UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 30, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-21577
WILD OATS MARKETS, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1100630
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3375 Mitchell Lane
Boulder, Colorado 80301
(Address of principal executive offices, including zip code)
(303) 440-5220
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Common Stock, $.001 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 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.( )
As of March 26, 2001, the aggregate market value of the voting stock held by
non-affiliates (as defined by the regulations of the Securities and Exchange
Commission) of the Registrant was $161,187,502, based upon the closing sale
price of such stock on such date as reported on the NASDAQ National Market. As
of March 26, 2001, the total number of shares outstanding of the Registrant's
common stock, $.001 par value, was 24,604,209 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Registrant's Annual Meeting
of Stockholders to be held on May 22, 2001, have been incorporated by reference
into Part III of this report.
TABLE OF CONTENTS
Page
PART I.
Item 1. Business. 3
Item 2. Properties. 10
Item 3. Legal Proceedings. 12
Item 4. Submission of Matters to a Vote of Security Holders. 12
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. 13
Item 6. Selected Financial Data. 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 22
Item 8. Financial Statements and Supplementary Data. 24
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. 49
PART III.
Item 10. Directors and Executive Officers of the Registrant 50
Item 11. Executive Compensation 50
Item 12. Security Ownership of Certain Beneficial
Owners and Management 50
Item 13. Certain Relationships and Related Transactions 50
PART IV.
Item 14. Exhibits, Financial Statements, Financial
Statements Schedules and Reports on Form 8-K 51
2
PART I.
Item 1. BUSINESS
Introduction
Wild Oats Markets, Inc. ("Wild Oats") is the second largest natural foods
supermarket chain in North America. As of March 30, 2001, we operated 109
natural food stores, including two small vitamin stores, in 23 states and
British Columbia, Canada under several names, including:
o Wild Oats Market (nationwide)
o Henry's Marketplace (San Diego and Orange County, CA)
o Nature's Fresh and Nature's Northwest (metropolitan Portland, OR)
o Sun Harvest Market (TX)
o Capers Community Market (British Columbia, Canada)
We are dedicated to providing a broad selection of high quality natural and
gourmet foods and related products at competitive prices in an inviting and
educational store environment emphasizing customer service. Our stores range in
size from 2,700 to 45,000 gross square feet and feature natural alternatives for
virtually every product category found in conventional supermarkets. Wild Oats
provides its customers with a one-stop, full-service shopping alternative to
both conventional supermarkets and traditional health food stores. We believe we
have developed a differentiated concept that appeals to a broader, more
mainstream customer base than the traditional natural foods store. Our
comprehensive selection of natural health foods products appeals to health
conscious shoppers while we also offer virtually every product category found in
a conventional supermarket, including grocery, produce, meat, poultry, seafood,
dairy, frozen, food service, bakery, vitamins and supplements, health and body
care and household items. Our positioning, coupled with industry data that
states that the natural products industry comprises less than 5% of the total
grocery industry, offers significant potential for us to continue to expand our
customer base.
Wild Oats' sales grew from $721.1 million during fiscal 1999 to $838.1
million during fiscal 2000, an increase of 16.2%, due largely to the opening of
11 new stores, the acquisition of two operating stores and the relocation of
three stores in fiscal 2000. As part of the strategic repositioning announced by
the Company in the second and fourth quarters of fiscal 2000, the Company
identified as many as 18 stores for closure or sale, and during fiscal 2000,
closed 15 natural foods stores and two small vitamin stores, and sold three
stores. As a result, we had 106 stores located in 22 states and Canada at the
end of fiscal 2000, as compared to 110 natural foods stores in 22 states and
Canada as of the end of fiscal 1999.
As a result of our aggressive growth over the last four years, we have
increased our penetration of existing markets, entered new geographic markets
and created a stronger platform for future growth. We believe our growth has
resulted in operating efficiencies created by:
o warehousing, distribution and administrative economies of scale
o improved volume purchasing discounts
o coordinated merchandising and marketing strategies
Our aggressive growth has also resulted in certain acquisition
integration difficulties that have had a negative impact upon our overall
operating results in fiscal 2000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Comparable Store Sales Results."
3
Natural products industry
Retail sales of natural products have grown from $7.6 billion in 1994 to
$21.5 billion in 1999, a 23% compound annual growth rate, and total sales of
natural products (including over the internet, by practitioners, by multi-level
marketers and through mail order) reached $28.0 billion in 1999. Sales growth in
the traditional grocery industry has remained relatively flat over the same
period. We believe that this growth reflects a broadening of the natural
products consumer base which is being propelled by several factors, including
healthier eating patterns, increasing concern regarding food purity and safety
and greater environmental awareness. While natural products generally have
higher costs of production and correspondingly higher retail prices, we believe
that more of the population now attributes added value to high quality natural
products and is willing to pay a premium for such products. The increase in the
availability of natural products in conventional supermarkets, whose sales of
natural products increased by 19.1% in 1999, demonstrates the increase in
consumer acceptance of natural products. Despite the increase in natural foods
sales within conventional supermarkets, we believe that conventional
supermarkets still lack the total shopping experience that natural foods stores
offer. Many natural foods stores develop a more personal relationship with
increased interaction between store staff and customers than that of
conventional supermarkets. Conventional supermarkets may also have less appeal
for natural foods shoppers because they are largely dependent on commercial
brand names, resulting in a more limited selection of natural products from
which to choose. In addition, conventional supermarkets may not be able to match
our pricing in many categories because of the greater volume purchase discounts
we receive on natural products. As a result, while conventional supermarkets may
carry a limited selection of natural foods products, they do not duplicate the
inventory of natural foods stores, which carry a more comprehensive selection of
natural products sourced from a large number of independent vendors.
Operating strategy
Our objective is to become the grocery store of choice both for natural
foods shoppers and quality-conscious consumers in each of our markets by
emphasizing the following key elements of our operating strategy:
Destination format. Our stores are one-stop, full-service supermarkets for
customers seeking high quality natural and gourmet foods and related products.
In most of our stores, we offer between 10,000 and 25,000 stock-keeping units of
natural foods products in virtually every product category found in a
conventional supermarket. Our stores carry a much broader selection of natural
and gourmet foods and related products than those offered by typical independent
natural foods stores or conventional supermarkets.
High quality, unique products. We seek to offer the highest quality
products throughout our merchandise categories and emphasize unique products and
brands not typically found in conventional supermarkets. Each of our stores
tailors its product mix to meet the preference of its local market, in
particular sourcing produce from local organic growers whenever possible. We
also operate regional commissary kitchens and bakeries that provide our stores
with fresh bakery items and a unique assortment of prepared foods for the
quality and health-conscious consumer.
Educational and entertaining store environment. Each store strives to
create a fun, friendly and educational environment that makes grocery shopping
enjoyable, encouraging shoppers to spend more time in the store and to purchase
new products. In order to enhance our customers' understanding of natural foods
and how to prepare them, we train our store staff to educate customers as to the
benefits and quality of our products and prominently feature educational
brochures and newsletters, as well as an in-store consumer information
department. In addition, many stores offer cafe seating areas, espresso and
fresh juice bars and in-store massage therapists, all of which emphasize the
comfortable, relaxed nature of the shopping experience. We believe our
knowledgeable store staff and high ratio of store staff to customers results in
significantly higher levels of customer service than in a conventional
supermarket. In fiscal 2001, we plan to increase staffing levels at many of our
stores to address our guests' requests for higher service levels.
Extensive community involvement. We seek to engender customer loyalty by
demonstrating our high degree of commitment to the local community. Each store
makes significant monetary and in-kind contributions to local not-for-profit
4
organizations through programs such as "5% Days," where a store may, once each
calendar quarter, donate 5% of its gross sales from one day to a local
not-for-profit group, and a "Charity Work Benefit" where we pay employees for
time spent working for local charities.
Multiple store formats. We operate two store formats: natural foods
supermarkets, which emphasize natural and organic products and high-quality
service; and farmers' market stores, which emphasize fresh produce, natural
living and value. Our multiple store format enables us to customize our stores
to specific site characteristics and to meet the unique needs of a variety of
markets. We believe that this multiple store format strategy allows us to
operate successfully in a diverse set of markets, enabling us to reach a broader
customer base and to increase our market penetration.
Competitive pricing. We seek to offer products at prices which are at or
below those of other natural foods stores. We have implemented a competitive
price program designed to ensure that high quality, all natural items in each
product category are offered at prices that are competitive with those offered
on similar items in conventional supermarkets. We have also expanded our private
label programs to include a large selection of high quality private label
products under our "Wild Oats(R)" and "A Wild Oats Down to Earth Value" lines at
competitive prices. We believe these pricing programs broaden our consumer
appeal and encourage our customers to fill more of their shopping needs at our
stores.
Motivated staff. We have developed a unique culture by encouraging active
participation and communication among all staff members, advocating store-level
participation in a variety of marketing, merchandising and operating decisions
and rewarding staff based upon the achievement of targeted store-level sales,
profitability and other financial performance criteria. In addition, we seek to
hire individuals dedicated to the concept of natural foods and a healthy
lifestyle. We believe that these practices translate into a satisfied and
motivated staff and a high level of customer service.
In the first half of fiscal 2000, as part of a strategic repositioning
announced by the Company, we conducted an in-depth survey of our guests and
staff to determine who our target customers are and how best to market to and
serve those target customers. The Company developed, from that survey data, a
comprehensive strategic plan to increase sales, service, guest satisfaction and
staff satisfaction. A test of several marketing and service initiatives was
commenced in 14 stores in January 2001, including new merchandising, increased
advertising, increases in staffing and implementation of certain personnel
initiatives. The Company will evaluate the results from these stores through the
first half of 2001 and then determine which, if any, of these initiatives will
be implemented throughout the Company.
Growth strategy
Our growth strategy is to increase sales and income through:
o improved guest service and store execution
o opening of new stores
o year over year comparable store sales growth
We plan to open and relocate as many as eight stores in fiscal 2001. We
intend to continue our expansion strategy by increasing penetration in existing
markets and expanding into new regions which we believe are currently
underserved by natural foods retailers. While we believe that most of our store
expansion will result from new store openings, we may continue to evaluate
acquisition opportunities in both existing and new markets.
As of the date of this report, we have opened four new stores (Irvine,
California; Westport, Connecticut; Omaha, Nebraska and Cleveland, Ohio) in
fiscal 2001. We currently have leases or letters of intent signed for seven
additional new stores to be opened or relocated in the remainder of fiscal 2001
and in fiscal 2002, including two relocations of existing stores. The proposed
sites are in southern California (three sites), south Florida, Kentucky,
Missouri and Maine.
Our growth strategy will be affected in fiscal 2001 and beyond by our
ability to successfully renegotiate the terms of our existing credit facility,
5
which is currently in non-monetary default as a result of two financial covenant
violations, although the lenders have not accelerated repayment of our
outstanding borrowings. We are currently negotiating an amendment to the credit
facility to waive the outstanding defaults and provide covenant relief in
exchange for an increase in interest rates, limitations on the execution of
leases and capital expenditures, and the granting of a security interest in
certain of our assets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
Acquisition of assets of independent and small chain natural foods store
operators. During fiscal 2000, we acquired two operating natural foods grocery
stores in Hemet and Escondido, California.
Opening of new stores. In fiscal 2000, we opened 11 new stores in Laguna
Niguel, San Diego (two) and Yorba Linda, California; Kansas City, Kansas; St.
Louis, Missouri; Reno, Nevada; Cleveland and Cincinnati, Ohio; Bend and
Portland, Oregon; and relocated three stores in West Hartford, Connecticut; Las
Vegas, Nevada; and Salt Lake City, Utah. We also closed 15 underperforming
natural foods stores and two small vitamin stores, as well as sold three stores
in related transactions. To date in fiscal 2001, we have opened four new stores
in Irvine, California; Westport, Connecticut; Omaha, Nebraska and Cleveland,
Ohio; and closed one store. In fiscal 1999, we opened eight new stores in
Phoenix, Arizona; San Diego, California; Hinsdale and Evanston, Illinois;
Madison, New Jersey; Albuquerque, New Mexico; Tulsa, Oklahoma; and Nashville,
Tennessee; and relocated five stores in Phoenix, Arizona; Ft. Collins, Colorado;
Portland, Oregon; Salt Lake City, Utah; and Memphis, Tennessee.
Year over year comparable store sales growth. Comparable store sales
declined 2.6% in 2000, due to greater than expected competition and
cannibalization of existing stores, integration difficulties from certain stores
acquired in fiscal 1999 and difficulties in implementing our operating
strategies. After in-depth examination of our operations and surveying of our
guests and staff, we formulated a strategic plan to increase sales that includes
increasing store size, staffing levels, and advertising, as well as
remerchandising with an emphasis on food service, artisan products and
mercantile. We intend to attract new customers, generate repeat business and
gradually increase the size of the average transaction by introducing, expanding
and improving key merchandise categories such as perishables (produce, deli and
prepared foods) and private label products, as well as implementing expanded
marketing programs and improving customer service through aggressive training
programs.
Our comparable store sales results have been negatively affected in the
past by planned cannibalization, which is the loss of sales at an existing store
when we open a new store nearby. The greater than expected cannibalization we
experienced in fiscal 2000 as a result of the opening of stores in existing
markets has diminished and will continue to diminish as we approach the one-year
anniversary of the new stores. There can be no assurance that comparable store
sales for any particular period will not decrease in the future.
Products
We offer our customers a broad selection of unique, high-quality products
that are natural alternatives to those found in conventional supermarkets. We
generally do not offer well-known national conventional brands and focus instead
on a comprehensive selection of lesser-known natural branded products within
each category. Although the core merchandise assortment is similar at each of
our stores, individual stores adapt the product mix to reflect local and
regional preferences. Our stores source produce from local organic growers
whenever possible and typically offer a variety of local products unique to the
region. In addition, in certain markets, our stores may offer more food service,
gourmet and ethnic items as well as feature more value-added services such as
gift baskets, catering and home delivery, while in other markets, a store may
focus more on bulk foods, produce and staple grocery items. We regularly
introduce new high-quality and locally-grown products in our merchandise
selection to minimize overlap with products carried by conventional
supermarkets.
In addition, we intend to continue to expand and enhance our prepared food
and in-store cafe environment. We believe that consumers are increasingly
seeking convenient, healthy, "ready-to-eat" meals and that by increasing our
commitment to this category we can provide an added service to our customers,
broaden our customer base and further differentiate us from conventional
supermarkets and traditional natural foods stores.
Quality standards. Our objective is to offer products that generally meet
the following standards:
6
o free of preservatives, artificial colors, chemical additives and added
hormones
o organically grown, whenever possible
o minimally processed
o not tested on animals
We continually evaluate new products, quality issues and controversial
ingredients and frequently counsel store managers on compliance with our product
standards.
Private label. The natural foods industry is highly fragmented and
characterized by many small independent vendors. As a result, we believe that
our customers do not have strong loyalty to particular brands of natural foods
products. In contrast to conventional supermarkets whose private label products
are intended to be low cost alternatives to name-brand products, we have
developed our "Wild Oats(R)" private label program in order to build brand
loyalty to specific products based on our relationship with our customers and
our reputation as a natural foods authority. Through this program, we have
successfully introduced a number of high quality, unique private label products,
such as cereals, breads, salad dressings, vitamins, chips, salsa, pretzels,
cookies, juices, pasta, pasta sauces, oils, frozen products such as pizza and
veggie burgers, and pet foods. In fiscal 2000, we introduced a new line of "Wild
Oats(R)" imported goods, including olive oil, roasted red peppers, pickles and
cherries. We intend to continue to expand our private label product offerings on
a selected basis. In fiscal 1999, we introduced our "A Wild Oats Down to Earth
Value" label of "staple" products, such as peanut butter, cookies, coffee,
canned tomatoes, bottled water and paper products, to offer our customers
quality natural products at competitive prices.
Pricing. In general, natural and gourmet foods and related products have
higher costs of production and correspondingly higher retail prices than
conventional grocery items. Our pricing strategy has been to maintain prices
that are at or below those of our natural foods competitors while educating our
customers about the higher quality and added value of our products to
differentiate them from conventional products. Like most conventional
supermarkets, we regularly feature dozens of sale items. Sale items are promoted
through a variety of media, including direct mail, newspapers and in-store
flyers. We regularly monitor the prices at natural foods and conventional
supermarket competitors to ensure our prices remain competitive.
