<PAGE> 1
Filed Pursuant to Rule 424(b)(1)
Registration No. 333-11261
1,680,000 SHARES
WILD OATS MARKETS LOGO
COMMON STOCK
Of the 1,680,000 shares of Common Stock offered hereby, 1,400,000 shares
are being sold by Wild Oats Markets, Inc. (the "Company") and 280,000 shares are
being sold by the Selling Stockholders. See "Principal and Selling
Stockholders." The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders.
Prior to this offering, there has been no public market for the Common
Stock of the Company. See "Underwriting" for a discussion of factors considered
in determining the initial public offering price. The Common Stock has been
approved for listing on the Nasdaq National Market under the symbol "OATS."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 OF THE PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company(2) Stockholders(2)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............. $25.00 $1.75 $23.25 $23.25
Total(3).............. $42,000,000 $2,940,000 $32,550,000 $6,510,000
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting offering expenses payable by the Company estimated at
$780,000. The Selling Stockholders are not responsible for offering
expenses.
(3) The Company and certain Selling Stockholders have granted to the
Underwriters a 30-day option to purchase up to 252,000 additional shares of
Common Stock solely to cover over-allotments, if any. If the Underwriters
exercise this option in full, the Price to Public will total $48,300,000,
the Underwriting Discount will total $3,381,000, Proceeds to Company will
total $37,048,852, and Proceeds to Selling Stockholders will total
$7,870,148. See "Principal and Selling Stockholders" and "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, as and if delivered to and accepted by the Underwriters and subject to
their right to reject any orders in whole or in part. It is expected that the
delivery of the certificates representing such shares will be made against
payment therefor at the office of Montgomery Securities on or about October 28,
1996.
------------------------
MONTGOMERY SECURITIES SMITH BARNEY INC.
October 22, 1996
<PAGE> 2
Five photographs, including one picture of two Wild Oats grocery bags
overflowing with groceries (no brand names showing) and four pictures of
exterior store fronts.
<PAGE> 3
Ten photographs, including seven pictures of store interiors and three
pictures of private label products. One picture of private label products
contains fragments of quotations from the product packaging, including "Health
is the primary duty of life. Oscar Wilde. Hurt not the earth, neither the sea
nor the trees. Revelations. The frog does not drink up the pond in which it
lives. Buddhist proverb. Life is not merely to be alive, but to be well.
Martial."
<PAGE> 4
Nine photographs, including six pictures of store interiors, two pictures
of private label products and one picture of informational signage. The picture
of informational signage includes the following text: "great
Organics . . . organics care for earth's soil, air and water, preserving these
resources for our children's children. organics provide greater nutrition and
flavor than conventional produce. organics are safer for human consumption,
especially for growing children. organics support smaller, non-industrial farms,
especially family farms in our area. look for our organic symbol" (also contains
picture of organic fruits and vegetables).
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
Wild Oats(R), Wild Oats Community Markets(R), Wild Cafe(TM), Wild Nuts(TM),
Wild Honey(TM), Wild Water(TM), Alfalfa's(TM) and Capers(TM) are trademarks
owned by the Company.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus. Except as otherwise specified, all information in
this Prospectus assumes: (i) a 1.7735 for 1 stock split of the Common Stock
which was effected October 15, 1996; (ii) the conversion of each outstanding
share of preferred stock into Common Stock upon the closing of this offering;
and (iii) no exercise of the Underwriters' over-allotment option. Unless
otherwise indicated, references herein to fiscal years of the Company are to the
Company's 52- or 53-week fiscal year, which ends on the Saturday nearest to
December 31 of each year, and references to fiscal years of Alfalfa's, Inc. are
to Alfalfa's 52- or 53-week fiscal year, which ends on the Sunday nearest to
June 30 of each year. Except as otherwise indicated in this Prospectus or the
financial statements included elsewhere in this Prospectus, all references to
"Wild Oats" and the "Company" refer to Wild Oats Markets, Inc. and its
predecessors or subsidiaries. All operating data for Wild Oats excludes Lolita's
Market, a single store which the Company sold in 1993. See "Risk Factors" for a
discussion of certain factors that should be considered by prospective
purchasers of the Common Stock offered hereby.
THE COMPANY
Wild Oats Markets, Inc. ("Wild Oats" or the "Company") is the second
largest natural foods supermarket chain in North America with the largest
natural foods store base in the western United States. The Company currently
operates 38 stores in seven states, including California, Colorado, Kansas,
Missouri, Nevada, New Mexico, Utah, and British Columbia, Canada.
