income (loss) ........................... $ (279) $ 4,112 $(1,575) $ 3,121
Net income (loss) attributable to common
shareholders ............................... $ (279) $ 3,970 $(1,575) $ 2,553
Per share amount, attributable to common
shareholders .............................. $ (0.05) $ 0.58 $ (0.31) $ 0.45
</TABLE>
Holders of Series A Preferred Stock ("Series A Stock") were entitled to
a receive an 8% annual dividend which was payable in either cash or additional
Series A Stock, at our election. The dividend was payable semi-annually. For the
thirteen and the thirty-nine week periods ended May 27, 2000, we adjusted net
income by $142,000 and $568,000 per period to arrive at net income attributable
to common shareholders. In connection with the purchase of Fresh Samantha, as
described in Note 8, the Series A Stock was converted into common stock as of
the effective date of the Fresh Samantha acquisition.
6. RECLASSIFICATION
To conform with new classifications in our fiscal 2000 financial
statement presentation, we reclassified certain fiscal 1999 expenses. The
reclassification was an increase ($55,000 and $159,000 for the thirteen and
thirty-nine week periods ended May 29, 1999) in fiscal 1999 sales and
distribution costs and a corresponding decrease in general and administrative
expenses.
7
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ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. INSURANCE CLAIM SETTLEMENT
On April 12, 2000, we entered into a Mutual Release and Settlement
Agreement with New Hampshire Insurance Company regarding the business
interruption insurance claim we filed following the recall in October 1996.
Under the Mutual Release and Settlement Agreement, New Hampshire Insurance
Company agreed to pay us $6.5 million in two installments on April 20, 2000 and
June 9, 2000. In connection with the settlement, we dismissed our lawsuit
against New Hampshire Insurance Company filed on May 21, 1999 in the United
States District Court for the Eastern District of California in Fresno,
California. The proceeds from the insurance settlement, net of legal fees of
$1.0 million, was recorded as other income.
8. ACQUISITION AND RELATED MATTERS
On February 2, 2000, Odwalla announced a definitive agreement to merge
with Fresh Samantha, Inc. At the annual shareholders meeting on April 25, 2000,
Odwalla's shareholders approved the acquisition and other matters necessary to
complete the transaction. On May 2, 2000, we completed our acquisition of Fresh
Samantha. We accounted for the acquisition of Fresh Samantha as a purchase for
accounting purposes and, accordingly, the purchase price has been allocated to
the tangible and intangible assets acquired and liabilities assumed on the basis
of their fair values on the acquisition date, May 2, 2000. The Statement of
Operations includes the results of Fresh Samantha, a wholly owned subsidiary,
since the acquisition.
The total purchase price of approximately $28.8 million consisted of
the issuance of 3,612,122 shares of Odwalla common stock with an estimated fair
value of $27.5 million plus transaction costs of approximately $1.3 million,
consisting principally of professional fees. The purchase price of $28.8 million
plus $1.7 million in net assumed liabilities resulted in total preliminary
goodwill related to the Fresh Samantha acquisition of $30.5 million. We intend
to evaluate whether a portion of the preliminary goodwill should be allocated to
other intangible assets. The fair value of the common stock issued was
determined using the average closing market price of Odwalla's common stock for
several days before and after the merger announcement. The goodwill is being
amortized over a twenty year period.
The following unaudited pro forma financial information shows pro forma
net revenue, net income (loss) and net income (loss) per share as if the
acquisition had occurred at the beginning of each of the periods presented. The
pro forma information includes the amortization of goodwill. The pro forma
information is not necessarily indicative of operating results that might have
been if the acquisition had taken place as of the beginning of each of the
periods presented and may not be indicative of future operating results.
<TABLE>
<CAPTION>
THIRTY-NINE
THIRTEEN WEEKS ENDED WEEKS ENDED
--------------------- --------------------
MAY 29, MAY 27, MAY 29, MAY 27,
1999 2000 1999 2000
---------- -------- -------- -------
In thousands, except per share amounts
<S> <C> <C> <C> <C>
Revenues .................................. $ 27,487 $33,601 $ 69,809 $91,662
Net income (loss) ......................... (2,070) 3,022 (5,194) (2,202)
Income (loss) per share
Basic ............................. $ (0.19) $ 0.27 (0.47) $ (0.20)
Diluted ........................... $ (0.19) $ 0.27 (0.47) $ (0.20)
Weighted average shares
Basic ............................. 11,032 11,032 11,032 11,032
Diluted ........................... 11,032 11,118 11,032 11,032
</TABLE>
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ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We also issued shares of our common stock to three funds managed by
Wasserstein Perella Group, Inc. and to Catterton-Simon Partners III, L.P.
pursuant to a Stock Purchase Agreement dated as of February 11, 2000, and
amended as of April 25, 2000, among Odwalla, U.S. Equity Partners, L.P.
(representing the Wasserstein Perella funds), and Catterton-Simon Partners. We
issued 800,641 shares of our common stock to the Wasserstein Perella funds on
May 2, 2000 for an aggregate purchase price of $5.0 million. We also agreed,
pursuant to the Stock Purchase Agreement, to issue an additional 160,128 shares
of our common stock to Catterton-Simon Partners for an aggregate purchase price
of $1.0 million, which was completed in late May 2000. In addition, under a
Preferred Stock Conversion Agreement, dated as of February 11, 2000, between
Odwalla and Catterton-Simon Partners, we issued 1,333,333 shares of our common
stock to Catterton-Simon Partners in exchange for 1,074,666 shares of Odwalla's
Series A Preferred Stock, representing all of the outstanding shares of such
stock, held by Catterton-Simon Partners and cancellation of a warrant to
purchase 75,000 shares of Odwalla's common stock held by Catterton-Simon
Partners. The issuance of common stock to Catterton-Simon Partners as an
inducement for early conversion was approved by Odwalla's shareholders on April
25, 2000. During the third quarter of fiscal 2000, we recorded an expense of
$1.6 million to reflect the value of the 258,667 additional shares issued to
induce Catterton-Simon to convert the Series A Stock that they held and to
cancel the outstanding warrant that they held. The inducement shares were valued
using the closing market price for our common stock at the date the shareholders
approved the issuance.
