<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR SECTION 15(D)OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(D)OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________________
TO __________________
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
incorporation or organization) Number)
1645 BROADWAY
BOULDER, COLORADO 80302
(Address of principal executive offices, including zip code)
(303) 440-5220
(Registrant's telephone number, including area code)
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 ( ) No (X)
As of December 6, 1996, there were 6,867,768 shares outstanding of the
Registrant's Common Stock (par value $0.001 per share).
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet
September 28, 1996 (Unaudited) and December 30, 1995 3
Consolidated Statements of Operations
Three and Nine Months Ended September 28, 1996
and September 30, 1995 (Unaudited) 4-5
Consolidated Statement of Cash Flows
Nine Months Ended September 28, 1996 and
September 30, 1995 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 13
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WILD OATS MARKETS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 28, DECEMBER 30,
1996 1995
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,345 $ 1,150
Accounts receivable (less allowance
for doubtful accounts of $113 and
$47, respectively) 797 378
Inventories, net 13,056 7,789
Income tax receivable 3,143 1,367
Other current assets 1,074 464
Deferred income taxes 705 343
------- -------
Total current assets 22,120 11,491
------- -------
Property and equipment, net 33,045 19,318
Intangible assets, net 35,376 7,309
Other assets 1,015 258
------- -------
$91,556 $38,376
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $17,630 $ 8,468
Accrued wages and employee costs 1,626 1,230
Accrued sales and property taxes 1,161 793
Deferred charges and other accruals 6,053 444
Current portion of long-term debt 82
Current portion of capitalized leases
obligations 58 82
------- -------
Total current liabilities 26,610 11,017
Long-term debt 16,933 13,236
Capitalized lease obligations 57 66
Deferred income taxes 1,680 1,310
------- -------
45,280 25,629
------- -------
Redeemable convertible preferred stock;
$.001 par value; 5,000,000 shares
authorized; 298,730 designated as
Series A, 298,730 issued and outstanding;
2,845 designated as Series B, none
issued and outstanding; 743,240
designated as Series C, 739,727
issued and outstanding; 631,062
designated as Series D, 408,336
issued and outstanding; 1,513,973
designated as Series E, 876,016
issued and outstanding 43,527 16,956
Shareholders' equity (deficit): ------- -------
Common stock: $.001 par value; 20,000,000
shares authorized;
3,146,065 and 2,723,307
issued; 3,146,065 and
2,321,716 outstanding 3 3
Additional paid-in capital 10,950 2,868
Accumulated deficit (8,204) (1,731)
Treasury stock, at cost, no shares and
401,591 shares (5,349)
------- -------
Total shareholders' equity (deficit) 2,749 (4,209)
------- -------
$91,556 $38,376
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 4
WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
<S> <C> <C>
Sales $60,203 $25,724
Cost of goods sold and occupancy costs 41,079 17,534
------- -------
Gross profit 19,124 8,190
Operating expenses:
Direct store expenses 15,416 7,070
Selling, general and administrative expenses 2,743 1,097
Preopening expenses 458 403
Non-recurring expenses 7,297
------- -------
Loss from operations (6,790) (380)
Interest expense, net 304 47
------- -------
Loss before income taxes (7,094) (427)
Income tax benefit (1,689) (151)
------- -------
Net loss (5,405) (276)
Accretion of redeemable preferred stock 1,340 495
------- -------
Net loss allocable to common stock $(6,745) $ (771)
======= =======
Pro forma net loss per common share $ (1.05) $ (0.07)
======= =======
Pro forma weighted average number
of common shares outstanding 5,149 3,865
======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 5
WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
<S> <C> <C>
Sales $129,132 $68,509
Cost of goods sold and occupancy costs 88,035 46,545
-------- -------
Gross profit 41,097 21,964
Operating expenses:
Direct store expenses 32,252 16,997
Selling, general and administrative expenses 5,614 2,868
Preopening expenses 1,244 621
Non-recurring expenses 7,297
-------- -------
Income (loss) from operations (5,310) 1,478