Company culture and store operations
Company culture. Our culture is embodied in our mission statement, which
stresses responsibility to our guest, our staff, our bottom line, and our
communities. In particular, we believe that knowledgeable, satisfied and
motivated staff members have a positive impact on store performance and overall
profitability. We have made a substantial commitment to staff training,
including the creation of "Wild Oats University," an in-house training program,
and in fiscal 2000 we hired a Vice President of Training and Development to
oversee staff training, with a focus on improved guest service.
Management and employees. Our stores are organized into geographic regions,
each of which has a regional director who is responsible for the store
operations within his or her region and who reports to our senior management.
The regional directors are responsible for, and frequently visit, their cluster
of stores to monitor financial performance and ensure adherence to our operating
standards. We maintain a staff of corporate level department specialists
including Natural Living, Food Service, Produce, Meat/Poultry/Seafood and
Grocery purchasing directors who manage centralized buying programs and assist
with store-level merchandising, pricing and staff training to ensure
company-wide adherence to product standards and store concept.
Staff members at the store and home-office levels participate in an
incentive plan that ties compensation awards to the achievement of specified
store-level or company-wide sales, profitability and other performance criteria.
We also seek to foster enthusiasm and dedication in our staff members through
comprehensive benefits packages, including health and disability insurance and
an employer-matching 401(k) plan.
Purchasing and distribution
We have a centralized purchasing function which sets product standards,
approves products and negotiates volume purchase discount arrangements with
7
distributors and vendors. Individual store purchases are handled through
department managers who make purchasing decisions within these established
parameters. This approach enables each store to customize its product mix to
meet the needs and preferences of its customers while adhering to our
established product standards and allowing each store to benefit from our volume
purchasing discounts.
The wholesale segment of the natural foods industry provides a large and
growing array of product choices across the full range of grocery product
categories. Although we purchase products from approximately 8,000 suppliers, in
fiscal 2000 approximately 27% of the Company's inventory purchases were from
United Natural Foods Inc. ("UNFI"), a wholesale distributor that operates
multiple warehouses nationwide and with whom we are in the second of a four-year
buying agreement. We believe that UNFI has the capacity to service all of our
existing stores as well as most of our future sites. As a result of our rapid
growth, we have been able to negotiate greater volume discounts with this
distributor and certain other vendors. In fiscal 1999, we entered into a supply
agreement with Nutricia (formerly GNP), under which Nutricia manufactures for us
certain private label vitamins and supplements. The agreement has a three-year
term, but is terminable by either party with advance notice. We have no supply
contracts with the majority of our smaller vendors, who could discontinue
selling to us at any time. Although we believe that we could develop alternative
sources of supply, any such termination may create a short-term disruption in
store-level merchandise selection.
Most products are delivered directly to our stores by vendors and
distributors. We currently operate four warehouse facilities in Denver,
Colorado; Los Angeles and San Diego, California and San Antonio, Texas, which
receive and distribute truckload purchases of produce and grocery items and
distribute products that cannot be delivered directly to the stores by outside
vendors. We maintain a small fleet of local delivery vans and over-the-road
trucks. As we enter new markets, we will evaluate the need for additional
warehouse and distribution facilities.
We operate six commissary kitchens in Phoenix, Arizona; Los Angeles,
California; Denver, Colorado; Santa Fe, New Mexico; Portland, Oregon and
Vancouver, British Columbia, Canada, as well as a bakeries in Phoenix and
Tucson, Arizona; San Diego, California and Denver, Colorado. These facilities
produce deli food, take-out food, bakery products and certain private label
items for sale in our stores. Each kitchen can make daily deliveries to stores
within a hundred mile radius of the facility. We will evaluate the need for new
commissary kitchens as we expand into new markets.
Marketing
We recognize the importance of building brand awareness within our trade
area and advertise in traditional media outlets such as radio, newspapers,
outdoor and direct mail to gain new customer trial and repeat business. As part
of our marketing strategy, we have increased our use of radio, direct mail and
newspaper inserts to increase our market exposure to a broader base of
customers. Our farmers' market format stores primarily use flyers and "weekly
specials" advertising to generate consumer interest and increase customer
traffic. We also focus on in-store consumer education through the use of a
variety of media, including in-store flyers, informational brochures and signage
that promote the depth of our merchandise selection, benefits of natural
products and competitive prices. When we first enter a new market, we execute an
intense marketing campaign to build awareness of our new store and its selection
of natural products. After the initial campaign, this advertising is
supplemented by the marketing strategies described above.
Our advertising costs historically have been less than 1.5% of sales,
although as part of our strategic repositioning, we intend to expand our
advertising program in certain regions, which will increase advertising expense
in those regions. We operate a multifaceted annual promotional program to our
vendors which allows for different degrees of promotional participation. In
exchange for participation in our promotional program, vendors receive access to
national advertising programs and feedback on volume movement.
Management information systems
Our management information systems have been designed to provide detailed
store-level financial data, including sales, gross margin, payroll and store
contribution, to regional directors and store directors and to our headquarters
on a timely basis. Currently, certain inventory management systems are processed
8
manually. We purchased a software system that allows us to establish centralized
pricing on certain merchandise and to track product movement, and have
implemented such system in all of our Wild Oats stores. In the first half of
fiscal 2001, we will be installing the system to track product movement in our
Henry's Marketplace stores in the metropolitan San Diego area. The Henry's
stores host their own pricing structure.
We have implemented new, faster credit card processing systems company-wide
to reduce transaction time at the cash register and the cost to us of individual
credit card transactions. We have also implemented a wide-area network to allow
faster data transmissions between our headquarters and stores, and between our
stores and our credit card processor. The credit card processing system is fully
operational in our stores, with the exception of the stores in Canada and a few
of our smaller stores.
In fiscal 1999, we standardized our timekeeping systems throughout our
stores, and installed new software that now allows us to process payroll
in-house instead of through a third-party processor. In the first quarter of
fiscal 2001, we began processing our Canadian payroll in-house. We believe that
by handling payroll in-house, we have greater accuracy in payroll processing,
greater control over payroll and, in the future, we expect to realize a cost
savings by not paying outside processing fees.
Competition
Our competitors currently include other independent and multi-unit natural
foods supermarkets, smaller traditional natural foods stores, conventional
supermarkets and specialty grocery stores. While certain conventional
supermarkets, smaller traditional natural foods stores and small specialty
stores do not offer as complete a range of products as we do, they compete with
us in one or more product categories. A number of other natural foods
supermarkets offer a range of natural foods products similar to those offered in
our stores. We believe that the principal competitive factors in the natural
foods industry include customer service, quality and variety of selection, store
location and convenience, price and store atmosphere. We believe that our
primary competitor is Whole Foods Market, Inc., a company based in Texas. We
currently compete directly with Whole Foods in California, Colorado, Florida,
Illinois, Massachusetts, New Mexico and Texas.
Employees
As of March 1, 2001, we employed approximately 6,730 full-time individuals
and 2,350 part-time individuals. Approximately 8,830 of our employees are
engaged at the store-level and 250 are devoted to regional administrative and
corporate activities. We believe that we maintain a good relationship with our
employees. One small group of employees at one of our acquired stores was
unionized at the time of the store's acquisition and continues to be unionized,
and the workforce was unionized at another smaller store subsequently sold as
part of a multi-store transaction in fiscal 2000. We anticipate that in the
future one or more of our stores may be the subject of attempted organizational
campaigns by labor unions representing grocery industry workers, and that from
time to time certain of our stores may be picketed by local labor unions
relating to area wage and benefit standards. Four of our stores (including two
Henry's stores in metropolitan San Diego, California) are currently being
picketed relating to area standards.
Going Concern Matters
The financial statements accompanying this report on Form 10-K have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. As
discussed in "Notes to Consolidated Financial Statements - Note 2 - Going
Concern Matters", the terms of our credit facility require, among other things,
compliance with certain financial ratios on a quarterly basis. As a result of
restructuring charges incurred during fiscal 2000, we were not in compliance
with the fixed charge coverage ratio and minimum net income covenants under our
credit facility as of and for the quarter ended December 30, 2000, and as a
result, our lenders have issued a notice of default, although no acceleration of
outstanding debt has been requested. All borrowings outstanding under the credit
facility at December 30, 2000 are considered to be due on demand and
accordingly, are classified as a current liability at December 30, 2000. We
currently do not have sufficient funds to pay all outstanding indebtedness. The
Company currently is negotiating an amendment of its credit facility that may
include the payment of an amendment fee, an increase in interest rates, a
security interest in certain of our assets and additional covenants relating to
capital expenditures and new leases. In conjunction with the Company's
negotiations to amend its credit facility and obtain less restrictive covenants
and other terms and conditions therein, the Company also proposes to raise
9
approximately $30.0 million in equity financing to provide additional liquidity.
If the Company's lenders accept the amendments currently proposed by the
Company, then the Company's borrowing capacity would be limited to $125 million,
the maturity date of the credit facility would remain August 1, 2003, the
interest rate would be increased periodically, and all existing events of
default would be waived as of the amendment date. If we are not successful in
negotiating an amendment acceptable to our lenders, the lenders could accelerate
repayment of all outstanding indebtedness. We currently do not have sufficient
funds to repay all outstanding indebtedness. Although no assurances can be
given, we expect that we would be in compliance throughout the term of the
amended credit facility with respect to the financial and other covenants,
including those regarding funded debt ratio, fixed charge coverage ratio,
minimum year-to-date net income, tangible net worth, capital expenditure limits,
and new lease limits. We believe that cash generated from operations will be
sufficient to satisfy the Company's currently budgeted capital expenditure and
debt service requirements through fiscal 2001 and that no additional funding
will be necessary. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
Item 2. PROPERTIES
We currently lease approximately 29,500 square feet for our corporate
office in Boulder, Colorado. The lease has two and one-half years remaining on
the term, with two three-year renewal options. We have been in negotiations with
the landlord for expansion of our office space by an additional 12,000 square
feet.
We lease all of our currently operating stores. We currently have letters
of intent or leases signed for seven sites projected to be opened in the
remainder of fiscal 2001 and in fiscal 2002, including one relocation. In fiscal
1999, we acquired certain unimproved real property in Oregon in conjunction with
the acquisition of the stock of Nature's Fresh Northwest, Inc., and an office
building in San Antonio, Texas as part of the pooling-of-interest transaction
with Sun Harvest Farms, Inc. In fiscal 2000, we sold the property in Oregon and
the office building in Texas. Our leases typically provide for a 10- to 25-year
base term and generally have several renewal periods. The rental payments are
either fixed base rates or percentages of sales with minimum rentals. All of the
leases are accounted for as operating leases.
Store locations
The following map and store list show, as of March 30, 2001, the number of
natural foods grocery stores and two small vitamin stores in Texas that Wild
Oats operates in each state and Canadian province and the cities in which Wild
Oats stores are located:
10
[map]
------------------------ ----------------------------- -------------------------- ------------------------------
Arizona Connecticut Nebraska Tennessee
Phoenix (2) West Hartford Omaha Memphis
Scottsdale Westport Nashville (2)
Tucson (3) Nevada
Florida Las Vegas (2) Texas
Arkansas Boca Raton Reno Austin (2)
Little Rock Fort Lauderdale Corpus Christi
Melbourne New Jersey El Paso (2)
California Miami Princeton McAllen
Berkeley Miami Beach San Antonio (4)
Escondido West Palm Beach New Mexico
Hemet Albuquerque (3) Utah
Irvine Illinois Santa Fe Salt Lake City (2)
Laguna Beach Evanston
Laguna Niguel Hinsdale New York Washington
Los Angeles New York City Vancouver
Pasadena Indiana
Sacramento Indianapolis Ohio British Columbia, Canada
San Anselmo Cincinnati Vancouver (2)
San Diego (12) Kansas Cleveland (2) Victoria
Santa Monica (2) Kansas City (2) Upper Arlington West Vancouver
Sunnyvale
Yorba Linda Massachusetts Oklahoma
Boston (3) Tulsa
Colorado
Boulder (3) Missouri Oregon
Colorado Springs Kansas City Bend
Denver (7) St. Louis (2) Eugene (2)
Fort Collins Portland (7)
------------------------ ----------------------------- -------------------------- ------------------------------
11
Item 3. LEGAL PROCEEDINGS
In August 1998, we filed Wild Oats Markets, Inc. v. Plaza Acquisition, Inc.
in United States District Court for the Northern District of Illinois, Eastern
Division, seeking recovery of $300,000 in tenant improvement allowances owed to
us by our landlord for the build-out of our Buffalo Grove, Illinois store. The
landlord counterclaimed for $1 million in damages, and after we closed the
Buffalo Grove store in May 1999, the landlord increased its counterclaim to $3
million, including accelerated rent resulting from an alleged breach of a
continuous operations clause in the lease. In December 2000, following trial,
the court awarded the landlord approximately $27,000.
Alfalfa's Canada, Inc., our Canadian subsidiary, is a defendant in a suit
brought in the Supreme Court of British Columbia, by one of its distributors,
Waysafer Wholefoods Limited and one of its principals, seeking monetary damages
for breach of contract and injunctive relief to enforce a buying agreement for
three Canadian stores entered into by a predecessor of Alfalfa's Canada, Inc.
The suit was filed in September 1996. In June 1998, we filed a Motion for
Dismissal on the grounds that the contract in dispute constituted a restraint of
trade. The Motion was subsequently denied. We do not believe our potential
exposure in connection with the suit to be material to our consolidated
financial position, results of operations, or cash flows.
In January 2001, we were named as defendant in Glades Plaza, LP v. Wild
Oats Markets, Inc., a suit filed in the 15th Judicial Circuit Court, Palm Beach
County, Florida, by a landlord alleging we breached our lease obligations when
we gave notice of termination of the lease for landlord's default in not timely
turning over the premises. The plaintiff seeks unspecified damages.
In February 2001, we were named as defendant in Grange Investments, Inc. v.
Wild Oats Markets, Inc., a suit filed in United States District Court, District
of Connecticut, by the purchaser of a former Wild Oats store for breach of a
noncompetition covenant. The plaintiff seeks injunctive relief and damages. The
parties are currently in settlement discussions.
We also are named as defendant in various actions and proceedings arising
in the normal course of business. In all of these cases, the Company is denying
the allegations and is vigorously defending against them and, in some cases, has
filed counterclaims. Although the eventual outcome of the various lawsuits
cannot be predicted, it is management's opinion that these lawsuits will not
result in liabilities that would materially affect the Company's consolidated
results of operations, financial position or cash flows.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12
PART II.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the NASDAQ National Market under
the symbol "OATS".
The following are the quarterly high and low sales prices (adjusted for the
3-for-2 splits described below) for each quarter of the past two years:
HIGH LOW
-------- --------
First Quarter 1999 21.330 14.670
Second Quarter 1999 20.500 16.500
Third Quarter 1999 27.420 20.040
Fourth Quarter 1999 28.500 17.440
First Quarter 2000 22.750 15.313
Second Quarter 2000 23.500 8.000
Third Quarter 2000 14.250 9.313
Fourth Quarter 2000 13.000 3.875
As of March 26, 2001, Wild Oats' common stock was held by 687 stockholders
of record. No cash dividends have been declared previously on our common stock,
and we do not anticipate declaring a cash dividend in the near future. Our
revolving line of credit facility contains restrictions on the payment of cash
dividends without lender consent for so long as amounts remain unpaid under the
facility. On January 7, 1998, and on December 1, 1999, Wild Oats effected
3-for-2 stock splits of its common stock for securities held of record as of
December 22, 1997 and November 17, 1999, respectively.
13
Item 6. SELECTED FINANCIAL DATA
(in thousands, except per-share amounts and number of stores)
The following data for the fiscal years ended December 30, 2000; January 1,
2000; January 2, 1999; December 27, 1997; and December 28, 1996 are derived from
the consolidated financial statements of the Company. The following data should
be read in conjunction with the Company's consolidated financial statements,
related notes thereto and other financial information included elsewhere in this
report on Form 10-K.