In September 1999, we entered into a revolving credit agreement with a
new lender and paid the balance then outstanding under our prior line of credit
arrangement. The credit agreement provides a revolving credit facility up to
$5.0 million. The first $2.0 million of borrowings do not require separate
borrowing base reporting. Borrowings over $2.0 million and up to $5.0 million
are limited to 80% of eligible accounts receivable. The credit agreement defines
eligible accounts receivable which generally represents all trade accounts
receivable less delinquent balances. Interest is payable monthly at either the
prime interest rate plus 1% or the Eurodollar rate plus 3.5%. The interest rate
to be incurred is selected by Odwalla at the inception of each loan and may be
changed during the period in which the borrowed amount is outstanding in
accordance with provisions included in the credit agreement. The initial term of
the credit agreement was for three years.
In late April, 2000, the credit facility was increased from $5.0
million to $10.0 million in connection with the close of the Fresh Samantha
acquisition. The terms of the amended credit facility, which has a three year
term, are substantially the same as the original credit facility. As before, all
of our consolidated assets are pledged as collateral under the credit agreement.
We are also required to meet certain covenants, including maintenance of certain
financial, leverage, and debt service coverage ratios, and certain tangible net
worth. The credit agreement also contains certain business restrictions,
including the ability to borrow additional funds, limitations on capital
expenditures in excess of certain amounts, restrictions on the payment of cash
dividends, sale or purchase of Company stock, ability to encumber or sell
Company assets, and limitations on other business transactions without prior
approval from the lender.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements
about future financial results, future business changes and other events that
haven't yet occurred. For example, statements like "we expect," "we anticipate"
or "we believe" are forward-looking statements. Investors should be aware that
actual results may differ materially from our expressed expectations. 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 Quarterly
Report on Form 10-Q. Investors should read all of these risks carefully.
Investors should also refer to Odwalla's Annual Report on Form 10-K for the year
ended August 28, 1999, including our financial statements and related notes
included in that Annual Report on Form 10-K, the proxy statement for the annual
shareholders meeting held on April 25, 2000, 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 all-natural, super-premium refrigerated
juice company in the country, serving selected markets in the Western, Eastern
Seaboard, and Midwest regions of the United States with two brands, Odwalla and
Fresh Samantha. When we discuss Odwalla, we are including both brands unless we
specify otherwise. Odwalla's complete product line consists of more than 45
all-natural, super-premium juices and smoothies (including single-flavor and
blended fruit- and vegetable-based juice products), all-natural meal replacement
and dairy-free shakes, natural spring water, all-natural food bars and frozen
fruit bars. Our beverage product line appeals to many consumers because of the
superior taste of minimally processed beverages and greater nutritional value
compared to juice from concentrate or with artificial flavors.
We want to be the leading nourishment company in our existing and
future markets. We seek to achieve this objective by leading the industry in
beverage and other food knowledge, optimizing quality through sourcing and
production, controlling product access and distribution from production through
retail, artful presentation, growing through geographic and product line
expansion, leveraging our information systems, interacting with consumers and
living our vision.
Odwalla's sourcing procedures and production methods enable us to
create products with high nutritional and flavor quality. The distribution of
our products through both our own and other direct-store-delivery 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 over
5,000 retail locations, including supermarkets, specialty retailers, natural
food stores, warehouse outlets, convenience stores and food service operators
through our direct-store-delivery 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.
Odwalla products are currently sold in over thirty states. Our
all-natural food bars are available in additional states and can also be
purchased through our Web site at odwalla.com.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
ACQUISITION OF FRESH SAMANTHA
On February 2, 2000, Odwalla announced a definitive agreement to merge
with Fresh Samantha, Inc. Fresh Samantha manufactures and distributes
all-natural super-premium refrigerated juices. Its product line consists of
approximately 20 blends of juices, depending on the season, which are
distributed to selected markets along the East Coast from Maine to Florida from
a single production facility in Saco, Maine. Certain of the citrus juices sold
by Fresh Samantha are co-packed by vendors and sold under the Fresh Samantha
label. Fresh Samantha has ten regional distribution facilities where finished
product is stored for local distribution. Fresh Samantha's products include
classic juices, including orange juice and grapefruit juice, smoothies and other
nutritionally fortified juice products. Fresh Samantha sales for the year ended
October 1999 were $32.2 million. At the effective date of the merger, Doug
Levin, chief executive officer and a founder of Fresh Samantha, became President
of Odwalla.
At the annual shareholders meeting on April 25, 2000, Odwalla's
shareholders approved the acquisition and other matters necessary to complete
the transaction. On May 2, 2000, we completed our acquisition of Fresh Samantha.
We accounted for the acquisition of Fresh Samantha as a purchase for accounting
purposes and, accordingly, the purchase price has been allocated to the tangible
and intangible assets acquired and liabilities assumed on the basis of their
fair values on the acquisition date. The Statement of Operations includes the
results of Fresh Samantha, a wholly owned subsidiary, since the acquisition.
The total purchase price of approximately $28.8 million consisted of
the issuance of 3,612,122 shares of Odwalla common stock with an estimated fair
value of $27.5 million plus transaction costs of approximately $1.3 million,
consisting principally of professional fees. The purchase price of $28.8 million
plus $1.7 million in net assumed liabilities resulted in total preliminary
goodwill related to the Fresh Samantha acquisition of $30.5 million. We intend
to evaluate whether a portion of the preliminary goodwill should be allocated to
other intangible assets. The goodwill is being amortized over a twenty year
period. The fair value of the common stock issued was determined using the
average closing market price of Odwalla's common stock for several days before
and after the merger announcement.
We also issued shares of our common stock to three funds managed by
Wasserstein Perella Group, Inc. and to Catterton-Simon Partners III, L.P.
pursuant to a Stock Purchase Agreement dated as of February 11, 2000, and
amended as of April 25, 2000, among Odwalla, U.S. Equity Partners, L.P.
(representing the Wasserstein Perella funds), and Catterton-Simon Partners. We
issued 800,641 shares of our common stock to the Wasserstein Perella funds for
an aggregate purchase price of $5.0 million. We also agreed, pursuant to the
Stock Purchase Agreement, to issue an additional 160,128 shares of our common
stock to Catterton-Simon Partners for an aggregate purchase price of $1.0
million, which was completed in late May 2000. In addition, under a Preferred
Stock Conversion Agreement, dated as of February 11, 2000, between Odwalla and
Catterton-Simon Partners, we issued 1,333,333 shares of our common stock to
Catterton-Simon Partners in exchange for 1,074,666 shares of Odwalla's Series A
Preferred Stock, representing all of the outstanding shares of such stock, held
by Catterton-Simon Partners and cancellation of a warrant to purchase 75,000
shares of Odwalla's common stock held by Catterton-Simon Partners. The issuance
of common stock to Catterton-Simon Partners as an inducement for early
conversion was approved by Odwalla's shareholders on April 25, 2000. During the
third quarter of fiscal 2000, we recorded an expense of $1.6 million to reflect
the value of the 258,667 additional shares issued to induce Catterton-Simon to
convert the Series A Stock that they held and to cancel the outstanding warrant
that they held. The inducement shares were valued using the closing market price
for our common stock at the date the shareholders approved the issuance.
