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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ODWALLA LOGO]
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended September 2, 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, California 94019
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE)
Registrant's telephone number, including area code: (650) 726-1888
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
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Title of each class Name of Exchange on which registered
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none none
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock
(no par value)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
[Cover page 1 of 2 pages]
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The aggregate market value of voting stock held by non-affiliates of the
Registrant, as of November 21, 2000, was approximately $45,450,000 (based on the
closing price for shares of the Registrant's common stock as reported by the
Nasdaq National Market for the last trading day prior to that date). Shares of
common stock held by each executive officer, director, and holder of 5% or more
of the outstanding common stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On November 21, 2000 approximately 11,035,530 shares of the Registrant's
common stock, no par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None.
[Cover Page 2 of 2 pages]
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CAUTIONS ABOUT FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements about
future financial results, future business changes and other events that haven't
yet occurred. For example, statements like "we expect," "we want," "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-K if any
forward-looking statement later turns out to be inaccurate. Details about risks
that could affect various aspects of our business are included throughout this
Form 10-K. Investors should read all of these risks carefully, and should pay
particular attention to risks affecting the following areas: availability and
pricing of raw materials (page 5); competition (page 6); our dependence on
significant trade partners (page 6); government regulations that may impact our
business (page 6); the specific risk factors discussed on pages 7 to 10; legal
proceedings (page 11); and commitments and contingencies described in Note 4 to
the financial statements.
PART I
ITEM 1. BUSINESS
OVERVIEW
Odwalla began operations in September 1980 and was incorporated in
California in September 1985. When we refer to "we," "Odwalla" or the "Company"
in this Form 10-K, we mean our California corporation (Odwalla, Inc.), our Maine
corporation (Fresh Samantha, Inc.) and its Maine subsidiary (Fresh Samantha
Juice Bar, Inc.). When we refer to "Samantha," in this Form 10-K, we mean the
branded products of Fresh Samantha, Inc.
Odwalla's business is to provide easy access to great tasting nourishment.
We are the nation's leading branded super-premium beverage company, delivering
nourishment coast to coast with the Odwalla and Samantha lines of more than 45
all natural juices, smoothies, dairy-free shakes, spring water and natural food
bars. Our beverage product lines appeal 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, on-line grocers 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 nourishing
food bars are available in additional states and can also be purchased through
our Web site at www.odwalla.com.
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ACQUISITION OF FRESH SAMANTHA
On May 2, 2000, we completed our acquisition of Fresh Samantha. Fresh
Samantha manufactures and distributes all-natural super-premium refrigerated
juices natural spring water and frozen fruit bars. 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 Samantha label.
Fresh Samantha had 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. 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. At the effective date of the merger,
Doug Levin, chief executive officer and a founder of Fresh Samantha, became
President of Odwalla.
The total purchase price of approximately $29.0 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 $1.5 million,
consisting principally of professional fees. The purchase price of $29.0 million
plus $1.7 million in net assumed liabilities and $3.8 million in acquired
deferred tax asset, net of a $10.2 million deferred tax liability and the
release of a deferred tax valuation allowance of $2.3 million recorded in
accordance with Statement of Financial Accounting Standards No. 109, resulted in
total intangible assets related to the Fresh Samantha acquisition of $34.8
million. After evaluating the nature of the intangible assets acquired, the
acquisition cost was allocated as follows (amounts in thousands):
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Trade name ................................. $ 21,980
Customer list............................... 3,790
Goodwill.................................... 9,022
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$ 34,792
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The trade name and goodwill are being amortized over a twenty-year period and
the customer list is being amortized over a five-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, in accordance with generally accepted accounting principles.
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 connection with the acquisition, we also increased the principal amount
available under our credit facility as discussed in the Liquidity and Capital
Resources section on page 18.
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PRODUCTS, DISTRIBUTION AND TRADE PARTNERS
Our current product line consists of single-flavor and blended fruit-
and vegetable-based juice products, all-natural meal replacement and dairy-free
shakes, nourishing 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.
Odwalla products are currently sold in Alaska, Arizona, Bermuda,
British Columbia, California, Colorado, Connecticut, Delaware, Florida, Georgia,
Guam, Idaho, Illinois, Indiana, Iowa, Louisiana, Maine, Massachusetts, Maryland,
Michigan, Minnesota, Nevada, New Hampshire, New Jersey, New Mexico, New York,
Nevada, North Carolina, Oregon, Pennsylvania, Rhode Island, South Carolina,
Texas, Utah, Virginia, Washington state, Washington, D.C. area, Vermont, and
Wisconsin.
Since September 1, 1999, we have used our branded, custom-designed 450
milliliter and 325 milliliter bottles made from recyclable, HDPE plastic for the
Odwalla brand. This bottle retains fresh fruit flavor notes 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 Odwalla's proprietary bottle
also extends the shelf life of our products. We establish shelf life standards
for each product to maintain the flavor and nutritional integrity that consumers
associate with freshly produced fruit and vegetable beverages. The shelf life of
Odwalla's fruit and vegetable-based products is typically between 10 and 20 days
at the retail outlet. Although the cost of the new bottle is approximately 50%
greater than the prior bottle, we anticipate that the ability to lengthen shelf
life and our distribution capabilities will offset the increased cost. Our food
bars have a significantly longer shelf life.
Our policy is to have all products removed from trade partners' shelves
on or before their Odwalla-established expiration date. In addition, because of
our "day of production" quality standards, products reflect the seasonal changes
in fruit varieties in color and taste. Our production methods are designed to
minimize the effect of processing on the fruit juice extracted. Our entire
product line varies due to a significant component of seasonal ingredients,
seasonal product usage, and the addition and deletion of products.
In addition, we've trademarked various aspects of our brands, including
labels, certain product names, certain phrases and symbols, as we believe that
these and other intellectual property that we own are critical to our success.
These items help create the Odwalla and Samantha brands and connect in an
important way with our consumers. We have taken steps to protect our
intellectual property and we intend to continue to protect against imitation of
our products and packages and to protect our trademarks and copyrights as
necessary. This action could be time-consuming, result in costly litigation and
divert management personnel. Furthermore, there can be no assurance that we
would be successful in such action.
Our products are sold and distributed primarily through our
direct-store-delivery system, which is serviced by route sales representatives
who sell, deliver and merchandise products to our trade partners. This
direct-store-delivery system is designed to allow us to preserve the integrity
of our highly perishable all-natural products, 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 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,
on-line grocers 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, some of which may be geographically difficult
for us to service, and still maintain
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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 flavor profile and nutritional integrity 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 that captures and preserves the various qualities of fresh and
consistent flavors. 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 as well as new sources for the ingredients we need. Beginning in
1998, we contracted for a substantial portion of our fall apple needs through
McAfee Apple Gardens, a California Central Valley grower using Good Agricultural
Practices, field Hazard Analysis Critical Control Points or HACCP plan and
sustainable farming practices. On the Eastern Seaboard, we currently utilize a
Florida co-packing arrangement for flash-pasteurized single-strength citrus
products for the 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, 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 used until the impact of the freeze ended in
the beginning of the third quarter of fiscal 2000. See Management's Discussion
and Analysis of Financial Conditions and Results of Operations beginning on page
14 for more information. Adverse weather conditions could negatively affect our
business and results of operations.
Odwalla is pursuing a no genetically engineered organisms status on our
entire product line. Genetically modified organisms are the product of splicing
or modifying crops to release new organisms to the environment. Crops are
genetically modified in order to increase crop yields, to withstand high doses
of herbicides or to produce their own insecticides. There are uncertainties
about the potential risks genetically modified foods pose to humans and the
environment. We intend to provide our consumers information about genetically
modified organisms. However, ingredients that are not generically modified are
at times difficult to source in the required volumes.
We also source a number of fruits, including tropical fruits, from
foreign suppliers in the form of frozen fruit puree. A puree is whole fruit that
has been processed, finely cut, heat treated, packed in a container and frozen.
A puree is not a concentrate. Purees are combined with the freshly extracted and
flash pasteurized juices of other fruits in a number of our products. The purees
we purchase are heat treated to increase safety and meet government regulations.
Most purees are purchased under annual price contracts. Some of our products,
including our water and nourishing food bars, are produced to our specifications
and recipes by independent companies.
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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, dairy-free beverages,
nourishing 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, private
equity funds, food and energy bar companies and premium bottled water companies.
Our direct competitors in the juice business are national brands including
Horizon, Just Squeezed, Tropicana, Minute Maid, Newman's Own and Nantucket
Nectars. Our juice products compete with regional brands, many of which are
owned by North Castle Partners, a private equity fund, heavily invested in the
healthy living and aging consumer goods products including Naked Juice, a brand
which is present in the Western region, Pacific Northwest, and most recently on
the East Coast. Other regional North Castle brands include Saratoga Beverage, in
several different regions of the United States, Zeigler, predominantly in the
Midwest and Southeast regions, Fantasia in Chicago and the Midwest, and
Ferraro's in California and the Northeast. Other privately owned regional brands
of premium juice also serve as competition to Odwalla, including Rocket Juice in
the West and the Midwest. `Smoothie Drink Bars' such as Jamba Juice are also
considered as direct 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 our products. A decision by North Castle 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 (owned by Nestle), Balance Bar
(owned 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 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. As a
result in September 2000, Odwalla repositioned the Odwalla Bar as the Nourishing
Food Bar in enhanced packaging at a lower price point within the food bar
category to compete with some of the more established food bar products on the
market.
DEPENDENCE ON ONE OR A FEW MAJOR TRADE PARTNERS
Safeway, Inc. is our largest single account and accounted for 11% of
our fiscal 2000 sales. We spend considerable time to maintain a good
relationship with Safeway and other significant accounts, but we can't offer any
assurance that sales to significant accounts will not decrease or that these
trade partners will not choose to replace our products with those of
competitors. The loss of Safeway or other significant accounts or any
significant decrease in the volume of products purchased by their customers in
the future would seriously harm our business and results of operations.
Continuity of trade partner relationships is important, and events that impact
our trade partners, including labor disputes, may have an adverse impact on our
results of operations.
GOVERNMENT REGULATION
The production and sales of beverages are subject to the rules and
regulations of various federal, state and local food and health agencies,
including the U.S. Food and Drug Administration and the California State Food
and Drug, Department of Health Services. In 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 pathogenic bacterial
loads, which represents a 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. All products produced in our Dinuba, California and Saco, Maine
production facilities are manufactured under a HACCP plan with validated
critical control points. Odwalla products are all pasteurized. Each is in
compliance with the FDA regulations for Apple Juice and the proposed FDA
regulations for citrus juices. No juices require the use of warning labels.
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We are also subject to various federal, state and local environmental
laws and regulations that limit the discharge, storage, handling and disposal of
a variety of substances and by laws and regulations relating to workplace safety
and worker health, principally the Occupational Safety and Health Administration
Act, as well as similar state laws and regulations. We believe that we comply in
all material respects with these laws and regulations, although we cannot assure
that future compliance with such laws or regulations will not have a material
adverse effect on our results of operations or financial condition. We did not
incur any significant costs in fiscal 2000 to comply with environmental laws.
EMPLOYEES
As of November 21, 2000, Odwalla had approximately 700 employees,
almost all of whom were full-time employees. We don't have any collective
bargaining agreements with our employees, and we believe employee relations are
generally good.
OTHER FACTORS AFFECTING ODWALLA'S BUSINESS
Risks associated with perishable products. Except for natural spring
water, food bars and frozen fruit bars, Odwalla's products are flash pasteurized
and heat treated and don't contain any preservatives. As a result, our products
have a limited shelf life. In order to maintain our "day-of-production" flavor
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. 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 related to 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.
Product liability. Because our products are not irradiated or
chemically treated and are flash or gently pasteurized, they are highly
perishable and contain certain naturally occurring microorganisms. 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. We depend 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
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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, Odwalla's market
share in the Northeastern portion of the United States has lessened the
concentration in Northern California, although there is no assurance that this
will remain the case.
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.
Such an interruption would seriously harm our business and results of
operations. Separate companies produce and package our 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 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 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 and the effort to complete the Fresh Samantha integration, we
currently anticipate limited expansion in fiscal 2001 beyond existing markets.
There can be no assurance that we will expand into new geographic areas or
continue to invest in newer markets or if such expansion or investment is
undertaken that it will be successful or that such expansion can be accomplished
on a profitable basis. Demands on management and working capital costs resulting
from the perishable nature 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.
