<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ODWALLA LOGO]
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 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)
<TABLE>
<S> <C>
California 77-0096788
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
120 Stone Pine Road, Half Moon Bay, CA 94019
(Address and zip code of principal executive offices)
(650) 726-1888
(Registrant's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check X whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Common Stock, no par value 11,040,141 shares
-------------------------- -----------------
<S> <C>
(Class) (Outstanding at January 8, 2001)
</TABLE>
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[ODWALLA LOGO]
ODWALLA, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 2, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 2, 2000
and December 2, 2000....................................... 3
Consolidated Statements of Operations for the thirteen week
periods ended November 27, 1999 and December 2, 2000....... 4
Consolidated Statements of Cash Flows for the thirteen week
periods ended November 27, 1999 and December 2, 2000....... 5
Notes to Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 19
Part II. Other Information
Item 1. Legal Proceedings.......................................... 20
Item 6. Exhibits and Reports on Form 8-K........................... 20
</TABLE>
2
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[ODWALLA LOGO]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ODWALLA, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 2, DECEMBER 2,
2000 2000
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<S> <C> <C>
Current assets
Cash and cash equivalents $ 3,374 $ 909
Short term investments 2,018 2,997
Trade accounts receivable, less allowance for doubtful
accounts and product returns of $1,436 and $1,432 11,599 12,977
Inventories 6,705 6,905
Prepaid expenses and other current assets 2,357 2,441
Deferred tax asset, current 2,265 2,199
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Total current assets 28,318 28,428
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Plant, property and equipment, net 20,011 21,815
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Other assets
Intangible assets, net 35,091 34,487
Covenants not to compete, net 393 371
Deferred tax asset, non-current 4,864 4,656
Other noncurrent assets 677 646
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Total other assets 41,025 40,160
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Total assets $ 89,354 $ 90,403
============ ============
Current liabilities
Accounts payable $ 9,139 $ 10,737
Accrued payroll and related items 2,328 1,537
Line of credit 1,950 1,950
Other accruals 2,574 2,331
Income taxes payable 24 367
Current maturities of capital lease obligations 372 345
Current maturities of long-term debt 219 217
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Total current liabilities 16,606 17,484
Capital lease obligations, less current maturities 735 626
Long-term debt, less current maturities 390 387
Deferred tax liability 10,296 10,100
Other 655 586
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Total liabilities 28,682 29,183
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Shareholders' equity
Common stock, no par value, shares authorized, 15,000,000; shares
issued and outstanding, 11,033,000 and 11,038,000 72,948 72,978
Accumulated deficit (12,276) (11,758)
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Total shareholders' equity 60,672 61,220
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Total liabilities and shareholders' equity $ 89,354 $ 90,403
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
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[ODWALLA LOGO]
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
---------------------------------
NOVEMBER 27, DECEMBER 2,
1999 2000
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<S> <C> <C>
Net sales $ 16,769 $ 31,442
Cost of sales 8,956 14,857
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Gross profit 7,813 16,585
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Operating expenses
Sales and distribution 6,227 11,029
Marketing 543 1,115
General and administrative 1,884 2,817
Amortization of intangible assets from Fresh
Samantha acquisition - 577
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Total operating expenses 8,654 15,538
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Income (loss) from operations (841) 1,047
Other (expense) income, net (12) (71)
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Income (loss) before income taxes (853) 976
Income tax benefit (expense) 128 (458)
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Net income (loss) (725) 518
Preferred stock dividend (213) -
----------- ----------
Net income (loss) applicable to common shareholders $ (938) $ 518
=========== ==========
Basic net income (loss) applicable to common
shareholders per share $ (0.18) $ 0.05
========== ==========
Shares used in per share amounts 5,125 11,035
========== ==========
Diluted net income (loss) applicable to common
shareholders per share $ (0.18) $ 0.05
========== ==========
Shares used in per share amounts 5,125 11,332
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
4
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[ODWALLA LOGO]
ODWALLA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------------
NOVEMBER 27, DECEMBER 2,
1999 2000
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<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (725) $ 518
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation 545 1,199
Amortization 41 632
Deferred taxes (131) 79