In connection with the acquisition, we also increased our credit
facility as discussed in the Liquidity and Capital Resources section on page 15.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
RESULTS OF OPERATIONS
The following table presents, as a percentage of net sales, certain
statements of operations data for the thirteen week and thirty-nine week periods
ended for each of May 29, 1999 and May 27, 2000. These operating results are not
necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
----------------------- ------------------------
MAY 29, MAY 27, MAY 29, MAY 27,
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................ 52.7 49.4 52.6 51.6
-------- -------- -------- --------
Gross margin ............................. 47.3 50.6 47.4 48.4
Operating expenses
Sales and distribution ................ 33.8 32.4 34.7 34.4
Marketing ............................. 4.2 2.8 4.7 3.1
General and administrative ............ 10.9 10.3 11.3 10.6
-------- -------- -------- --------
Income (loss) from operations ............ (1.6) 5.1 (3.3) 0.3
Insurance settlement ..................... -- 21.2 -- 9.0
Series A stock inducement expense ........ -- (6.2) -- (2.6)
Interest and other income (expense), net.. (0.1) (0.2) (0.3) (0.2)
Income tax benefit (expense) ............. 0.2 (3.9) 0.5 (1.4)
-------- -------- -------- --------
Net income (loss) ........................ (1.5)% 16.0% (3.1)% 5.1%
======== ======== ======== ========
</TABLE>
NET SALES. Net beverage and bar sales for the third quarter of fiscal
2000 increased 35.0% to $25.6 million compared to $19.0 million in the third
quarter of fiscal 1999. By-product sales were approximately $30,000 in the third
quarter of fiscal 2000 compared to $130,000 for the third quarter of fiscal
1999. The decrease in by-product sales resulted from the sale of our small
by-product operation in late fiscal 1999. Total net sales for the third quarter
of fiscal 2000 increased 34.3% to $25.7 million compared to $19.1 million for
the same period last year. The sales growth this quarter for the Odwalla brand
only was 13.2%. The remaining beverage and bar sales growth results from four
weeks of Fresh Samantha brand sales that had not been included in the prior
fiscal year.
Our sales growth rate this quarter was about the same for both our
direct-store-delivery and our distributor business. Total sales in our newest
markets, which include the Midwest, Mid-Atlantic and Atlanta markets, were about
9% of beverage and bar sales, excluding Fresh Samantha brand sales, and
represent a significant percentage increase from the third quarter of fiscal
1999 as we were in the early stages of selling in some of the newer markets at
that time. 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. With a few exceptions, the Fresh
Samantha brand has not historically been sold through distributors. We expect to
supplement the Eastern Seaboard direct-store-delivery system with distributors
during the next year, which may impact net sales growth percentages.
Net beverage and bar sales for the first thirty-nine weeks of fiscal
2000 increased 20.2% to $60.4 million compared to $50.3 million for the same
period last year. By-product sales were approximately $123,000 this year
compared to $531,000 for the first thirty-nine weeks of fiscal 1999. As noted
above, we sold our by-product operation in late fiscal 1999. Total net sales for
the first thirty-nine weeks of fiscal 2000 were $60.5 million, an increase of
19.2% over the $50.8 million of net sales in the same period last year. The
sales growth for the first thirty-nine weeks this year for the Odwalla brand
beverage and bar sales was 12.0%. The remaining beverage and bar sales growth
results from four weeks of Fresh Samantha brand sales that had not been included
in the prior fiscal year. Excluding the impact of the Fresh Samantha brand
sales, our sales growth for the first thirty-nine weeks of the year was about
equal for our direct-store-delivery and our distributor business and was
strongest in our new markets and most established markets. Food bar sales
increased about 12%
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
during the first thirty-nine weeks of fiscal 2000 compared to the same period in
the prior year due to increased geographic distribution and sales promotions
during the first half of fiscal 2000. Food bar sales represent less than 5% of
net sales.
On September 1, 1999, we introduced new branded, custom-designed 450
milliliter and 325 milliliter bottles made from recyclable, HDPE plastic. Our
new bottle retains fresh fruit flavor notes better than our previous bottle and
better than the bottles commonly used by our competitors. It also has a
tamper-resistant, screw-on cap, which allows consumers to easily reseal their
beverage while drinking Odwalla on-the-go. The characteristics of the new bottle
also extend the shelf life of our products. At the same time, we began using a
new bottling line designed to accommodate our new bottles. During the first
quarter of fiscal 2000, we experienced problems in producing beverage products
to meet sales orders during the initial introduction period. We also experienced
unexpected issues that caused some products to ferment and, ultimately, caused
some bottles to bloat. These issues disrupted a consistent flow of product
during the first half of the first quarter of fiscal 2000. We believe that these
issues negatively impacted sales in the first quarter.
COST OF SALES. Cost of sales increased to $12.7 million in the third
quarter of fiscal 2000 compared to $10.1 million for the same period during
fiscal 1999. Gross margin as a percentage of net sales was 50.6% in the third
quarter of fiscal 2000, an increase from 47.3% in the third quarter of fiscal
1999. The gross margin increase for the third quarter of fiscal 2000 compared to
the prior year resulted from (a) a normalization of citrus costs following the
December 1998 citrus freeze discussed below despite an increase in apple costs,
(b) better efficiencies in labor and packaging yields due to the new bottling
line, offset by (c) additional packaging costs due to the new bottle and the
increased costs of the new bottling line. With the Fresh Samantha acquisition,
we now have two production facilities. The impact on gross margin of the Fresh
Samantha facility in Saco, Maine was not significant in the third quarter as the
cost structure of both facilities is similar.
Cost of sales for the first thirty-nine weeks of fiscal 2000 were $31.2
million compared to $26.7 million in the same period last year. Gross margin as
a percentage of net sales was 48.4% for the first thirty-nine weeks of this year
compared to 47.4% in the prior year.