The Fresh Samantha acquisition has presented challenges to management,
including the integration of the operations, product lines, technologies and
personnel of 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.
8
<PAGE> 10
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.
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.
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.
Competition. Our direct competitors in the juice business are national
brands including Horizon, Just Squeezed, Tropicana, Minute Maid, Newman's Own
and Nantucket Nectars. Our juice products compete with regional brands, many of
which are owned by North Castle Partners, a private equity fund, heavily
invested in the healthy living and aging consumer goods products including Naked
Juice, a brand which is present in the Western region, Pacific Northwest, and
most recently on the East Coast. Other regional North Castle brands include
Saratoga Beverage, in several different regions of the United States, Zeigler,
predominantly in the Midwest and Southeast regions, Fantasia in Chicago and the
Midwest, and Ferraro's in California and the Northeast. Other privately owned
regional brands of premium juice also serve as competition to Odwalla, including
Rocket Juice in the West and the Midwest. `Smoothie Bars' such as Jamba Juice
are also considered as direct 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 our products. A decision by North Castle 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 (owned by Nestle),
Balance Bar (owned 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 flavor categories, brand name recognition and
loyalty, our products are typically sold at prices higher than most other
competing beverage and bar products. Significant competitive pressure from these
or other companies could negatively impact our sales and results of operations.
Quarterly fluctuations. Because the fruits and vegetables we use are
purchased in the open market on a negotiated basis, the price and availability
of key ingredients may fluctuate on a quarterly basis. Consumers tend to
establish certain buying patterns, and a disruption of those buying patterns may
result in a decline in sales. Other factors, including expansion into new
markets, consummating an acquisition, costs of integrating acquired operations,
price promotions of certain products, changes by our competitors, and
introduction of new products, can result in fluctuations to sales and costs on a
quarterly basis.
Intellectual property rights. We believe our trademarks, trade dress,
trade secrets and similar intellectual property are critical to Odwalla's
success and we attempt to protect such property with registered and common law
9
<PAGE> 11
trademarks and copyrights, restrictions on disclosure and other actions to
prevent infringement. We've licensed elements of our distinctive trademarks,
trade dress and similar proprietary rights to third parties in the past and may
continue this practice. While we attempt to ensure that the quality of our brand
is maintained by these third party licenses, we can't be sure that these third
parties will not take actions that might seriously harm the value of our
proprietary rights or the reputation of our products, either of which could have
a material adverse effect on our business. Product package and merchandising
design and artwork are important to the success of Odwalla, and we intend to
take action to protect against imitation of our products and packages and to
protect our trademarks and copyrights as necessary. This action could be
time-consuming, result in costly litigation and divert management personnel.
Furthermore, there can be no assurance that we would be successful in such
action. We don't currently have any patents.
Control by officers and directors. Odwalla's officers, directors and
their affiliates beneficially own, in the aggregate, approximately 59% of the
outstanding shares of common stock. Through their holdings, these shareholders,
acting together, would be able to significantly influence most matters requiring
shareholder approval, including the election of a majority of our Board of
Directors. This control could have the effect of delaying, deferring or
preventing a change of control of the Company.
Dependence on key personnel. Odwalla's success depends to a significant
extent upon the continued service of its senior management, including Stephen
Williamson, our Chairman and Chief Executive Officer, and the loss of services
from any of such key personnel could have a material adverse effect on our
business or results of operations. Furthermore, our continued growth strategy
depends on the ability to identify, recruit and retain key management personnel.
The competition for such employees is intense, and there can be no assurance we
will be successful in such efforts. We are also dependent on our ability to
continue to attract, retain and motivate production, distribution, sales,
communications and other personnel.
Volatility of stock price. Odwalla's common stock price has, at certain
times, experienced significant price volatility. Announcements of developments
related to our business, fluctuations in operating results, failure to meet
securities analysts' expectations, general conditions in the fruit and vegetable
industries and the worldwide economy, announcements of innovations, new products
or product enhancements by us or our competitors, fluctuations in the level of
cooperative development funding, acquisitions, changes in governmental
regulations, developments in patents or other intellectual property rights and
changes in our relationships with trade partners and suppliers could cause the
price of our common stock to fluctuate substantially. In addition, in recent
years the stock market in general, and the market for small capitalization
stocks in particular, has experienced extreme price fluctuations which have
often been unrelated to the operating performance of affected companies. Such
fluctuations could adversely affect the market price of our common stock. Read
"Item 5, Market For Registrant's Common Equity And Related Shareholder Matters."
ITEM 2. PROPERTIES
Our production facility is in Dinuba, California and consists of
approximately 100,000 square feet of production, office and cold storage space
on a 13-acre parcel of land plus approximately 29 acres of land adjacent to the
production facility. We own this property and believe we carry adequate property
insurance. We also have a production facility in Saco, Maine which consists of
approximately 40,000 square feet of leased production, office, cold storage and
warehouse space. Our administrative offices are located in Half Moon Bay,
California. We also have distribution centers throughout California and at the
following locations: Denver, Colorado; Stamford and North Haven, Connecticut;
Pompano Beach, Florida; Atlanta, Georgia; Saco and Bangor, Maine; Elkridge,
Maryland; Woburn and Hadley, Massachusetts; Pennsauken and Fairfield, New
Jersey; Albuquerque, New Mexico; Brooklyn, New York; Eugene and Portland,
Oregon; Austin, Houston and Dallas, Texas; Burlington, Vermont; and Seattle,
Washington. We lease all our facilities other than the Dinuba production
facility.
ITEM 3. LEGAL PROCEEDINGS
The following personal injury claims and legal proceedings seek
monetary damages and other relief relating to the product recall in 1996, as
discussed in Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations":
10
<PAGE> 12
1. The McGregor Case: A personal injury lawsuit filed in Santa Clara County
Superior Court, San Jose, California on June 2, 1997 and served on
June 16, 1997. There is no trial date set.
2. The Nixon Case: A personal injury lawsuit filed in Sacramento County
Municipal Court, Sacramento, California on August 15, 1997. There is no
trial date set.
The following personal injury claim and legal proceeding has been
settled:
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 was settled in September, 2000.
We maintained commercial general liability insurance totaling $27,000,000
during the period for which the above claims were filed. 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. 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the fourth
quarter of fiscal 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Odwalla's common stock began trading on the Nasdaq SmallCap Market in
December 1993 at the time of our initial public offering. Since May 18, 1995,
our stock has traded on the Nasdaq National Market under the symbol "ODWA." The
following table shows the range of high and low closing sales prices reported on
the Nasdaq National Market for the periods indicated. On November 21, 2000, the
closing price of Odwalla's common stock was $10.00.
<TABLE>
<S> <C> <C>
FISCAL YEAR ENDED SEPTEMBER 2, 2000 HIGH LOW
Fourth Quarter $7.50 $6.00
Third Quarter $9.00 $5.625
Second Quarter $9.00 $4.813
First Quarter $7.469 $4.75
</TABLE>
11
<PAGE> 13
<TABLE>
<S> <C> <C>
FISCAL YEAR ENDED AUGUST 28, 1999 HIGH LOW
Fourth Quarter $8.00 $6.25
Third Quarter $9.00 $5.438
Second Quarter $8.00 $5.875
First Quarter $10.625 $7.00
FISCAL YEAR ENDED AUGUST 29, 1998
Fourth Quarter $12.875 $9.00
Third Quarter $10.25 $7.50
Second Quarter $8.75 $5.625
First Quarter $11.00 $7.375
</TABLE>
As of November 21, 2000, there were approximately 304 holders of record of
the Company's common stock.
In connection with the Fresh Samantha acquisition in May 2000, we issued
shares of our common stock in a private placement under Section 4(2) of the
Securities Act of 1933. We issued 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.
Under the Stock Purchase Agreement, 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 issued 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.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock. We currently
anticipate that we will retain all future earnings for use in our business, and
we do not anticipate paying any cash dividends in the foreseeable future.
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<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The following table shows selected consolidated financial information
for Odwalla for the past five fiscal years. To better understand the information
in the table, investors should also read "Management's Discussion and Analysis
of Financial Condition and Results of Operations" beginning on page 14, and the
Consolidated Financial Statements and Notes beginning on page 25. The
consolidated financial information includes the results of operations of Fresh
Samantha since the acquisition on May 2, 2000.
<TABLE>
<CAPTION>
Fiscal Year
-------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
STATEMENT OF OPERATIONS DATA: (in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales......................................... $ 59,197 $ 52,630 $ 59,088 $ 68,042 $ 93,450
Cost of sales..................................... 29,889 27,650 29,236 35,542 47,477
-------- -------- -------- -------- --------
Gross Profit...................................... 29,308 24,980 29,852 32,500 45,973
Operating expenses:
Sales and distribution........................... 20,236 22,465 20,445 24,254 31,815
Marketing........................................ 2,179 2,919 2,696 2,908 2,795
General and administrative....................... 6,206 7,625 6,710 7,449 9,616
Amortization of intangible assets from Fresh Samantha
Acquisition................................... - - - - 711
Recall and related costs......................... - 6,518 1,242 250 -
-------- -------- -------- -------- --------
Total operating expenses..................... 28,621 39,527 31,093 34,861 44,937
-------- -------- -------- -------- --------
Income (loss) from operations..................... 687 (14,547) (1,241) (2,361) 1,036
Proceeds from insurance settlement, net........... - - - - 5,458
Series A preferred stock inducement expense....... - - - - (1,587)
Other income (expense), net....................... 346 210 (163) (40) (112)
-------- -------- --------- --------- ---------
Income (loss) before income taxes................. 1,033 (14,337) (1,404) (2,401) 4,795
Income tax (expense) benefit...................... (400) 1,901 25 359 (1,140)
--------- -------- -------- -------- ---------
Net income (loss)................................. 633 (12,436) (1,379) (2,042) 3,655
Preferred stock dividend.......................... - - - (267) (568)
-------- -------- -------- --------- ---------
Net income (loss) applicable to common shareholders $ 633 $ 12,436) $ (1,379) $ (2,309) $ 3,087
========= ======== ======== ========= =========
Basic net income (loss) per share applicable to
common shareholders.............................. $ 0.13 $ (2.49) $ (0.27) $ (0.45) $ 0.44
======== ======== ======== ======== ========
Diluted net income (loss) per share applicable to common
shareholders..................................... $ 0.12 $ (2.49) $ (0.27) $ (0.45) $ 0.43
======== ======== ======== ======== ========
End of Fiscal Year
--------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(in thousands)
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments........................... $ 12,413 $ 3,225 $ 3,191 $ 7,369 $ 5,392
Working capital................................... 14,655 1,449 1,849 7,674 11,712
Total assets...................................... 37,700 31,006 29,350 35,305 89,354
Long-term liabilities............................. 501 441 888 688 12,076
Total shareholders' equity........................ 29,574 17,635 16,445 21,954 60,672
</TABLE>
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<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements
about future financial results, future business changes and other events that
haven't yet occurred. For example, statements like "we expect," "we want," "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-K if any
forward-looking statement later turns out to be inaccurate. Details about risks
that could affect various aspects of our business are included throughout this
Form 10-K. Investors should read all of these risks carefully, and should pay
particular attention to risks affecting the following areas: availability and
pricing of raw materials (page 5); competition (page 6); our dependence on
significant trade partners (page 6); government regulations that may impact our
business (page 6); the specific risk factors discussed on pages 7 to 10; legal
proceedings (page 11); and commitments and contingencies described in Note 4 to
the financial statements.
OVERVIEW
This section provides information about our operating results and
changes in financial position over the past three years and should be read in
conjunction with the Consolidated Financial Statements and related Notes
beginning on page 25. Fiscal 2000 contained 53 weeks compared to 52 weeks in
both fiscal 1999 and 1998. We do not consider the impact of the additional week
to be material to the overall operations for the year. The operating results and
other financial information discussed below includes the results of Fresh
Samantha since the acquisition was completed on May 2, 2000.
GENERAL BUSINESS
Net sales in fiscal 2000 increased to $93.4 million, an increase of 37%
from $68.0 million of sales last year, which represents a record sales year for
Odwalla. In fiscal 2000, we acquired Fresh Samantha on May 2, 2000, experienced
growth in all of our geographic market areas, and expanded our presence in
markets we entered in prior years. Before considering the preferred stock
dividend, our net income for the year was $3.6 million or $0.52 per share
compared to a loss of $2.0 million or $.40 per share last year. Before
considering the insurance settlement proceeds, net of tax, the cost of
converting the Series A preferred stock and the preferred stock dividend, net
income for fiscal 2000 was $603,000 or $0.09 per basic share and $0.08 per
diluted share. Overall, the year represented a return to profitability for
Odwalla.