FISCAL YEAR 2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Sales $ 838,131 $ 721,091 $ 530,726 $ 431,974 $ 299,567
Cost of goods sold and occupancy costs 581,980 499,627 369,475 301,644 208,454
------------ ------------ ------------ ------------ ------------
Gross profit 256,151 221,464 161,251 130,330 91,113
Direct store expenses 190,986 155,869 113,094 96,448 69,485
------------ ------------ ------------ ------------ ------------
Store contribution 65,165 65,595 48,157 33,882 21,628
Selling, general and administrative 32,480 27,939 20,026 16,314 12,361
expenses
Pre-opening expenses 3,289 2,767 3,449 1,149 1,863
Merger and restructuring expenses 44,126 12,642 393 7,035
------------ ------------ ------------ ------------ ------------
Income (loss) from operations (14,730) 22,247 24,289 16,419 369
Interest expense, net 8,850 4,280 28 622 1,471
------------ ------------ ------------ ------------ ------------
Income (loss) before income taxes (23,580) 17,967 24,261 15,797 (1,102)
Income tax expense (benefit) (8,559) 5,198 7,822 5,501 (120)
------------ ------------ ------------ ------------ ------------
Net income (loss) before cumulative effect
of change in accounting principle (15,021) 12,769 16,439 10,296 (982)
Cumulative effect of change in accounting
principle, net of tax (1) 281
------------ ------------ ------------ ------------ ------------
Net income (loss) (15,021) 12,488 16,439 10,296 (982)
Accretion of redeemable preferred stock 2,396
------------ ------------ ------------ ------------ ------------
Net income (loss) allocable to common $ (15,021) $ 12,488 $ 16,439 $ 10,296 $ (3,378)
stock
============ ============ ============ ============ ============
Basic net income (loss) per common share $ (0.65) $ 0.55 $ 0.73 $ 0.55 $ (0.32)
============ ============ ============ ============ ============
Weighted average number of
common shares outstanding 23,090 22,806 22,440 18,841 10,606
============ ============ ============ ============ ============
Diluted net income (loss) per common share $ (0.65) $ 0.53 $ 0.71 $ 0.53 $ (0.32)
============ ============ ============ ============ ============
Weighted average number of
common shares outstanding 23,090 23,467 23,079 19,425 10,606
============ ============ ============ ============ ============
Number of stores at end of period 106 110 82 70 57
BALANCE SHEET DATA:
Working capital (deficit) $(136,969) $ (20,971) $ (5,281) $ 32,566 $ 5,998
Total assets $ 377,013 $ 350,629 $ 217,320 $ 190,752 $ 123,045
Long-term debt (including capitalized $ 353 $ 80,328 $ 2,675 $ 4,157 $ 4,678
leases) (2)
Stockholders' equity $ 151,564 $ 165,387 $ 152,608 $ 136,697 $ 77,809
(1) In fiscal 1999 the Company recorded $281,000 in expenses associated with a
cumulative effect of a change in accounting principle. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Preopening Expenses."
(2) As a result of restructuring charges incurred during fiscal 2000 and as
discussed elsewhere in this document, the Company was not in compliance
with certain covenants under the credit facility as of and for the quarter
ended December 30, 2000. Accordingly, all outstanding borrowings ($123,944)
under the credit facility at December 30, 2000 are classified as a current
liability.
14
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This report on Form 10-K contains certain forward-looking statements
regarding our future results of operations and performance. Important factors
that could cause differences in results of operations include, but are not
limited to, the Company's ability to negotiate a suitable amendment to its
outstanding line of credit facility, the success of the Company's currently
proposed strategic repositioning initiatives, the successful transition of
operating authority to our new Chief Executive Officer Perry Odak, the timing
and execution of new store openings, relocations, remodels, sales and closures,
the timing and impact of promotional and advertising campaigns, the impact of
competition, changes in product supply, changes in management information needs,
changes in customer needs and expectations, governmental and regulatory actions,
and general industry or business trends or events, changes in economic or
business conditions in general or affecting the natural foods industry in
particular, and competition for and the availability of sites for new stores and
potential acquisition candidates. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Cautionary Statement Regarding
Forward-Looking Statements." All information stated herein has been revised to
reflect the stock-for-stock transactions, accounted for as poolings of
interests, with Henry's Marketplace, Inc. and Sun Harvest Farms, Inc., which
were consummated on September 27, 1999 and December 15, 1999, respectively.
Overview
Store openings, closings, sales, remodels, relocations and acquisitions. In
fiscal 2000, we opened 11 new stores in Laguna Niguel, San Diego (two) and Yorba
Linda, California; Kansas City, Kansas; St. Louis, Missouri; Reno, Nevada;
Cleveland and Cincinnati, Ohio; Bend and Portland, Oregon; and relocated three
stores in West Hartford, Connecticut; Las Vegas, Nevada; and Salt Lake City,
Utah. We also acquired two operating natural food stores in Escondido and Hemet,
California. We plan to open or relocate as many as eight stores in fiscal 2001.
Through the date of this report, we have opened four new stores in Irvine,
California; Westport, Connecticut; Omaha, Nebraska and Cleveland, Ohio.
Our ability to open additional stores in fiscal 2001 and beyond will depend
upon our ability to successfully negotiate an amendment to our existing credit
facility. As of December 30, 2000, we were in non-monetary default as a result
of our violation of certain financial covenants contained in our credit
facility, although our lenders have not accelerated repayment on our outstanding
debt. All borrowings outstanding under the credit facility at December 30, 2000
are considered to be due on demand and accordingly are classified as a current
liability at December 30, 2000. We are currently negotiating an amendment to the
credit facility that, if agreed upon, will waive the outstanding defaults in
exchange for limitations on our execution of new leases and capital
expenditures, as well other financial covenants, increased interest rates and an
amendment fee. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources."
As has been our past practice, we will continue to evaluate the
profitability, strategic positioning, impact of potential competition on and
sales growth potential of all of our stores on an ongoing basis. We may, from
time to time, make decisions regarding closures, disposals, relocations or
remodels in accordance with such evaluations. As a result of such evaluations
and as part of the strategic repositioning described below, in fiscal 2000 we
closed 15 operating grocery stores and two small vitamin stores and sold three
stores in related transactions. To date, in the first quarter of fiscal 2001, we
have closed one store identified for closure as part of the strategic
repositioning described below, and are considering the sale or closure of as
many as six more stores in the first half of fiscal 2001.
Restructuring charges; strategic repositioning. In the second quarter of
fiscal 2000, we undertook an assessment of our inventory of operating and vacant
properties as part of a strategic repositioning of the Company. We made certain
decisions related to our operations which identified as many as ten stores to be
sold or closed and resulted in a pre-tax restructuring charge of $22.7 million.
In the fourth quarter of fiscal 2000, as part of the ongoing assessment, we
further determined that we would close or sell up to an additional eight stores
whose performance did not meet Company expectations. As a result of this
decision to close or sell additional stores, the Company recorded an additional
pre-tax restructuring charge of $21.4 million in the fourth quarter of fiscal
2000. As of March 30, 2001, the Company has closed or sold 12 of the stores
15
identified for sale or closure. As the result of customer research and internal
assessments performed in fiscal 2000, the Company expanded the scope of its
strategic repositioning and plans to spend up to $20 million through fiscal 2001
for additional staff training, advertising, store and corporate office level
staffing and other strategic initiatives designed to improve our store sales
results.
Results of Operations. Our results of operations have been and will
continue to be affected by, among other things, the number, timing and mix of
store openings, acquisitions, relocations or closings. New stores build their
sales volumes and refine their merchandise selection gradually and, as a result,
generally have lower gross margins and higher operating expenses as a percentage
of sales than more mature stores. We anticipate that the new stores opened in
fiscal 2001 will experience operating losses for the first six to 12 months of
operation, in accordance with historical trends. Further, acquired stores, while
generally profitable as of the acquisition date, generate lower gross margins
and store contribution margins than our company average due to their
substantially lower volume purchasing discounts and the integration of the
acquired stores into our operating systems. Over time, we expect that the gross
margin and store contribution margin of acquired stores approach our company
average.
Other factors that could cause acquired stores to perform at lower than
expected levels include, among other things, turnover of regional and store
management, disruption of advertising, changes in product mix and delays in the
integration of purchasing programs. The Company continues to experience
integration difficulties with certain of the stores acquired or added to our
store base in fiscal 1999, and as a result such stores are having a negative
impact on our consolidated results of operations. We expect that these stores
will take substantially longer to show gross margin and store contribution
margin improvements. As part of the Company's strategic repositioning, we plan
to increase advertising expenditures and staffing at some of our acquired stores
to change prior practices that may have contributed to weaker than expected
performance from such stores.
We are actively upgrading, remodeling or relocating some of our older
stores. We plan to complete the remodel or remerchandise as many as 10 of our
older stores in the first half of fiscal 2001. Remodels and relocations
typically cause short-term disruption in sales volume and related increases in
certain expenses as a percentage of sales, such as payroll. Remodels on average
take between 90 and 120 days to complete. Certain remodels in fiscal 2000 took
longer to complete, resulting in greater than projected sales disruptions. We
cannot predict whether sales disruptions and the related impact on earnings may
be greater in time or volume than projected in certain remodeled or relocated
stores.
Store format and clustering strategy. We operate two store formats: natural
foods supermarkets and farmers' markets. The natural foods supermarket format is
generally 20,000 to 35,000 gross square feet, and the farmers' markets are
generally 15,000 to 25,000 gross square feet. Our profitability has been and
will continue to be affected by the mix of natural foods supermarkets and
farmers' market stores opened, acquired or relocated and whether stores are
being opened in markets where we have an existing presence. As part of our
strategic repositioning, we intend to increase the size of our natural foods
supermarket stores over time to an average size of 28,000 to 30,000 square feet.
We are currently making revisions to our store format and design, including,
among other things, expanding the average size of our natural foods supermarket
format stores to an average of 28,000 to 30,000 square feet, expanding our
selections of gourmet and crossover products, housewares, gift items, beer and
wine, bakery and floral and redesigning store layouts and signage. We also plan
to expand the Henry's Marketplace(R) farmers' market-style store format as our
second, parallel store format. We believe this format, which is primarily
located in the metropolitan San Diego, California area, appeals to a more
value-conscious customer.
In the past, we have pursued a strategy of clustering stores in each of our
markets to increase overall sales, reduce operating costs and increase customer
awareness. In prior years, when we opened a store in a market where we had an
existing presence, our sales and operating results declined at certain of our
existing stores in that market. However, over time, the affected stores
generally achieved store contribution margins comparable to prior levels on the
lower base of sales. Certain new stores opened in fiscal 1999 and fiscal 2000
have caused a greater degree of cannibalization than previously expected, and at
this time it does not appear that the store contribution margins at the older,
affected stores in these regions will rebound to their prior levels. In certain
existing markets the sales and operating results trends for other stores may
continue to experience temporary declines related to the clustering of stores.
We are currently reevaluating our clustering strategy in response to greater
than expected sales cannibalization in certain existing markets where we opened
new stores in fiscal 2000.
16
Comparable store sales results. Sales of a store are deemed to be
comparable commencing in the thirteenth full month of operations for new,
relocated and acquired stores. A variety of factors affect our comparable store
sales results, including, among others:
o the opening of stores by us or by our competitors in markets where we
have existing stores
o the relative proportion of new or relocated stores to mature stores
o the timing of advertising and promotional events
o store remodels
o our ability to effectively execute our operating plans
o changes in consumer preferences for natural foods products
o availability of produce and other seasonal merchandise
o general economic conditions.
Past increases in comparable store sales may not be indicative of future
performance.
Our comparable store sales results have been negatively affected in the
past by, among other factors, planned cannibalization, which is the loss of
sales at an existing store when we open a new store nearby, resulting from the
implementation of our store clustering strategy. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Store format and
clustering strategy." Comparable store sales results were negatively affected in
fiscal 2000 by planned cannibalization due to the openings in fiscal 1999 and
fiscal 2000 of new or relocated stores in several of our existing markets,
including, among others: Phoenix, Arizona; San Diego, California; Kansas City
and St. Louis, Missouri; Portland, Oregon; Albuquerque, New Mexico; Nashville,
Tennessee and Salt Lake City, Utah. For certain stores opened in fiscal 1999 and
fiscal 2000, we experienced a higher degree of cannibalization than in the past
in markets where we expected higher demand for additional stores. Certain
stores, such as the Henry's Marketplace(R) format stores, which depend heavily
on produce sales, are more susceptible to sales fluctuations resulting from the
availability and price of certain produce items. In addition, in fiscal 2000
certain stores faced greater than expected competition both from other natural
foods grocery stores and from increased natural foods offerings in conventional
and gourmet grocery stores, which negatively affected comparable store sales
results. As a result of the higher degree of cannibalization, as well as reduced
levels of marketing in certain regions, delays in remodels, increased
competition in some regions, difficulty in properly executing our operating
plans and other factors, comparable store sales decreased 3.5% in the fourth
quarter of fiscal 2000 and 2.6% for fiscal 2000. We expect comparable store
sales results to be flat to low single-digits for fiscal 2001 as a whole, with
the results flat to slightly negative in the first half of the year and
improving in the remainder of the year. There can be no assurance that
comparable store sales for any particular period will not decrease in the
future.
Pre-opening expenses. Pre-opening expenses include labor, rent, utilities,
supplies and certain other costs incurred prior to a store's opening.
Pre-opening expenses have averaged approximately $250,000 to $350,000 per store
historically, although the amount per store may vary depending on the store
format and whether the store is the first to be opened in a market, or is part
of a cluster of stores in that market.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Accounting for Costs of Start-Up
Activities." Statement of Position 98-5 requires that pre-opening costs be
expensed as incurred. Statement of Position 98-5 is effective for fiscal years
beginning after December 15, 1998, and the initial application should be
reported as a cumulative effect of a change in accounting principle. We adopted
Statement of Position 98-5 in fiscal 1999 and recorded approximately $281,000 as
a cumulative effect of a change in accounting principle, net of taxes, during
fiscal 1999.
17
Results of Operations
The following table sets forth for the periods indicated, certain selected
income statement data expressed as a percentage of sales:
FISCAL YEAR ENDED 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------
Sales 100.0% 100.0% 100.0%
Cost of goods sold and occupancy costs 69.4 69.3 69.6
----------------- ------------- -------------
Gross profit 30.6 30.7 30.4
Direct store expenses 22.8 21.6 21.3
----------------- ------------- -------------
Store contribution 7.8 9.1 9.1
Selling, general and
administrative expenses 3.9 3.9 3.8
Pre-opening expenses 0.4 0.4 0.6
Merger and restructuring expenses 5.3 1.8 0.1
----------------- ------------- -------------
Income (loss) from operations (1.8) 3.0 4.6
Interest expense, net 1.0 0.6
----------------- ------------- -------------
Income (loss) before income taxes (2.8) 2.4 4.6
Income tax expense (benefit) (1.0) 0.7 1.5
----------------- ------------- -------------
Net income (loss) before cumulative
effect of change in account (1.8) 1.7 3.1
principle
Cumulative effect of change in
accounting principle, net of taxes 0.1
----------------- ------------- -------------
Net income (loss) (1.8)% 1.6% 3.1%
================= ============= =============
Fiscal 2000 Compared to Fiscal 1999
Fiscal 2000 and 1999 each contained 52 weeks of operations.
Sales. Sales for the fiscal year ended December 30, 2000, increased 16.2%
to $838.1 million from $721.1 million in fiscal 1999. The increase was primarily
due to the acquisition of two stores, the opening of 11 new stores, and the
relocation of three stores, as well as the inclusion of a full year of sales for
the eight new stores opened, five stores relocated, and 17 stores acquired in
fiscal 1999. Comparable store sales decreased 2.6% for fiscal 2000, as compared
to a 6% increase for fiscal 1999.
Gross Profit. Gross profit for the fiscal year ended December 30, 2000,
increased 15.7% to $256.2 million from $221.5 million in fiscal 1999. The
increase in gross profit is primarily attributable to the acquisition of two
stores, the opening of 11 new stores and the relocation of three stores. As a
percentage of sales, gross profit decreased to 30.6% in fiscal 2000 from 30.7%
in fiscal 1999 due primarily to acquisition integration difficulties in Oregon,
Massachusetts and Texas.
Direct Store Expenses. Direct store expenses for the fiscal year ended
December 30, 2000, increased 22.5% to $191.0 million from $155.9 million in
fiscal 1999. The increase in direct store expenses is attributable to the
increase in the number of stores operated by the Company. As a percentage of
sales, direct store expenses increased to 22.8% in fiscal 2000 from 21.6% in
fiscal 1999 due to the increased number of acquired and newly-opened stores in
late fiscal 1999, acquisition integration difficulties and significant
investments that the Company has made in employee benefit programs, particularly
expanded health insurance offerings.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the fiscal year ended December 30, 2000, increased
16.3% to $32.5 million from $27.9 million in fiscal 1999. The increase is
primarily attributable to additions in the corporate and regional staff
necessary to support the Company's accelerated growth in fiscal 1999. As a
18
percentage of sales, selling, general and administrative expenses remained
constant at 3.9% in fiscal 2000 from fiscal 1999. As part of the Company's
expanded strategic repositioning, we expect to spend additional funds on
marketing at the national level, as well as increased corporate and regional
support staffs. As a result of these increased expenditures, we expect that
selling, general and administrative expenses will increase in fiscal 2001.