In late December 1998, the San Joaquin Valley in central California
experienced a citrus freeze that seriously damaged the navel orange crop. Other
parts of California were also affected, but to a significantly lesser extent.
The freeze also impacted the California Valencia orange crop and other citrus,
which extended the impact throughout calendar 1999 and into January 2000. The
immediate effect 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. The freeze also caused us to be more reliant on citrus sources farther
from our production facility than in prior years, which caused an increase in
freight cost. As a result of the citrus freeze, we became more dependent upon
alternative and more expensive sources of fresh supply than in prior years. We
used our extensive network of grower contacts to maintain our supply of fresh
ingredients.
Gross margin increased primarily due to the net effect of (a) the end
of the impact of the citrus freeze discussed above, (b) the increase in the cost
of apples, (c) the additional costs due to the issues involved with our new
bottle introduction in the first quarter of fiscal 2000, as noted above, as we
worked through the production challenges of the new bottling line, and (d) the
better efficiencies in labor and packaging yields from the new bottling line in
the third quarter of fiscal 2000 offset by the additional packaging costs.
SALES AND DISTRIBUTION. Sales and distribution expenses increased to
$8.3 million in the third quarter of fiscal 2000 compared to $6.5 million in the
third quarter of fiscal 1999, and decreased to 32.4% of net sales compared to
33.8% in the third quarter last year. The increase in absolute dollars is due to
the Fresh Samantha acquisition in May 2000, increased costs of utilizing a
direct-store-delivery system in some of our newer markets, some of which were
previously serviced with third party distributors, and increased national and
regional labor costs. Future decisions regarding growth and expansion consistent
with long-term strategic
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
objectives may increase sales and distribution costs as a percentage of net
sales. We continue to look for efficiencies in this part of our business.
However, expansion into markets serviced by our direct-store-delivery system
will require an investment for some initial period and changes to the Eastern
Seaboard direct-store-delivery system may cause a short-term increase in costs
as we standardize our national operations.
Expenses will also continue to be affected as we seek to find the
proper mix between third party distributors and our own direct-store-delivery
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.
Sales and distribution expenses for the first thirty-nine weeks of
fiscal 2000 were $20.8 million or 34.4% of net sales compared to $17.6 million
or 34.7% of net sales during the same period last year. The increase in absolute
dollars results from the addition of the Fresh Samantha operations in May 2000,
increased national and regional labor costs and the increased costs of utilizing
a direct-store-delivery system in some of our newer markets, some of which were
previously serviced with third party distributors, particularly in the first
quarter of fiscal 2000.
MARKETING. Marketing expenses decreased to $726,000 in the third
quarter of fiscal 2000 compared to $806,000 in the third quarter of fiscal 1999.
For the first thirty-nine weeks of fiscal 2000, marketing expenses were $1.9
million compared to $2.4 million in the same period last year. Most of the
decrease in expenses from last year results from a change in marketing strategy
which resulted in fewer employees, less advertising, and decreased product
tastings as we move to more strategic tastings, both in retail locations and at
community events. These reductions were offset by an increase in market research
in the second quarter of fiscal 2000.
Despite the reduced marketing expenses during the first thirty-nine
weeks of this year compared to the prior year, we expect marketing expenses to
increase in both absolute dollars and as a percentage of net sales for the
remainder of fiscal 2000 and in fiscal 2001 as we integrate the Odwalla and
Fresh Samantha brands and implement the changes in our marketing strategy.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $2.6 million in the third quarter of fiscal 2000 from $2.1 million
in the third quarter of fiscal 1999, and decreased as a percentage of net sales
to 10.3% from 10.9% last year. The change was due primarily to professional fees
and a general increase in expenses, including amortization of goodwill,
resulting from the Fresh Samantha acquisition. We expect that general and
administrative costs will increase in absolute dollars throughout the remainder
of fiscal 2000 as we continue to integrate Fresh Samantha with Odwalla. We will
continue to invest in infrastructure through fiscal 2001, particularly in
information systems and research and development, to allow for sustainable
growth.
For the first thirty-nine weeks of fiscal 2000, general and
administrative expenses were $6.4 million or 10.6% of net sales compared to $5.7
million or 11.3% of net sales in the first thirty-nine weeks of fiscal 1999.
Most of the increase in absolute dollars resulted from professional and
recruiting fees, collection costs, and a general increase in expenses, including
amortization of goodwill, resulting from the Fresh Samantha acquisition.
PROCEEDS FROM INSURANCE SETTLEMENT. On April 12, 2000, we entered into
a Mutual Release and Settlement Agreement with New Hampshire Insurance Company
regarding the business interruption insurance claim we filed following the
recall in October 1996. Under the Mutual Release and Settlement Agreement, New
Hampshire Insurance Company agreed to pay us $6.5 million. In connection with
the settlement, we dismissed our lawsuit against New Hampshire Insurance Company
filed on May 21, 1999 in the United States District Court for the Eastern
District of California in Fresno, California. The proceeds from the insurance
settlement, net legal fees of $1.0 million, was recorded as other income in the
third quarter of fiscal 2000.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
SERIES A PREFERRED STOCK INDUCEMENT EXPENSE. In connection with the
Fresh Samantha acquisition and the February 11, 2000 Preferred Stock Conversion
Agreement between Odwalla and Catterton-Simon Partners, we issued 1,333,333
shares of Odwalla's common stock to Catterton-Simon Partners in exchange for
1,074,666 shares of Odwalla's Series A Preferred Stock, representing all of the
outstanding shares of such stock, held by Catterton-Simon Partners and
cancellation of a warrant to purchase 75,000 shares of Odwalla's common stock
held by Catterton-Simon Partners. The issuance of common stock to
Catterton-Simon Partners was approved by Odwalla's shareholders on April 25,
2000. During the third quarter of fiscal 2000, we recorded an expense of $1.6
million to reflect the value of the 258,667 additional shares issued to induce
Catterton-Simon to convert the Series A stock that they held and to cancel the
outstanding warrant that they held. The inducement shares were valued using the
market price for our common stock at the date the shareholders approved the
issuance.
INTEREST AND OTHER EXPENSE. Odwalla had net interest and other expense
of $55,000 in the third quarter of fiscal 2000 compared to $26,000 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, including the
debt acquired with the Fresh Samantha acquisition and the imputed interest
impact of the fiscal 1998 settlement with the U.S. Government.