Changes in assets and liabilities:
Trade accounts receivable 117 (1,378)
Inventories (150) (200)
Prepaid expenses and other current assets (158) (84)
Other noncurrent assets 133 25
Accounts payable 305 1,598
Accrued payroll and related items 326 (791)
Other accruals (526) (244)
Income taxes payable - 344
Other long-term liabilities - (68)
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Net cash provided by (used in) operating activities (223) 1,630
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Cash flows from investing activities
Capital expenditures (1,616) (3,003)
Proceeds from sale (purchase) of short-term investments 451 (980)
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Net cash used in investing activities (1,165) (3,983)
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Cash flows from financing activities
Principal payments under long-term debt and capital leases (94) (142)
Net payments under line of credit (819) -
Sale of common stock 1 30
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Net cash used in financing activities (912) (112)
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Net decrease in cash and cash equivalents (2,300) (2,465)
Cash and cash equivalents, beginning of period 2,581 3,374
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Cash and cash equivalents, end of period $ 281 $ 909
========== ========
</TABLE>
See accompanying notes to consolidated financial statements
5
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ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation. The accompanying consolidated balance sheet of
Odwalla, Inc. and its subsidiaries ("Odwalla" or "Company") at December 2, 2000
and the related consolidated statements of operations and of cash flows for the
thirteen week periods ended for each of November 27, 1999 and December 2, 2000
have not been audited by independent accountants. However, in management's
opinion, they include all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of the financial position and the
results of operations for the periods presented. The statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Accordingly, certain information and footnote disclosure normally
included in financial statements prepared in conformity with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. The operating results for the interim periods are not necessarily
indicative of results to be expected for an entire year. The aforementioned
statements should be read in conjunction with the consolidated financial
statements for the year ended September 2, 2000 appearing in Odwalla's 2000
Annual Report on Form 10-K.
The Statement of Operations includes the results of Fresh Samantha, a
wholly owned subsidiary, since its acquisition on May 2, 2000.
2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
We consider all investments with an initial maturity of three months or less
at the date of purchase to be cash equivalents. Both cash equivalents and short
term investments are considered available-for-sale securities and are reported
at amortized cost, which approximates fair value.
3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 2, December 2,
2000 2000
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<S> <C> <C>
Raw materials $ 4,276 $ 4,040
Packaging supplies and other 944 1,171
Finished product 1,485 1,694
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$ 6,705 $ 6,905
========== ============
</TABLE>
4. PLANT, PROPERTY AND EQUIPMENT
Plant, property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
September 2, December 2,
2000 2000
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<S> <C> <C>
Land $ 618 $ 618
Buildings and building improvements 7,244 7,244
Leasehold improvements 2,314 2,375
Machinery and equipment 14,018 16,302
Vehicles 997 1,010
Data processing equipment 4,019 4,621
Other 1,619 1,662
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30,829 33,832
Less accumulated depreciation and amortization (10,818) (12,017)
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$ 20,011 $ 21,815
========== ============
</TABLE>
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ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. EARNINGS PER COMMON SHARE
Basic earnings per share is computed using the weighted average number
of common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Common equivalent shares
consist of the shares issuable upon the exercise of stock options and warrants
under the treasury stock method.
The following table shows the computation of basic and diluted earnings per
share, in thousands except per share data:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------------
NOVEMBER 27, DECEMBER 2,
1999 2000
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<S> <C> <C>
Basic:
Weighted average common shares outstanding 5,125 11,035
Net income (loss) $ (725) $ 518
Net income (loss) attributable to common shareholders $ (938) $ 518
Per share amount, attributable to common shareholders $ (0.18) $ 0.05
Diluted:
Weighted average common shares outstanding 5,125 11,035
Common equivalent shares - 297
Shares used in per share amounts 5,125 11,332
Net income (loss) $ (725) $ 518
Net income (loss) attributable to common shareholders $ (938) $ 518
Per share amount, attributable to common shareholders $ (0.18) $ 0.05
</TABLE>
We had no dilutive common equivalent shares during the thirteen week period
ended November 27, 1999 due to the reported net loss.
Holders of 1,033,333 shares of Series A Preferred Stock ("Series A
Stock") at November 27, 1999 were entitled to a receive an 8% annual dividend
which was payable in either cash or additional Series A Stock, at our election.