Before considering the impact of the Fresh Samantha acquisition, our
sales strength this year has come predominantly from continued penetration in
existing markets and sales of new products. We believe that continued
recognition of the Odwalla and Samantha brand and consumer attraction to our
products, new product introductions, better store shelves placement, increased
placement of branded in-store coolers, and increased delivery system support has
contributed to our sales growth.
We experience quarterly fluctuations in sales and costs, particularly
in raw materials, which are sometimes significant and we anticipate that these
fluctuations will continue in future quarters. Some factors behind the
fluctuations include: changes in the price or availability of raw materials,
particularly fruit products, due to seasonality, weather and other factors; new
product introductions; costs of expansion into new markets, which can continue
for many quarters beyond the market entry date; increased competition; sales
promotions; buying patterns of consumers; competitor product introductions;
overall economic trends influencing consumers. In addition, weather patterns
impacting consumers, including unseasonably cool or rainy weather, can result in
fewer sales to consumers and ultimately lower sales to trade partners and higher
return credits issued if we haven't been able to forecast and adjust for the
change in consumer buying patterns. While the direct-store-delivery system
offers many benefits to us, it is also an expensive and fairly fixed cost
distribution system. We have invested significantly in our production facilities
and management team; the benefit of this investment will result from higher
volume of product through the facilities. Conversely, lower volume than expected
will result in higher fixed costs as a percentage of sales. Finally, we may
choose to reduce prices or
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<PAGE> 16
increase spending in response to competition in some markets, which usually has
a negative short-term effect on our results of operations.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain
statements of operations data for fiscal years 1998, 1999 and 2000. These
operating results are not necessarily indicative of the results for any future
period.
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------
1998 1999 2000
--------------- --------------- ---------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 49.5 52.2 50.8
---- ----- -----
Gross margin 50.5 47.8 49.2
Operating expenses
Sales and distribution 34.6 35.6 34.0
Marketing 4.6 4.3 3.0
General and administrative 11.4 10.9 10.3
Amortization of intangible assets from Fresh Samantha acquisition 0.0 0.0 0.8
Recall and related costs 2.1 0.4 0.0
--- ----- -----
Income (loss) from operations (2.1) (3.5) 1.1
Insurance settlement 0.0 0.0 5.8
Series A stock inducement expense 0.0 0.0 (1.7)
Interest and other income (expense), net (.2) (0.0) (0.1)
Income tax benefit (expense) 0.0 0.5 (1.2)
--- ----- -----
Net income (loss) (2.3)% (3.0)% 3.9%
==== ===== =====
</TABLE>
NET SALES. Net sales for fiscal 2000 increased 37% to $93.4 million
compared to $68.0 million in fiscal 1999, and increased 15% in fiscal 1999 from
$59.1 million in fiscal 1998. After removing the impact of the additional week
in fiscal 2000 and the impact of the Fresh Samantha acquisition since May 2,
2000, our sales increased 14% from the prior year. Our 2000 sales increase,
excluding the sales resulting from the Fresh Samantha acquisition, occurred in
all geographic regions and resulted primarily from growth in existing markets
and accounts and new products. We did not enter any significant new markets in
fiscal 2000 other than through the Fresh Samantha acquisition. Our food bar
business continues as an important product, although it continues to represent
less than 5% of our net sales in both fiscal 1999 and fiscal 2000. The sales
increase in fiscal 1999 compared to fiscal 1998, which occurred in all
geographic regions, resulted primarily from (a) growth in existing markets and
accounts and new products and (b) sales volume from new markets. Net sales in
fiscal 1999 were also impacted by our expanded use of third party distributors.
Our sales growth rate this year, excluding the Fresh Samantha
acquisition, 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, continued at less than 10% of
beverage and bar sales, excluding Fresh Samantha brand sales, and represent a
significant percentage increase from last year when we were in an earlier
selling stage in some of those markets. 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.
Since September 1, 1999, we have used branded, custom-designed 450
milliliter and 325 milliliter bottles made from recyclable, HDPE plastic for the
Odwalla brand. Our new bottle retains fresh fruit flavor notes 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
15
<PAGE> 17
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.
We implemented the guidance in EITF 00-14, Accounting for Certain Sales
Incentives, which does not represent a change from our existing accounting
policies. Accordingly, any cash sales incentives are classified as a reduction
of revenue.
COST OF SALES. Cost of sales increased to $47.5 million or 50.8% of net
sales in fiscal 2000 compared to $35.5 million or 52.2% of net sales in fiscal
1999. Cost of sales was $29.2 million or 49.5% of net sales in fiscal 1998.
Gross margin increased from 47.8% in fiscal 1999 to 49.2% in fiscal 2000 after
decreasing from 50.5% in fiscal 1998. In late December 1998, the San Joaquin
Valley in central California experienced a citrus freeze that seriously damaged
the navel orange crop. Other parts of California were also affected, but to a
significantly lesser extent. The freeze also impacted the California Valencia
orange crop and other citrus, which extended the impact throughout calendar year
1999 and into early calendar 2000. The immediate effect of the freeze during
this period was to increase the price of the fresh citrus we purchased. 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. With the
Fresh Samantha acquisition, we now have two production facilities. The impact on
cost of sales of the Fresh Samantha facility in Saco, Maine had a slight
negative impact for the year. This results primarily due to the reliance on more
expensive Florida fruit in the summer months.
Gross margin increased primarily due to (a) a return, in the second
half of fiscal 2000, to more favorable pricing and yield for ingredients,
primarily citrus, for the Odwalla brand, (b) better efficiencies in labor and
packaging yields due to the new bottling line for the Odwalla brand, offset by
(c) additional packaging costs due to the new bottle and the increased costs of
the new bottling line and (d) the co-packing costs in the summer months for
citrus products for the Fresh Samantha brand. The continued use of third party
distributors also negatively affected gross margins.
The decrease in gross margin in fiscal 1999 to 47.8% compared to fiscal
1998 resulted primarily from (a) unfavorable pricing and yield for ingredients,
primarily citrus, and (b) increases in labor, due to poorer yields, and
co-packing costs.
SALES AND DISTRIBUTION. Sales and distribution expenses were $31.8
million in fiscal 2000 compared to $24.2 million in fiscal 1999, and decreased
as a percentage of net sales to 34.0% from 35.6% in fiscal 1999. Sales and
distribution expenses increased as a percentage of net sales and in dollars in
fiscal 1999 when compared to the 34.6% and $20.4 million in fiscal 1998. 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 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 in a given market between our own
direct-store-delivery system and third party distributors. The perishable nature
of most of our products and our stringent service standards can make it
difficult to find appropriate distributors in some markets.
The fiscal 1999 expense increase as a percentage of net sales as
compared to fiscal 1998, resulted from increased sales volume supported by a
more fixed cost operations structure, which was offset by a full year of costs
in our newest expansion markets, particularly the Washington, D.C. area.
MARKETING. Marketing expenses were $2.8 million or 3.0% of net sales in
fiscal 2000 compared to $2.9 million or 4.3% of net sales in fiscal 1999. The
fiscal 1999 expense represented an increase from $2.7 million or 4.6% of net
sales in fiscal 1998. 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
16
<PAGE> 18
research during a portion of fiscal 2000. Despite reduced marketing expense
this year compared to the prior year, we expect marketing expenses to increase
in both absolute dollars and as a percentage of net sales in fiscal 2001 as we
integrate the Odwalla and Fresh Samantha brands and implement changes in our
marketing strategy.
The increase in absolute dollars in fiscal 1999 compared to fiscal 1998
is the result of increased product tastings, both in retail locations and
sponsorships of community events, consultants and product research and
development.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were
$9.6 million in fiscal 2000 or 10.3% of net sales compared to $7.4 million or
10.9% of net sales in fiscal 1999 and $6.7 million or 11.4% of net sales in
fiscal 1998. General and administrative expenses increased in absolute dollars
primarily due to professional fees and a general increase in expenses resulting
from the Fresh Samantha acquisition. We expect that general and administrative
costs will increase in absolute dollars in fiscal 2001 as we continue to
integrate Fresh Samantha with Odwalla and invest in infrastructure, particularly
in information systems and research and development, to allow for sustainable
growth. In fiscal 1999, the increase in absolute dollars from fiscal 1998
resulted primarily from increased payroll in human resources, financial analysis
and information technology personnel, increased recruiting and search firm
costs, and consulting fees.
AMORTIZATION OF INTANGIBLE ASSETS FROM FRESH SAMANTHA ACQUISITION. The
cost of the intangible assets and goodwill acquired with the Fresh Samantha
acquisition are being amortized over their estimated useful lives as more fully
described in notes to the financial statements beginning on page 30. Due to the
significance of this expense, we have included it as a separate line item.
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 the 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
were recorded net of legal fees of $1.0 million in the third quarter of fiscal
2000.
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.
RECALL AND RELATED COSTS. On October 30, 1996, Odwalla was notified by
the State of Washington Environmental Health Services of an epidemiological link
between several cases of E. coli O157:H7 and Odwalla's apple juice products. We
immediately implemented a recall of all Odwalla products containing apple juice.
Odwalla incurred significant direct costs as a result of the recall. Under our
arrangement with our insurance company, we pay a portion of the legal fees
related to third party claims resulting from the recall and related claims. We
originally established a $2.2 million charge to establish a liability for future
professional fees related to the recall. The reserve for professional fees is an
estimate, and there can be no assurance that the actual reserved liability
established will be adequate. We reviewed this charge during fiscal 1998 and
believed that the reserve established was adequate. In fiscal 1999, we reviewed
available information, including recently filed claims, and added $250,000 to
this reserve. We reviewed this charge in fiscal 2000 and believe that the
remaining balance of the reserve established is reasonable. We will continue to
assess this liability and will make appropriate adjustments if circumstances
change. Approximately $800,000 of this reserve for professional fees remained at
September 2, 2000.
17
<PAGE> 19
In early 1997, Odwalla was informed that it was the subject of a
federal grand jury investigation (Eastern District of California) concerning the
1996 recall and related issues. In July 1998, in connection with the
investigation, we entered into a misdemeanor plea agreement with the U.S.
government, concerning 16 shipments in October 1996 of unpasteurized apple juice
from a single contaminated batch. As part of the plea agreement, Odwalla agreed
to pay, over a period of five years, $1.25 million to the U.S. government and
$250,000 to three non-profit organizations involved with advancing the cause of
food safety. We also agreed, as part of the conditions attached to a five-year
term of unsupervised Court probation, to develop and implement a HACCP plan and
to undertake other measures related to food safety. The net present value of the
payments of $1.24 million was recorded as a recall and related cost in fiscal
1998.
INTEREST AND OTHER EXPENSE (INCOME). Odwalla had net interest expense
in fiscal 2000 of $218,000 compared to net interest expense of $159,000 in
fiscal 1999 and $206,000 in fiscal 1998. Gross interest income of $268,000,
$278,000 and $160,000 in fiscal 2000, 1999 and 1998 resulted primarily from the
remainder of the proceeds of the May 1996 public offering, the proceeds in 1999
of the January 1999 Series A Preferred Stock offering, and the net proceeds of
the private placement in May 2000 in connection with the Fresh Samantha
acquisition. Gross interest expense of $486,000, $437,000 and $366,000 in fiscal
2000, 1999 and 1998 resulted primarily from interest on the line of credit,
capital lease interest and other debt, including capital leases and debt
acquired with the Fresh Samantha acquisition.
INCOME TAX BENEFIT. The $1.1 million tax expense in fiscal 2000 results
from taxes currently due of approximately $162,000 due primarily to minimum tax
and alternative minimum taxes plus deferred taxes of approximately $2.4 million
on temporary differences between book and tax income reduced by a $1.4 million
reduction in the deferred tax valuation allowance. The effective tax rate of 24%
for the year considers the effective tax rate of 15% applied prior to the Fresh
Samantha acquisition which was lower than the statutory tax rate primarily due
the valuation allowance established. The Fresh Samantha acquisition was
structured as a tax-free reorganization for income tax purposes. This results in
intangible and other assets with a basis for accounting purposes, as the
acquisition was accounted for using purchase accounting, that does not exist for
tax reporting purposes. Because the financial accounting basis will result in
future accounting amortization in excess of tax amortization, a deferred tax
liability was established to account for that difference. At the same time, most
of our deferred tax valuation allowance was removed and included in the
determination of the cost of goodwill in accordance with SFAS 109. We expect
that our effective tax rate will be 40% beginning in fiscal 2001.