For the first thirty-nine weeks of fiscal 2000, we had net interest and
other expense of $106,000 compared to $176,000 in the prior year. In fiscal
2000, borrowings under our line of credit were at lower levels than in the prior
year and we recognized interest income from the invested proceeds of the
February 1999 Series A Stock offering.
INCOME TAX BENEFIT. The $1.0 million income tax expense for the third
quarter of 2000 and the $831,000 tax expense for the first thirty-nine weeks of
fiscal 2000 resulted primarily from operating income for the third quarter,
although operating income is not significant on a year to date basis, and the
impact of the proceeds from the insurance settlement in April 2000. There is no
tax impact of the Series A Stock inducement expense in fiscal 2000. In the third
quarter of fiscal 1999 and for the first thirty-nine weeks of fiscal 1999, we
recorded a $49,000 and a $277,000 income tax benefit. The 15% effective tax rate
for all periods noted for fiscal 2000 and 1999, excluding the inducement
expense, 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 our future
profitability becomes available.
LIQUIDITY AND CAPITAL RESOURCES
At May 27, 2000, we had working capital of $9.3 million compared to
working capital of $7.4 million at August 28, 1999. The increase resulted
primarily from the sale of $6.0 million in common stock in May 2000 offset by
cash used for capital asset purchases, payment of debt acquired with the Fresh
Samantha acquisition, and a reduction in our line of credit borrowings. At May
27, 2000, we had cash and cash equivalents and short-term investments of $5.9
million, compared to $7.4 million at August 28, 1999.
Net cash provided by operating activities in the first thirty-nine
weeks of fiscal 2000 was $1.9 million. This consisted of net income plus
depreciation, amortization and the non-cash expense incurred in connection with
the conversion of the Series A Stock and the increase in accounts receivable,
inventories, and other current assets and the decrease in accounts payable and
other accrued liabilities. Other current assets increased due to the $2.5
million of insurance proceeds that were received in June 2000. Net cash used in
investing activities in the first thirty-nine weeks of fiscal 2000 was $2.7
million, consisting primarily of the sale of short-term investments offset by
capital expenditures for production equipment at the Dinuba plant, computer
hardware and software, and display coolers and by cash costs of the Fresh
Samantha acquisition,
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
primarily professional fees. Net cash provided by financing activities in the
first thirty-nine weeks of fiscal 2000 was $1.6 million, consisting primarily of
the sale of common stock, the payment of debt acquired from the Fresh Samantha
acquisition, and a reduction on our outstanding line of credit balance.
We've used, and expect to continue to use, both operating and capital
lease financing to obtain production equipment, computer and communication
equipment, and coolers used in selling our products. We are currently discussing
additional lease lines, 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 inability
to obtain needed equipment may negatively affect our operations. For the first
thirty-nine weeks of fiscal 2000, we utilized significant cash to purchase
equipment that we were unsuccessful in leasing at acceptable terms.
In September 1999, we entered into a revolving credit agreement with a
new lender and paid the balance then outstanding under our prior line of credit
arrangement. The credit agreement provides a revolving credit facility up to
$5.0 million. The first $2.0 million of borrowings do not require separate
borrowing base reporting. Borrowings over $2.0 million and up to $5.0 million
are limited to 80% of eligible accounts receivable. The credit agreement defines
eligible accounts receivable which generally represents all trade accounts
receivable less delinquent balances. Interest is payable monthly at either the
prime interest rate plus 1% or the Eurodollar rate plus 3.5%. The interest rate
to be incurred is selected by Odwalla at the inception of each loan and may be
changed during the period in which the borrowed amount is outstanding in
accordance with provisions included in the credit agreement. The initial term of
the credit agreement was for three years.
In late April, 2000, the credit facility was increased from $5.0
million to $10.0 million in connection with the close of the Fresh Samantha
acquisition. The terms of the amended credit facility, which has a three year
term, are substantially the same as the original credit facility. As before, all
of our consolidated assets are pledged as collateral under the credit agreement.
We are also required to meet certain covenants, including maintenance of certain
financial, leverage, and debt service coverage ratios, and certain tangible net
worth. The credit agreement also contains certain business restrictions,
including the ability to borrow additional funds, limitations on capital
expenditures in excess of certain amounts, restrictions on the payment of cash
dividends, sale or purchase of Company stock, ability to encumber or sell
Company assets, and limitations on other business transactions without prior
approval from the lender.
See the description of the Fresh Samantha acquisition on page 11
regarding other matters resulting from transaction.
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.
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,
dairy-free shakes, wholesome food bars, natural spring water and frozen fruit
bars. All of our juices are currently flash pasteurized and some are produced on
a seasonal basis.
Our products are sold and distributed primarily through our
direct-store-delivery system, which is serviced by route sales people who
deliver and merchandise products to our trade partners. This
direct-store-delivery system is designed to allow us to optimally manage
delivery schedules, efficiently control product mix, keep store shelves or our
own coolers stocked with freshly prepared products and have a greater influence
on determining in-store location and merchandising of our products. At most
direct-store-delivery accounts, we stock, order and merchandise our products at
the point of sale, and we issue credits to
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
the trade partner for unsold product. This full service relationship allows us
to avoid paying slotting fees for shelf space, as well as other handling fees,
and to maintain control over our product merchandising at the point of sale. We
provide a lesser degree of service to certain trade partners who are responsible
for stocking, ordering and merchandising Odwalla products. These trade partners
don't receive credit for unsold products. Consumers can purchase our products at
supermarkets, specialty retail stores, natural food stores, convenience stores,
warehouse outlets and institutional food service trade partners. We also
distribute our products through third party distributors. This distribution
channel, with merchandising support provided by the distributors' employees
and/or our employees, provides opportunities to expand product distribution in
selected markets and still maintain relationships with trade partners. We sell
directly to the third party distributors and they generally don't receive credit
for unsold product.
RAW MATERIALS. Producing and selling our minimally processed products
entails special requirements in ingredient sourcing, production, distribution
and sales in order to preserve and maximize the freshness and flavor quality of
the products. We source and select fruits and vegetables to meet a variety of
established criteria, including overall quality, flavor profile, variety,
ripeness and other factors. Processing of the fruit and vegetables is performed
in a manner to capture and preserve various qualities of fresh flavors and
consistency. Odwalla has focused on each of these elements in an effort to
achieve our goal of providing the safest, best tasting and most nutritious
beverage and other products for consumers.