The dividend was payable semi-annually. For the thirteen week period ended
November 27, 1999, we adjusted net income by $213,000 to arrive at net income
attributable to common shareholders. In connection with the purchase of Fresh
Samantha in May 2000, the Series A Stock was converted into common stock as of
the effective date of the Fresh Samantha acquisition.
6. LINE OF CREDIT
As of December 2, 2000, we had exceeded the capital asset acquisition
limitation covenant included in the Credit Agreement. We requested our lender to
waive the specific December 2, 2000 covenant violation and, in January 2001, the
lender granted the requested waiver.
7
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ODWALLA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUBSEQUENT EVENTS
On December 14, 2000, Odwalla announced that Doug Levin, Founder and
CEO of Fresh Samantha, was leaving the company after helping to complete the
successful merger of Odwalla and Fresh Samantha. On January 11, 2001, Odwalla
announced the relocation of Fresh Samantha production to southern Florida in a
new state of the art production facility to be operational in late 2001. The
move will result in the closure of the Saco, Maine production facility. The
company expects the impact of the above announcements to result in a $3.0 to
$3.5 million charge to operations in the second quarter. During the second
quarter, we will evaluate the appropriate charges resulting from these
subsequent events. With this charge anticipated, Odwalla believes it will report
a net loss for the second quarter of fiscal 2001.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements
about future financial results, future business changes and other events that
haven't yet occurred. For example, statements like "we expect," "we 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-Q 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-Q, including in this Item 2 - Other factors affecting Odwalla's
business. Investors should read all of these risks carefully . Investors should
also refer to Odwalla's Annual Report on Form 10-K for the year ended September
2, 2000 and should pay particular attention to risks affecting the following
areas: availability and pricing of raw materials (page 14); competition (page
18); our dependence on significant trade partners (page 15); government
regulations that may impact our business (page 15); the specific risk factors
discussed on pages 13 to 19; legal proceedings (page 20); and our financial
statements and related notes included in that Annual Report on Form 10-K and
other documents that we file from time to time with the Securities and Exchange
Commission in conjunction with the following discussion and analysis.
OVERVIEW
Odwalla's business is to provide easy access to great tasting
nourishment. We are the 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. When we
refer to "Odwalla," we mean Odwalla, Inc. and our wholly owned subsidiary, Fresh
Samantha, Inc. When we refer to "Samantha," we mean the branded products of
Fresh Samantha, Inc.
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
thousands of 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.
We completed our acquisition of Fresh Samantha on May 2, 2000, and the
financial information presented herein includes the operations of Fresh Samantha
since the acquisition date.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
RESULTS OF OPERATIONS
The following table presents, as a percentage of net sales, certain
statements of operations data for the thirteen week periods ended for each of
November 27, 1999 and December 2, 2000. These operating results are not
necessarily indicative of the results for any future period.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-----------------------------
NOVEMBER 27, DECEMBER 2,
1999 2000
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<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 53.4 47.3
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Gross margin 46.6 52.7
Operating expenses
Sales and distribution 37.1 35.1
Marketing 3.3 3.5
General and administrative 11.2 9.0
Amortization of intangible assets from
Fresh Samantha acquisition 0.0 1.8
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Income (loss) from operations (5.0) 3.3
Interest and other income (expense), net (0.1) (0.2)
Income tax benefit (expense) 0.8 (1.5)
--------- --------
Net income (loss) (4.3)% 1.6%
=========== ========
</TABLE>
NET SALES. Net beverage and bar sales for the first quarter of fiscal
2001 increased 87.5% to $31.4 million compared to $16.8 million in the first
quarter of fiscal 2000. The sales growth this quarter was 20% on a pro forma
basis if we were to include Samantha sales for the first quarter of fiscal 2000.
Our sales growth rate this quarter, excluding the impact of the Samantha sales,
was about the same for both our direct-store-delivery and our distributor
business. Our sales growth occurred throughout the country, both in our more
established markets and in newer markets. We did not enter any significant new
markets this quarter. 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. In addition, growth
in large new accounts serviced by distributors, which we support with initial
product return right programs, will have a negative impact on net sales, as it
did in the first quarter of fiscal 2001. 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 fiscal 2001, which may impact net sales growth percentages. Our food bar
sales continue as an important component of our nourishment product lines,
although food bar sales were less than 5% of total sales in both quarters.