The $359,000 and $25,000 income tax benefit for fiscal 1999 and 1998
results from the tax benefit associated with operating losses. The 15% effective
tax rate in 1999 and 1998 (after offsetting the impact of the non-deductible
settlement with the U.S. government discussed previously for 1998) 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. As noted above, most of the valuation allowance was
released in fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
At September 2, 2000, we had working capital of $11.7 million compared
to working capital of $7.7 million at August 28, 1999. The increase resulted
primarily from operating activities. At September 2, 2000, the Company had cash,
cash equivalents and short term investments of $5.4 million compared to $7.4
million at the end of fiscal 1999.
Net cash provided by operating activities in fiscal 2000 was $3.1
million. This consisted of the net income plus depreciation, amortization,
preferred stock inducement expense, deferred taxes and other non-current
liabilities, offset by increases in accounts receivable, inventory and prepaid
expenses and decreases in accounts payable and other accrued expenses. Increases
in accounts receivable are generally due to increased sales volume compared to
the same time period in fiscal 1999, particularly due to the Fresh Samantha
sales included since the May 2, 2000 acquisition. The inventory increase
represents primarily from frozen raw materials acquired or stored in the second
half of fiscal 2000 and the additional inventory resulting from the Fresh
Samantha acquisition and increased sales volume. Prepaid expenses increased
primarily due to the timing of insurance payments, advances for future costs and
refundable deposits and similar items. Accounts payable decreased when
considering the payment of liabilities acquired with the Fresh
18
<PAGE> 20
Samantha transaction. Accrued expenses, which include the reserve for recall
related professional fees, decreased primarily as we paid for previously
accrued costs.
Net cash used in investing activities for fiscal 2000 was $3.7 million.
The decrease consisted primarily of the sale of short-term investments offset by
capital expenditures for data processing and computer hardware and software,
production equipment at the Dinuba plant, display coolers and by cash costs of
the Fresh Samantha acquisition, representing primarily professional fees.
Net cash provided by financing activities for fiscal 2000 was $1.4
million. This consisted principally of proceeds from the sale of common stock in
a private placement at the time of the Fresh Samantha acquisition offset by
payments of debt acquired from Fresh Samantha and payment of long-term debt and
capital lease obligations.
We had purchase commitments for the future delivery of raw materials as
of September 2, 2000, approximately $2.5 million of which are under contracts
and are expected to be completed by January 2002.
We've used, and expect to continue to use, both operating and capital
lease financing to obtain refrigeration coolers used in selling our products,
computer and communication equipment, and production assets, primarily
equipment. If we don't obtain adequate lease or other financing, our inability
to obtain needed equipment may negatively impact our operations. At September 2,
2000, we owed $1.1 million for capital lease obligations, primarily related to
leasing of production equipment, computer equipment and vehicles.
In September 1999, we entered into a Revolving Credit Agreement with a
new lender and paid the balance then outstanding under, and terminated, our
prior security agreement. The Credit Agreement, which was further amended in
April 2000 in connection with the Fresh Samantha acquisition, provides borrowing
under a revolving credit facility up to $10.0 million. 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 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. 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. 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 interest rate paid as of
September 2, 2000 was 10.5%. The Credit Agreement has a three-year term. As of
September 2, 2000, we were not in compliance with one covenant as we had
exceeded the capital asset acquisition limitation included in the Credit
Agreement. We requested our lender to waive the specific September 2, 2000
covenant violation and, in November 2000, the lender granted the requested
waiver.
The increased costs associated with integrating Fresh Samantha, our
plans to invest in new products and certain new market areas, and general
corporate needs may cause us to seek additional financing that may be dilutive
to current investors or result in a higher debt-to-equity ratio than would
otherwise be the case. Any financing we obtain may not be on terms favorable to
us, even if it is available.
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.
19
<PAGE> 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. It is our policy not to enter into derivative
financial instruments. We do not currently have any significant foreign currency
exposure since we do not transact business in foreign currencies. Due to this,
we did not have significant overall currency exposure at September 2, 2000.
FOREIGN CURRENCY RATE RISK. As almost all of our sales and expenses
are denominated in U.S. dollars, we have experienced only insignificant foreign
exchange gains and losses to date, and we do not expect to incur significant
gains and losses. We do not engage in foreign currency hedging activities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated herein by
reference to the consolidated financial statements and supplementary data listed
in Item 14 of Part IV of this report.
All schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or notes
thereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information about the Company's directors and executive
officers as of November 21, 2000 is listed below. The remaining information
required by this Item 10 is incorporated by reference to the description under
the captions "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in our proxy statement for the Annual Meeting of
Shareholders to be held February 6, 2001.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
D. Stephen C. Williamson 42 Chairman of the Board and Chief Executive Officer
Doug Levin 39 President
James R. Steichen 50 Senior Vice President, Finance and Chief Financial Officer
Linda A. Frelka 39 Vice President, Quality Assurance
Theodore R. Leaman III 44 Vice President, Manufacturing
Karen Lucas 36 Vice President, Marketing and West Coast Sales
Susan M. Kirmayer 42 Vice President, Human Resources
John E. Stankiewicz 42 Vice President, East Coast Sales
Andrew B. Balson (2) 34 Director
Richard L. Grubman (1)(2) 38 Director
Ellis B. Jones (1) 46 Director
Mark E. Nunnelly 42 Director
Juan I. Prado 40 Director
Craig H. Sakin (1)(2) 40 Director
</TABLE>
(1) Member of Audit Committee
(2) Member of Compensation Committee
20
<PAGE> 22
D. STEPHEN C. WILLIAMSON currently serves as Chairman of the Board and
as Chief Executive Officer, a position he has held since June 1996. Prior to
that time, Mr. Williamson served as Co-Chairman of the Board and Co-Chief
Executive Officer from January 1995 to June 1996 and as Chief Financial Officer
of the Company from March 1991 to August 1996. Mr. Williamson also served as the
Company's President from May 1992 until January 1995. Mr. Williamson holds a
B.A. degree in history from the University of California at Berkeley. He is also
Chairman of Avenal Land & Oil Company, a private investment company.
DOUG LEVIN as served as President since May 2000. Mr. Levin was a
founder of Fresh Samantha in 1992 and has served in various positions, including
Chief Executive Officer since April 1, 1994. Mr. Levin holds a B.A. degree in
American Studies from Wesleyan University.
JAMES R. STEICHEN has served as Senior Vice President, Finance since
August 1998 and as Chief Financial Officer since September 1996. From May 1996
to August 1996, Mr. Steichen served as Vice President, Finance and had served as
a consultant to the Company since August 1995. Prior to that, he had been a
partner with BDO Seidman, LLP, a public accounting firm, since December 1990.
Mr. Steichen is a Certified Public Accountant and holds a B.S. degree from the
University of South Dakota.
LINDA A. FRELKA has served as Vice President, Quality Assurance since
September 1997. From October 1987 to August 1997, Ms. Frelka worked at Redi-Cut
Foods, Inc. in several quality assurance roles, most recently as Vice President
from 1995 to 1997. Ms. Frelka has a B.S. degree in Biological Sciences, emphasis
Microbiology, from Northern Illinois University.
SUSAN M. KIRMAYER has served as Vice President, Human Resources since
August 1998. From October 1997 until August 1998, Ms. Kirmayer served as
Director, Human Resources. From February 1992 to October 1997, Ms. Kirmayer
served as Director of Human Resources and Administrative Services for Collagen
Corporation. Ms. Kirmayer attended San Jose State University and majored in
Business Administration.
THEODORE R LEAMAN III has served as Vice President, Manufacturing since
April 1999. From January 1998 until April 1999, Mr. Leaman was Plant Manager for
Stouffer Foods, a subsidiary of Nestle Corporation. From January 1993 until
December 1998, Mr. Leaman served as Plant Manger for Contadina, another Nestle
Corporation subsidiary. Mr. Leaman received a B.S. in Industrial Management from
Carnegie-Mellon University.
KAREN LUCAS has served as Vice President, Marketing since August 1999
and as Vice President, Sales since August 2000. From December 1997 to August
1999, Ms. Lucas was Director of Marketing for Oberto Company. Ms. Lucas was
Senior Marketing Manager at Starbucks Corporation from January 1996 until
December 1997 and was Senior Brand Manager, Marketing at Chiquita Brands
International, Inc. from September 1991 to January 1996. Ms. Lucas has a B.S.
degree in Marketing from Miami University.
JOHN E. STANKIEWICZ has served as Vice President, East Coast Sales
since August 2000. Prior to that, Mr. Stankiewicz served as the Vice President,
Finance for Fresh Samantha since September 1998. From January 1997 until August
1998, Mr. Stankiewicz served as the Financial Controller for EJ Prescott, Inc.,
a privately held distribution company. From January 1995 until December 1996,
Mr. Stankiewicz served as Corporate Controller for C. Cowles and Co., a
privately held manufacturing company. Mr. Stankiewicz has a B.S. degree in
finance from Northeastern University.
ANDREW B. BALSON has served as a director of the Company since May
2000. Mr. Balson has been a Principal of Bain Capital, Inc. since June 1998 and
had been an Associate at Bain Capital since November 1996. Prior to this, Mr.
Balson was a consultant with Bain & Company since August 1994. Mr. Balson is
also a director of Domino's Pizza, Inc.
21
<PAGE> 23
RICHARD L. GRUBMAN has served as a director of the Company since August
1997. Mr. Grubman has been a Managing Director of Highfields Capital Management,
LP since April 1998. Prior to this, Mr. Grubman was a Managing Director of
Development Capital, LLC since January 1997 and a general partner of its
affiliate, Corporate Value Partners, LP, since November 1996. Mr. Grubman was
also previously President of Sycamore Capital Management, Inc., a position he
held since January 1996. From December 1992 to November 1995, Mr. Grubman was a
general partner of Lakeview Partners, L.P. During 1992, he was a vice president
of Gollust, Tierney and Oliver, Incorporated. Mr. Grubman holds an A.B. degree
in Art and Archaeology from Princeton University.
ELLIS B. JONES has served as a director of the Company since May 2000.
Mr. Jones currently serves as Managing Director of Wasserstein Perella & Co.,
Inc. and President of Wasserstein Perella Asset Management, the firm's merchant
banking and venture capital businesses. Prior to joining Wasserstein Perella in
February 1995, Mr. Jones was Managing Director/Head of Los Angeles Corporate
Finance at Salomon Brothers, Inc. from 1989 through 1994. Mr. Jones graduated
from the Yale School of Management and the University of California at Berkeley.
He currently serves as a director for a number of privately held companies. has
served as a director of the Company since May 2000.
MARK E. NUNNELLY has served as a director of the Company since May
2000. Mr. Nunnelly has been a Managing Director of Bain Capital since 1990.
Prior to that time, Mr. Nunnelly was a partner at Bain & Company and was
employed by Procter & Gamble Company Inc. in product management. Mr. Nunnelly
serves on the board of directors of several companies, including Domino's Pizza,
eCredit.com, Modus Media, Stream International, Inc., Advanced
Telecommunications, Inc. and DoubleClick, Inc.
JUAN I. PRADO has served as a director of the Company since August
2000. Mr. Prado has served as Chairman and CEO of Promisant Ltd., a provider of
internet financial services since March 1999. Prior to this, Mr. Prado served as
a senior officer of the Coca-Cola Company's Latin American Group since 1991. Mr.
Prado received an MBA from The Wharton School, an MA in languages and
international studies from The University of Pennsylvania, and a B.S. in
industrial engineering from Tufts University.