Interest expense, net 888 134
-------- -------
Income (loss) before income taxes (6,198) 1,344
Income tax provision (benefit) (1,295) 553
-------- -------
Net income (loss) (4,903) 791
Accretion of redeemable preferred stock 2,394 1,443
-------- -------
Net loss allocable to common stock $ (7,297) $ (652)
======== =======
Pro forma net income (loss) per common share $ (1.14) $ 0.21
======== =======
Pro forma weighted average number
of common shares outstanding 4,308 3,865
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 6
WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (4,903) $ 791
Adjustments to reconcile net
income to net cash provided
by operating activities:
Write-off of assets in non-recurring expenses 5,746
Depreciation and amortization 3,799 1,955
Loss on disposal of equipment 84 135
Deferred tax provision (benefit) (29) 83
Change in assets and liabilities:
Inventories (1,831) (2,476)
Receivables and other assets (2,508) (1,797)
Accounts payable 3,786 4,293
Accrued liabilities 2,361 1,492
-------- ---------
Net cash provided by operating activities 6,505 4,476
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (9,126) (10,380)
Payment for purchase of acquired
entities, net of cash acquired (13,139)
-------- ---------
Net cash used by investing activities (22,265) (10,380)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term debt 3,445 4,215
Payments on long term debt (2,012) (3,501)
Principal payments under capitalized lease obligations (32) (117)
Proceeds from preferred stock issuance,
net of stock issuance costs 16,495
Proceeds from issuance of common stock 88 3
Purchase of treasury stock (29) (5)
-------- ---------
Net cash provided by financing activities 17,955 595
-------- ---------
Net increase (decrease) in cash and cash equivalents 2,195 (5,309)
Cash and cash equivalents at beginning of period 1,150 6,413
-------- ---------
Cash and cash equivalents at end of period $ 3,345 $ 1,104
======== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE> 7
WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING POLICIES
The consolidated balance sheet as of September 28, 1996, the
consolidated statements of operations for the three and nine months
ended September 28, 1996 and September 30, 1995, as well as the
consolidated statement of cash flows for the nine months ended
September 28, 1996 and September 30, 1995 have been prepared without
an audit. In the opinion of management, all adjustments, consisting
only of normal, recurring adjustments necessary for a fair
presentation thereof, have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these consolidated financial statements be read in conjunction
with financial statements and notes thereto included in the Company's
Registration Statement on Form S-1 effective October 22, 1996. The
results of operations for interim periods presented are not
necessarily indicative of the operating results for the full year.
2. BUSINESS COMBINATIONS
In July 1996, the Company acquired all of the outstanding common and
preferred stock of Alfalfa's, Inc., a natural foods supermarket chain
headquartered in Boulder, Colorado. The total acquisition cost was
$39.1 million and consisted of $16.2 million in cash, issuance of
783,421 shares of common stock and options valued at $14.2 million,
issuance of 408,336 shares of redeemable convertible Series D
Preferred Stock valued at $7.7 million, and approximately $1.0 million
of acquisition-related costs. The acquisition was accounted for using
the purchase method, and the excess of cost over the fair value of the
assets acquired of $27.8 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 at the date of
acquisition are as follows (in thousands):
<TABLE>
<S> <C>
Current assets . . . . . . . . . . . . . . . . . . . . . . $ 7,924
Equipment . . . . . . . . . . . . . . . . . . . . . . . . 11,495
Other assets . . . . . . . . . . . . . . . . . . . . . . . 403
Liabilities . . . . . . . . . . . . . . . . . . . . . . . (8,560)
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . 27,799
----------
$ 39,061
==========
</TABLE>
Also in July 1996, immediately prior to the acquisition of Alfalfa's,
the Company sold 876,016 shares of Series E Preferred Stock for $16.5
million. The proceeds were used primarily to purchase shares of
common and preferred stock held by former Alfalfa's shareholders.