According to The Natural Foods Merchandiser, growth in the natural foods
industry has accelerated from a 10% increase in sales in 1991 to a 22% increase
in each of 1994 and 1995, when the market reached $9.1 billion. The Company
believes that this growth reflects a broadening of the natural foods consumer
base which is being propelled by several factors including healthier eating
patterns, increasing concern regarding food purity and safety, and greater
environmental awareness. Wild Oats believes it has developed a differentiated
concept that provides this expanding consumer base with an attractive one-stop,
full-service shopping alternative to both conventional supermarkets and
traditional health food stores.
Since acquiring its first natural foods store in 1987, Wild Oats has
pursued an aggressive growth strategy. The Company grew from six natural foods
stores located primarily in Colorado at the end of 1991, to 21 stores in six
states at the end of 1995, representing a compound annual growth rate of 36.8%.
During this period, the Company's sales increased from $25.2 million to $98.5
million, representing a compound annual growth rate of 40.6%. In the first half
of 1996, the Company opened three stores and acquired three additional stores
and sales increased 61.0% to $68.9 million from $42.8 million in the first half
of 1995. Historically, the Company's growth resulted from the acquisition of
independent and small chain natural foods store operators, the opening of new
stores and positive comparable store sales growth.
In July 1996, Wild Oats completed the acquisition of Alfalfa's Inc.
("Alfalfa's"), a leading natural foods supermarket chain that operated 11 stores
in three states and Canada. For its fiscal year ended June 30, 1996, Alfalfa's
had sales of $85.6 million. Through the acquisition of Alfalfa's, the Company
combined two natural foods retailers with similar operating strategies and
complementary store bases, increased the Company's penetration of existing
markets, entered new geographic markets and created a stronger platform for
future growth. The Company believes the successful integration of Alfalfa's will
result in future operating efficiencies created by: (i) warehousing,
distribution and administrative economies of scale; (ii) improved merchandise
buying terms as a result of the Company's larger size; and (iii) the
implementation of coordinated merchandising and marketing strategies. On a pro
forma basis, after giving effect to the Company's acquisition of three stores in
the first half of 1996 and the acquisition of Alfalfa's, the Company had sales
of $182.4 million in 1995 and $118.8 million in the first half of 1996.
Wild Oats' stores range in size from 5,000 to 35,000 square feet and
feature between 10,000 and 25,000 stock-keeping units (SKUs) of natural and
gourmet foods and related products in virtually every product category found in
a conventional supermarket. The Company's strict quality standards require
products to be minimally processed, free of preservatives, artificial colors and
chemical additives, and not tested on animals.
3
<PAGE> 6
The Company emphasizes unique products not typically found in conventional
supermarkets and tailors the product mix to meet the preferences of the local
market. In addition, the Company has implemented a "down to earth" competitive
price program which offers high quality, all natural items in each product
category at prices competitive with those of similar items in conventional
supermarkets.
Each Wild Oats store strives to create a fun, friendly and educational
store environment that makes grocery shopping enjoyable and encourages shoppers
to spend more time in the store and to purchase new products. The Company trains
its store staff to educate customers as to the benefits and quality of its
products and prominently features educational brochures, newsletters and an
in-store information department. In addition, many of the stores offer cafe
seating areas, espresso and fresh juice bars, and in-store massage therapists,
all of which emphasize the comfortable and relaxed nature of the Wild Oats
shopping experience. The Company also seeks to engender customer loyalty by
demonstrating its high degree of commitment to the local community through
on-going programs which provide significant monetary and in-kind contributions
to local not-for-profit organizations.
Wild Oats plans to open one additional store in the remainder of 1996 and
to open or acquire seven stores in 1997. The Company intends to continue to
strengthen its position in the western United States and to expand to new
regions, such as Florida, which it believes are currently underserved by natural
foods retailers. The Company believes its flexible store format strategy, which
includes large supermarket format stores and medium-sized urban format stores,
and its store clustering strategy enable it to increase market penetration,
reach a broader customer base, and operate successfully in a diverse set of
markets. The Company periodically evaluates the location and positioning of its
stores and may close, consolidate or relocate stores from time to time. As part
of this strategy, the Company has recently closed two stores which did not fit
the Company's current operating strategy. The Company incurred a non-recurring
charge of approximately $7.3 million in the third quarter of 1996 in connection
with the closing of these stores and certain redundant facilities. While the
Company believes that most of its growth will result from new store openings, it
continues to evaluate possible acquisition opportunities in both new and
existing markets.
The Company was incorporated in Colorado in 1987 and reincorporated in
Delaware in 1993. In July 1996, in connection with the acquisition of Alfalfa's,
Inc., the Company effected a merger into WO Holdings, Inc., a Delaware
corporation, which subsequently changed its name to Wild Oats Markets, Inc. The
Company's executive offices are located at 1645 Broadway, Boulder, Colorado, and
its telephone number is (303) 440-5220.