CRAIG H. SAKIN has served as a director of the Company since February
1999. Mr. Sakin has served as Managing Director of Catterton Partners, a group
of affiliated venture capital funds, since August 1996. From November 1991 to
August 1996, Mr. Sakin was Chairman of Gold Coast Beverage Distributors, a beer
distribution company, and also served as the Chief Executive Officer during this
period. Mr. Sakin holds a B.S. from St. Lawrence University.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference to the description under
the caption "Election of Directors" and "Executive Compensation" in Odwalla's
Proxy Statement for the Annual Meeting of Shareholders to be held February 6,
2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference to the description under
the caption "Election of Directors" and "Principal Stockholders" in Odwalla's
Proxy Statement for the Annual Meeting of Shareholders to be held February 6,
2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is incorporated by reference to the description under
the caption "Certain Relationships and Related Transactions" in Odwalla's Proxy
Statement for the Annual Meeting of Shareholders to be held February 6, 2001.
22
<PAGE> 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Report of independent accountants...................................25
Consolidated Balance Sheets, August 28, 1999 and September 2, 2000..26
Consolidated Statements of Operations, three years in the period
ended September 2, 2000.........................................27
Consolidated Statements of Changes in Shareholders' Equity,
three years in the period ended September 2, 2000...............28
Consolidated Statements of Cash Flows, three years in the period
ended September 2, 2000.........................................29
Notes to Consolidated Financial Statements..........................30
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1* Amended and Restated Articles of Incorporation of the
Registrant.
3.2*** Amended and Restated Bylaws of the Registrant.
4.1# Stock and Warrant Purchase Agreement dated January 7, 1999,
together with certain exhibits thereto.
10.1** Form of Indemnity Agreement entered into between the
Registrant and its directors and officers.
10.2* Registrant's 1993 Stock Option Plan, as amended (and related
stock option grant forms).
10.6** Promissory Note dated March 1, 1993 between the Registrant
and Greg A. Steltenpohl.
10.7** Promissory Note dated March 1, 1993 between the Registrant
and Bonnie Bassett Steltenpohl.
10.9* Registrant's 1994 Non-Employee Directors' Stock Option
Plan (and related stock option grant forms).
10.15*** Revolving Credit Agreement dated September 3, 1999 between
the Registrant and Imperial Bank
10.16*** Amendment Agreement dated April 28, 2000 between Registrant
and Imperial Bank.
10.17*** Employment Agreement dated May 2, 2000 between Registrant
and Douglas L. Levin.
10.18*** Stock Purchase Agreement dated February 11, 2000 between
Registrant, U.S. Equity Partners, L.P. and Catterton-Simon
Partners III, L.P.
10.19*** 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.
10.20*** Shareholders Rights Agreement dated May 2, 2000 among
Registrant, Samantha Investors, LLC, and the shareholders of
Registrant and other persons named therein.
10.21*** Preferred Stock Conversion Agreement dated as of April 24,
2000, between Registrant and Catterton-Simon Partners III,
L.P.
10.22*** Letter Agreement, dated May 1, 2000, from Bain Capital
Fund VI, L.P., to Registrant and Catterton-Simon Partners
III, L.P.
10.23## Agreement and Plan of Merger dated February 2, 2000 by and
among Registrant, Fresh Samantha, Inc., and Orange
Acquisition Sub, Inc.
21.1 Subsidiaries of the Registrant
23.1 Consent of independent accountants
27.1 Financial Data Schedule
</TABLE>
----------
* Incorporated by reference to Registrant's Report on Form 10-KSB for the
fiscal year ended August 31, 1994, as filed with the SEC.
23
<PAGE> 25
** Incorporated by reference to Registrant's Registration Statement on
Form SB-2, SEC File No. 33-71530-LA, as filed with the SEC on November
9, 1993, as amended.
*** Filed as an exhibit to the Registrant'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.
# Incorporated by reference to Registrant's Report on Form 10-Q for the
fiscal quarter ended November 28, 1998.
## Filed as an exhibit to the Registrant'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 also filed a Current Report on Form 8-K/A (File No.
0-23036) with the Securities and Exchange Commission on July 14, 2000. The Form
8-K/A report contained financial information under Item 2 and item 7, and
included financial statements.
24
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Odwalla, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Odwalla, Inc. and its subsidiary at September 2, 2000 and August 28, 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended September 2, 2000, in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America which require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
November 13, 2000
25
<PAGE> 27
ODWALLA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AUGUST 28, SEPTEMBER 2,
1999 2000
------------ ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 2,581 $ 3,374
Short term investments 4,788 2,018
Trade accounts receivable, less allowance for doubtful
accounts and product returns of $631 and $1,436 6,072 11,599
Inventories 3,718 6,705
Prepaid expenses and other current assets 1,820 2,357
Deferred tax asset, current 1,358 2,265
------------ ------------
Total current assets 20,337 28,318
------------ ------------
Plant, property and equipment, net 12,587 20,011
------------ ------------
Other assets
Intangible assets, net 1,117 35,091
Covenants not to compete, net 497 393
Deferred tax asset, non-current 520 4,864
Other noncurrent assets 247 677
------------ ------------
Total other assets 2,381 41,025
------------ ------------
Total assets $ 35,305 $ 89,354
============ ============
Current liabilities
Accounts payable $ 6,876 $ 9,139
Accrued payroll and related items 1,142 2,328
Line of credit 2,319 1,950
Other accruals 2,126 2,574
Income taxes payable - 24
Current maturities of capital lease obligations 28 372
Current maturities of long-term debt 172 219
------------ ------------
Total current liabilities 12,663 16,606
Capital lease obligations, less current maturities 15 735
Long-term debt, less current maturities 673 390
Deferred tax liability - 10,296
Other - 655
------------ ------------
Total liabilities 13,351 28,682
------------ ------------
Commitments and contingencies (Note 4)
Mandatorily redeemable and convertible preferred stock
Series A, no par value, shares authorized, 5,000,000; shares issued and
outstanding, 1,033,333 in 1999. Liquidation preference minimum,
$8,600,000 at August 28, 1999 7,505 -
------------ ------------
Shareholders' equity
Common stock, no par value, shares authorized, 15,000,000; shares
issued and outstanding, 5,125,000 and 11,033,000 29,750 72,948
Additional paid-in capital 62 -
Accumulated deficit (15,363) (12,276)
------------- -------------
Total shareholders' equity 14,449 60,672
------------ ------------
Total liabilities and shareholders' equity $ 35,305 $ 89,354
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 28
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
YEAR ENDED
--------------------------------------------------
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 59,088 $ 68,042 $ 93,450
Cost of sales 29,236 35,542 47,477
---------- ---------- ----------
Gross profit 29,852 32,500 45,973
---------- ---------- ----------
Operating expenses
Sales and distribution 20,445 24,254 31,815
Marketing 2,696 2,908 2,795
General and administrative 6,710 7,449 9,616
Amortization of intangible assets from Fresh
Samantha acquisition - - 711
Recall and related costs 1,242 250 -
---------- ---------- ----------
Total operating expenses 31,093 34,861 44,937
---------- ---------- ----------
Income (loss) from operations (1,241) (2,361) 1,036
Proceeds from insurance settlement, net of legal fees - - 5,458
Series A preferred stock inducement expense - - (1,587)
Other (expense) income, net (163) (40) (112)
----------- ----------- -----------
Income (loss) before income taxes (1,404) (2,401) 4,795
Income tax benefit (expense) 25 359 (1,140)
---------- ---------- -----------
Net income (loss) (1,379) (2,042) 3,655
Preferred stock dividend - (267) (568)
---------- ----------- -----------
Net income (loss) applicable to common shareholders $ (1,379) $ (2,309) $ 3,087
=========== =========== ==========
Basic net income (loss) applicable to common
shareholders per share $ (0.27) $ (0.45) $ 0.44
========== ========== ==========
Shares used in per share amounts 5,045 5,098 7,074
========== ========== ==========
Diluted net income (loss) applicable to common
shareholders per share $ (0.27) $ (0.45) $ 0.43
========== ========== ==========
Shares used in per share amounts 5,045 5,098 7,134
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 29
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock
--------------------- Additional Accumulated
Shares Amount Paid-in Capital deficit Total
------- --------- --------------- ----------- -------
<S> <C> <C> <C> <C> <C>
Balance, September 1, 1997 5,024 $ 29,310 $(11,675) $ 17,635
Exercise of common stock options 37 189 - 189
Net loss for the year - - (1,379) (1,379)
------ --------- -------- ---------
Balance, August 29, 1998 5,061 29,499 (13,054) 16,445
Exercise of common stock options 64 251 - 251
Issuance of stock warrants in connection with
preferred stock - - $ 62 - 62
Preferred Stock dividend - - - (267) (267)
Net loss for the year - - - (2,042) (2,042)
------ --------- ------ -------- ---------
Balance, August 28, 1999 5,125 29,750 62 (15,363) 14,449
Issuance of common stock to holders of Fresh Samantha
stock at time of acquisition 3,612 27,475 - - 27,475
Conversion of Series A convertible preferred stock
in connection with acquisition of Fresh Samantha 1,075 8,073 - - 8,073
Issuance of common stock to Series A preferred
shareholder as inducement to convert stock 259 1,649 (62) - 1,587
Issuance of common stock in private placement 961 6,000 - - 6,000
Exercise of common stock options 1 1 - - 1
Preferred Stock dividend - - - (568) (568)
Net income for the year - - - 3,655 3,655
------ --------- ------ -------- ---------
Balance, September 2, 2000 11,033 $ 72,948 $ - $(12,276) $ 60,672
====== ========= ====== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 30
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------
1998 1999 2000
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ (1,379) $ (2,042) $ 3,655
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 2,084 2,130 3,072
Amortization 251 220 933
US government settlement 1,242 - -
Deferred taxes (25) (348) 937
Preferred stock inducement expense - - 1,587
Gain on sale of assets (50) (141) (44)
Changes in assets and liabilities
Trade accounts receivable (881) (581) (2,819)
Inventories 866 (675) (1,599)
Refundable income taxes 660 - -
Prepaid expenses and other current assets (98) (844) (454)
Other noncurrent assets 77 81 (270)
Accounts payable (57) 1,537 (1,668)
Accrued payroll and related items (172) 51 345
Other accrued liabilities (1,001) (837) (1,280)
Other noncurrent liabilities - - 644
Income taxes payable - - 24
---------- ---------- ----------
Net cash provided by (used in) operating activities 1,517 (1,449) 3,063
---------- ----------- ----------
Cash flows from investing activities
Capital expenditures (1,391) (2,291) (5,344)
(Purchase) proceeds from short-term investments, net 1,008 (4,788) 2,770
Net cash costs of Fresh Samantha acquisition - - (1,239)
Proceeds from sale of assets 130 673 146
---------- ---------- ----------
Net cash used in investing activities (253) (6,406) (3,667)
----------- ----------- -----------
Cash flows from financing activities
Principal payments under long-term debt (301) (457) (294)
Net borrowings under line of credit 31 274 (369)
Payments of obligations under capital leases (209) (123) (114)
Issuance of mandatorily redeemable and convertible
preferred stock - 7,300 -
Payment of debt acquired from Fresh Samantha - - (3,827)
Sale of common stock 189 251 6,001
---------- ---------- ----------
Net cash provided by (used in) financing activities (290) 7,245 1,397
----------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 974 (610) 793
Cash and cash equivalents, beginning of period 2,217 3,191 2,581
---------- ---------- ----------
Cash and cash equivalents, end of period $ 3,191 $ 2,581 $ 3,374
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 31
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company. Odwalla's business is to provide easy access to great tasting
nourishment. We are the nation's leading branded super-premium beverage company,
delivering nourishment coast to coast with the Odwalla and Samantha lines of
more than 45 all natural juices, smoothies, dairy-free shakes, spring water and
natural food bars.
Basis of presentation and principles of consolidation. The accompanying
consolidated financial statements include the accounts of the Company and our
wholly owned subsidiaries Fresh Samantha, Inc., Fresh Samantha Juice Bars, Inc.
(collectively, Fresh Samantha) and Odwalla Canada, Inc. The accounts of Fresh
Samantha are included since May 2, 2000, the date of acquisition. We have
eliminated all significant intercompany balances and transactions. Beginning
September 1, 1997, we changed our annual reporting periods to the 52 or 53 week
period ending on the Saturday nearest August 31. The year ended September 2,
2000 contains 53 weeks. The change doesn't materially impact the comparability
of information presented in these financial statements. All references to years
refer to the Company's fiscal year. In these financial statements, our fiscal
years ended August 29, 1998, August 28, 1999 and September 2, 2000.