Pre-Opening Expenses. As previously discussed herein, in April 1998, the
AICPA issued SOP 98-5, Accounting for the Costs of Start-Up Activities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Pre-Opening Expenses." Pre-opening expenses for the fiscal year
ended December 30, 2000, increased 18.9% to $3.3 million from $2.8 million in
fiscal 1999. The increase in pre-opening expenses is attributable to the
increase in the number of stores opened. As a percentage of sales, pre-opening
expenses remained constant at 0.4% due to the opening of 14 new stores
(including three relocations) in fiscal 2000 as compared to 13 new stores
(including five relocations) in fiscal 1999.
Merger and Restructuring Expenses. Merger and restructuring expenses for
fiscal 2000 were $44.1 million as compared to $12.6 million in fiscal 1999. The
expenses for 2000 consisted of two separate strategic repositioning efforts. The
first restructuring occurred during the second quarter of fiscal 2000, when
certain decisions were made relating to the strategic repositioning of our
operations resulting in a pre-tax restructuring charge of $22.7 million. These
decisions included the closure of three natural food stores and one small
vitamin store during the second quarter of fiscal 2000 ($4.7 million); the
planned sale or closure of seven stores during the remainder of fiscal 2000
($9.9 million); exit costs of previously closed or abandoned sites ($5.6
million); and the discontinuation of e-commerce activities ($2.5 million).
Components of the restructuring charge consist primarily of abandonment of fixed
and intangible assets ($15.3 million); noncancelable lease obligations ($5.3
million); and write-down of the Company's long-term equity investment in an
e-commerce business partner due to asset impairment ($2.1 million).
Substantially all of the restructuring charges are non-cash expenses. In
conjunction with the restructuring charge, the Company recorded a liability of
$4.9 million for noncancelable lease obligations.
The second restructuring occurred in the fourth quarter of fiscal 2000,
when the Company expanded its strategic repositioning and, as part of such
expansion, decided to close or sell up to an additional eight stores which were
not meeting expectations. This decision resulted in an additional pre-tax
restructuring charge in the fourth quarter of fiscal 2000 of $21.4 million. This
restructuring charge consists primarily of costs associated with the abandonment
of fixed and intangible assets ($15.3 million) and noncancelable lease
obligations ($6.1 million). In conjunction with the restructuring charge, the
Company recorded a liability of $5.9 million for noncancelable lease
obligations. See "Notes to Consolidated Financial Statements - Note 12 - Merger
and Restructuring Expenses" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Store openings, closings,
remodels, relocations and acquisitions."
The total restructuring charges in fiscal 2000 of $44.1 million reflect a
249% increase over fiscal 1999 restructuring charges of $12.6 million, which
primarily resulted from closure of two Farm to Market stores located in Buffalo
Grove, Illinois, and Tempe, Arizona ($4.5 million) and the reallocation of
corporate resources to service new and existing stores, rather than closed sites
($6.4 million).
Interest Expense, Net. Net interest expense for the fiscal year ended
December 30, 2000, increased to $8.9 million, from $4.3 million in fiscal 1999.
As a percentage of sales, net interest expense increased to 1.0% from 0.6% in
fiscal 1999. The increase is primarily attributable to increased borrowings on
our line of credit to fund acquisitions, new stores, relocations and remodels.
Interest expense may increase in the future as a result of increased borrowing
and/or an expected increase in the interest rate under our credit facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" below.
Fiscal 1999 Compared to Fiscal 1998
Fiscal 1999 contained 52 weeks of operations as compared to 53 weeks in
fiscal 1998.
Sales. Sales for the fiscal year ended January 1, 2000, increased 35.9% to
$721.1 million from $530.7 million in fiscal 1998. The increase was primarily
due to the acquisition of 17 stores, the opening of eight new stores, and the
relocation of five stores, as well as the inclusion of a full year of sales for
the nine new stores opened and seven stores acquired in fiscal 1998. Comparable
store sales increased 6% for fiscal 1999, as compared to 4% for fiscal 1998.
Gross Profit. Gross profit for the fiscal year ended January 1, 2000,
increased 37.3% to $221.5 million from $161.3 million in fiscal 1998. The
19
increase in gross profit is primarily attributable to the acquisition of
seventeen stores and the opening of eight new stores. As a percentage of sales,
gross profit increased to 30.7% in fiscal 1999 from 30.4% in fiscal 1998 due to
the maturation of the Company's store base and the Company's increasing volume
purchase discounts.
Direct Store Expenses. Direct store expenses for the fiscal year ended
January 1, 2000, increased 37.8% to $155.9 million from $113.1 million in fiscal
1998. The increase in direct store expenses is attributable to the increase in
the number of stores operated by the Company. As a percentage of sales, direct
store expenses increased to 21.6% in fiscal 1999 from 21.3% in fiscal 1998 due
to the increased number of acquired and newly-opened stores in fiscal 1999 over
fiscal 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the fiscal year ended January 1, 2000, increased
39.5% to $27.9 million from $20.0 million in fiscal 1998. As a percentage of
sales, selling, general and administrative expenses increased to 3.9% from 3.8%
in fiscal 1998. The increases are primarily attributable to additions in the
corporate and regional staff necessary to support the Company's growth. In
addition, the Company moved its corporate office during the fourth quarter of
fiscal 1998 to a larger facility to accommodate an increased support staff for
its larger base of stores. There is a full year of additional selling, general
and administrative expenses for rent and utilities on the new facility in fiscal
1999, as compared to one quarter in fiscal 1998.
Pre-Opening Expenses. As previously discussed herein, in April 1998, the
AICPA issued SOP 98-5, Accounting for the Costs of Start-Up Activities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Pre-Opening Expenses." Pre-opening expenses for the fiscal year
ended January 1, 2000, decreased 19.8% to $2.8 million from $3.4 million in
fiscal 1998. The decrease in pre-opening expenses is attributable to the
decrease in the number of stores opened. As a percentage of sales, pre-opening
expenses decreased to 0.4% from 0.6% due to the opening of eight new stores in
fiscal 1999 as compared to nine new stores in fiscal 1998.
Merger and Restructuring Expenses. Merger and restructuring expenses for
the fiscal year ended January 1, 2000, were $12.6 million, as compared to
$393,000 in fiscal 1998. Restructuring expenses of approximately $10.9 million
were recorded in the first quarter of fiscal 1999 as the result of certain
decisions by our management regarding our operations and selected store
closures. The first decision was a change in our strategic direction with
respect to our two Farm to Market stores located in Buffalo Grove, Illinois, and
Tempe, Arizona which resulted in restructuring expenses of $4.5 million. The
second decision involved the reallocation of corporate resources to service new
and existing stores, rather than closed sites which resulted in a merger and
restructuring expense of $6.4 million. Components of the restructuring charge
consist primarily of noncancelable lease obligations through fiscal 2000 in the
amount of $1.2 million and abandonment of fixed and intangible assets in the
amount of $9.7 million. There were also restructuring expenses of $645,000
during the third quarter of fiscal 1999, and $1.1 million during the fourth
quarter fiscal 1999, as a result of the poolings with Henry's and Sun Harvest.
The components were primarily noncancelable lease obligations and professional
fees. The fiscal 1998 charge is attributed to employee severance costs,
inventory and fixed asset write-downs, and lease cancellation costs associated
with two poolings-of-interests transactions during fiscal 1998.
Interest Expense, Net. Net interest expense for the fiscal year ended
January 1, 2000, increased to $4.3 million, from $28,000 in fiscal 1998. As a
percentage of sales, net interest expense increased to 0.6% from less than 0.1%
in fiscal 1998. The increase is primarily attributable to increased borrowings
on our line of credit to fund acquisitions and new stores.
Liquidity and Capital Resources
Our primary sources of capital have been cash flow from operations, trade
payables, bank indebtedness, and the sale of equity securities. Primary uses of
cash have been the financing of new store development, new store openings,
relocations, remodels and acquisitions.
Net cash provided by operating activities was $41.0 million during fiscal
2000 as compared to $53.9 million during fiscal 1999. Cash from operating
activities decreased during this period primarily due to decreases in net income
offset by merger and restructuring expenses. Net cash provided by operating
activities was $53.9 million during fiscal 1999 and $32.1 million during fiscal
20
1998. Cash from operating activities increased during this period primarily due
to increases in net income before depreciation and amortization expense and
merger and restructuring expenses. We have not required significant external
financing to support inventory requirements at our existing and new stores
because we have been able to rely on vendor financing for most of the inventory
costs, and we anticipate that vendor financing will continue to be available for
new store openings.
Net cash used by investing activities was $72.8 million during fiscal 2000
as compared to $120.0 million during the same period in fiscal 1999. The
decrease is due to the opening of 11 new stores, the acquisition of two stores,
the relocation of three stores and several store remodels in fiscal 2000, as
compared to eight new stores, five relocated stores, 17 acquired stores and
several store remodels in fiscal 1999. Net cash used by investing activities was
$63.5 million during fiscal 1998 due to the acquisition of seven stores, the
opening of nine new stores, the relocation of one store, and construction costs
incurred for new stores in development that opened during 1999.
Net cash provided by financing activities was $22.3 million during fiscal
2000 as compared to $76.0 million during fiscal 1999. The decrease reflects
lower incremental borrowings under our revolving line of credit to fund fewer
store acquisitions during fiscal 2000. Net cash provided by financing activities
was $76.0 million during fiscal 1999 and net cash used by financing activities
was $4.0 million during fiscal 1998. The increase reflects increased borrowing
under our revolving line of credit related to acquisition activity, as well as
repayment of $17.5 million in debt.
In the third quarter of fiscal 2000, we renewed and increased our existing
revolving credit facility to $157.5 million. The facility as increased and
amended has two separate lines of credit, a revolving line for $111.2 million
and the remainder in a term loan facility, each with a three-year term expiring
August 1, 2003. The facility currently bears interest at the default rate, which
is the prime rate. The credit agreement includes certain financial and other
covenants, as well as restrictions on payments of dividends. As of December 30,
2000, we were in violation of two financial covenants, and the lending group
issued a notice of default, although it has not accelerated our repayment
obligations. All borrowings outstanding under the credit facility at December
30, 2000 are considered to be due on demand and accordingly are classified as a
current liability at December 30, 2000. As a result of the covenant violations,
our borrowings under the credit facility have been limited to $125 million. We
are currently negotiating an amendment to the credit facility to waive the
defaults and modify certain of the covenants that may include an increase in our
interest rate and certain limitations on the execution of new leases and capital
expenditures, as well as other financial covenants and a security interest in
certain of our assets. If we are unsuccessful in negotiating an amendment
acceptable to our lenders, such lenders could accelerate repayment of existing
borrowings. The Company currently does not have sufficient available funds to
repay in the event of an acceleration of our debt. The Company is also proposing
to raise approximately $30.0 million in equity financings to provide additional
liquidity. As of December 30, 2000, there were $77.6 million in borrowings
outstanding under the revolving facility and $46.3 million in borrowings
outstanding under the term loan. If we are successful in negotiating an
amendment to our existing credit facility, we believe that cash generated from
operations will be sufficient to meet our capital expenditure requirements in
fiscal 2001.
We spent approximately $60.6 million during fiscal 2000 for new store
construction, development, remodels and maintenance capital expenditures,
exclusive of acquisitions, and anticipate that we will spend $35.0 to $40.0
million in fiscal 2001 for new store construction, equipment, leasehold
improvements, remodels and maintenance capital expenditures and relocations of
existing stores, exclusive of acquisitions. Our average capital expenditures to
open a leased store, including leasehold improvements, equipment and fixtures,
have ranged from approximately $2.0 to $3.0 million historically, excluding
inventory costs and initial operating losses. We anticipate that our average
capital expenditures will be $2.5 to $4.0 million in the future, partly because
of increases in the size of new stores and partly because our new store
prototype requires more expensive fixturing. Delays in opening new stores may
result in increased capital expenditures and increased pre-opening costs for the
site, as well as lower than planned sales for the Company.
We anticipate cash flows from operations of approximately $40.0 million in
fiscal 2001. Although there can be no assurance that actual capital expenditures
will not exceed anticipated levels, we believe that cash generated from
operations will be sufficient to satisfy the Company's capital expenditure
requirements through fiscal 2001.
In fiscal 2000 we sold certain unimproved real property acquired as part of
the acquisition of the outstanding stock of Nature's Fresh Northwest and an
office building acquired as part of the pooling of interests transaction with
Sun Harvest Farms, Inc., both in fiscal 1999.
21
The cost of initial inventory for a new store is approximately $300,000 to
$800,000 depending on the store format; however, we obtain vendor financing for
most of this cost. Pre-opening costs currently are approximately $250,000 to
$350,000 per store and are expensed as incurred. The amounts and timing of such
pre-opening costs will depend upon the availability of new store sites and other
factors, including the location of the store and whether it is in a new or
existing market for us, the size of the store, and the required build-out at the
site. Costs to acquire future stores, if any, are impossible to predict and
could vary materially from the cost to open new stores. There can be no
assurance that actual capital expenditures will not exceed anticipated levels.
We believe that cash generated from operations will be sufficient to satisfy our
cash requirements, exclusive of additional acquisitions, through fiscal 2001.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." In June 2000, FAS No. 138
"Accounting for Certain Derivative Instruments and Hedging Activities, an
Amendment of FAS 133," was issued. FAS No. 133 and No. 138 address the
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts, and hedging activities. The Company is required to
adopt FAS No. 133 and No. 138 in the first quarter of fiscal 2001, but does not
expect such adoption to materially affect financing statement presentation.
Cautionary Statement Regarding Forward-Looking Statements
This Report on Form 10-K contains "forward-looking statements," within the
meaning of the Private Securities Litigation Reform Act of 1995, that involve
known and unknown risks. Such forward-looking statements include statements as
to the Company's plans to open, acquire or relocate additional stores, the
anticipated performance of such stores, the impact of competition, the
sufficiency of funds to satisfy the Company's cash requirements through fiscal
2001, our ability to negotiate an amendment to our credit facilities acceptable
to our lenders, our expectations for comparable store sales, our plans for
expanding store format, other elements of our strategic repositioning, levels of
cannibalization, expected levels of direct store expenses, selling, general and
administrative expenses, pre-opening expenses and capital expenditures and other
statements containing words such as "believes," "anticipates," "estimates,"
"expects," "may," "intends" and words of similar import or statements of
management's opinion. These forward-looking statements and assumptions involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, market performance or achievements of the Company to differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. Important factors that could cause
such differences include, but are not limited to, the success of the Company's
proposed strategic repositioning plan, the availability and integration of
acquisitions, the timing and execution of new store openings, relocations,
remodels, sales and closures, the timing and impact of promotional and
advertising campaigns, the impact of competition, changes in product supply,
changes in management information needs, changes in customer needs and
expectations, governmental and regulatory actions, and general industry or
business trends or events, changes in economic or business conditions in general
or affecting the natural foods industry in particular, competition for and the
availability of sites for new stores and potential acquisition candidates, and
factors such as timing of closures and sales of stores. The Company undertakes
no obligation to update any forward-looking statements in order to reflect
events or circumstances that may arise after the date of this Report.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
In the normal course of business, the Company is exposed to fluctuations in
interest rates and the value of foreign currency. The Company employs various
financial instruments to manage certain exposures when practical.
The Company is exposed to foreign currency exchange risk. The Company owns
and operates four natural foods supermarkets and a commissary kitchen in British
Columbia, Canada. The commissary supports the four Canadian stores and does not
independently generate sales revenue. Sales made from the four Canadian stores
are made in exchange for Canadian dollars. To the extent that those revenues are
repatriated to the United States, the amounts repatriated are subject to the
22
exchange rate fluctuations between the two currencies. The Company does not
hedge against this risk because of the small amounts of funds at risk.
The Company's exposure to interest rate changes is primarily related to its
variable rate debt issued under its $157.5 million revolving credit facility.