COST OF SALES. Cost of sales increased to $14.9 million in the first
quarter of fiscal 2001 compared to $9.0 million for the same period during
fiscal 2000. Gross margin as a percentage of net sales was 52.7% in the first
quarter of fiscal 2001, an increase from 46.6% in the first quarter of fiscal
2000. In late December 1998, the San Joaquin Valley in central California
experienced a citrus freeze that seriously damaged the navel orange crop. 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 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. During the first quarter of fiscal 2001, we experienced a return
to more favorable pricing and yield for ingredients, primarily citrus, for the
Odwalla brand.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
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 quarter. This results primarily due
to the reliance on more expensive Florida fruit before the new Florida crop in
late fall and early winter and the co-packing costs incurred for some Samantha
products. In addition, for the Odwalla brand, gross margin has improved due to
better production efficiencies from our investment in equipment and production
personnel during the past few years. These investments have improved our product
yields on both processing and packaging by amounts in excess of the costs of the
improvements. In the first quarter of fiscal 2001, we began processing
internally some products that had been produced at a higher cost by a co-packer
in prior quarters. The continued use of third party distributors also negatively
affected gross margins.
In January 2001, we announced that we plan to cease production at the
facility in Saco, Maine in June 2001 and that we will construct a new production
facility in southern Florida to handle our east coast production requirements
beginning in late calendar 2001.
In the first quarter of fiscal 2000, we introduced new branded,
custom-designed 450 milliliter and 325 milliliter bottles made from recyclable,
HDPE plastic. At the same time, we began using a new bottling line designed to
accommodate our new bottles. During the first quarter of fiscal 2000, we
experienced problems in producing beverage products to meet sales orders during
the initial introduction period. We also experienced unexpected issues that
caused some products to ferment and, ultimately, caused some bottles to bloat.
These issues disrupted a consistent flow of product during the first half of the
first quarter of fiscal 2000 and contributed to higher costs in that quarter.
SALES AND DISTRIBUTION. Sales and distribution expenses increased to
$11.0 million in the first quarter of fiscal 2001 compared to $6.2 million in
the first quarter of fiscal 2000, and decreased to 35.1% of net sales compared
to 37.1% in the first quarter last year. The increase in absolute dollars is due
to the Fresh Samantha acquisition in May 2000, increased costs of utilizing a
direct-store-delivery system in some of our newer markets, some of which were
previously serviced with first party distributors, and increased national and
regional labor costs. The decrease as a percentage of net sales compared to the
first quarter of last year partially results from our overall sales growth,
which allows us efficiencies in our distribution organization due to the
relatively fixed cost nature of a direct-store-delivery system. 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 additional investments in the Eastern
Seaboard sales and distribution organization 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.
MARKETING. Marketing expenses increased to $1.1 million or 3.5% of net
sales in the first quarter of fiscal 2001 compared to $543,000 or 3.3% of net
sales in the first quarter of fiscal 2000. Most of the increase in expenses
compared to the first quarter of last year is due to additional personnel that
we hired last year in connection with the Fresh Samantha acquisition, increased
promotional activity in the first quarter of this year, and event sponsorship.
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.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased to $2.8 million in the first quarter of fiscal 2001 from $1.9 million
in the first quarter of fiscal 2000, and decreased as a percentage of net sales
to 9.0% from 11.2% last year. The change was due primarily to a general increase
in expenses resulting from the Fresh Samantha acquisition and from
infrastructure expenses, including a new financial software package that was
operational at the beginning of fiscal 2001. We expect that general and
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
administrative costs will increase in absolute dollars throughout the remainder
of fiscal 2001 as we continue to integrate Fresh Samantha with Odwalla. We will
continue to invest in infrastructure through fiscal 2001, particularly in
information systems and research and development, to allow for sustainable
growth.
INTEREST AND OTHER EXPENSE. Odwalla had net interest and other expense
of $71,000 in the first quarter of fiscal 2001 compared to $12,000 in the first
quarter last year. The net interest expense resulted primarily from borrowings
under the line of credit and other existing debt for each quarter, including the
debt acquired with the Fresh Samantha acquisition.