Odwalla buys ingredients according to stringent specifications. Fruits
and vegetables, in particular, are purchased year-round or seasonally depending
on the type of produce. Because various types of fruit and vegetable crops are
harvested at different times of the year, we obtain and produce different juices
on a seasonal basis. Most of our fruits and vegetables are purchased in the open
market on a negotiated basis. Historically, oranges, apples, carrots and
tangerines are the largest volume commodities we purchase. We have developed an
extensive network of ingredient sourcing relationships over the years and rely
on this network and new sources for the ingredients we need. We also farm a
small orange ranch in California to have access to local fresh fruit in the
early winter months. On the Eastern Seaboard, we currently utilize a Florida
co-packing arrangement for flash-pasteurized single-strength citrus products for
the Fresh Samantha brand. We also purchase organic oats as a significant
ingredient in our food bars. All of these key ingredients are subject to
volatility in supply, price and quality that could seriously harm our business
and results of operations. We are subject to the same risks with our other
ingredients as well. We also source a number of fruits, including tropical
fruits, from foreign suppliers in the form of frozen fruit puree. Most purees
are purchased under annual price contracts.
As with most agricultural products, the supply and price of raw
materials we use can be affected by a number of factors beyond our control,
including frost, drought, flood, hurricane and other natural disasters. Weather
conditions, economic factors affecting growing decisions, various plant diseases
and pests will affect the condition and size of the crop. For example, the heavy
rains and flooding that occurred in California in the first and second quarters
of fiscal 1995 resulted in higher costs of fruit and lower yields from the
California orange crop in the last quarter of fiscal 1995 and the first quarter
of fiscal 1996. We understand that the El Nino conditions and other weather
patterns in the winter of 1997-1998 caused temporary shortages of certain
tropical products. Additionally, significant events including the devastation
caused by hurricanes in Honduras, Nicaragua and neighboring countries in 1998
negatively impacted the supply and pricing of certain ingredients. In December
1998, a freeze damaged citrus crops in the San Joaquin Valley and other portions
of California. This had a significant negative impact on the cost and yield of
fresh citrus products we have used since the freeze. See Management's Discussion
and Analysis of Financial Conditions and Results of Operations beginning on page
10 for more information. 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, food bars and frozen fruit bars, Odwalla's products are flash pasteurized
and 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
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
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. In addition, our
products are subject to issues such as the fermentation and subsequent bottle
bloating experienced in the first quarter of fiscal 2000 due to natural
organisms in ingredients. We've historically experienced difficulties in
accurately forecasting product demands and expect that challenge to continue.
When we don't accurately forecast product demand, we are either unable to meet
higher than anticipated demand or we produce excess inventory that cannot be
profitably sold. In addition, most of our trade partners have the right to
return any products that are not sold by their expiration date. Our inability to
meet higher than anticipated demand or excess production or significant amounts
of product returns on any of our products could harm our business and results of
operations.
COST SENSITIVITY. Our profitability is highly sensitive to increases in
raw materials, labor and other operating costs. Unfavorable trends or
developments concerning factors including inflation, raw material supply, labor
and employee benefit costs, including increases in hourly wage and minimum
unemployment tax rates, rent increases resulting from the rent escalation
provisions in our leases, and the availability of hourly employees may also
adversely affect our results. We've benefited in prior years from relatively
favorable inflation rates and part-time labor supplies in our principal market
areas. However, there is no assurance that these conditions will continue or
that we will have the ability to control costs in the future. In fiscal 1999 and
in the first half of fiscal 2000, for example, the cost for citrus products
increased significantly due to the citrus crop freeze in California as discussed
above. In some markets, the competition for a skilled labor force requires us to
pay salaries higher than we have experienced historically and we expect this
trend to continue for some period of time.
DEPENDENCE ON ONE OR A FEW MAJOR TRADE PARTNERS. Safeway, Inc. is our
largest single account and accounted for 13% of our fiscal 1999 sales. We spend
considerable time to maintain a good relationship with Safeway and other
significant accounts, but we can't offer any assurance that sales to significant
accounts will not decrease or that these trade partners will not choose to
replace our products with those of competitors. The loss of Safeway or other
significant accounts or any significant decrease in the volume of products
purchased by their customers in the future would seriously harm our business and
results of operations. Continuity of trade partner relationships is important,
and events that impact our trade partners, including labor disputes, may have an
adverse impact on our results of operations.
COMPETITION. In a broad sense, our beverages compete with all beverages
available to consumers and our food bars compete with all food bars currently
available. The natural foods market is highly competitive. It includes national,
regional and local producers and distributors; many of them have greater
resources than we do, and many of them have shelf-stable products that can be
distributed with significantly less cost. We believe our niche is
easily-accessed nourishing beverages in the refrigerated super premium juice,
emerging dairy-free beverages, all-natural food bar and bottled water
categories. We believe our direct competition in this market niche is currently
from nationally, regionally and locally focused juice producers, certain of
which are owned by major beverage producers, nationally branded meal replacement
beverage producers, food and energy bar companies and premium bottled waters.
Our direct competitors in the juice business are national brands including Just
Squeezed, Tropicana, Minute Maid and Nantucket Nectars. Our juice products
compete with regional brands including Naked Juice (owned by a large
international company, Chiquita Brands International, Inc.) in Southern
California and Colorado, Fantasia in the Chicago and other Midwest market areas,
and Saratoga Beverage Group in several regions in the United States. Juice and
smoothie bars including Jamba Juice are also competitors. In addition, a number
of major supermarkets and other retail outlets squeeze and market their own
brand of fresh juices that compete with the Company's products. A decision by
Chiquita or any other large company to focus on Odwalla's existing markets or
target markets could have a material adverse effect on our business and results
of operations. Our food bar products, which have been on the market since August
1998, compete with several more established companies, including PowerBar
(recently acquired by Nestle), Balance Bar (recently acquired by Kraft Foods, a
division of Phillip Morris) and Clif Bar. While we believe that we compete
favorably with our competitors on factors including quality, nutritional
integrity, food safety, merchandising, service, sales and distribution, multiple
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
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 products are not irradiated or
chemically treated and are flash pasteurized, they are highly perishable and
contain certain naturally occurring microorganisms. In addition to the recall
(see "Part 2. Item 1. Legal Proceedings" on page 23) associated with the E. coli
O157:H7 bacteria in 1996, from time to time we receive complaints from consumers
regarding ill effects allegedly caused by our products. These past claims
haven't resulted in any material liability to date, but there can be no
assurance that we won't have future claims or that any claims associated with
the recall in 1996 will not result in adverse publicity or monetary damages,
either of which could seriously harm our business and results of operations.