In May 1996, the Company acquired substantially all of the combined
assets of three related natural foods retail stores in Salt Lake City,
Utah in exchange for total consideration of $2.2 million consisting of
$500,000 in cash and $1.7 million in promissory notes. The
acquisition was accounted for using the purchase method, and the
excess of cost over fair value of the assets acquired of $2.1 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 at the date of acquisition are as follows (in thousands):
<TABLE>
<S> <C>
Current assets . . . . . . . . . . . . . . . . . . . . . . $ 583
Equipment . . . . . . . . . . . . . . . . . . . . . . . . 535
Other assets . . . . . . . . . . . . . . . . . . . . . . . 120
Liabilities . . . . . . . . . . . . . . . . . . . . . . . (1,178)
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . 2,100
----------
$ 2,160
==========
</TABLE>
<PAGE> 8
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:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
<S> <C> <C>
Sales $ 178,958 $ 129,048
Net income (loss) (4,098) 715
Pro forma net income (loss) per share $ (0.95) $ 0.19
</TABLE>
3. PRO FORMA NET INCOME (LOSS) PER SHARE
Pro forma net income (loss) per common share is computed based on the
weighted average number of common shares outstanding during the
respective periods and gives effect to the reverse merger with
Alfalfa's, Inc. as of January 1, 1995 and to certain adjustments
described below. Common equivalent shares are not included in the
per-share calculation where the effect of their inclusion would be
antidilutive (i.e., in a loss period), except that, in conformity with
SEC requirements, common shares and common share equivalents issued
during the twelve-month period prior to the filing of the Company's
initial public offering have been included in the calculation as if
they were outstanding for all periods using the treasury stock method.
Additionally, all outstanding shares of convertible preferred stock
are assumed to have been converted to common stock at the time of
their issuance. The Company's historical capital structure is not
indicative of its structure following the closing of its October 1996
initial public offering, due to the automatic conversion of
convertible preferred stock into common stock. Accordingly, net
income (loss) per common share has been presented on a pro forma basis
only.
4. NON-RECURRING EXPENSES
In late August 1996, the Company's Board of Directors made certain
decisions relating to the Company's operations, which resulted in
approximately $7.3 million of non-recurring expenses being recorded in
the three months ending September 28, 1996. Approximately $2.0 million
of the charge is attributable to: (1) closing the Wild Oats
Markets(TM) Lawrence, Kansas store as well as a regional bakery and
kitchen; (2) the Company moving out of its existing corporate
headquarters and relocating to former Alfalfa's, Inc. corporate
offices; and (3) consolidating certain information systems, thereby
abandoning certain Wild Oats hardware and software. In addition,
after operating the combined businesses, management has closed the
Alfalfa's Market(TM) Seattle, Washington store and a restaurant in a
Vancouver, British Columbia Capers(TM) store which, at the time of the
acquisition, the Company had planned to retain. These closures
resulted in the remaining $5.3 million of the charge. Components of
the non-recurring charge consist primarily of lease cancellation costs
($1.1 million), employee severance and relocation costs ($400,000) and
losses on disposal or abandonment of certain assets ($5.8 million).
5. SUBSEQUENT EVENTS
On October 22, 1996, the Company completed an initial public offering
of its common stock. Proceeds to the Company, net of underwriting
discounts, commissions and other expenses, were $31.8 million in
exchange for the issuance of 1,400,000 shares. A portion of the
proceeds was used to pay off substantially all of the Company's
long-term debt. Additionally, all of the Company's outstanding
redeemable convertible preferred stock automatically converted into
2,322,809 shares of common stock upon consummation of the offering.
In connection with the initial public offering of the Company's common
stock, a 1.7735 for 1 stock split was effected on October 15, 1996.
All share and per share information presented in these financial
statements have been restated for all periods presented to reflect the
stock split. Additionally, upon the closing of the offering, the
Company's authorized capital stock increased to 20,000,000 shares
of common stock and 5,000 shares of preferred stock.
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q contains forward-looking statements within the context of
Section 21E of the Securities Exchange Act of 1934, as amended. Each and every
forward-looking statement involves a number of risks and uncertainties,
including the Risk Factors specifically delineated and described in the
Company's Registration Statement on Form S-1, No. 333-11261, effective October
22, 1996 ("Registration Statement"), including those Risk Factors from the
Registration Statement that have been specifically expanded or modified below.
The actual results that the Company achieves may differ materially from any
forward-looking statements due to such risks and uncertainties. Words such as
"believes", "anticipates", "expects", "intends", and similar expressions are
intended to identify forward-looking statements, but are not the exclusive
means of identifying such statements. 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.