The facility has two separate lines of credit, a revolving line in the amount of
$111.2 million and a term loan in the amount of $46.3 million, each with a
three-year term expiring August 1, 2003. As a result of violations by the
Company of certain financial covenants under the line of credit facility, the
Company's lenders issued a notice of default, although the lenders have not
accelerated repayment of outstanding borrowings at this time. All borrowings
outstanding under the credit facility at December 30, 2000 are considered to be
due on demand and accordingly are classified as a current liability at December
30, 2000. Borrowings under the credit facility have been limited to $125
million. As of December 30, 2000, there were $77.6 million in borrowings
outstanding under the $111.2 million revolving line of this facility and $46.3
million in borrowings outstanding under the $46.3 million term note. As a result
of the Company's default, the interest rate on the credit facility was adjusted
to the prime rate, effective December 30, 2000. The Company is currently
negotiating an amendment to the credit facility that would retroactively adjust
interest rates to a variable rate based on the prime rate or LIBOR, effective
January 1, 2001. Because the interest rates on these facilities are variable,
based upon the prime rate or LIBOR, if the Company is successful in negotiating
an amendment to the facility, the Company's interest expense and net income are
affected by interest rate fluctuations. If interest rates were to increase or
decrease by 100 basis points, the result, based upon the existing outstanding
debt as of December 30, 2000, would be an annual increase or decrease of
approximately $1.2 million in interest expense and a corresponding decrease or
increase of approximately $780,000 in the Company's net income after taxes.
In September 2000, the Company entered into an interest rate swap to hedge
its exposure on variable rate debt positions. Variable rates are predominantly
linked to LIBOR as determined by one month intervals. The interest rate provided
by the swap on variable rate debt is 6.7%. At December 30, 2000, the notional
principal amount at the interest rate swap agreement was $50.0 million, expiring
in August 2003. The notional amount is the amount used for the calculation of
interest payments which are exchanged over the life of the swap transaction on
the amortized principal balance. In fiscal 2000, the gains (losses) in interest
expense associated with this agreement were approximately $(12,000).
23
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per-share amounts)
FISCAL YEAR 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------------
Sales $ 838,131 $ 721,091 $ 530,726
Cost of goods sold and occupancy costs 581,980 499,627 369,475
------------------ ------------------ ------------------
Gross profit 256,151 221,464 161,251
Operating expenses
Direct store expenses 190,986 155,869 113,094
Selling, general and administrative expenses 32,480 27,939 20,026
Pre-opening expenses 3,289 2,767 3,449
Merger and restructuring expenses 44,126 12,642 393
------------------ ------------------ ------------------
Income (loss) from operations (14,730) 22,247 24,289
Interest income 117 304 975
Interest expense (8,967) (4,584) (1,003)
------------------ ------------------ ------------------
Income (loss) before income taxes (23,580) 17,967 24,261
Income tax expense (benefit) (8,559) 5,198 7,822
------------------ ------------------ ------------------
Net income (loss) before cumulative effect
of change in accounting principle (15,021) 12,769 16,439
Cumulative effect of change in accounting
principle, net of tax 281
------------------ ------------------ ------------------
Net income (loss) (15,021) 12,488 16,439
Other comprehensive income (expense)
Foreign currency translation adjustment, net (259) 510 22
------------------ ------------------ ------------------
Comprehensive income (loss) $ (15,280) $ 12,998 $ 16,461
================== ================== ==================
Basic net income (loss) per common share:
Net income (loss) before cumulative effect
of change in accounting principle $(0.65) $0.56 $0.73
Cumulative effect of change in accounting
principle, net of tax (0.01)
------------------ ------------------ ------------------
Net income (loss) $(0.65) $0.55 $0.73
================== ================== ==================
Diluted net income (loss) per common share:
Net income (loss) before cumulative effect of
change in accounting principle, net of tax $(0.65) $0.54 $0.71
Cumulative effect of change in accounting
principle, net of tax (0.01)
------------------ ------------------ ------------------
Net income (loss) $(0.65) $0.53 $0.71
================== ================== ==================
Weighted average number of
common shares outstanding 23,090 22,806 22,440
================== ================== ==================
Weighted average number of common shares
outstanding assuming dilution 23,090 23,467 23,079
================== ================== ==================
The accompanying notes are an integral part of these consolidated financial
statements.
24
WILD OATS MARKETS, INC.
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
FISCAL YEAR ENDED 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 12,457 $ 21,877
Inventories 55,258 51,412
Accounts receivable (net of allowance for doubtful
accounts of $355 and $259, respectively) 3,936 2,159
Income tax receivable 9,973 520
Prepaid expenses and other current assets 2,004 2,424
Deferred tax asset 1,989 1,775
--------------------------- --------------------------
Total current assets 85,617 80,167
Property, plant and equipment, net 172,916 156,156
Intangible assets, net 114,461 108,734
Deposits and other assets 3,791 4,072
Long-term investment 228 1,500
--------------------------- --------------------------
$ 377,013 $ 350,629
=========================== ==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 56,556 $ 48,048
Accrued liabilities 41,815 30,381
Current portion of debt and capital leases 124,215 22,709
--------------------------- --------------------------
Total current liabilities 222,586 101,138
Long-term debt and capital leases 353 80,328
Deferred tax liability 989 1,185
Other long-term obligations 1,521 2,591
--------------------------- --------------------------
225,449 185,242
--------------------------- --------------------------
Commitments and contingencies (Notes 10 and 11)
Stockholders' equity:
Common stock; $0.001 par value; 60,000,000
shared authorized; 23,147,103 and 22,992,437
issued and outstanding, respectively 23 23
Additional paid-in capital 149,764 148,307
Retained earnings 1,635 16,656
Accumulated other comprehensive income 142 401
--------------------------- --------------------------
Total stockholders' equity 151,564 165,387
--------------------------- --------------------------
$ 377,013 $ 350,629
=========================== ==========================
The accompanying notes are an integral part of these consolidated financial
statements.
25
WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (In thousands, except
share and per-share amounts)
ACCUM-
ULATED
RETAINED OTHER
EARNINGS COMPRE- TOTAL
ADD'L (ACCUM- HENSIVE STOCK-
COMMON STOCK PAID IN ULATED INCOME HOLDERS'
-------------------------- CAPITAL DEFICIT) (LOSS) EQUITY
SHARES AMOUNT
----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 27, 1997 22,108,149 $ 22 $ 138,812 $ (2,006) $ (131) $136,697
Pooling-of-interests transactions 200,045 60 188 248
Equity transactions of pooled companies (4,701) (4,701)
Issuance of common stock
($9.63 to $20.33 per share) 69,846 1,096 1,096
Common stock options exercised
($3.13 to $16.00 per share) 227,979 1 2,806 2,807
Net income 16,439 16,439
Foreign currency translation adjustment 22 22
------------ ------------ ------------- ------------- ------------- -------------
BALANCE AT JANUARY 2, 1999 22,606,019 23 142,774 9,920 (109) 152,608
Equity transactions of pooled companies 104 (5,752) (5,648)
Issuance of common stock
($16.72 to $18.92 per share),
net of issuance costs 131,239 2,104 2,104
Common stock options exercised
($3.13 to $19.79 per share) 255,179 3,325 3,325
Net income 12,488 12,488
Foreign currency translation adjustment 510 510
------------ ------------ ------------- ------------- ------------- -------------
BALANCE AT JANUARY 1, 2000 22,992,437 23 148,307 16,656 401 165,387
Issuance of common stock
($10.68 per share),
net of issuance costs 67,889 802 802
Common stock options exercised
($3.13 to $18.00 per share) 86,777 655 655
Net loss (15,021) (15,021)
Foreign currency translation adjustment (259) (259)
------------ ------------ ------------- ------------- ------------- -------------
BALANCE AT DECEMBER 30, 2000 23,147,103 $ 23 $ 149,764 $ 1,635 $ 142 $151,564
============ ============ ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
26
WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands, except share amounts)
FISCAL YEAR 2000 1999 1998
---------------------------------------------------------------- ------------------- ------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (15,021) $ 12,488 $ 16,439
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 25,574 22,072 15,546
Loss (gain) on disposal of property and equipment and
settlement of property-related obligations (306) 14 (829)
Deferred tax provision (benefit) (410) (1,409) 406
Merger and restructuring expenses 44,126 12,642 393
Other 104
Change in assets and liabilities, net of acquisitions:
Inventories (5,048) (7,569) (6,504)
Receivables, net and other assets (11,551) (2,417) (2,215)
Accounts payable 8,542 12,057 7,202
Accrued liabilities (5,001) 6,028 1,632
---------------- ---------------- ----------------
Net cash provided by operating activities 41,009 53,906 32,070
---------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (60,584) (62,592) (56,448)
Acquisitions, net of cash acquired (16,791) (77,779) (10,481)
Proceeds from sale of property and equipment 4,585 21,902 3,408
Long-term investment (38) (1,500)
---------------- ---------------- ----------------
Net cash used in investing activities (72,828) (119,969) (63,521)
---------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds on line of credit, net 28,751 95,200
Proceeds from notes payable and long-term debt 1,538 1,720
Payments on notes payable, long-term debt and capitalized (7,489) (18,810) (3,041)
leases
Proceeds from issuance of common stock, net 1,069 3,865 2,003
Distributions to stockholders, net (5,752) (4,726)
---------------- ---------------- ----------------
Net cash provided by (used in) financing 22,331 76,041 (4,044)
activities
---------------- ---------------- ----------------
Effect of exchange rates on cash 68 510 62
---------------- ---------------- ----------------
Net (decrease) increase in cash and cash equivalents (9,420) 10,488 (35,433)
Cash and cash equivalents at beginning of year 21,877 11,389 46,822
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 12,457 $ 21,877 $ 11,389
================ ================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 9,715 $ 3,570 $ 897
================ ================ ================
Cash paid for income taxes $ 4,503 $ 2,097 $ 6,370
================ ================ ================
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Short-term note payable issued for acquisition $ 3,150
================
Common stock issued and total debt and liabilities
assumed in acquisitions $ 750 $ 1,668 $ 488
================ ================ ================
Stock received in exchange for services
The accompanying notes are an integral part of these consolidated
financial statements.
27
WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization. Wild Oats Markets, Inc. ("Wild Oats" or the "Company"),
headquartered in Boulder, Colorado, owns and operates natural foods supermarkets
in the United States and Canada. The Company also operates bakeries, commissary
kitchens, and warehouses that supply the retail stores. The Company's operations
are concentrated in one market segment, grocery stores, and are geographically
concentrated in the western and central parts of the United States.
Basis of Presentation. Certain amounts in the prior years' financial
statements have been reclassified to conform to the current year presentation.
Principles of Consolidation. The Company's consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Fiscal Year. The Company reports its financial results on a 52- or 53-week
fiscal year ending on the Saturday closest to December 31. Fiscal years for the
consolidated financial statements included herein ended on December 30, 2000,
January 1, 2000, and January 2, 1999. Fiscal 2000 was a 52-week year, fiscal
1999 was a 52-week year and fiscal 1998 was a 53-week year.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Inventories. Inventories consisting of products held for sale are stated at
the lower of cost (first-in, first-out) or market, as determined by the retail
inventory method. Perishable inventories are valued at the lower of cost (first
in, first out) or market.
Property, Plant and Equipment. Property, plant and equipment are recorded
at cost. Depreciation is computed on a straight-line basis over the estimated
useful lives of machinery and equipment (three to ten years). Depreciation is
computed on a straight-line basis over the estimated useful lives of buildings
(30 years). Leasehold improvements are amortized on a straight-line basis over
the shorter of the useful life of the asset or the lease term. Major renewals
and improvements are capitalized, while maintenance and repairs are expensed as
incurred. Upon sale or retirement of assets, the cost and related accumulated
depreciation or amortization are eliminated from the respective accounts and any
resulting gains or losses are reflected in operations. Applicable interest
charges incurred during the construction of assets are capitalized as one of the
elements of cost and are amortized over the assets' estimated useful lives. All
construction-related overhead and a portion of direct administrative expenses
are capitalized and allocated to assets based on the relative asset costs.
Intangible Assets. Intangible assets consist primarily of goodwill, which
is amortized using the straight-line method over 40 years, and are shown net of
accumulated amortization of $8.8 million and $7.1 million at December 30, 2000
and January 1, 2000, respectively. Amortization expense related to intangible
assets totaled approximately $3.1 million, $2.6 million and $1.4 million in
fiscal 2000, 1999 and 1998, respectively.
Impairment of Long-Lived Assets. Management periodically evaluates the
recoverability of long-lived assets, by comparing anticipated undiscounted
future cash flows from operations to net book value. If this review indicates
that the carrying amounts will not be recoverable, the carrying amounts of the
long-lived assets are reduced by the estimated shortfall of cash flows on a
discounted basis.
28
Pre-Opening Expenses. Beginning in fiscal 1999, the Company adopted SOP
98-5, Accounting for the Costs of Start-Up Activities, which requires that
pre-opening costs be expensed as incurred and was effective for fiscal years
beginning after December 15, 1998. The Company recorded $281,000 as a cumulative
effect of change in accounting principle, net of taxes, during the first quarter
of fiscal 1999. Through fiscal 1998, pre-opening expenses were deferred until
the store's opening date, at which time such costs were expensed in full.
Beginning in fiscal 1999, pre-opening expenses are recognized as incurred.
Concentration of Risk. The Company purchases approximately 27% of its cost
of goods sold from one vendor. The Company's reliance on this supplier can be
shifted, over a period of time, to alternative sources of supply, should such
changes be necessary. However, if the Company could not obtain products from
this supplier for factors beyond its control, the Company's operations would be
disrupted in the short term while alternative sources of product were secured.
Revenue Recognition. Revenue for sales of the Company's products is
recognized at the point of sale. SEC Staff Accounting Bulletin 101 did not have
an impact on the Company's revenue recognition policy.
Advertising. Advertising is expensed as incurred. Advertising expense was
$6.8 million, $7.3 million and $6.8 million for fiscal 2000, 1999 and 1998,
respectively.
Fair Value of Financial Instruments. The carrying amounts of the Company's
financial instruments, including cash and cash equivalents, short-term trade
receivables and payables, approximate their fair values due to the short-term
nature of the instruments. The fair value of the Company's long-term debt
approximates its carrying value due to the variable interest rate feature of the
instrument.
Derivative Financial Instruments. The Company uses an interest rate swap to
manage interest costs and the risk associated with changing interest rates. As
interest rates change, the differential paid or received is recognized in
interest expense of the related period.
Long-Term Investment. The Company's long-term investment in an e-commerce
nutrition company totaling $228,000 at December 30, 2000 is recorded under the
cost method as the Company is unable to exercise effective control.
Use of Estimates. The preparation of these financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
Foreign Currency Translation. The functional currency for the Company's
Canadian subsidiary is the Canadian dollar. Translation into U.S. dollars is
performed for assets and liabilities at the exchange rate as of the balance
sheet date. Income and expense accounts are translated at average exchange rates
for the year. Adjustments resulting from the translation are reflected as a
separate component of other comprehensive income. Translation adjustments are
not tax-effected as they relate to investments that are permanent in nature.
Self-Insurance. The Company is self-insured for certain losses relating to
worker's compensation claims and employee medical and dental benefits. The
Company has purchased stop-loss coverage in order to limit its exposure to any
significant levels of claims. Self-insured losses are accrued based upon the
Company's estimates of the aggregate uninsured claims incurred using certain
actuarial assumptions followed in the insurance industry and the Company's
historical experiences.
Earnings Per Share. Basic earnings per share is based on the
weighted-average number of common shares outstanding, and diluted earnings per
share is based on the weighted-average number of common shares outstanding and
29
all dilutive potential common shares outstanding, except where the effect of
their inclusion would be antidilutive. A reconciliation of the basic and diluted
per-share computations is as follows (in thousands, except per-share data):
FISCAL YEAR 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
Basic and diluted earnings per
common share computation:
Net income (loss) $ (15,021) $ 12,488 $ 16,439
Basic net income (loss) per common
share:
Net income (loss) before cumulative
effect of change in accounting
principle $ (0.65) $ 0.56 $ 0.73
Cumulative effect of change in
accounting principle, net of tax (0.01)
--------------------- --------------------- --------------------
Net income (loss) $ (0.65) $ 0.55 $ 0.73
===================== ===================== ====================
Diluted net income (loss) per common share:
Net income (loss) before cumulative
effect of change in accounting
principle $ (0.65) $ 0.54 $ 0.71
Cumulative effect of change in
accounting principle, net of tax (0.01)
--------------------- --------------------- --------------------
Net income (loss) $ (0.65) $ 0.53 $ 0.71
===================== ===================== ====================
Weighted average number of common
shares outstanding 23,090 22,806 22,440
Incremental shares from assumed
conversions:
Stock options 661 639
--------------------- --------------------- --------------------
Weighted average number of common
shares outstanding assuming dilution 23,090 23,467 23,079
===================== ===================== ====================
New Accounting Pronouncement. In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("FAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities."