INCOME TAX BENEFIT (EXPENSE). The $458,000 income tax expense for the
first quarter of 2001 represents a 47% effective tax rate. The Fresh Samantha
acquisition was structured as a tax-free reorganization for income tax purposes.
This resulted in intangible and other assets with a basis for accounting
purposes, as the acquisition was recorded 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 the temporary portion of
the difference. In accordance with SFAS 109, there remains a permanent
difference between the financial accounting basis and the tax reporting basis of
certain acquired assets. This and other permanent differences will continue to
impact the effective tax applied for financial reporting purposes under SFAS
109. We will evaluate the effective tax rate as we proceed through fiscal 2001,
but we currently expect that our effective tax rate will be 47% for the
remainder of fiscal 2001. The $128,000 income tax benefit for the first quarter
of fiscal 2000 resulted from the tax benefit associated with the reported net
loss.
SUBSEQUENT EVENT. On December 14, 2000, Odwalla announced that Doug
Levin, Founder and CEO of Fresh Samantha, was leaving the company after helping
to complete the successful merger of Odwalla and Fresh Samantha. On January 11,
2001, Odwalla announced the relocation of Fresh Samantha production to southern
Florida in a new state of the art production facility to be operational in late
2001. The move will result in the closure of the Saco, Maine production
facility. The company expects the impact of the above announcements to result in
a $3.0 to $3.5 million charge to operations in the second quarter. During the
second quarter, we will evaluate the appropriate charges resulting from these
subsequent events. With this charge anticipated, Odwalla will report a net loss
for the second quarter of fiscal 2001.
LIQUIDITY AND CAPITAL RESOURCES
At December 2, 2000, we had working capital of $10.9 million compared
to working capital of $11.7 million at September 2, 2000. The decrease resulted
primarily from cash provided by operating activities offset by cash used for
capital asset purchases. At December 2, 2000, we had cash and cash equivalents
and short-term investments of $3.9 million, compared to $5.4 million at
September 2, 2000.
Net cash provided by operating activities in the first quarter of
fiscal 2001 was $1.6 million. This consisted of the net income plus
depreciation, amortization, deferred taxes, accounts payable and income taxes
payable, offset by increases in accounts receivable, inventories and prepaid
expenses and decreases in other accrued liabilities and other noncurrent
liabilities. Increases in accounts receivable are generally due to increased
sales volume. The inventory increase results primarily from an increase in
packaging supplies, increased food bars inventory for a January 2001 promotion,
and increased sales volume. Accounts payable increased primarily due to the
timing of payments. 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 the first quarter of fiscal
2001 was $4.0 million. The decrease consisted primarily of capital expenditures
for production equipment at the Dinuba plant, data processing and computer
hardware and software as we continue our infrastructure investment, and display
coolers and also the purchase of short-term investments.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
Net cash used in financing activities for the first quarter of fiscal
2001 was $112,000. This consisted principally of payments of long-term debt and
capital lease obligations.
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. For the first
thirteen weeks of fiscal 2001, we utilized significant cash to purchase
equipment that we were unsuccessful in leasing at acceptable terms. At December
2, 2000, we owed $971,000 for capital lease obligations, primarily related to
leasing of production equipment, computer equipment and vehicles.
Our current Credit Agreement 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 Credit Agreement has a three-year term ending
in April 2003. As of December 2, 2000, we had exceeded the capital asset
acquisition limitation covenant included in the Credit Agreement. We requested
our lender to waive the specific December 2, 2000 covenant violation and, in
January 2001, 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.
OTHER FACTORS AFFECTING ODWALLA'S BUSINESS
PRODUCTS, DISTRIBUTION AND TRADE PARTNERS. Our current product line
consists of single-flavor and blended fruit- and vegetable-based juice products,
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. 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.
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
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<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
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 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. 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. The purees
we purchase are heat treated to increase safety and meet government regulations.
Some of our products, including our water and nourishing food bars, are produced
to our specifications and recipes by independent companies.
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. Adverse weather conditions
could negatively affect our business and results of operations.
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<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
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.
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.
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 currently
do not incur any significant costs to comply with environmental laws.
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
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
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, the availability of hourly employees may also adversely affect our
results, and fuel or other energy costs. 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. 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. There can be no assurance that we won't have future claims
which 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 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. After production ceases in the Saco facility in June 2001, we will
have one production facility remaining until our new facility in Florida is
operational in late calendar 2001. 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.