Certain of the Registration Statement Risk Factors are hereby restated,
modified and expanded in accordance with the following section references that
correlate to the corresponding Registration Statement sections:
POTENTIAL DIFFICULTIES OF INTEGRATING ALFALFA'S OPERATIONS (AMENDED IN RELEVANT
PORTIONS)
In July 1996, the Company significantly increased its store base through the
acquisition of Alfalfa's, Inc., a natural foods supermarket chain that operated
11 stores in Colorado, New Mexico, Washington and British Columbia, Canada.
Subsequent to the acquisition, the Company closed the Alfalfa's Market(TM)
Seattle, Washington store. The Company is in the process of integrating
Alfalfa's production, warehousing and distribution, administration and other
operational functions. The Company is also implementing changes to certain
aspects of both Wild Oats' and Alfalfa's store-level operations based on
selected practices from each company. The Company intends to convert the
different Wild Oats and Alfalfa's point-of-sale and pricing systems to a single
system and is in the process of transferring the Alfalfa's accounting function
to the Company's system. Integrating the operations of the two companies could
have a material adverse effect on the Company's operations. See "Registration
Statement--Risk Factors--Potential Difficulties of Integrating Alfalfa's
Operations."
UNCERTAIN ABILITY TO EXECUTE GROWTH STRATEGY (AMENDED)
The Company's business has grown considerably in size and geographic scope,
increasing from six stores located primarily in Colorado in 1991, to its
current size of forty stores (as of the date of this report on Form 10-Q) in
eight states and Canada. The Company opened its first store outside of the
western U.S. (in Florida) in November 1996. The Company closed the Alfalfa's
Market(TM) Seattle, Washington store and the Wild Oats Market(TM) Lawrence,
Kansas store in September 1996 and October 1996, respectively. The Company
opened seven stores in 1996 (exclusive of the Alfalfa's acquisition), including
one store originally scheduled to open in 1997, and anticipates opening or
acquiring six additional stores in 1997. The Company currently has signed a
lease for one store and a purchase agreement for real property for the
construction of a second store planned to open in 1997. The Company's ability
to implement its growth strategy depends to a significant degree upon its
ability to open or acquire stores in existing and new markets and to integrate
and operate those stores profitably. While the Company plans to expand
primarily through the opening of new stores, it will continue to pursue
acquisitions of natural foods retailers where attractive opportunities exist.
The Company's growth strategy is dependent upon a number of factors, including
its ability to: (i) access adequate capital resources; (ii) expand into regions
where it has no operating experience; (iii) identify markets that meet its site
selection criteria; (iv) locate suitable store sites and negotiate acceptable
lease terms; (v) locate acquisition targets and negotiate acceptable
acquisition terms; (vi) hire, train and integrate management and store
employees; and (vii) expand its distribution and other operating systems. In
addition, the Company pursues a strategy of clustering stores in each of its
markets to increase overall sales, achieve operating efficiencies and further
penetrate markets. In the past, when the Company has opened a store in a
market where it had an existing presence, the Company has experienced a decline
in the sales and operating results at certain of its existing stores in these
markets. The Company intends to continue to pursue its store clustering
strategy and expects the sales and operating result trends for other stores in
an expanded market to continue. Further, acquisitions involve a number of
additional risks, such as short-term negative effects on the Company's reported
operating results, diversion of management's attention, unanticipated problems
or legal liabilities, and the integration of potentially dissimilar operations,
some or all of which could have a material adverse effect on the Company's
business, results of operations and financial condition. There can be no
assurance that the Company will achieve its planned expansion in existing
markets, enter new markets, or operate or integrate its existing, newly-opened
or newly-acquired stores profitably. If the Company fails to do so, the
Company's business, results of operations and financial condition will be
materially and adversely affected. In addition, the Company's ability to
execute its growth strategy is partially dependent upon the demographic trends
and market conditions in the natural foods industry and any change in those
trends and conditions could adversely effect the Company's future growth rate.
SAFETY OF PRODUCTS (NEW)
A recent nationwide recall of products by Odwalla, Inc., a leader in the fresh
juice market and a supplier to the Company, because of possible contamination
of certain of its juices by a strain of E. coli bacteria, and the resultant
publicity generated by the recall and the death of a consumer, apparently from
consumption of a contaminated juice, has prompted certain governmental agencies
to reexamine existing laws governing food purity and quality assurance. This
reexamination could result in legislation affecting the processing methods,
testing requirements or safety disclosures for certain products prepared or
sold by the Company, resulting in higher costs of goods sold. In addition,
possible negative public perception regarding the safety of organically grown
or minimally processed foods of the kind prepared or sold by the Company could
result in lower sales volume or additional volatility in the price of the
Company's stock. See "Registration Statement--Risk Factors--Government
Regulation."