In June 2000, FAS No. 138 "Accounting for Certain Derivative Instruments and
Hedging Activities, an Amendment of FAS 133," was issued. FAS No. 133 and No.
138 address the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. The
Company is required to adopt FAS No. 133 and No. 138 in the first quarter of
fiscal 2001, but does not expect such adoption to materially affect financial
statement presentation
2. Going Concern Matters
These consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The terms of our credit
facility require, among other things, compliance with certain financial ratios,
including a funded debt (i.e., debt/EBITDA) ratio and a fixed charge coverage
ratio, on a quarterly basis. As a result of restructuring charges incurred
during fiscal 2000, we were not in compliance with the fixed charge coverage
ratio and minimum net income covenants under our credit facility as of and for
the quarter ended December 30, 2000, and as a result, our lenders have issued a
notice of default, although no acceleration of outstanding debt has been
requested. All borrowings outstanding under the credit facility at December 30,
2000 are considered to be due on demand and accordingly are classified as a
current liability at December 30, 2000. We currently do not have sufficient
funds to pay all outstanding indebtedness. These factors raise substantial doubt
about our ability to continue as a going concern. The Company currently is
negotiating an amendment of its credit facility that may include the payment of
an amendment fee, an increase in interest rates, a security interest in assets
and additional covenants relating to capital expenditures and new leases. In
conjunction with the Company's negotiations to amend its credit facility and
obtain less restrictive covenants and other terms and conditions therein, the
Company also proposes to raise approximately $30.0 million or more in equity
financings to be used to provide additional liquidity. If the Company's lenders
accept the amendments currently proposed by the Company, then the Company's
borrowing capacity would be limited to $125 million, the maturity date of the
30
credit facility would continue to be August 1, 2003, the interest rate would be
increased periodically, and all existing events of default would be waived as of
the amendment date.
A breach of any of the terms and conditions of the amended credit facility
agreement could result in acceleration of our indebtedness, in which case the
debt would become immediately due and payable. Although no assurances can be
given, we expect that we would be in compliance throughout the term of the
amended credit facility with respect to the financial and other covenants,
including those regarding funded debt ratio, fixed charge coverage ratio,
minimum year-to-date net income, tangible net worth, capital expenditure limits,
and new lease limits. We believe that cash generated from operations will be
sufficient to satisfy the Company's currently budgeted capital expenditure and
debt service requirements through fiscal 2001 and that no additional funding
will be necessary.
3. Business Combinations
Fiscal 2000
In May 2000, the Company acquired the assets and operations of two
operating natural food supermarkets located in southern California, for a
purchase price of $13.7 million in cash. The acquisition was accounted for using
the purchase method and the excess of cost over the fair value of the assets
acquired of $12.9 million was allocated to goodwill, which is being amortized on
a straight-line basis over 40 years.
Fiscal 1999
Poolings of Interests. On December 15, 1999, the Company issued
approximately 890,000 shares of common stock in exchange for all of the
outstanding stock of Sun Harvest Farms, Inc. and an affiliate in a transaction
accounted for as a pooling of interests. Accordingly, the financial position,
results of operations and cash flows of Sun Harvest have been combined with
those of the Company in these financial statements. Certain reclassifications
have been made to the prior financial statements of Sun Harvest to conform with
the Company's financial presentations and policies. There were no intercompany
transactions between the Company and Sun Harvest for all periods presented.
On September 27, 1999, the Company issued approximately 2.1 million shares
of common stock in exchange for all of the outstanding stock of Henry's
Marketplace, Inc. in a transaction accounted for as a pooling of interests.
Accordingly, the financial position, results of operations and cash flows of
Henry's have been combined with those of the Company in these financial
statements. Certain reclassifications have been made to the prior financial
statements of Henry's to conform with the Company's financial presentation and
policies. There were no intercompany transactions between the Company and
Henry's for all periods presented.
Results of Pooled Company Prior to Transaction. Separate results of
operations for the Company's, Henrys', and Sun Harvest's (including the
affiliated entity) operations for the periods prior to the transaction are as
follows (in thousands):
31
FISCAL YEAR 1999 1998
-----------------------------------------------------------------------------------------
Sales:
Wild Oats $ 593,109 $ 398,857
Henry's 74,979 81,026
Sun Harvest 53,003 50,843
---------------- ----------------
Combined $ 721,091 $ 530,726
================ ================
Net Income:
Wild Oats $ 7,355 $ 11,648
Henry's 3,542 3,859
Sun Harvest 1,591 932
---------------- ----------------
Combined $ 12,488 $ 16,439
================ ================
Other Changes in Stockholders' Equity:
Wild Oats $ 5,939 $ 4,173
Henry's (4,450) (3,565)
Sun Harvest (1,198) (1,136)
---------------- ----------------
Combined $ 291 $ (528)
================ ================
Purchase Transactions. On November 15, 1999, the Company acquired the
assets and operations of four natural foods supermarkets located in metropolitan
Boston, Massachusetts, for a purchase price of $12.5 million in cash. The
acquisition was accounted for using the purchase method and the excess of cost
over the fair value of the assets acquired of $787,000 was allocated to
goodwill, which is being amortized on a straight-line basis over 40 years.
On May 29, 1999, the Company acquired all of the outstanding stock of
Nature's Fresh Northwest, Inc., a Delaware corporation that owned seven
operating natural food stores, one new site and one relocation in development in
metropolitan Portland, Oregon. The purchase price for this acquisition
aggregated $40.0 million in cash, including the assumption by the Company of a
$17.0 million promissory note owed by Nature's to the seller. The acquisition
was accounted for using the purchase method and the excess of cost over the fair
value of the assets acquired and liabilities assumed of $32.6 million was
allocated to goodwill, which is being amortized on a straight-line basis over 40
years.
On April 30, 1999, the Company acquired the operations of three existing
natural foods supermarkets in Norwalk and Hartford, Connecticut and Melbourne,
Florida. The purchase price for this acquisition aggregated $6.6 million in
cash. The acquisition was accounted for using the purchase method, and the
excess of cost over the fair value of the assets acquired and liabilities
assumed of $6.1 million was allocated to goodwill, which is being amortized on a
straight-line basis over 40 years.
On February 1, 1999, the Company acquired the operations of three existing
natural foods supermarkets in Tucson, Arizona. The purchase price for this
acquisition aggregated $18.4 million in cash. The acquisition was accounted for
using the purchase method, and the excess of cost over the fair value of the
assets acquired of $17.0 million was allocated to goodwill, which is being
amortized on a straight-line basis over 40 years.
The fair values of the purchased assets and liabilities of these purchased
acquisitions are as follows (in thousands):
Current assets ($697 of cash) $ 8,912
Equipment 26,604
Building and land 9,153
Other assets 89
Liabilities (24,730)
Goodwill 57,352
------------
$ 77,380
============
32
Fiscal 1998
In January, May, June and December 1998, in four separate transactions, the
Company acquired the assets and assumed certain liabilities of five operating
natural foods supermarkets in Nashville, Tennessee; New York, New York; Santa
Barbara, California; Victoria, British Columbia, Canada and Boulder, Colorado.
The purchase price for these acquisitions aggregated $10.6 million in cash and a
note payable of $3.1 million that was repaid in full in January 1999. The
acquisitions were accounted for using the purchase method, and the excess of
cost over the fair value of the assets acquired of $12.0 million was allocated
to goodwill, which is being amortized on a straight-line basis over 40 years.
The fair values of the acquired assets and liabilities of these
acquisitions are as follows (in thousands):
Current assets ($127 of cash) $ 1,304
Equipment 1,397
Other assets 25
Liabilities (1,022)
Goodwill 12,014
------------
$ 13,718
============
Also during fiscal 1998, the Company issued 200,045 shares of the Company's
common stock in exchange for all of the common stock of two companies operating
natural foods grocery stores in Columbus, Ohio and Little Rock, Arkansas. These
acquisitions were accounted for as poolings of interests, and accordingly, the
Company's consolidated financial statements for fiscal 1998 include the
operations of the stores for the entire year, adjusted to conform with the
Company's accounting policies and presentation. The Company's financial
statements prior to fiscal 1998 were not restated to include the results of
these pooling transactions as the effect is immaterial. Restructuring,
acquisition-related expenses of $393,000 were recorded in conjunction with the
poolings.
The following unaudited pro forma combined results of operations of the
Company and the acquired businesses discussed above have been prepared as if the
transactions occurred as of the beginning of the respective periods presented
(in thousands):
FISCAL YEAR 2000 1999
--------------------------------------------------------------------------------
Sales $ 846,017 $ 815,180
Net income (loss) (14,469) 18,802
Basic earnings (loss) per share (0.63) 0.82
Diluted earnings (loss) per share (0.63) 0.80
The unaudited pro forma results above are not necessarily representative of
the actual results that would have occurred or may occur in the future, if the
transactions had been in effect on the dates indicated. The pre-acquisition
historical results of the acquired businesses discussed above are not reflected
in the Company's historical financial statements.
33
4. Property, Plant and Equipment
Property, plant and equipment consist of the following (in thousands):
FISCAL YEAR ENDED 2000 1999
--------------------------------------------------------------------------------
Machinery and equipment $ 119,001 $ 101,585
Leasehold improvements 81,490 60,977
Land and building 11,102 13,322
Construction in progress 28,142 35,157
--------------------- ---------------------
Less accumulated depreciation 239,735 211,041
and amortization (66,819) (54,885)
--------------------- ---------------------
$ 172,916 $ 156,156
===================== =====================
Depreciation and amortization expense related to property, plant and
equipment totaled approximately $22.5 million, $19.6 million and $14.2 million
in fiscal 2000, 1999 and 1998, respectively. Property, plant and equipment
includes approximately $890,000 of interest capitalized during fiscal 2000 and
$776,000 during fiscal 1999. No interest was capitalized during fiscal 1998. The
amounts shown above include $1,086,000 of machinery and equipment which are
accounted for as capitalized leases and which have accumulated amortization of
$291,000 at December 30, 2000. There were $969,000 of machinery and equipment
accounted for as capitalized leases as of January 1, 2000, with accumulated
amortization of $275,000.
5. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
FISCAL YEAR ENDED 2000 1999
---------------------------------------------------------------------------
Wages and employee costs $ 16,510 $ 14,370
Sales and personal property taxes 3,034 3,565
Real estate costs 18,709 4,984
Deferred charges and other accruals 3,562 7,462
---------------- -----------------
$ 41,815 $ 30,381
================ =================
34
6. Notes Payable and Long-Term Debt
Long-term debt outstanding consists of the following (in thousands):
FISCAL YEAR ENDED 2000 1999
-------------------------------------------------------------------------------------------------------------
Mortgage payable to lending institution payable in monthly installments of $3,899,
including interest, secured by real estate $ 176
Note payable to corporation due and payable March 23, 2000; 0% interest; unsecured 95
Note payable to corporation; variable interest rate per annum based on lender's
external borrowing rate; principle and interest due November 28, 2000 6,629
Capitalized leases $ 624 937
Bank line of credit due March 1, 2000; bearing interest, at the Company's option,
at the prime rate or LIBOR plus 1.15% (7.3375% on January 1, 2000); unsecured 15,500
Bank line of credit due March 2, 2002; bearing interest, at the Company's
option, at the prime rate or LIBOR plus 1.15% ($63,0000,000 at 7.3375%;
$15,000,000 at
7.275%; $1,700,000 at 8.5% on January 1, 2000); unsecured 79,700
Bank line of credit due August 1, 2003; bearing interest at the prime rate
(9.5% on December 30, 2000); unsecured 77,621
Bank term debt due August 1, 2003; bearing interest at the prime rate
(9.5% on December 30, 2000); unsecured 46,323
----------- -----------
124,568 103,037
Less current portion (124,215) (22,709)
----------- -----------
$ 353 $ 80,328
=========== ===========
The maturities of notes payable and long-term debt are as follows (in
thousands):
FISCAL YEAR ENDING
-------------------------------------------------------------------
2001 $ 124,215
2002 324
2003 19
2004 10
Thereafter 0
--------------
$ 124,568
==============
The Company has a $157.5 million revolving line of credit. The facility has
two separate lines of credit, one in the amount of $111.2 million and the other
in the amount of $46.3 million, each with a three-year term expiring on August
1, 2003. Both currently bear interest at the default rate, which is the prime
rate. The line of credit agreement includes certain financial and other
covenants, as well as restrictions on the payment of dividends. In addition, the
Company has two letters of credit outstanding as of December 30, 2000 that total
$1.1 million and expire in January 2001 ($30,000) and November 2001 ($1.0
million).
As a result of restructuring charges incurred during fiscal 2000, we were
not in compliance with the fixed charge coverage ratio and minimum net income
covenants under our credit facility as of and for the quarter ended December 30,
2000, and as a result, our lenders have issued a notice of default, although no
acceleration of outstanding debt has been requested. All borrowings outstanding
under the credit facility at December 30, 2000 are considered to be due on
demand and accordingly are classified as a current liability at December 30,
2000. We currently do not have sufficient funds to pay all outstanding
indebtedness. These factors raise substantial doubt about our ability to
continue as a going concern. The Company currently is negotiating an amendment
35
of its credit facility that may include the payment of an amendment fee, an
increase in interest rates, a security interest in assets and additional
covenants relating to capital expenditures and new leases. (See Note 2 to "Notes
to Consolidated Financial Statements".)
In September 2000, the Company entered into an interest rate swap to hedge
its exposure on variable rate debt positions. Variable rates are predominantly
linked to LIBOR as determined by one month intervals. The interest rate provided
by the swap on variable rate debt is 6.7%. At December 30, 2000, the notional
principal amount at the interest rate swap agreement was $50.0 million, expiring
in August 2003. The notional amount is the amount used for the calculation of
interest payments which are exchanged over the life of the swap transaction on
the amortized principal balance. In fiscal 2000, the gains (losses) in interest
expense associated with this agreement were approximately $(12,000).
7. Income Taxes
Income (loss) before income taxes consists of the following (in thousands):
FISCAL YEAR 2000 1999 1998
-------------------------------------------------------------------------------
Domestic $ (24,358) $ 17,519 $ 23,405
Foreign 778 448 856
---------------- --------------- --------------------
$ (23,580) $ 17,967 $ 24,261
================ =============== ====================
Income tax expense (benefit) consists of the following (in thousands):
FISCAL YEAR 2000 1999 1998
-------------------------------------------------------------------------------
Current:
Federal $ (7,690) $ 4,624 $ 5,685
State and foreign (454) 1,983 1,731
------------- ------------- -----------------
(8,144) 6,607 7,416
------------- ------------- -----------------
Deferred:
Federal (373) (1,019) 430
State and foreign (42) (390) (24)
------------- ------------- -----------------
(415) (1,409) 406
------------- ------------- -----------------
$ (8,559) $ 5,198 $ 7,822
============= ============= =================
The differences between the U.S. federal statutory income tax rate and the
Company's effective tax rate are as follows:
FISCAL YEAR 2000 1999 1998
---------------------------------------------------------------------------
Statutory tax rate (35.0)% 35.0% 35.0%
State income taxes (benefit), net of
Federal income tax benefit (2.4) 2.1 3.6
Tax effect of non-deductible goodwill 2.5 2.6 1.2
Untaxed earnings related to pooled (10.2) (7.0)
companies
Change in tax status of pooled companies (4.7)
Other permanent items related to 2.9
acquisitions
Other, net (1.4) 1.2 (0.6)
------- ------- -------
Effective tax rate (36.3)% 28.9% 32.2%
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as follows
(in thousands):
36
FISCAL YEAR 2000 1999
--------------------------------------------------------------------------------
Deferred tax assets
Inventory related $ 533 $ 536
Vacation accrual 1,727 1,284
Real estate accruals 3,008 1,775
Other 220 887
---------------- ------------
Total deferred tax assets 5,488 4,482
---------------- ------------
Deferred tax liabilities
Property related (4,488) (3,892)
---------------- ------------
Total deferred tax liabilities (4,488) (3,892)
---------------- -------------
Net deferred tax asset $ 1,000 $ 590
================ ============
Financial statements:
Current deferred tax asset $ 1,989 $ 1,775
Non-current deferred tax liability 989 1,185
---------------- ------------
Net deferred tax asset $ 1,000 $ 590
================ ============
During fiscal 2000, 1999 and 1998, the Company recognized $293,000, $1,418,000
and $1,153,000, respectively, as a tax benefit directly to additional
paid-in-capital related to noncompensatory stock plans.