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<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
LACK OF DIVERSIFICATION. Odwalla's business is vertically integrated
and centered around essentially one product, 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 until the third quarter of fiscal 2000 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.
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.
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<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
In January 2001, we announced that we were closing the Saco, Maine
production facility and relocating East Coast production to a new facility to be
constructed in southern Florida. The process of operating a facility after
notifying the employees of the relocation may require additional management time
while we simultaneously manage the construction of a new production facility. In
addition, we have not completed negotiations for an appropriate site in Florida,
entered into a construction contract, or completed financing arrangements for
the new facility. Difficulties in negotiating a site location or financing
acceptable to Odwalla may occur. This could negatively impact the timely
completion of construction of the new facility, which could result in additional
costs to the company.
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.
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<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, continued:
INTELLECTUAL PROPERTY RIGHTS. We believe our trademarks, trade dress,
trade secrets and similar intellectual property are critical to Odwalla's
success and we attempt to protect such property with registered and common law
trademarks and copyrights, restrictions on disclosure and other actions to
prevent infringement. We've licensed elements of our distinctive trademarks,
trade dress and similar proprietary rights to third parties in the past and may
continue this practice. While we attempt to ensure that the quality of our brand
is maintained by these third party licenses, we can't be sure that these third
parties will not take actions that might seriously harm the value of our
proprietary rights or the reputation of our products, either of which could have
a material adverse effect on our business. Product package and merchandising
design and artwork are important to the success of Odwalla, and we intend to
take action to protect against imitation of our products and packages and to
protect our trademarks and copyrights as necessary. This action could be
time-consuming, result in costly litigation and divert management personnel.
Furthermore, there can be no assurance that we would be successful in such
action. We don't currently have any patents.
VOLATILITY OF STOCK PRICE. Odwalla's common stock price has, at certain
times, experienced significant price volatility. Announcements of developments
related to our business, fluctuations in operating results, failure to meet
securities analysts' expectations, general conditions in the fruit and vegetable
industries and the worldwide economy, announcements of innovations, new products
or product enhancements by us or our competitors, fluctuations in the level of
cooperative development funding, acquisitions, changes in governmental
regulations, developments in patents or other intellectual property rights and
changes in our relationships with trade partners and suppliers could cause the
price of our common stock to fluctuate substantially. In addition, in recent
years the stock market in general, and the market for small capitalization
stocks in particular, has experienced extreme price fluctuations which have
often been unrelated to the operating performance of affected companies. Such
fluctuations could adversely affect the market price of our common stock.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK. It is our policy not to enter into derivative
financial instruments. We do not currently have any significant foreign currency
exposure since we do not transact business in foreign currencies. Due to this,
we did not have significant overall currency exposure at December 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.
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<PAGE> 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The following personal injury claims and legal proceedings seek
monetary damages and other relief relating to the product recall in 1996, as
discussed in Item 2 "Management's Discussion and Analysis of Financial Condition
and Results of Operations":
1. The McGregor Case: A personal injury lawsuit filed in Santa Clara
County Superior Court, San Jose, California on June 2, 1997 and
served on June 16, 1997. There is no trial date set.
2. The Nixon Case: A personal injury lawsuit filed in Sacramento County
Municipal Court, Sacramento, California on August 15, 1997. There is
no trial date set.
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.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.1 Consulting Agreement dated December 14, 2000 between
Registrant and Douglas L. Levin.
10.2 Separation Agreement and Release dated December 14, 2000
between Registrant and Douglas L. Levin.
27.1 Financial Data Schedule
</TABLE>
B. REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the quarter
ended December 2, 2000.
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<PAGE> 21
SIGNATURE
Pursuant to the requirements of the Securities Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ODWALLA, INC.
-------------
(Registrant)
Date: January 12, 2001 By: /s/ D. STEPHEN C. WILLIAMSON
-------------------------------
D. Stephen C. Williamson
Chief Executive Officer
(Principal Executive Officer)
Date: January 12, 2001 By: /s/ JAMES R. STEICHEN
------------------------
James R. Steichen
Chief Financial Officer
(Principal Financial and
Accounting Officer)
21