Although we maintain product liability insurance, our coverage 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 disasters, including earthquakes, economic downturns and
other conditions affecting Northern California may adversely affect our business
and results of operations. With the Fresh Samantha acquisition, we expect that
the Northeastern portion of the United States will lessen the concentration in
Northern California, although there is no assurance that this will occur.
CONCENTRATION OF PRODUCTION CAPACITY. Virtually all of our juice
production capacity is located at our Dinuba, California facility. Our facility
in Saco, Maine expands our blending and bottling capability, although that
facility does not contain citrus extraction or fruit and vegetable pressing
capability. We also currently utilize a citrus co-packer in Florida for Fresh
Samantha brand single-strength citrus products. Because we maintain minimal
finished goods inventory at all production locations as part of our
"day-of-production" production system, we could be challenged to continue to
produce an adequate supply of 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, as
the Dinuba facility has the largest production capacity. Such an interruption
would seriously harm our business and results of operations. Separate companies
produce and package our dairy-free shakes, meal replacement beverages, spring
water, food bars and frozen bars.
LACK OF DIVERSIFICATION. Odwalla's business is vertically integrated
and centered around essentially one product, all-natural super-premium
beverages, sold primarily through our direct-store-delivery system. Although
we've added dairy-free shakes, meal replacement beverages, spring water, food
bars and frozen fruit bars, and are using more third party distributors, the
risks associated with focus on essentially one product are exemplified by the
material adverse effect on our business and results of operations that resulted
from the recall in October 1996 and from the impact of the California citrus
freeze in December 1998. Any significant decrease in the consumption of
beverages generally or specifically with respect to our products would have an
adverse effect on our business and results of operations.
RISKS RELATED TO EXPANSION. Continued growth depends in part upon our
ability to expand into new geographic areas, either through internal growth or
by acquisition. Following the 1996 recall, management plans for expansion, for
the most part, were postponed until fiscal 1998 as management focused on
restoring
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<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
production and sales in our then-existing markets and dealing with legal and
other company issues. Due to the extent of our operating losses in recent years,
we currently anticipate limited expansion in fiscal 2000 beyond existing markets
other than the acquisition of Fresh Samantha. 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, consumer tastes vary by region and
there can be no assurance that consumers located in other regions will be
receptive to our products.
We've expanded into certain markets, including the Pacific Northwest
and Colorado several years ago, through acquisitions of local juice
manufacturers. Acquisitions involve a number of special risks, including the
diversion of management's resources, issues related to the assimilation of the
operations and personnel of the acquired businesses, potential adverse effects
on operating results and amortization of acquired intangible assets. In
addition, gross margins may be negatively impacted to the extent that gross
margins on acquired product lines are lower than Odwalla's average gross
margins. If we seek and find attractive acquisition candidates, we may not be
able to complete the transaction on acceptable terms, to successfully integrate
the acquisition into our operations, or to assure that the acquisition won't
have an adverse impact on our operations. See also the risks related to the
Fresh Samantha acquisition on page 21.
Any plans to invest in new markets or to consider additional
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 REGULATIONS. The production and sales of beverages are
subject to the rules and regulations of various federal, state and local food
and health agencies, including the U.S. Food and Drug Administration ("FDA") and
California State Food and Drug. On September 8, 1998, the FDA regulations for
fresh apple juice went into effect. The regulations for fresh-squeezed citrus
juices were enacted in July 1999. The FDA's ruling for citrus was to require all
fresh juice processors to show a 5-log reduction in potential pathogens, 99.999%
barrier, supported by a Hazard Analysis Critical Control Point plan, or HACCP.
All fresh juice processors that could not demonstrate a 5-log reduction were
expected to label their product with a warning label on the bottle to alert
consumers of the presence of unprocessed product. Because all products produced
in our Dinuba, California production facility are manufactured under a HACCP
plan with validated critical control points, we are already in compliance with
the FDA regulations for fresh apple juice and the proposed FDA regulations for
citrus juices, and will not need to use warning labels on unpasteurized juice
products.
However, due to an outbreak of Salmonellosis in another company's
orange juice in 1999, the FDA reconsidered the effectiveness of the proposed
ruling. Regulators, industry representatives and scientists held a meeting
during the summer of 1999 to discuss what regulation should become final. FDA
officials emphasized their preference for a 5-log reduction in fresh juice from
the time it is extracted until bottled. A validated HACCP plan currently does
not have to include this requirement. The most effective way presented to meet
the newly discussed 5-log reduction in commercial production is flash
pasteurization. In November 1999, this same processor of fresh-squeezed,
non-pasteurized orange juice enacted a recall due to Salmonellosis concerns.
Based upon discussions with members of the scientific community and informal
discussions with FDA officials, we anticipate that flash pasteurization will be
required.
Currently all our juice products are flash pasteurized. Odwalla is
ready for the anticipated FDA regulations and we don't anticipate significant
additional costs to comply with current FDA regulations.
RISKS RELATED TO THE FRESH SAMANTHA ACQUISITION. The acquisition will
present challenges to management, including the integration of the operations,
product lines, technologies and personnel of
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<PAGE> 21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
Odwalla and Fresh Samantha, and special risks, including possible unanticipated
liabilities, unanticipated costs and diversion of management attention. We
cannot assure you that we will successfully integrate or profitably manage Fresh
Samantha's businesses. In addition, we cannot assure you that the combined
businesses will achieve increased sales levels, profitability, efficiencies or
synergies or that the merger will result in increased earnings for the combined
companies in any future period. The difficulties of combining the operations of
Odwalla and Fresh Samantha are exacerbated by the necessity of coordinating
geographically separated organizations. The process of integrating operations
could cause an interruption of, or loss of momentum in, the activities of
Odwalla's businesses, including the business acquired in the merger.
Additionally, the combined company may experience slower rates of growth as
compared to historical rates of growth of Odwalla and Fresh Samantha
independently. Although we believe that the merger was in the best interest of
Odwalla and its shareholders, we cannot assure you that the companies will
realize the anticipated benefits of the merger.