<PAGE> 10
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected
income statement data expressed as a percentage of sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 28, SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold and occupancy costs 68.2 68.2 68.2 67.9
----- ----- ----- -----
Gross margin 31.8 31.8 31.8 32.1
Direct store expenses 25.6 27.5 25.0 24.8
Selling, general and administrative expenses 4.6 4.3 4.3 4.2
Preopening expenses 0.8 1.6 1.0 0.9
Non-recurring expenses 12.1 5.7
----- ----- ----- -----
Income (loss) from operations (11.3) (1.6) (4.2) 2.2
Interest expense, net 0.5 0.2 0.7 0.2
----- ----- ----- -----
Income (loss) before income taxes (11.8) (1.8) (4.9) 2.0
Income tax provision (benefit) (2.8) (0.6) (1.0) 0.8
----- ----- ----- -----
Net income (loss) (9.0)% (1.2)% (3.9)% 1.2%
===== ===== ===== =====
</TABLE>
Fluctuations in Quarterly Results. The Company's results of operations may
fluctuate significantly from period-to-period as the result of a variety of
factors, including: (i) the number, timing and mix of store openings,
acquisitions or closings; (ii) the ratio of stores opened to stores acquired;
(iii) the opening of stores by the Company or its competitors in markets where
the Company has existing stores; (iv) comparable store sales results; and (v)
the ratio of urban format to supermarket format stores. The Company incurs
significant preopening expenses and new stores typically experience an initial
period of operating losses. As a result, the opening of a significant number
of stores in a single period will have an adverse effect on the Company's
results of operations. In addition, the Company's store base is geographically
concentrated and shifts in economic or demographic trends and consumer
preferences in a particular market could have an adverse effect on the
Company's results of operations. Further, a variety of factors affect the
Company's comparable store sales results, including, among others, the relative
proportion of new stores to mature stores, the opening of stores by the Company
or its competitors in markets where the Company has existing stores, the timing
of promotional events, the Company's ability to execute its operating strategy
effectively, changes in consumer preferences for natural foods and general
economic conditions. Past increases in comparable store sales may not be
indicative of future operating performance. Due to the foregoing factors, the
Company believes that period-to-period comparisons of its operating results are
not necessarily meaningful and that such comparisons cannot be relied upon as
indicators of future financial performance.
Store Openings, Closings, and Acquisitions. In the third quarter of 1996, the
Company opened two new stores in St. Louis, Missouri and west Los Angeles,
California, respectively. In the fourth quarter of 1996, the Company opened
two new stores in Ft. Lauderdale, Florida and Sunnyvale, California,
respectively. The Sunnyvale store was originally scheduled to open in the
first quarter of 1997. The Company also completed the acquisition of
Alfalfa's, Inc., which operated eight Alfalfa's Market(TM) and three Capers(TM)
stores. See "Acquisition of Alfalfa's" below. In addition, the Company closed
one Alfalfa's Market(TM) store in Seattle, Washington and, in the fourth
quarter, closed a Wild Oats Market(TM) store in Lawrence, Kansas. The
Company's results of operations have been and will continue to be affected by,
among other things, the number, timing and mix of store openings, acquisitions
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. In
the first nine months of 1996, the Company opened five stores and acquired
fourteen stores. While store openings and the acquisition of Alfalfa's Inc.
contributed to an increase in the Company's overall sales during these periods,
from $68.5 million during the first nine months of 1995 to $129.1 million in
the first nine months of 1996, net income decreased, largely as a result of a
$7.3 million non-recurring charge described below and preopening costs (which
aggregated approximately $458,000 in the third quarter of 1996 and $1.24
million in the first nine months of 1996), and initial operating losses at the
new stores. The Company anticipates that the new stores opened in the third
quarter of 1996 will experience operating losses for the first six to twelve
months of operation, in accordance with historic trends. The Company will
continue to evaluate the profitability of all its stores on an ongoing basis
and may, from time to time, make decisions regarding closures, relocations or
remodels in accordance with such evaluations.