8. Capital Stock
The Company declared 3-for-2 stock splits for all stockholders of record as
of December 22, 1997, and November 17, 1999, effective January 7, 1998 and
December 1, 1999, respectively. All shares and per-share prices presented herein
have been retroactively restated to reflect the stock splits.
In October 1999, the Company's shareholders approved an increase in the
authorized common stock of the Company to 60,000,000 shares.
9. Stock Plans, Options and Warrants
Employee Stock Purchase Plan. In August 1996, the Company's board of
directors approved and adopted an Employee Stock Purchase Plan ("Purchase Plan")
covering an aggregate of 287,307 shares of common stock. The Purchase Plan is
intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the Internal Revenue Code. Under the Purchase Plan, the board of
directors may authorize participation by eligible employees, including officers,
in periodic offerings. The offering period for any offering will be no more than
27 months. The board authorized an offering commencing on the initial public
offering date of October 22, 1996 and ending June 30, 1997, and sequential
six-month offerings thereafter.
Employees are eligible to participate in the currently authorized offerings
if they have been employed by the Company or an affiliate of the Company
incorporated in the United States of America for at least six months preceding
October 22, 1996. Employees can have up to 15% of their earnings withheld
pursuant to the Purchase Plan (10% under the currently authorized offerings) and
applied on specified purchase dates (currently the last day of each authorized
offering) to the purchase of shares of common stock. The price of common stock
purchased under the Purchase Plan will be equal to 85% of the lower of the fair
market value of the common stock on the commencement date of each offering or
the relevant purchase date. As of December 30, 2000, there were approximately
$460,000 of payroll deductions of which $449,000 were used to purchase 124,431
of common stock on January 2, 2001.
The Board suspended participation in the Purchase Plan effective January
29, 2001, when the available pool of shares was substantially exhausted. The
Company is seeking shareholder approval at its annual meeting in May 2001 to
increase the pool of stock by 500,000 shares.
37
Equity Incentive Plan. The Company's Equity Incentive Plan (the "Incentive
Plan") was adopted by the board of directors in August 1996. As of December 30,
2000, 4,650,221 shares of common stock were reserved for issuance under the
Incentive Plan.
The Incentive Plan provides for the grant of incentive stock options to
employees (including officers and employee-directors) and nonqualified stock
options, restricted stock purchase awards and stock bonuses to employees and
directors. The exercise price of options granted under the Incentive Plan is
determined by the board of directors, provided that the exercise price for an
incentive stock option cannot be less than 100% of the fair market value of the
common stock on the grant date and the exercise price for a nonqualified stock
option cannot be less than 85% of the fair market value of the common stock on
the grant date. Outstanding options generally vest over a period of five years
and generally expire ten years from the grant date.
Fair Values. The Company applies Accounting Principles Board Opinion No. 25
and related Interpretations in accounting for its stock plans. Accordingly, no
compensation expense has been recognized for these plans. Had compensation cost
for these plans been determined based on the fair value at the grant dates as
prescribed by FAS No. 123, Accounting for Stock-Based Compensation, the
Company's net income (loss) allocable to common stock and basic and diluted
income (loss) per share would have been reduced to the pro forma amounts
indicated below:
FISCAL YEAR 2000 1999 1998
--------------------------------------------------------------------------------
Net income (loss)
As reported $(15,021) $ 12,488 $ 16,439
Pro forma $(19,269) $ 8,855 $ 6,825
Basic income (loss) per share
As reported $ (0.65) $ 0.55 $ 0.73
Pro forma $ (0.83) $ 0.39 $ 0.30
Diluted income (loss) per share
As reported $ (0.65) $ 0.53 $ 0.71
Pro forma $ (0.83) $ 0.38 $ 0.30
The fair value of the employees' purchase rights was estimated using the
Black-Scholes model with the following weighted-average assumptions:
FISCAL YEAR 2000 1999 1998
---------------------------------------------------------------
Estimated dividends None None None
Expected volatility 68% 46% 46%
Risk-free interest rate 4.8% 5.6% 4.5%
Expected life (years) 0.5 0.5 0.5
Weighted-average fair value per share $1.16 $4.96 $4.66
The fair value of each option grant under the Incentive Plan is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
FISCAL YEAR 2000 1999 1998
---------------------------------------------------------------
Estimated dividends None None None
Expected volatility 68% 46% 46%
Risk-free interest rate 5.75% 5.6% 4.5 - 4.7%
Expected life (years) 7 7 7
A summary of the status of the Company's Incentive Plan as of the 2000,
1999, and 1998 fiscal year ends and changes during the years ending on those
dates is presented below:
38
Weighted
Number of Average
Shares Exercise Price
--------------------------------------------------------------------------------
Outstanding as of December 27, 1997 1,402,268 $ 7.95
Granted 346,611 $ 17.91
Forfeited (101,546) $ 11.11
Exercised (227,979) $ 6.03
-----------------
Outstanding as of January 2, 1999 1,419,354 $ 10.49
Granted 809,665 $ 20.18
Forfeited (165,632) $ 16.80
Exercised (255,179) $ 7.26
-----------------
Outstanding as of January 1, 2000 1,808,208 $ 14.68
Granted 881,832 $ 10.13
Forfeited (203,434) $ 18.53
Exercised (86,777) $ 7.55
-----------------
Outstanding as of December 30, 2000 2,399,829 $ 12.94
=================
The following table summarizes information about incentive and nonqualified
stock options outstanding and exercisable at December 30, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------------------- --------------------------------------
WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
------------------- ----------------- ------------------- ----------------- ------------------ ------------------
$2.65 - 5.30 132,690 6.4 years $ 3.96 68,340 $ 3.68
$5.30 - 7.95 458,239 5.3 $ 7.36 375,198 $ 7.36
$7.95 - 10.60 556,444 9.3 $ 9.09 62,914 $ 9.13
$10.60 - 13.25 255,720 8.2 $11.95 83,144 $11.48
$13.25 - 15.90 55,781 7.3 $14.77 50,831 $14.85
$15.90 - 18.55 521,799 7.3 $17.00 243,323 $16.86
$18.55 - 21.20 173,807 7.8 $19.98 59,810 $19.61
$21.20 - 23.85 144,793 8.5 $22.25 11,757 $22.54
$23.85 - 26.50 100,556 8.3 $26.50 20,391 $26.50
----------------- ------------------
2,399,829 7.6 $12.94 975,708 $11.66
================= ==================
At December 30, 2000, options exercisable for 1,297,646 shares were
available for future grant under the Incentive Plan. At January 1, 2000 and
January 2, 1999, options for 661,588 and 620,448 shares with weighted average
exercise prices of $9.74 and $7.67, respectively, were exercisable. The
weighted-average grant-date per-share fair values of options granted during
fiscal 2000, 1999 and 1998 were $10.13, $20.18 and $17.91, respectively.
10. Litigation
In August 1998, the Company filed Wild Oats Markets, Inc. v. Plaza
Acquisition, Inc. in United States District Court for the Northern District of
Illinois, Eastern Division, seeking recovery of $300,000 in tenant improvement
allowances owed to it by its landlord for the build-out of the Company's Buffalo
Grove, Illinois store. The landlord counterclaimed for $1 million in damages and
after the Company closed the Buffalo Grove store in May 1999, the landlord
increased its counterclaim to $3 million, including accelerated rent resulting
from an alleged breach of a continuous operations clause in the lease. After a
trial in November 2000, the court awarded the landlord approximately $27,000 in
damages.
Alfalfa's Canada, Inc., a Canadian subsidiary of the Company, is a
defendant in a suit brought in the Supreme Court of British Columbia, by one of
39
its distributors, Waysafer Wholefoods Limited and one of its principals, seeking
monetary damages for breach of contract and injunctive relief to enforce a
buying agreement for the three Canadian stores entered into by a predecessor of
Alfalfa's Canada. Under the buying agreement, the stores must buy products
carried by the plaintiff if such are offered at the current advertised price of
its competitors. The suit was filed in September 1996. In June 1998, Alfalfa's
Canada filed a Motion for Dismissal on the grounds that the contract in dispute
constituted a restraint of trade. The Motion was subsequently denied. We do not
believe its potential exposure in connection with the suit will have a material
adverse effect on the Company's consolidated results of operations, financial
position, or cash flows.
In January 2001, we were named as defendant in Glades Plaza, LP v. Wild
Oats Markets, Inc., a suit filed in the 15th Judicial Circuit Court, Palm Beach
County, Florida, by a landlord alleging we breached our lease obligations when
we gave notice of termination of the lease for landlord's default in not timely
turning over the premises. The plaintiff seeks unspecified damages.
In February 2001, we were named as defendant in Grange Investments, Inc. v.
Wild Oats Markets, Inc., a suit filed in United States District Court, District
of Connecticut, by the purchaser of a former Wild Oats store for breach of a
noncompetition covenant. The plaintiff seeks injunctive relief and damages. The
parties are currently in settlement discussions.
We also are named as defendant in various actions and proceedings arising
in the normal course of business. In all of these cases, the Company is denying
the allegations and is vigorously defending against them and, in some cases, has
filed counterclaims. Although the eventual outcome of the various lawsuits
cannot be predicted, it is management's opinion that these lawsuits will not
result in liabilities that would materially affect the Company's consolidated
results of operations, financial position, or cash flows.
11. Commitments
The Company has numerous operating leases related to facilities occupied
and store equipment. These leases generally contain renewal provisions at the
option of the Company. Total rental expense (consisting of minimum rent and
contingent rent) under these leases was $34.5 million, $25.5 million and $17.1
million during fiscal 2000, 1999 and 1998, respectively.
Future minimum lease payments under noncancelable operating leases as of
December 30, 2000 are summarized as follows (in thousands):
FISCAL YEAR
------------------------------------------------------------------
2001 $ 37,160
2002 38,024
2003 37,333
2004 35,234
2005 33,303
Thereafter 318,287
------------
Total minimum lease payments $ 499,341
============
Minimum rentals for operating leases do not include contingent rentals
which may become due under certain lease terms which provide that rentals may be
increased based on a percentage of sales. During fiscal 2000, 1999 and 1998, the
Company paid contingent rentals of $445,000, $938,000 and $755,000,
respectively.
Included in the $499.3 million of minimum lease payments is $42.7 million,
which is related to lease costs for closed stores. The Company is actively
working to defease these payments through assignments, subleases or terminations
of the lease obligations.
As of December 30, 2000, the Company had commitments under construction
contracts totaling $1.7 million.
40
12. Merger and Restructuring Expenses
During the second quarter of fiscal 2000, the Company's management made
certain decisions relating to the strategic repositioning of the Company's
operations which resulted in a pre-tax restructuring charge of $22.7 million.
These decisions included the closure of three natural food stores and one small
vitamin store during the second quarter of fiscal 2000 ($4.7 million); the
planned sale or closure of seven stores during the remainder of fiscal 2000
($9.9 million); exit costs of previously closed or abandoned sites ($5.6
million); and the discontinuation of e-commerce activities ($2.5 million).
Components of the restructuring charge consist primarily of abandonment of fixed
and intangible assets ($15.3 million); noncancelable lease obligations and lease
related liabilities ($5.3 million); and write-down of the Company's long-term
equity investment in an e-commerce business partner due to asset impairment
($2.1 million). Substantially all of the restructuring charges are non-cash
expenses. In conjunction with the restructuring charge, the Company recorded a
liability of $4.9 million for noncancelable lease obligations.
During the fourth quarter of fiscal 2000, the Company expanded its
strategic repositioning and, as a part of such expansion, decided to close or
sell up to an additional eight stores which did not meet expectations. This
decision resulted in an additional pre-tax restructuring charge in the fourth
quarter of fiscal 2000 of $21.4 million. This restructuring charge consists
primarily of costs associated with the abandonment of fixed and intangible
assets ($15.3 million) and noncancelable lease obligations and lease-related
liabilities ($6.1 million). Substantially all of the restructuring charges are
non-cash expenses. In conjunction with the restructuring charge, the Company
recorded a liability of $5.9 million for noncancelable lease obligations.
During the first quarter of fiscal 1999, the Company's management made
certain decisions relating to the Company's operations and selected store
closures, which resulted in approximately $10.9 million of restructuring
expenses being recorded. These decisions included (1) a change in the Company's
strategic direction, resulting in the closure in the second quarter of fiscal
1999 of its two "Farm to Market" stores located in Buffalo Grove, Illinois, and
Tempe, Arizona ($4.5 million), and (2) a decision by the Company's management to
allocate corporate resources to servicing new and existing stores, rather than
closed sites ($6.4 million). Components of the restructuring charge consist
primarily of noncancelable lease obligations through the year fiscal 2000 ($1.2
million) and abandonment of fixed and intangible assets ($9.7 million).
During the third quarter of fiscal 1999, the Company recognized
restructuring expenses related to the pooling transaction with Henry's that
totaled $645,000. Components of the restructuring charge consist primarily of
noncancelable lease obligations ($287,000) and professional fees associated with
the pooling ($323,000).
During the fourth quarter of fiscal 1999, the Company recognized
restructuring expenses related to the pooling transaction with Sun Harvest that
totaled $1.1 million. Components of the restructuring charge consist primarily
of professional fees associated with the pooling ($869,000) and employee-related
costs ($128,000).
During fiscal 1998, a $393,000 restructuring charge was recorded in
conjunction with two pooling-of-interests transactions (see Note 3). The
restructuring charge consists of $201,000 of employee severance costs, $162,000
of inventory and fixed asset write-downs, and $30,000 of lease cancellation
costs.
41
(amounts in thousands)
Employee Facility Closure Total
Separations Costs
--------------------------------------------------------------------------------
1999 Restructuring Charges
1999 restructuring $ -- $ 12,642 $ 12,642
charges
1999 cash paid -- (1,074) (1,074)
1999 write-down of assets -- (9,700) (9,700)
---------------------------------------------------
Balance, January 1, 2000 -- 1,868 1,868
---------------------------------------------------
2000 Restructuring Charges
2000 restructuring 287 43,839 44,126
charges
2000 cash paid (287) (3,017) (3,304)
2000 write-down of assets -- (28,430) (28,430)
---------------------------------------------------
Balance, December 30, 2000 $ -- $ 14,260 $ 14,260
============== ==================== ===============
The facility closure costs are expected to be paid out over approximately two
years.
13. 401(k) Plan
The Company maintains a tax-qualified employee savings and retirement plan
(the "401(k) Plan") covering the Company's employees. Pursuant to the 401(k)
Plan, eligible employees may elect to reduce their current compensation by up to
the lesser of 15% of their annual compensation or the statutorily prescribed
annual limit ($10,500 in fiscal 2000) and have the amount of such reduction
contributed to the 401(k) Plan. The 401(k) Plan provides for additional matching
contributions to the 401(k) Plan by the Company in an amount determined by the
Company prior to the end of each plan year. Total Company contributions during
fiscal 2000, 1999 and 1998 were approximately $1.0 million, $557,000 and
$408,000, respectively. The trustees of the 401(k) Plan, at the direction of
each participant, invest the assets of the 401(k) Plan in designated investment
options. The 401(k) Plan is intended to qualify under Section 401 of the
Internal Revenue Code.
The Company, through Henry's, also sponsored a 401(k) plan in fiscal 1999
covering Henry's employees with at least 12 months of service. Contributions are
discretionary. Henry's contributed $90,000 and $106,000 to this 401(k) plan for
fiscal 1999 and 1998, respectively.
The Company, through Sun Harvest, also sponsored a 401(k) plan in fiscal
1999 covering Sun Harvest employees with at least 12 months of service.
Contributions are discretionary. Sun Harvest contributed $36,000 and $36,000 to
this 401(k) plan for fiscal 1999 and 1998, respectively.