Use of estimates. To comply with generally accepted accounting principles, we
make estimates and use assumptions that affect the amounts reported in the
financial statements and disclosures made in the accompanying notes. Our most
significant estimates are related to the collectibility of accounts receivable,
reserves for products to be returned, reserves for inventory that may not be
useable and reserves for legal fees related to claims and litigation. We also
use estimates to determine the carrying value of goodwill and purchased
intangibles. Actual results may differ from our estimates.
Cash, cash equivalents and short term investments. We consider all
investments with an initial maturity of three months or less at the date of
purchase to be cash equivalents. Both cash equivalents and short term
investments are considered available-for-sale securities and are reported at
amortized cost, which approximates fair value. The following schedule summarizes
the estimated fair value of our cash, cash equivalents and short-term
investments (in thousands):
<TABLE>
<CAPTION>
AUGUST 28, SEPTEMBER 2,
1999 2000
----------- ------------
<S> <C> <C>
Cash and cash equivalents:
Cash $ 249 $ 2,277
Cash equivalents 2,332 1,097
----------- ----------
$ 2,581 $ 3,374
=========== ==========
Short term investments
U. S. government securities $ 4,788 $ -
Corporate obligations - 2,018
----------- ----------
$ 4,788 $ 2,018
=========== ==========
</TABLE>
Interest earned on cash, cash equivalents and short-term investments was
$278,000 and $268,000 in 1999 and 2000.
30
<PAGE> 32
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories. Inventories are valued at the lower of cost (first-in,
first-out) or market (net realizable value). Our inventories consist of the
following (in thousands):
<TABLE>
<CAPTION>
AUGUST 28, SEPTEMBER 2,
1999 2000
------------ ------------
<S> <C> <C>
Raw materials $ 2,433 $ 4,276
Packaging supplies and other 629 944
Finished product 656 1,485
---------- ----------
Total $ 3,718 $ 6,705
========== ==========
</TABLE>
Plant, property, equipment and depreciation. Plant, property and
equipment are stated at the lower of cost or, if impaired, the fair value at
date of impairment. We calculate depreciation and amortization using the
straight-line method over the estimated useful lives of the assets. For
leasehold improvements, the amortization period is the shorter of the estimated
useful life or the remaining lease term. Amortization of assets under capital
leases is based upon the shorter of the lease term or useful life of the leased
asset and is included with depreciation expense.
Estimated useful lives that we use are as follows:
<TABLE>
<S> <C>
Buildings and building improvements .......................... 7 to 35 years
Leasehold improvements........................................ 3 to 15 years
Machinery and equipment....................................... 3 to 15 years
Vehicles...................................................... 5 years
Other......................................................... 3 to 7 years
</TABLE>
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 28, SEPTEMBER 2,
1999 2000
----------- -----------
<S> <C> <C>
Land $ 618 $ 618
Buildings and building improvements 7,220 7,244
Leasehold improvements 1,397 2,314
Machinery and equipment 7,370 14,018
Vehicles 762 997
Computer and data processing 2,242 4,019
Other 1,726 1,619
---------- ----------
21,335 30,829
Less accumulated depreciation and amortization (8,748) (10,818)
----------- -----------
Plant, property and equipment, net $ 12,587 $ 20,011
========== ==========
</TABLE>
31
<PAGE> 33
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets and covenants not to compete. Working with third parties,
we evaluate the fair value of intangible assets that we acquire. We record
goodwill when the cost of net assets we acquire exceeds their fair value.
Intangible assets and goodwill are amortized on a straight-line basis over their
estimated life. We regularly perform reviews to determine if the carrying value
of the assets is impaired. The reviews look for the existence of facts or
circumstances, either internal or external, which indicate the carrying value of
the asset cannot be recovered. No such impairment has been indicated to date. If
there is impairment in the future, we will measure the amount of the loss based
on undiscounted expected future cash flows from the impaired assets. The cash
flow calculations would be based on management's best estimates, using
appropriate assumptions and projections at the time.
We entered into covenants not to compete when we acquired certain
businesses. The cost is amortized on a straight-line basis over the life of the
agreements.
Goodwill and covenants not to compete consisted of the following (in
thousands):
<TABLE>
<CAPTION>
AUGUST 28, SEPTEMBER 2, ESTIMATED LIFE
1999 2000 (IN YEARS)
----------- ----------- ---------------
<S> <C> <C> <C>
Goodwill $ 1,620 $ 10,642 15 - 20
Trade name - 21,980 20
Customer list - 3,790 5
---------- ----------
1,620 36,412
Accumulated amortization (503) (1,321)
---------- ----------
Net $ 1,117 $ 35,091
========== ==========
Covenants not to compete $ 990 $ 890 10
Accumulated amortization (493) (497)
---------- ----------
Net $ 497 $ 393
========== ==========
</TABLE>
Concentration of credit risk. Odwalla operates a multi-faceted business,
both manufacturing and distribution. Many circumstances could have an
unfavorable impact on our operating results. Examples include unfavorable
weather impact on raw materials, changes in government regulations, changes in
consumer demands or the emergence of significant competitors. A large portion of
our business and our customers are currently concentrated in Northern
California.
We are also subject to risks related to our significant trade accounts
receivable, although our customer base is generally diversified in each of our
market areas due to the number of accounts that we service. We perform ongoing
evaluations of customer credit to reduce the risk associated with accounts
receivable. We maintain reserves for estimated credit losses, based on specific
customers, historical trends and other information, and those losses have
historically been within our expectations.
One customer represented approximately 13%, 13% and 11% of sales in 1998,
1999, and 2000.
Revenue recognition. We recognize sales when products are delivered to our
customers. Most of our sales are through our own direct-store-delivery or
direct-store-delivery system. We usually guarantee that sales through our
direct-store-delivery system will be sold to consumers and we record a reserve
for products estimated to be returned. Most of our sales to independent
distributors are not guaranteed. We implemented the guidance in EITF 00-14,
Accounting for Certain Sales Incentives, which does not represent a change from
our existing accounting policies. Accordingly, any cash sales incentives are
classified as a reduction of revenue.
32
<PAGE> 34
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per share. Basic earnings per share is computed using the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed using the weighted average number of common and
dilutive common equivalent shares outstanding during the period. Common
equivalent shares consist of the shares issuable upon the exercise of stock
options and warrants under the treasury stock method.
The following table shows the computation of basic and diluted earnings
per share, in thousands except per share data:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
1998 1999 2000
---------- --------- ---------
<S> <C> <C> <C>
Basic:
Weighted average common shares outstanding 5,045 5,098 7,074
Net income (loss) $ (1,379) $ (2,042) $ 3,655
Net income (loss) attributable to common shareholders $ (1,379) $ (2,309) $ 3,087
Per share amount, attributable to common shareholders $ (0.27) $ (0.45) $ 0.44
Diluted:
Weighted average common shares outstanding 5,045 5,098 7,074
Common equivalent shares - - 60
Shares used in per share amounts 5,045 5,098 7,134
Net income (loss) $ (1,379) $ (2,042) $ 3,655
Net income (loss) attributable to common shareholders $ (1,379) $ (2,309) $ 3,087
Per share amount, attributable to common shareholders $ (0.27) $ (0.45) $ 0.43
</TABLE>
We had no dilutive common equivalent shares during fiscal 1998 or 1999
due to the reported net loss.
Reclassifications. To conform with new classifications in our fiscal
2000 financial statement presentation, we reclassified certain prior year
expenses. The primary reclassification was an increase ($163,000 for fiscal 1998
and $198,000 for the fiscal 1999) in sales and distribution costs and a
corresponding decrease in general and administrative expenses. We also
reclassified certain accounts on the balance sheet which increased prepaid
expenses and other assets at August 28, 1999 by $290,000 and decreased property,
plant and equipment by a corresponding amount.
2. 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.
33
<PAGE> 35
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total purchase price of approximately $29.0 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 $1.5 million,
consisting principally of professional fees. The purchase price of $29.0 million
plus $1.7 million in net assumed liabilities and $3.8 million in acquired
deferred tax asset, net of a $10.2 million deferred tax liability and the
release of a deferred tax valuation allowance of $2.3 million recorded in
accordance with Statement of Financial Accounting Standards No. 109, resulted in
total intangible assets related to the Fresh Samantha acquisition of $34.8
million. After evaluating the nature of the intangible assets acquired, the
acquisition cost was allocated as follows (amounts in thousands):
<TABLE>
<S> <C>
Trade name ..................................... $ 21,980
Customer list................................... 3,790
Goodwill........................................ 9,022
----------
$ 34,792
</TABLE>
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 following unaudited pro forma financial information shows pro forma
net revenue, net loss and net 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>
Year ended
-----------------------------
1999 2000
----------- -----------
(in thousands, except per share data)
(unaudited)
<S> <C> <C>
Revenue $ 100,200 $ 121,472
Net loss (10,550) (462)
Loss per share
Basic $ (0.96) $ (0.04)
Diluted $ (0.96) $ (0.04)
Weighted average shares
Basic 11,004 11,033
Diluted 11,004 11,033
</TABLE>
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-
34
<PAGE> 36
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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.
3. DEBT
LINE OF CREDIT
In May 1997, we entered into a Loan and Security Agreement ("Security
Agreement") with a lender which provided a revolving line of credit up to $5.0
million. Our borrowings were limited to 85% of eligible accounts receivable
("Receivable Line") plus up to $500,000 for new capital equipment ("Equipment
Line"). Eligible accounts receivable were defined in the Security Agreement and
generally represented all trade accounts receivable less balances that were
delinquent. We paid monthly interest on borrowings at prime plus 1.5%. During
1999, we borrowed only under the Receivable Line. If we borrowed under the
Equipment Line, we would pay interest only for the first three months and then
pay monthly interest and principal payments using a 45 month amortization
schedule.
The Security Agreement contained certain restrictions, including the
ability to borrow additional funds, pay dividends, purchase or otherwise acquire
Company stock, or encumber or sell Company assets. The interest rate changed to
prime plus 2% if our adjusted net worth, as defined, was less than $14 million.
We were required to pay interest on $2 million whether or not we borrowed that
amount and, accordingly, we had borrowed approximately $2.3 million under the
Receivable Line at August 28, 1999. All of our assets were pledged as collateral
under the Security Agreement.
In September 1999, we entered into a Revolving Credit Agreement
("Credit Agreement") with a new lender and paid the balance then outstanding
under, and terminated, the Security Agreement. The Credit Agreement provides a
revolving credit facility up to $5.0 million. The first $2.0 million of
borrowings do not require separate borrowing base reporting. Borrowings over
$2.0 million and up to $5.0 million are limited to 80% of eligible accounts
receivable. The Credit Agreement defines eligible accounts receivable which
generally represents all trade accounts receivable less delinquent balances.
Interest is payable monthly at either the prime interest rate plus 1% or the
Eurodollar rate plus 3.5%. The interest rate to be incurred is selected by
Odwalla at the inception of each loan and may be changed during the period in
which the borrowed amount is outstanding in accordance with provisions included
in the Credit Agreement. The interest rate paid as of September 2, 2000 was
10.5%. 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.
35
<PAGE> 37
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 2, 2000, we were not in compliance with one covenant as
we had exceeded the capital asset acquisition limitation included in the Credit
Agreement. We requested our lender to waive the specific September 2, 2000
covenant violation and, in November 2000, the lender granted the requested
waiver.
LONG-TERM DEBT
As part of our plea agreement with the U.S. government discussed in
Note 4, we agreed to pay $1.5 million over a five-year period, without interest.
Generally accepted accounting principles require that we impute interest, which
means that we record the obligation on a discounted basis and charge the income
statement with interest expense (in this situation, at 9.5% per year) over the
five-year period. The discounted amount recorded in July 1998 was $1,242,000.
The U.S. government may file a lien on all of our assets under the plea
agreement but, if they do, has agreed to allow the Security Agreement holder
(subsequently modified to substitute the Credit Agreement holder) to retain
priority interest in our assets.
The carrying value of debt approximates its fair value except that we
carry the value of the U.S. government debt at cost less imputed interest, as
discussed above, as there is no reasonable way to evaluate this non-interest
bearing obligation.
The following summarizes long-term debt (in thousands):
<TABLE>
<CAPTION>
AUGUST 28, SEPTEMBER 2,
1999 2000
----------- -----------
<S> <C> <C>
U.S. government obligation $ 845 $ 581
Other - 28
-------- --------
845 609
Less current portion 172 219
-------- --------
$ 673 $ 390
======== ========
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
OPERATING AND CAPITAL LEASES
Odwalla leases office space, branch distribution facilities, equipment
and vehicles under various operating leases. These leases expire at various
dates through 2007 and many facility leases contain renewal options. Most
property leases require us to pay utilities, property taxes and common
maintenance costs. Total operating lease rent expense was $5.5 million, $5.6
million and $6.2 million for the years ended in 1998, 1999 and 2000. Odwalla
also leases some furniture, equipment and vehicles under capital leases expiring
through 2004.