Acquisition of Alfalfa's. The Company completed the acquisition of Alfalfa's,
Inc. in July 1996. Through this acquisition, the Company combined two natural
foods retailers with similar operating strategies and complementary store
bases, increased its penetration of existing markets, entered new geographic
markets and created a stronger platform for future growth. Wild Oats' and
Alfalfa's stores overlap in four markets: Santa Fe, New Mexico and Denver,
Boulder and Ft. Collins, Colorado. The Company believes these markets are
large enough to support these stores. In connection with the acquisition, the
Company recorded goodwill in the third quarter of 1996 of approximately $27.8
million, which is being amortized on a straight-line basis over 40 years. The
future operating and financial performance of the Company will depend in part
on its ability to integrate and operate the Alfalfa's Market(TM) stores
successfully and to enhance the profitability of the acquired business. See
"Possible Difficulties of Integrating Alfalfa's Operations."
Non-Recurring Expenses. During late August 1996, the Company performed a
thorough analysis of its operations subsequent to the acquisition of Alfalfa's,
Inc. and made certain decisions relating to its operations which resulted in a
$7.3 million non-recurring charge being recorded in the third quarter of 1996,
of which $5.7 million were non-cash write-offs. The charge is attributable to
(i) closing the Wild Oats Market(TM) Lawrence, Kansas store, resulting in
approximately $850,000 in lease cancellation costs and asset
<PAGE> 11
write-offs, as well as closing a regional bakery and kitchen resulting in
approximately $210,000 in asset write-offs and lease adjustment costs; (ii)
moving out of the Company's existing corporate headquarters and relocating to
the former Alfalfa's, Inc. corporate headquarters, resulting in approximately
$720,000 in lease cancellation costs, relocation costs and asset write-offs;
and (iii) consolidating certain information systems resulting in approximately
$300,000 in asset write-offs. In addition, after operating the combined
companies, management closed the Alfalfa's Market(TM) Seattle, Washington
store, resulting in approximately $4.8 million of severance costs, lease
cancellation costs and asset write-offs, and a restaurant in a Vancouver
Capers(TM) store, resulting in approximately $420,000 in asset write-offs. At
the time of the Alfalfa's acquisition, the Company had planned to retain the
Seattle store and Vancouver restaurant operation. The Company does not believe
that closing the two stores will have a material effect on the Company's future
operating results.
SALES. Sales in the three and nine months ended September 28, 1996 were $60.2
million and $129.1 million, respectively. For the three-month period, sales
increased by 134% over the corresponding period in 1995. The increase in the
three-month period was primarily due to the acquisition of the eight Alfalfa's
Market(TM) and three Capers(TM) stores and the opening of two Wild Oats
Markets(TM) stores. Sales for the nine months ended September 28, 1996
increased 88% over the corresponding period in 1995, due to the factors
previously described and to the acquisition of three stores in Salt Lake City,
Utah and the opening of five new stores during the first nine months of 1996.
Sales of a store are deemed to be comparable commencing in the thirteenth full
month after the store was opened or acquired. Comparable store sales were 0.5%
for the third quarter of 1996 and 0% for the first nine months of 1996, as
compared to 6.5% for the third quarter of 1995 and 10.2% for the first nine
months of 1995. Comparable store sales results in the three and nine months
ended September 28, 1996 were negatively affected primarily by planned
cannibalization (the loss of sales at an existing store when the Company opens
a new store nearby) resulting from the implementation of the Company's store
clustering strategy as described in "Uncertain Ability to Execute Growth
Strategy."
GROSS PROFIT. Gross profit in the three and nine months ended September 28,
1996 was $19.1 million and $41.1 million, respectively. Gross profit increased
during the three months by 134% over the corresponding period in 1995, and by
87% for the nine months ended September 28, 1996 over the corresponding period
in 1995. The increase in gross profit on a dollar basis is primarily
attributable to the acquisition of Alfalfa's Inc. and the opening of new
stores. There was no material change in gross profit as a percentage of sales
during these periods.