14. Stockholder Rights Plan
The Company has a stockholder rights plan having both "flip-in" and
"flip-over" provisions. Stockholders of record as of May 22, 1998 received the
right ("Right") to purchase a fractional share of preferred stock at a purchase
price of $145 for each share of common stock held. In addition, until the Rights
become exercisable as described below and in certain limited circumstances
thereafter, the Company will issue one Right for each share of common stock
issued after May 22, 1998. For the "flip-in provision," the Rights would become
exercisable only if a person or group acquires beneficial ownership of 15% (the
"Threshold Percentage") or more of the outstanding common stock. Holdings of
certain existing affiliates of the Company are excluded from the Threshold
Percentage. In that event, all holders of Rights other than the person or group
who acquired the Threshold Percentage would be entitled to purchase shares of
common stock at a substantial discount to the then-current market price. This
right to purchase common stock at a discount would be triggered as of a
specified number of days following the passing of the Threshold Percentage. For
the "flip-over" provision, if the Company was acquired in a merger or other
business combination or transaction, the holders of such Rights would be
entitled to purchase shares of the acquiror's common stock at a substantial
discount.
42
15. Deferred Compensation Plan
Effective fiscal 1999, the Company maintains a nonqualified Deferred
Compensation Plan (the "DCP") for certain members of management. Eligible
employees may contribute a portion of base salary or bonuses to the plan
annually. The DCP provides for additional matching contributions by the Company
in an amount determined by the Company prior to the end of each plan year. Total
Company matching contributions to the DCP during fiscal 2000 and 1999 were
approximately $75,000 and $21,000, respectively.
43
16. Quarterly Information (Unaudited)
The following interim financial information presents the fiscal 2000 and
1999 consolidated results of operations on a quarterly basis (in thousands,
except per-share amounts):
QUARTER ENDED
-----------------------------------------------------------------------------
April 1, July 1, September 30, December 30,
2000 2000 2000 2000
------------------------------------- -----------------------------------------------------------------------------
Statement of Operations Data:
Sales $ 211,241 $ 212,772 $ 207,201 $ 206,917
Gross profit 66,524 66,339 62,254 61,034
Net income (loss) before
cumulative effect of change 5,334 (8,780) 1,075 (12,650)
------------------- ------------------ -------------------- -----------------
Net income (loss) $ 5,334 $ (8,780) $ 1,075 $ (12,650)
=================== ================== ==================== =================
Basic net income (loss)
per common share:
Net income (loss) before
cumulative effect of change in
accounting principle $ 0.23 $ (0.38) $ 0.05 $ (0.55)
Cumulative effect of change in
accounting principle, net of tax
------------------- ------------------ -------------------- -----------------
Basic income (loss) per common $ 0.23 $ (0.38) $ 0.05 $ (0.55)
share =================== ================== ==================== =================
Diluted net income (loss)
Per common share:
Net income (loss) before
cumulative effect of change in
accounting principle $ 0.23 $ (0.38) $ 0.05 $ (0.55)
Cumulative effect of change in
accounting principle, net of tax
------------------- ------------------ -------------------- -----------------
Diluted income (loss) per common $ 0.23 $ (0.38) $ 0.05 $ (0.55)
share =================== ================== ==================== =================
QUARTER ENDED
-----------------------------------------------------------------------------
April 3, July 3, October 2, January 1,
1999 1999 1999 2000
------------------------------------- -----------------------------------------------------------------------------
Statement of Operations Data:
Sales $ 159,643 $ 173,207 $ 186,522 $ 201,719
Gross profit 48,352 52,805 57,965 62,342
Net income (loss) before
cumulative effect of change (1,157)
------------------- ------------------ --------------------------------------
Net income (loss) $ (1,438) $ 4,596 $ 4,882 $ 4,448
=================== ================== ======================================
Basic net income (loss)
per common share:
Net income (loss) before cumulativ e
effect of change in accounting
principle $ (0.05) $ 0.20 $ 0.22 $ 0.19
Cumulative effect of change in
accounting principle, net of tax (0.01)
------------------- ------------------ --------------------------------------
Basic income (loss) per common $ (0.06) $ 0.20 $ 0.22 $ 0.19
share =================== ================== ======================================
Diluted net income (loss)
per common share:
Net income (loss) before cumulative
effect of change in accounting
principle $ (0.05) $ 0.19 $ 0.21 $ 0.19
Cumulative effect of change in
accounting principle, net of tax (0.01)
------------------- ------------------ --------------------------------------
Diluted income (loss) per common $ (0.06) $ 0.19 $ 0.21 $ 0.19
share =================== ================== ======================================
44
17. Related Party Transactions
Elizabeth C. Cook and Michael C. Gilliland, executive officers and
directors of the Company, each own part interest in Pretty Good Groceries, LLC
("PGG"), which operates two grocery stores in Boulder, Colorado. PGG purchases
certain items through the Company's volume purchase discount programs with its
distributors, for which PGG pays the Company the cost of such items on a monthly
basis. The Company does not receive any profit from the purchase of such items
by PGG. Ms. Cook and Mr. Gilliland also are trustees of Wild Oats Community
Foundation ("Foundation"), a non-profit organization. In fiscal 1998, the
Foundation opened Wild Oats Wellness Centers in Boulder, Colorado and
Albuquerque, New Mexico in space subleased from the Company. In fiscal 1999, the
Foundation opened a Wellness Center in Denver, Colorado and closed the center in
Albuquerque, New Mexico. The Foundation pays to the Company the same rent as
paid by the Company for the space. There are no material transactions between
the Company and the Foundation. Subsequent to December 30, 2000, the Foundation
assigned the leases to the two remaining Wellness Centers to third-party
operators.
In fiscal 2000, the Company recorded a note receivable in the amount of
$75,000 from a related party that was a subtenant at one of the Company's
stores. The principal balance on the note at December 30, 2000 was approximately
$63,000. The note matures in March 2005 and provides for payment of principal
and interest at a rate of 7.0%
Subsequent to December 30, 2000, the Company borrowed $2.0 million from Ms.
Cook and Mr. Gilliland. The loan has no maturity date and bears interest at
9.0%.
18. Subsequent Events
Effective March 19, 2001, Michael Gilliland resigned as the Company's Chief
Executive Officer. Mr. Gilliland was replaced by Perry D. Odak as the Company's
Chief Executive Officer and President. Mr. Odak has a five-year employment
agreement with the Company. Mr. Odak purchased five percent of the outstanding
stock of the Company, on a fully diluted basis, in exchange for cash and a full
recourse promissory note with a five-year maturity date. His employment
agreement also provides that upon the issuance of equity in an offering within
nine months after the commencement of his employment, he will be granted
options, exercisable for up to a maximum of 300,000 shares, to maintain his
percentage ownership in the Company's stock.
45
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Wild Oats Markets, Inc.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements listed in the index appearing under Item
14(a)(1) on page 51 present fairly, in all material respects, the financial
position of Wild Oats Markets, Inc. and its subsidiaries (the "Company") at
December 30, 2000 and January 1, 2000, and the results of their operations and
their cash flows for each of the three years in the period ended December 30,
2000, in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, based on our audits and the
reports of other auditors, the financial statement schedule listed in the index
appearing under Item 14(a)(2) on page 51 present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. The consolidated financial
statements give retroactive effect to the mergers of Henry's Marketplace, Inc.
and Sun Harvest Farms, Inc. and its affiliate on September 17, 1999 and December
15, 1999, respectively, in transactions accounted for as poolings of interests,
as described in Note 3 to the consolidated financial statements. We did not
audit the financial statements of Henry's Marketplace, Inc., which statements
reflect total revenues of $81,025,852 for the fifty-two weeks ended December 27,
1998. Those statements were audited by other auditors whose report thereon has
been furnished to us, and our opinion expressed herein, insofar as it related to
the amounts included for Henry's Marketplace, Inc. for the fifty-two weeks ended
December 27, 1998, is based solely on the report of the other auditors.
Additionally, we did not audit the financial statements of Sun Harvest Farms,
Inc., which statements reflect total revenues of $41,155,576 and $50,841,400 for
the thirty-nine weeks ended September 28, 1999, and the fiscal year ended
December 29, 1998, respectively. Those statements were audited by other auditors
whose report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Sun Harvest Farms, Inc. for
the thirty-nine weeks ended September 28, 1999 and the fiscal year ended
December 29, 1998, is based solely on the report of the other auditors. 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 audit 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 and the reports of other auditors provide a
reasonable basis for our opinion.
In 1999, the Company changed its method of accounting for pre-opening expenses
as discussed in Note 1 to the consolidated financial statements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company is in violation of certain financial covenants
with its lenders and as a result the lenders may request full payment of the
outstanding debt upon demand. The Company currently would be unable to make such
payment, which raises substantial doubt about its ability to continue as a going
concern. The Company currently is negotiating an amendment to its credit
facility with the lenders and plans to raise approximately $30.0 million in
private equity financing. Management's plans in regard to these matters are
further described in Note 2. The financial statements do not include any
adjustments that may result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Denver, Colorado
March 28, 2001
46
Independent Auditors' Report
The Board of Directors
Henry's Marketplace, Inc.
We have audited the statements of earnings, stockholders' equity and cash flows
of Henry's Marketplace, Inc. for the fifty-two weeks ended December 27, 1998.
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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Henry's
Marketplace, Inc. for the fifty-two weeks ended December 27, 1998, in conformity
with generally accepted accounting principles.
KPMG LLP
San Diego, California
February 5, 1999
47
Report of Independent Auditors
The Board of Directors
Sun Harvest Farms, Inc.
We have audited the accompanying balance sheets of Sun Harvest Farms, Inc. (the
Company) as of September 28, 1999, December 29, 1998, and December 30, 1997, and
the related statements of income, shareholder's equity (deficit) and cash flows
for the nine-month period ended September 28, 1999 and the fiscal years ended
December 29, 1998, December 30, 1997, and December 31, 1996, not separately
presented herein. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sun Harvest Farms, Inc. as of
September 28, 1999, December 29, 1998, and December 30, 1997, and the results of
its operations and its cash flows for the nine-month period ended September 28,
1999 and the fiscal years ended December 29, 1998, December 30, 1997, and
December 31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
November 17, 1999
48
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None reported.
49
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included under the captions "Election of Directors" and
"Executive Compensation-Management-Executive Officers" in our definitive Proxy
Statement in connection with the Annual Meeting of stockholders to be held May
22, 2001, to be filed with the Commission on or before April 6, 2001, is
incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information included under the caption "Executive Compensation" in our
definitive Proxy Statement in connection with the Annual Meeting of stockholders
to be held May 22, 2001, to be filed with the Commission on or before April 6,
2001, is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information included under the caption "Security Ownership of Certain
Beneficial Owners and Management" in our definitive Proxy Statement in
connection with the Annual Meeting of stockholders to be held May 22, 2001, to
be filed with the Commission on or before April 6, 2001, is incorporated herein
by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included under the caption "Directors and Executive
Officers - Certain Transactions" in our definitive Proxy Statement in connection
with the Annual Meeting of stockholders to be held May 22, 2001, to be filed
with the Commission on or before April 6, 2001, is incorporated herein by
reference.
50
PART IV.
Item 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE
AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedule. The following are
filed as a part of this Report on Form 10-K:
(1) Consolidated Statement of Operations
Consolidated Balance Sheet
Consolidated Statement of Changes in Stockholders' Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Reports of Independent Accountants
(2) Schedule II - Valuation and Qualifying Accounts
(b) Reports on Form 8-K. The Company filed the following reports on Form 8-K
during fiscal 2000:
(i) Report dated February 28, 2000, reported under Item 5, Other Events,
the acquisition of all of the outstanding capital stock of Sun Harvest
Farms, Inc. and all of the partnership interests in an affiliated
entity, which together owned nine natural food stores and four small
vitamin stores located in San Antonio, Austin and other Texas
communities. The following audited financial statements were filed
with this report: Supplemental Combined Statement of Operations,
Supplemental Combined Statement of Changes in Stockholders Equity
(Deficit) and Statement of Cash Flows for the Three Years Ended
January 2, 1999, and Supplemental Combined Balance Sheet as of January
2, 1999 and December 27, 1997.
(ii) Report dated February 28, 2000 on Form 8-K/A to amend a report on Form
8-K filed on September 29, 1999 to restate the financial information
included in the previously filed report as the historic financial
statements of the Company.
(iii) Report dated March 21, 2000 reported under Item 5, Other Events,
certain selected financial data restated for the pooling of interest
transactions completed by the Company in September and December 1999.
The following financial statements were filed with this report:
Statement of Operations for the eight fiscal quarters ended January 1,
2000.
(iv) Report dated April 27, 2000 reported under Item 5, Other Events, the
Company's first quarter fiscal 2000 operating results.
(v) Report dated October 26, 2000 reported under Item 5, Other Events, the
Company's third quarter operating results.
51
(c) Exhibits. The following exhibits to this Form 10-K are filed pursuant to the
requirements of Item 601 of Regulation S-K:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
3(i).1.(a)** Amended and Restated Certificate of Incorporation of the Registrant. (1)
3(i).1.(b)** Certificate of Correction to Amended and Restated Certificate of Incorporation of the
Registrant. (1)
3(i).1.(c)** Certificate of Amendment to Amended and Restated Certificate of Incorporation of the
Registrant. (2)
3(ii).1** Amended and Restated By-Laws of the Registrant. (1)
4.1** Reference is made to Exhibits 3(i).1 through 3(ii).1.
4.2** Specimen stock certificate. (3)
4.3** Rights Agreement dated May 22, 1998 between Registrant and
Norwest Bank Minnesota. (4)
10.1** Form of Indemnity Agreement between the Registrant and its directors and executive
officers, with related schedule. (3)
10.2#** 1996 Equity Incentive Plan, including forms of Options granted to employees and
non-employee directors thereunder. (3)
10.3#** 1996 Employee Stock Purchase Plan. (3)
10.4#** 1993 Stock Option Plan. (3)
10.5#** 1991 Stock Option Plan. (3)
10.6#** Employee Stock Ownership Plan. (3)
10.7** Amended and Restated Stockholders Agreement among the Registrant and certain parties
named therein dated August 1996. (3)
10.8** Registration Rights Agreement between the Registrant and certain parties named therein
dated July 12, 1996. (3)
10.9** Amended and Restated Credit Agreement dated as of August 1, 2000, among Registrant,
the lenders named therein and Wells Fargo Bank National Association, as Administrative
Agent. (4)
21.1+ List of subsidiaries.
23.1+ Consent of PricewaterhouseCoopers LLP.
23.2+ Consent of KPMG LLP
23.3+ Consent of Ernst & Young LLP
--------------------------------
#Management Compensation Plan.
**Previously filed.
+Included herewith.
(1) Incorporated by reference from the Registrant's Form 10-K for the year
ended December 28, 1996. (File No. 0-21577)
(2) Incorporated by reference from the Registrant's Amendment No. 2 to the
Registration Statement on Form S-3 filed with the Commission on November
10, 1999 (File No. 333-88011)
(3) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (File No. 333-11261) filed on August 30, 1996
(4) Incorporated by reference from the Registrant's Form 10-Q for the period
ended September 30, 2000 (File No. 0-21577), filed on November 14, 2000.
52
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.
Wild Oats Markets, Inc.
(Registrant)
Date: March 30, 2001 By: /s/ Mary Beth Lewis
-----------------------
Mary Beth Lewis
Executive Officer and Chief Financial Officer
(Principal Financial and Accounting Officer)
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.
Signature Title Date
/s/ Perry D. Odak Chief Executive Officer, President March 29, 2001
-------------------------------------------- and Director
/s/ Mary Beth Lewis Chief Financial Officer March 30, 2001
--------------------------------------------
/s/ John A. Shields Chairman
--------------------------------------------
/s/ David M. Chamberlain Vice Chairman March 29, 2001
--------------------------------------------
/s/ Elizabeth C. Cook Executive Vice President March 29, 2001
-------------------------------------------- and Director
/s/ Brian K. Devine Director March 28, 2001
--------------------------------------------
/s/ David L. Ferguson Director
------------------------------------
/s/ Michael C. Gilliland Director March 29, 2001
--------------------------------------------
/s/ James B. McElwee Director March 29, 2001
------------------------------------
/s/ Morris J. Siegel Director March 28, 2001
--------------------------------------------
53
Schedule II
WILD OATS MARKETS, INC.
Valuation and Qualifying Accounts
(in thousands)
ALLOWANCE FOR DOUBTFUL ACCOUNTS FOR BALANCE AT
THE FISCAL YEAR ENDED: BEGINNING CHARGED TO BALANCE AT
OF YEAR EXPENSES WRITE-OFFS END OF YEAR
------------------------------------------------------------------------------------------------------------------
January 2, 1999 214 55 (110) 159
January 1, 2000 159 155 (55) 259
December 30, 2000 259 293 (197) 355
54