36
<PAGE> 38
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table lists property under capital leases by major
classes (in thousands):
<TABLE>
<CAPTION>
AUGUST 28, SEPTEMBER 2,
1999 2000
----------- -----------
<S> <C> <C>
Machinery and equipment $ 183 $ 488
Vehicles 108 232
Computer and data processing 41 472
Other - 18
-------- -------
332 1,210
Less accumulated amortization (267) (124)
--------- --------
Net leased equipment under capital leases $ 65 $ 1,086
======== =======
</TABLE>
Future net minimum lease payments under existing capital and
operating leases as of September 2, 2000, are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING IN AUGUST LEASES LEASES
--------------------- ------- --------
<S> <C> <C>
2001 $ 498 $ 6,924
2002 440 4,810
2003 350 4,602
2004 79 3,617
2005 - 2,421
Thereafter - 3,152
------ --------
1,367 $ 25,528
========
Less amount representing interest (260)
------
Present value of net minimum lease payments 1,107
Less current maturities (372)
------
Long-term portion $ 735
======
</TABLE>
We occasionally sublease all or portions of our leased facilities to
third parties under sublease agreements. We earned $54,000, $26,000 and $9,000
under sublease agreements in 1998, 1999 and 2000.
RAW MATERIAL CONTRACTS
We had purchase commitments for the future delivery of raw materials as
of September 2, 2000, approximately $2.5 million of which are under contracts
and are expected to be completed by January 2002.
RECALL AND RELATED COSTS
On October 30, 1996, Odwalla was notified by the State of Washington
Environmental Health Services of an epidemiological link between several cases
of E. coli O157:H7 and Odwalla's apple juice products. We immediately
implemented a recall of all Odwalla products containing apple juice.
Twenty-two personal injury claims and legal proceedings have been filed
against Odwalla seeking monetary damages and other relief relating to the
recall. There was also one legal proceeding alleging fraudulent business acts
and practices relating to the recall products. Twenty of these claims and
proceedings have been settled. In addition, approximately 600 other claims for
damages resulting from the recall were presented to our insurance carrier and
approximately 595 of those claims have been settled. We also received two claims
in fiscal 1999 allegedly arising out of product consumption prior to the recall,
which have both been settled. Settlement of the personal injury legal
37
<PAGE> 39
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
proceedings and claims was covered under our insurance policy. At this time, we
are unable to determine the potential liability from the remaining legal
proceedings and claims. We believe our insurance coverage is adequate to cover
such claims and legal proceedings, but the ultimate outcome of any litigation is
uncertain and we cannot be certain that insurance coverage will be adequate.
Litigation can also have an adverse impact on a company, regardless of the
outcome, due to defense costs, diversion of management resources and other
factors.
In early 1997, Odwalla was informed that it was the subject of a
federal grand jury investigation (Eastern District of California) concerning the
E. coli O157:H7 incident and related issues. In July 1998, in connection with
the investigation, we entered into a misdemeanor plea agreement with the U.S.
government, concerning 16 shipments in October 1996 of unpasteurized apple juice
from a single contaminated batch. As part of the plea agreement, Odwalla agreed
to pay, over a period of five years, $1.25 million to the U.S. government and
$250,000 to three non-profit organizations involved with advancing the cause of
food safety. We also agreed, as part of the conditions attached to a five-year
term of unsupervised Court probation, to develop and implement a HACCP plan and
to undertake other measures related to food safety. The net present value of the
payments of $1.24 million was recorded as a recall and related cost in fiscal
1998.
Odwalla also incurred significant direct costs as a result of the
recall. Under our arrangement with our insurance company, we pay a portion of
the legal fees related to third party claims resulting from the recall and
related claims. We originally established a $2.2 million charge to establish a
liability for future professional fees related to the recall. The reserve for
professional fees is an estimate, and there can be no assurance that the actual
reserved liability established will be adequate. We reviewed this charge during
fiscal 1998 and believed that the reserve established was adequate. In fiscal
1999, we reviewed available information, including recently filed claims, and
added $250,000 to this reserve. We reviewed this charge in fiscal 2000 and
believe that the remaining balance of the reserve established is reasonable. We
will continue to assess this liability and will make appropriate adjustments if
circumstances change. Approximately $800,000 of this reserve for professional
fees remained at September 2, 2000.
Odwalla maintains insurance coverage for product recall, product
adulteration, lost income and other first party business risks. The claim we
submitted to our insurance carriers for product recall costs and for business
losses incurred due to the recall was denied for substantially all of the
amounts claimed. On May 21, 1999, we 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. On April 12, 2000, we entered into a Mutual Release and
Settlement Agreement with the insurance company regarding the business
interruption insurance claim. Under the Mutual Release and Settlement Agreement,
the insurance company agreed to pay us $6.5 million and, in connection with the
settlement, we dismissed our lawsuit against the insurance company. The proceeds
from the insurance settlement were recorded net of legal fees of $1.0 million.
5. MANDATORILY REDEEMABLE AND CONVERTIBLE PREFERRED STOCK
Series A Preferred Stock. On January 7, 1999, we signed an agreement
with Catterton-Simon Partners III, L.P. ("Catterton-Simon"), a Delaware limited
partnership, to sell 1,000,000 shares of Odwalla Series A Preferred Stock
("Series A Stock") at $8.00 per share. The Series A Stock received an 8% annual
dividend which was payable in either cash or additional Series A Stock, at our
election. The dividend was payable semi-annually. All Series A Stock was
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
were entitled to preferential payment, in the event of any liquidation of
Odwalla, in an amount equal to the greater of $8.00 per share, plus any accrued
but unpaid dividends, or the amount due each holder of common stock.
Catterton-Simon also received a warrant to purchase 75,000 shares of Odwalla
common stock at $10.00 per share. The warrant expired in
38
<PAGE> 40
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
seven years.
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.
As previously discussed, 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 on May
2, 2000, 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 the 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. 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.
Preferred stock dividends recorded represent dividends declared by our
Board of Directors, prior to the conversion, for the Series A shareholder. All
dividends were paid in common stock.
5. SHAREHOLDERS' EQUITY
Warrants. A warrant for 4,640 shares of common stock at $3.23 per share
was issued in 1993 in connection with lease financing. Those warrants expire in
September 2000. We also issued two warrants in connection with the Series A
Preferred Stock financing described above. One warrant, issued for 75,000 shares
of common stock at $10.00 per share expiring in February 2006, was cancelled in
connection with the conversion of the Series A Preferred Stock at the time of
the Fresh Samantha acquisition as noted previously. The other warrant was issued
for 24,806 shares of common stock at $6.45 per share expiring in February 2004.
In 1997, we also issued a warrant for 7,000 shares of common stock at $12.50 per
share (fair market value at issue date), which expires in May 2002, in
connection with a loan agreement that has since expired.
Stock Option Plans. Under the 1993 Stock Option Plan, incentive stock
options could be granted to employees and nonstatutory stock options could be
granted to employees, directors or consultants. In December 1994, the Board of
Directors adopted the 1994 Non-Employee Directors' Stock Option Plan
("Directors' Plan") and, in January 1995, the shareholders approved this plan.
Incentive options may be granted at an exercise price not less than 100% of fair
market value on the grant date; nonstatutory options may be granted at an
exercise price not less than 85% of fair market value on the grant date. The
options generally vest one-sixtieth per month from the grant date, although
approximately 85,000 outstanding nonstatutory options vested immediately on the
grant date. Directors' Plan options may be granted at an exercise price not less
than 100% of fair market value and generally vest quarterly over a five-year
period. In general, options terminate ten years from date of grant.
In April 1997, Odwalla's shareholders approved the 1997 Stock Incentive
Plan ("1997 Plan") which replaced both the Stock Option Plan and the Directors'
Plan. The 1997 Plan consists of three programs: (i) a Discretionary Option Grant
Program ("Discretionary Program"), (ii) a Stock Issuance Program ("Stock
Program"), and (iii) an Automatic Option Grant Program ("Automatic Program"). A
total of 1,648,475 shares of common stock are reserved for issuance under the
1997 Plan, which includes all outstanding options under the Stock Option Plan
and Directors' Plan. In April 2000, Odwalla's shareholders approved an
additional 500,000 shares of common stock to be added to the 1997 Plan.
39
<PAGE> 41
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Discretionary Program allows us to issue both incentive and
non-qualified stock options, at an exercise price not less than 100% of fair
market value on the grant date, which expire ten years or less from the grant
date; vesting is generally in a series of installments measured from the grant
date. The Stock Program allows us to issue common stock directly for cash,
promissory note or for past services with no cash payment; vesting may be
immediate or in one or more installments. The Automatic Program awards 5,000
shares of common stock to each non-employee Board member upon initial election
or appointment and 3,000 shares of common stock at each annual shareholders
meeting. Awards under the Automatic Program are made at an exercise price equal
to the closing fair market value of the Company's common stock on the award
date, will have a maximum term of ten years from the grant date and vest in
annual installments over a four year period at the 5,000 share award level and
after one year for the 3,000 share award level. Under all programs of the 1997
Plan, accelerated vesting provisions apply in certain situations.
The activity under the above plans was as follows:
<TABLE>
<CAPTION>
SHARES AVAILABLE OPTIONS OPTION PRICE WEIGHTED AVERAGE
FOR GRANT OUTSTANDING PER SHARE PRICE PER SHARE
--------- ----------- ---------- ---------------
<S> <C> <C> <C> <C>
Balance at September 1, 1997 697,078 898,835 $3.33-$13.75 $8.59
Options granted (491,915) 491,915 $7.88-$12.50 $10.36
Options exercised - (35,182) $3.90-$10.62 $5.38
Options canceled 114,919 (114,919) $3.33-$13.75 $10.51
-------- ---------
Balance at August 29, 1998 320,082 1,240,649 $3.33-$13.75 $9.18
Options granted (448,750) 448,750 $5.44-$10.06 $6.74
Options exercised - (66,070) $3.33-$3.90 $3.89
Options canceled 195,476 (195,476) $3.33-$13.75 $10.42
-------- ---------
Balance at August 28, 1999 66,808 1,427,853 $3.33-$13.75 $8.56
Additional shares reserved 500,000 -
Options granted (416,111) 416,111 $4.875-$7.125 $6.59
Options exercised - (1,085) $6.375-$7.125 $6.66
Options canceled 258,950 (258,950) $3.33-$13.75 $9.11
-------- ---------
Balance at September 2, 2000 409,647 1,583,929 $3.33-$13.75 $7.95
======== =========
</TABLE>
We follow Accounting Principles Board Opinion 25 ("APB 25"),
"Accounting for Stock Issued to Employees," in accounting for stock-based
compensation. Accordingly, we are not required to record compensation expense
when stock options are granted to employees, as long as the exercise price is
not less than the fair market value of the stock when the option is granted. All
options that we have granted were at exercise prices at or above fair market
value of the common stock. In October 1995, the FASB issued SFAS 123,
"Accounting for Stock-Based Compensation." Although SFAS 123 allows us to
continue to follow the present APB 25 guidelines, we are required to disclose
pro forma net income (loss) and net income (loss) per share as if we had adopted
the new statement. The pro forma impact of applying SFAS 123 in fiscal 1998,
1999 and 2000 is not likely to be representative of the pro forma impact in
future years.
We have elected to use the Black-Scholes model to estimate the fair
value of options granted. This valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. This model requires the input of highly subjective
assumptions including the expected stock price volatility. Because our employee
stock options have characteristics significantly different from those of traded
options, and
40
<PAGE> 42
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
because changes in the subjective input assumptions can materially affect this
estimate, we believe the Black-Scholes model does not necessarily provide a
reliable single measure of fair value of our employee stock options. Inputs
used for the valuation model are as follows for 1998, 1999 and 2000: dividend
yield of 0% for all years; expected volatility of 5.2%, 4.5% and 4.8%;
risk-free interest rates of 6.1%, 5.4% and 6.0%; and expected lives
approximating 5 years for all years.