DIRECT STORE EXPENSES. Direct store expenses for the three and nine months
ended September 28, 1996 were $15.4 million and $32.3 million, respectively.
For the three-month period, direct store expenses increased 118% over the
corresponding period in 1995, and increased 90% for the nine-month period over
the corresponding period in 1995. The increase in direct store expenses during
the three- and nine-month periods is attributable to the increase in the number
of stores operated by the Company. As a percentage of sales, direct store
expenses for the three-month period decreased to 25.6% from 27.5% in the same
period in 1995 due to the matured performance of the new stores opened in 1995.
For the nine-month period, there was no material change in direct store
expenses as a percentage of sales as compared to the same period in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three and nine months ended September 28, 1996
were $2.7 million and $5.6 million, respectively. For the three-month period,
selling, general and administrative expenses increased 150% over the
corresponding period in 1995, and for the nine-month period, increased 96% over
the corresponding period in 1995. These increases are primarily attributable
to the acquisition of Alfalfa's, Inc. and the opening of five new stores during
the first nine months of 1996. For the three-month period, selling, general
and administrative expenses as a percentage of sales increased to 4.6% from
4.3% in the same period in 1995 as a result of combining and then beginning the
consolidation of the overhead structure of Alfalfa's, Inc. For the nine-month
period, there was no material change in selling, general and administrative
expenses as a percentage of sales as compared to the same period in 1995.
PREOPENING EXPENSES. Preopening expenses for the three and nine months ended
September 28, 1996 were $458,000 and $1.2 million, respectively. For the
three-month period, preopening expenses increased 14% over the corresponding
period in 1995, and for the nine-month period, increased 100% over the
corresponding period in 1995. The increase in preopening expenses for the
nine-month period is attributable to an increase in the number of new stores
opened (five in the first nine months of 1996, as compared to three in the
corresponding period in 1995), as well as increased costs for travel for
preopening arrangements and staff training for those stores opened in new or
less developed geographic regions.
NET INTEREST EXPENSE. Net interest expense for the three and nine months ended
September 28, 1996 were $304,000 and $888,000, respectively. For the
three-month period, net interest expense increased 547% over the corresponding
period in 1995, and for the nine-month period increased 563% over the
corresponding period in 1995. These increases are attributable to the higher
levels of indebtedness incurred to fund store openings and acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's 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 store openings and acquisitions.
Net cash provided by operating activities was $6.5 million during the nine
months ended September 28, 1996 and $4.5 million during the comparable period
in 1995. Net income decreased during the nine months ended September 28, 1996
as compare to the same period in 1995, but cash provided by operating
activities increased during this period primarily as a result of non-cash asset
write-offs and an increase in accrued liabilities related to the non-recurring
expenses during the period and an increase in trade
<PAGE> 12
payables related to new store openings for which the Company typically receives
extended payment terms from vendors. The Company has not required significant
external financing to support inventory requirements at its existing and new
stores because it has been able to rely on vendor financing for most of the
inventory costs, and anticipates that vendor financing will continue to be
available for new store openings.
Net cash used by investing activities was $22.3 million during the nine months
ended September 28, 1996 as compared to $10.4 million during the comparable
period in 1995 due to the Alfalfa's, Inc. acquisition and other minor
acquisitions and to the opening of five new stores during the nine months ended
September 28, 1996.
Net cash provided by financing activities was $18.0 million during the nine
months ended September 28, 1996 and $595,000 during the comparable period in
1995 due to net proceeds of $16.5 million from the sale of Series E convertible
preferred stock, the proceeds of which were used to fund a portion of the
purchase price of Alfalfa's, Inc. In addition, $3.4 million was obtained from
increased borrowings net of repayment of debt during the nine months ended
September 28, 1996.
The Company currently has a $20.0 million revolving line of credit with Bank
One Indianapolis, National Association (the "Revolving Line"). The Revolving
Line bears interest, at the Company's option, at the lender's prime rate or
LIBOR plus 1.75% and has a final maturity of February 2002. At September 28,
1996, the Company had borrowings outstanding under the Revolving Line of
approximately $16.7 million. The Company used a portion of the net proceeds
from its initial public offering in October 1996 to repay all amounts
outstanding on the Revolving Line. Further, in July 1996, the Company received
a commitment from its lender to increase its borrowing capacity under the
Revolving Line to $40.0 million. The Company's ability to borrow under the
Revolving Line is contingent upon its compliance with certain material
covenants, including covenants related to the Company's net worth, total funded
debt to total capitalization ratio, interest coverage ratio, tangible capital
base and fixed charge coverage.