At the close of the acquisition, we assumed all the liabilities of
Fresh Samantha. We believe based upon our due diligence and representations made
in the merger agreement that we have accurately assessed and can absorb these
liabilities. However, it is possible that liabilities may arise in the future
which we did not discover or anticipate. To the extent these liabilities are
inconsistent with representations and warranties made in the merger agreement,
we may have a claim for indemnification against the former shareholders of Fresh
Samantha. The merger agreement provides that 15% of Odwalla common stock issued
in the merger will be placed in an escrow account and held for a period of one
year from May 2, 2000 to cover any indemnification claim. The escrow amount is
our sole recourse for indemnification claims other than in the case of fraud.
However, Fresh Samantha's liabilities, both at the time of and arising after the
consummation of the merger, may exceed our expectations and the escrow amount
may be insufficient to cover these liabilities. If total liabilities for which
indemnification is available exceed the escrow amount or if liabilities arise
after the one year escrow period, we may suffer financial losses, which will
harm our business, results of operation and financial condition.
QUARTERLY FLUCTUATIONS. Because the fruits and vegetables we use are
purchased in the open market on a negotiated basis, the price and availability
of key ingredients may fluctuate on a quarterly basis. Consumers tend to
establish certain buying patterns, and a disruption of those buying patterns may
result in a decline in sales. Other factors, including expansion into new
markets, consummating an acquisition, costs of integrating acquired operations,
price promotions of certain products, changes by our competitors, and
introduction of new products, can result in fluctuations to sales and costs on a
quarterly basis.
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 27, 2000.
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<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
FOREIGN CURRENCY RATE RISK. As almost all of our sales and expenses are
denominated in U.S. dollars, we have experienced only insignificant foreign
exchange gains and losses to date, and we do not expect to incur significant
gains and losses. We do not engage in foreign currency hedging activities.
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<PAGE> 23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The following personal injury claims and legal proceedings seek
monetary damages and other relief relating to the recall in 1996, as discussed
in Item 2 "Management's Discussion and Analysis of Financial Condition and
Results of Operations":
1. The McGregor Case: A personal injury lawsuit filed in Santa Clara
County Superior Court, San Jose, California on June 2, 1997 and served
on June 16, 1997. There is no trial date set.
2. The Nixon Case: A personal injury lawsuit filed in Sacramento County
Municipal Court, Sacramento, California on August 15, 1997. There is no
trial date set.
3. The Scott Case: A personal injury action lawsuit filed in King County
Superior Court, Seattle, Washington, on October 14, 1999. The case is
set for trial on March 5, 2001.
The Company has one additional proceeding allegedly arising out of
product consumption prior to the recall in 1996:
1. The Shields Case: A personal injury lawsuit filed in King County
Superior Court, Seattle, Washington, and served on or about July 1,
1999. The case is set for trial on January 16, 2001.
We maintained commercial general liability insurance totaling
$27,000,000 during the period for which the above claims are filed, including
the recall. We 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. On April 12, 2000, we entered
into a Mutual Release and Settlement Agreement with New Hampshire Insurance
Company regarding the business interruption insurance claim. Under the Mutual
Release and Settlement Agreement, Odwalla will receive an aggregate of
approximately $5.5 million, net of professional fees. In connection with the
settlement, Odwalla dismissed the lawsuit against New Hampshire Insurance
Company.
We are subject to other legal proceedings and claims that arise in the
course of our business. We currently believe that the ultimate amount of
liability, if any, for any pending actions (either alone or combined) will not
materially affect our financial position, results of operations or liquidity.
However, the ultimate outcome of any litigation is uncertain, and unfavorable
outcomes could have a material negative impact on our results of operations and
financial condition.
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
The matters voted upon by the shareholders at the annual meeting on
April 25, 2000 were reported in the Current Report on Form 8-K filed on May 10,
2000. The information contained in that Current Report on Form 8-K is
incorporated by reference to this Quarterly Report on Form 10-Q.
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<PAGE> 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.1* Amended By-Laws of Odwalla, Inc. dated May 2, 2000
10.1* Employment Agreement dated May 2, 2000 between Registrant and Douglas L. Levin.
10.2* Amendment Agreement dated April 28, 2000 between Registrant and Imperial Bank.
10.3* Stock Purchase Agreement dated February 11, 2000 between Registrant, U.S. Equity
Partners, L.P. and Catterton-Simon Partners III, L.P.
10.4* Amendment No. 1 to the Stock Purchase Agreement dated April 25, 2000 between
Registrant, U.S. Equity Partners, L.P., U.S. Equity Partners (Offshore), L.P.,
Catterton-Simon Partners III, L.P., and BancBoston Investments, Inc.
10.5* Shareholders Rights Agreement dated May 2, 2000 among
Registrant, Samantha Investors, LLC, and the shareholders of
Registrant and other persons named therein.
10.6* Preferred Stock Conversion Agreement dated as of April 24,
2000, between Registrant and Catterton-Simon Partners III,
L.P.
10.7* Letter Agreement, dated May 1, 2000, from Bain Capital Fund VI, L.P., to Registrant
and Catterton-Simon Partners III, L.P.
10.8** Agreement and Plan of Merger dated February 2, 2000 by and among Odwalla, Inc.,
Fresh Samantha, Inc., and Orange Acquisition Sub, Inc.
27.1 Financial Data Schedule.
</TABLE>
* Filed as an exhibit to the Company's Current Report on Form 8-K
(File No. 0-23036) filed with the Securities and Exchange
Commission on May 10, 2000 and incorporated herein
by reference.
** Filed as an exhibit to the Company's definitive Proxy Statement
(File No. 0-23036) filed with the Securities and Exchange
Commission on March 16, 2000 and incorporated herein
by reference.
B. REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K (File No. 0-23036) with
the Securities and Exchange Commission on April 17, 2000. The Current Report
contained information regarding a Mutual Release and Settlement Agreement with
New Hampshire Insurance Company regarding Odwalla's business interruption
insurance claim filed following the recall of certain products in October 1996.
The Company also filed a Current Report on Form 8-K (File No. 0-23036)
with the Securities and Exchange Commission on May 10, 2000. The Form 8-K report
contained information about the completion of the acquisition of Fresh Samantha
and reported the results of the matters voted upon at the annual shareholders
meeting on April 25, 2000.
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<PAGE> 25
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 7, 2000 By: /s/ D. STEPHEN C. WILLIAMSON
-------------------------------
D. Stephen C. Williamson
Chief Executive Officer
(Principal Executive Officer)
Date: July 7, 2000 By: /s/ JAMES R. STEICHEN
-------------------------------
James R. Steichen
Chief Financial Officer
(Principal Financial and
Accounting Officer)
25