4
<PAGE> 7
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company........................ 1,400,000 shares
Common Stock offered by the Selling Stockholders........... 280,000 shares
Common Stock to be outstanding after the offering.......... 6,867,768 shares (1)
Use of proceeds............................................ To repay outstanding bank
debt, finance new store
openings and possible
acquisitions and for working
capital and other general
corporate purposes. See "Use
of Proceeds."
Nasdaq National Market symbol.............................. OATS
</TABLE>
- ---------------
(1) Excludes 659,979 shares of Common Stock issuable upon exercise of options
outstanding under the Company's stock option plans as of August 1, 1996 (of
which 167,701 shares were vested as of such date), 171,207 shares reserved
for issuance pursuant to the Company's stock options plans and 6,191 shares
of Common Stock reserved for issuance upon exercise of outstanding warrants.
As of August 1, 1996, the weighted average exercise prices of the Company's
stock options and warrants were $13.18 and $16.50 per share, respectively.
See "Capitalization," "Management--Stock Option Plans" and Note 7 of Notes
to Consolidated Financial Statements of Wild Oats Markets, Inc.
5
<PAGE> 8
SUMMARY FINANCIAL AND OPERATING DATA OF WILD OATS MARKETS, INC.
(IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR -------------------
--------------------------------------------------- JULY 1, JUNE 29,
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales............................. $25,222 $36,638 $47,266 $65,219 $98,517 $42,785 $ 68,929
Store contribution................ 2,047 2,859 3,915 4,897 6,281 4,060 5,137
Income from operations............ 1,084 1,160 1,675 2,580 779 1,858 1,480
Net income(1)..................... 580 616 804 1,327 376 1,068 501
Unaudited net income per common
share(2)........................ $ 0.10 $ 0.13
======= =======
Unaudited weighted average number
of common shares outstanding.... 3,864 3,886
======= =======
SELECTED OPERATING DATA(3):
Number of stores at end of
period.......................... 6 9 11 14 21 17 27
Average square feet per store at
end of period................... 8,039 11,802 11,196 11,780 13,653 11,736 13,884
Average sales per square
foot(4)......................... $ 500 $ 434 $ 383 $ 435 $ 464 $ 485 $ 444
Comparable store sales
increase(5)..................... 8% 13% 5% 13% 7% 12% 0%
</TABLE>
SUMMARY FINANCIAL AND OPERATING DATA OF ALFALFA'S, INC.
(IN THOUSANDS, EXCEPT OPERATING DATA)
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
1994 1995 1996(6)
------- ------- -------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales............................................................... $45,880 $64,852 $85,623
Store contribution.................................................. 3,952 5,308 4,973
Income (loss) from operations....................................... 1,738 1,717 (51)
Net income (loss)................................................... 979 933 (93)
SELECTED OPERATING DATA:
Number of stores at end of period................................... 6 9 11
Average square feet per store at end of period...................... 17,783 17,000 16,418
Average sales per square foot(4).................................... $ 444 $ 486 $ 484
Comparable store sales increase(5).................................. 8% 7% 3%
</TABLE>
6
<PAGE> 9
SUMMARY PRO FORMA COMBINED FINANCIAL DATA OF WILD OATS MARKETS, INC.
(IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
FISCAL YEAR JUNE 29,
1995 1996
------------ ------------
<S> <C> <C>
PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA(7):
Sales...................................................................... $ 182,432 $118,755
Store contribution......................................................... 11,723 9,203
Income from operations..................................................... 929 3,068
Unaudited pro forma net income............................................. 212 1,307
Unaudited pro forma net income per common share(8)......................... $ 0.05 $ 0.30
Pro forma weighted average number of
common shares outstanding................................................ 4,267 4,290
Number of stores at end of period.......................................... 35 38
</TABLE>
<TABLE>
<CAPTION>
JUNE 29, 1996
----------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(9) ADJUSTED(10)
------------ ------------ ------------
<S> <C> <C> <C>
PRO FORMA BALANCE SHEET DATA:
Working capital (deficit)................................... $ (497) $ (3,043) $ 11,065
Total assets................................................ 47,907 92,341 106,449
Long-term debt, including capitalized lease obligations..... 17,592 17,722 60
Redeemable convertible preferred stock...................... 18,009
Stockholders' equity (deficit).............................. (4,764) 46,643 78,413
</TABLE>
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(1) On July 3, 1993, Wild Oats changed its corporate status from an S
corporation to a C corporation. Net income for 1991, 1992 and 1993 are
shown pro forma (unaudited) to reflect income taxes for Wild Oats as if it
had been a C corporation for all periods presented. See Note 8 of Notes to
the Consolidated Financial Statements of Wild Oats Markets, Inc.