Had the fair value of the options been calculated in accordance with
FAS 123, net income (loss) applicable to common shareholders would have been
$(1,786,000), $(2,634,000) and $2,736,000 and basic net income (loss) per share
applicable to common shareholders would have been $(0.35), $(0.52) and $0.39 for
fiscal 1998, 1999 and 2000.
There were 682,498, 790,940 and 976,081 options exercisable at the end
of fiscal 1998, 1999 and 2000. The weighted average exercise price of options
exercisable at the end of 1998, 1999 and 2000 was $8.05, $8.70 and $8.42 per
share. At September 2, 2000, a total of approximately 2,148,475 shares of common
stock have been reserved for issuance under the Company's stock option plans.
The following table summarizes information about options outstanding at
September 2, 2000:
<TABLE>
<CAPTION>
Weighted Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life (years) Price Exercisable Price
----- ------------ ------------ ----- ------------ -----
<S> <C> <C> <C> <C> <C>
$3.33 - $6.75 679,623 7.5 $6.14 325,190 $5.79
$6.875 - $10.25 582,933 7.6 $8.27 366,385 $8.61
$10.625 - $13.75 321,373 4.26 $11.20 284,506 $11.19
----------- -----------
1,583,929 6.9 $7.95 976,081 $8.42
=========== ===========
</TABLE>
6. EMPLOYEE BENEFIT PLAN
Odwalla matches 10% of each employee's contribution to our 401(k)
Employee Benefit Plan ("Plan"). Odwalla contributions to the Plan approximated
$45,000, $52,000 and $55,000 in 1998, 1999 and 2000.
7. TAXES ON INCOME
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. We provide a
valuation allowance against certain deferred tax assets due to the uncertainty
of whether we will ultimately realize their benefit.
Deferred tax assets consist principally of the following (in
thousands):
<TABLE>
<CAPTION>
AUGUST 28, SEPTEMBER 2,
1999 2000
----------- -----------
<S> <C> <C>
Reserves and accruals $ 901 $ 1,938
Net operating loss carryforward 4,873 4,744
Tax credits 62 152
Property, plant and equipment (234) 386
Inventories 25 75
Other 293 170
-------- --------
5,920 7,465
Less valuation allowance (4,042) (336)
-------- --------
Net deferred tax asset $ 1,878 $ 7,129
======== ========
</TABLE>
41
<PAGE> 43
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred tax liability consist principally of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 2,
2000
------------
<S> <C>
Basis difference from acquisition $ 10,173
Property, plant and equipment 123
--------
Net deferred tax liability $ 10,296
========
</TABLE>
The basis difference from acquisition results from the Fresh
Samantha acquisition. The acquisition was structured as a tax-free
reorganization for income tax purposes. This results in intangible and other
assets with a basis for accounting purposes, as the acquisition was accounted
for using the purchase method, that does not exist for tax reporting purposes.
Because the financial accounting basis will result in future accounting
amortization in excess of tax amortization, a deferred tax liability was
established to account for that difference.
The Company's effective tax rate differs from the federal statutory
rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
1998 1999 2000
---- ------ -----
<S> <C> <C> <C>
Federal statutory tax rate (34)% (34)% 35%
State income taxes (5) (5) 5
Deferred tax asset valuation allowance 12 25 (30)
Permanent differences and other 25 (1) 14
-------- ------- ----
(2)% (15)% 24%
======= =========== =========
</TABLE>
The permanent difference in fiscal 1998 results primarily from the
settlement with the U.S. government described previously. The permanent
difference in fiscal 2000 results primarily from the Series A preferred stock
inducement expense.
Taxes on income consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------
1998 1999 2000
---- ------ -----
<S> <C> <C> <C>
Current:
Federal $ - $ - $ 134
State - - 28
------- -------- --------
- - 162
------- -------- --------
Deferred:
Federal (68) (860) 2,227
State 3 (131) 164
------- -------- --------
(65) (991) 2,391
------- -------- --------
Change in valuation allowance (see below) 40 632 (1,413)
------- -------- --------
$ (25) $ (359) $ 1,140
======= ======== ========
</TABLE>
The valuation allowance was reduced from $4.0 million at the beginning
of fiscal 2000 to $336,000 at the end of the year. The reduction consists of two
components. The first component, shown above, represents the change that
42
<PAGE> 44
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
impacts taxes on income for fiscal 2000. The second component represents the
portion of the valuation allowance, $2.3 million, that was reduced as part of
the recording of the Fresh Samantha acquisition.
At September 2, 2000, we had federal and state net operating loss
carryforwards of $12.3 million and $8.2 million, respectively, which expire
between 2002 and 2019.
8. RELATED PARTY TRANSACTIONS
We retained a board member for consulting services and incurred fees of
$27,500 and $9,000 in 1998 and 1999. The board member resigned in May 2000.
9. OTHER (EXPENSE) INCOME, NET
Other (expense) income consisted of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------
1998 1999 2000
------ ------ ------
<S> <C> <C> <C>
Interest income $ 160 $ 278 $ 268
Interest expense (366) (437) (486)
Other 43 119 106
------- ------ --------
$ (163) $ (40) (112)
======= ====== ========
</TABLE>
Included in other income for 1999 is a gain of $145,000 on the sale
of land adjacent to our administrative offices in Half Moon Bay, California.
10. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND PRODUCT RETURNS
The following summarizes activity in the allowance for doubtful
accounts and product returns for the years shown (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------
1998 1999 2000
------ ------ -----
<S> <C> <C> <C>
Allowance for doubtful accounts and product returns,
beginning of year $ 592 $ 588 $ 631
Allowance purchased with Fresh Samantha acquisition - - 295
Bad debt expense and change in allowance for product
returns for the year 258 360 1,061
Accounts receivable written off during the year (262) (317) (551)
------ ------ ------
Allowance for doubtful accounts and product returns,
end of year $ 588 $ 631 $1,436
====== ====== ======
</TABLE>
11. SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOW
Noncash investing and financing activities: In 1998, we entered into a
settlement with the US government which requires us to pay $1.5 million over a
five-year period. In 2000, we entered into capital lease obligations and
acquired assets valued at $634,000 in addition to the assets valued at $535,000
that we acquired through the Fresh
43
<PAGE> 45
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Samantha acquisition. The acquisition of Fresh Samantha in fiscal 2000 resulted
from a non-cash transaction as discussed in Note 2 to the financial statements.
Cash paid for interest in 1998, 1999 and 2000 was $315,000, $437,000,
and $380,000. Income taxes paid in 1998, 1999 and 2000 was 41,000, $2,000 and
$145,000.
44
<PAGE> 46
ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Net income (loss) Basic and diluted
attributable net income (loss)
Net Gross Net income to common attributable to common
Sales Profit (loss) shareholders shareholders per share
--------- --------- ---------- ------------------ ----------------------
Fully
Basic Diluted
--------- ---------
<S> <C> <C> <C> <C> <C> <C>
1998
----
1st Quarter $ 14,150 $ 7,039 $ (175) $ (175) $ (0.03) $ (0.03)
2nd Quarter 14,192 6,949 (274) (274) (0.05) (0.05)
3rd Quarter 15,446 7,974 140 140 0.03 0.03
4th Quarter 15,300 7,889 (1,070) (1,070) (0.21) (0.21)
--------- --------- --------- --------
$ 59,088 $ 29,852 $ (1,379) $ (1,379) $ (0.27) $ (0.27)
========= ========= ========= ======== ======= ========
1999
----
1st Quarter $ 15,332 $ 7,696 $ (479) $ (479) $ (0.09) $ (0.09)
2nd Quarter 16,342 7,333 (817) (817) (0.16) (0.16)
3rd Quarter 19,124 9,048 (279) (279) (0.05) (0.05)
4th Quarter 17,244 8,419 (467) (734) (0.14) (0.14)
--------- --------- --------- --------
$ 68,042 $ 32,500 $ (2,042) $ (2,309) $ (0.45) $ (0.45)
========= ========= ========= ======== ======= ========
2000
----
1st Quarter $ 16,769 $ 7,813 $ (725) $ (938) $ (0.18) $ (0.18)
2nd Quarter 18,090 8,505 (266) (479) (0.09) (0.09)
3rd Quarter 25,682 12,994 4,112 3,970 0.59 0.58
4th Quarter 32,909 16,661 534 534 0.05 0.05
--------- --------- --------- --------
$ 93,450 $ 45,973 $ 3,655 $ 3,087 $ 0.44 $ 0.43
========= ========= ========= ======== ======= ========
</TABLE>
45
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on November 29, 2000.
ODWALLA, INC.
By /s/ D. STEPHEN C. WILLIAMSON
-----------------------------
D. Stephen C. Williamson
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints D. Stephen C. Williamson and James R.
Steichen, as his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-effective
amendments) to this Report on Form 10-K, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ D. STEPHEN C. WILLIAMSON Chairman of the Board and November 29, 2000
----------------------------
D. Stephen C. Williamson Chief Executive Officer
(Principal Executive Officer)
/s/ ANDREW B. BALSON Director November 29, 2000
------------------------------------
Andrew B. Balson
/s/ RICHARD L. GRUBMAN Director November 29, 2000
---------------------------
Richard L. Grubman
/s/ ELLIS B. JONES Director November 29, 2000
------------------------------------
Ellis B. Jones
/s/ MARK E. NUNNELLY Director November 29, 2000
---------------------------
Mark E. Nunnelly
/s/ JUAN I. PRADO Director November 29, 2000
---------------------------
Juan I. Prado
/s/ CRAIG H. SAKIN Director November 29, 2000
------------------------------------
Craig H. Sakin
/s/ JAMES R. STEICHEN Senior Vice President, Finance November 29, 2000
------------------------------------ and Chief Financial Officer
James R. Steichen (Principal Financial and
Accounting Officer)
</TABLE>
46
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1* Amended and Restated Articles of Incorporation of the
Registrant.
3.2*** Amended and Restated Bylaws of the Registrant.
4.1# Stock and Warrant Purchase Agreement dated January 7, 1999,
together with certain exhibits thereto.
10.1** Form of Indemnity Agreement entered into between the
Registrant and its directors and officers.
10.2* Registrant's 1993 Stock Option Plan, as amended (and related
stock option grant forms).
10.6** Promissory Note dated March 1, 1993 between the Registrant
and Greg A. Steltenpohl.
10.7** Promissory Note dated March 1, 1993 between the Registrant
and Bonnie Bassett Steltenpohl.
10.9* Registrant's 1994 Non-Employee Directors' Stock Option
Plan (and related stock option grant forms).
10.15*** Revolving Credit Agreement dated September 3, 1999 between
the Registrant and Imperial Bank
10.16*** Amendment Agreement dated April 28, 2000 between Registrant
and Imperial Bank.
10.17*** Employment Agreement dated May 2, 2000 between Registrant
and Douglas L. Levin.
10.18*** Stock Purchase Agreement dated February 11, 2000 between
Registrant, U.S. Equity Partners, L.P. and Catterton-Simon
Partners III, L.P.
10.19*** 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.
10.20*** Shareholders Rights Agreement dated May 2, 2000 among
Registrant, Samantha Investors, LLC, and the shareholders of
Registrant and other persons named therein.
10.21*** Preferred Stock Conversion Agreement dated as of April 24,
2000, between Registrant and Catterton-Simon Partners III,
L.P.
10.22*** Letter Agreement, dated May 1, 2000, from Bain Capital
Fund VI, L.P., to Registrant and Catterton-Simon Partners
III, L.P.
10.23## Agreement and Plan of Merger dated February 2, 2000 by and
among Registrant, Fresh Samantha, Inc., and Orange
Acquisition Sub, Inc.
21.1 Subsidiaries of the Registrant
23.1 Consent of independent accountants
27.1 Financial Data Schedule
</TABLE>
----------
* Incorporated by reference to Registrant's Report on Form 10-KSB for the
fiscal year ended August 31, 1994, as filed with the SEC.
** Incorporated by reference to Registrant's Registration Statement on
Form SB-2, SEC File No. 33-71530-LA, as filed with the SEC on November
9, 1993, as amended.
*** Filed as an exhibit to the Registrant'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.
# Incorporated by reference to Registrant's Report on Form 10-Q for the
fiscal quarter ended November 28, 1998.
## Filed as an exhibit to the Registrant's definitive Proxy Statement
(File No. 0-23036) filed with the Securities and Exchange Commission on
March 16, 2000 and incorporated herein by reference.
47