The Company anticipates that it will spend approximately $2.0 million in the
last quarter of 1996 to complete the build-out and opening of two stores, one
of which was originally scheduled to open in 1997. The Company's average
capital expenditures to open a store, including leasehold improvements,
equipment and fixtures, have ranged from approximately $1.0 million to $2.0
million over the past 18 months, excluding inventory costs and initial
operating losses. The cost of initial inventory for a new store over such
period was approximately $500,000; however, the Company relies on vendor
financing for most of this cost. Preopening costs are approximately $250,000
per store and are expensed when the new store opens. The amounts and timing of
such expenditures 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 the Company, 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.
<PAGE> 13
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
3(i).1 Amended and Restated Certificate of Incorporation of
Registrant.*
3(ii).1 Amended and Restated Bylaws of Registrant.*
11.1 Statement Regarding Computation of Pro Forma Net
Income (Loss) Per Share.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K. There were no reports on Form 8-K for the
three-month period ended September 28, 1996.
* Incorporated by reference from Registrant's Registration Statement on Form
S-1, No. 333-11261.
SIGNATURES
Pursuant to the requirements 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, in the City of Boulder, County of
Boulder, State of Colorado, on the 6th day of December, 1996.
WILD OATS MARKETS, INC.
By /s/ Mary Beth Lewis
------------------------------------
Mary Beth Lewis
Executive Officer, Treasurer and
Chief Financial Officer (Principal
Financial and Accounting Officer)
<PAGE> 14
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
3(i).1 Amended and Restated Certificate of Incorporation of
Registrant.*
3(ii).1 Amended and Restated Bylaws of Registrant.*
11.1 Statement Regarding Computation of Pro Forma Net
Income (Loss) Per Share.
27.1 Financial Data Schedule.
* Incorporated by reference from Registrant's Registration Statement on Form
S-1, No. 333-11261.
<PAGE> 1
EXHIBIT 11.1
WILD OATS MARKETS, INC.
STATEMENT REGARDING COMPUTATION OF PRO FORMA NET INCOME (LOSS) PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 28, SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding 2,996,866 2,315,631 2,545,205 2,315,631
Weighted average number of shares of
preferred stock assumed converted to
common stock at the time of issuance 2,152,310 1,035,736 1,410,759 1,035,736
Common and common equivalent shares
issued during the twelve-month period
prior to the filing of the Company's
proposed initial public offering calculated
using the treasury stock method 514,008 351,793 514,008
----------- ---------- ----------- ----------
Pro forma weighted average number of
common shares outstanding 5,149,176 3,865,375 4,307,757 3,865,375
Net income (loss) $(5,405,000) $ (276,000) $(4,903,000) $ 791,000
=========== ========== =========== ==========
Pro forma net income (loss) per share $ (1.05) $ (0.07) $ (1.14) $ 0.21
=========== ========== =========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of September 28, 1996 and the consolidated
statement of operations for the nine months ended September 28, 1996 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-28-1996
<CASH> 3,345
<SECURITIES> 0
<RECEIVABLES> 910
<ALLOWANCES> 113
<INVENTORY> 13,056
<CURRENT-ASSETS> 22,120
<PP&E> 40,683
<DEPRECIATION> 7,638
<TOTAL-ASSETS> 91,556
<CURRENT-LIABILITIES> 26,610
<BONDS> 0
43,527
0
<COMMON> 3
<OTHER-SE> 2,746
<TOTAL-LIABILITY-AND-EQUITY> 91,556
<SALES> 129,132
<TOTAL-REVENUES> 129,132
<CGS> 88,035
<TOTAL-COSTS> 88,035
<OTHER-EXPENSES> 46,407
<LOSS-PROVISION> 123
<INTEREST-EXPENSE> 888
<INCOME-PRETAX> 6,198
<INCOME-TAX> 1,295
<INCOME-CONTINUING> 4,903
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,903
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
</TABLE>