(2) Unaudited net income per common share was computed, on a pro forma basis,
assuming conversion of all outstanding shares of preferred stock into
Common Stock, which will occur upon the completion of this offering. See
Note 1 of Notes to Consolidated Financial Statements of Wild Oats Markets,
Inc.
(3) Selected Operating Data for 1991, 1992 and 1993 excludes Lolita's Market, a
single store which the Company sold in 1993.
(4) Average sales per square foot is calculated by dividing total sales by the
weighted average gross square footage of stores open during the period. See
"Business--Properties."
(5) Sales of a store are deemed to be comparable commencing in the thirteenth
full month after the store was opened or acquired.
(6) Alfalfa's fiscal 1996 was a 53-week year.
(7) Pro Forma Combined Statement of Operations data reflects the acquisitions
of New Frontiers in June 1996 and Alfalfa's in July 1996 as if they had
occurred at the beginning of each period presented. See "Pro Forma Combined
Condensed Financial Statements (Unaudited)" including the notes thereto.
(8) A portion of the net proceeds from the offering will be used to repay
certain indebtedness. If, at the beginning of the year ended December 30,
1995 and the six-month period ended June 29, 1996, the Company had sold a
sufficient number of shares at $25.00 per share to repay the indebtedness,
and used the net proceeds therefor, supplemental pro forma combined net
income per common share would have been $0.10 and $0.33 for the respective
periods.
(9) Reflects the sale by the Company of 876,016 shares of its Series E
Preferred Stock and the acquisition of Alfalfa's in July 1996, the
conversion of all outstanding shares of preferred stock into Common Stock,
which will occur upon the completion of this offering and the effect of
$7.3 million non-recurring charge, net of estimated tax effects. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Non-Recurring Charge."
(10) Reflects the sale of the 1,400,000 shares of Common Stock offered by the
Company hereby at an initial public offering price of $25.00 per share and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
7
<PAGE> 10
RISK FACTORS
An investment in the Common Stock being offered hereby involves a high
degree of risk. In addition to other information contained in this Prospectus,
prospective investors should carefully consider the following risk factors
before purchasing any of the Common Stock offered hereby. This Prospectus
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the following risk factors and elsewhere in this Prospectus.
POTENTIAL DIFFICULTIES OF INTEGRATING ALFALFA'S OPERATIONS
In July 1996, the Company significantly increased its store base through
the acquisition of Alfalfa's, a natural foods supermarket chain that operated 11
stores in Colorado, New Mexico and Washington and British Columbia, Canada.
Alfalfa's achieved increases in operating income for the four consecutive years
prior to fiscal 1996 when it experienced an operating loss largely as a result
of pre-opening expenses and initial operating losses at its newly-opened stores.
Subsequent to the acquisition, the Company closed the Alfalfa's Seattle,
Washington store. The Company is in the process of integrating Alfalfa's
production, warehousing and distribution, administration and other operational
functions into Wild Oats. 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
currently 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. For
example, the process could: (i) interrupt the Company's business; (ii) divert
management's attention from the Company's existing stores and expansion plans;
(iii) place further pressure on the Company's executive officers; and (iv)
result in additional administrative expense. In addition, certain members of
Alfalfa's management team have joined Wild Oats. The successful integration of
Alfalfa's is dependent, in part, on the assimilation and retention of these
members of management. There can be no assurance that the Company will not
encounter unanticipated problems or liabilities as it combines the operations of
Wild Oats and Alfalfa's or that the integration of Alfalfa's will result in
enhanced store operations or improved profitability at the Company. The future
operating and financial performance of the Company will depend in part on its
ability to integrate and operate the Alfalfa's stores successfully and to manage
this larger store base. Failure to successfully complete this integration of
operations would have a material adverse effect on the Company's business,
results of operations and financial condition. See "Recent Acquisitions and New
Store Openings," "Pro Forma Combined Condensed Financial Statements
(Unaudited)," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Acquisition of Alfalfa's" and "Business--Management
Information Systems."
UNCERTAIN ABILITY TO EXECUTE GROWTH STRATEGY
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 these trends 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, unantici-
8
<PAGE> 11
pated 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. The
Company anticipates opening one additional store during the remainder of 1996
(for a total of six store openings and 14 store acquisitions in 1996, including
the acquisition of Alfalfa's), and opening or acquiring seven stores in 1997.
The Company currently has signed leases for one store planned to open in 1996
and for two stores planned to open in 1997. 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. See "Business--Growth
Strategy."
FLUCTUATIONS IN FINANCIAL RESULTS; NON-RECURRING CHARGE
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 pre-opening 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. For example, the
Company's profitability was lower in 1995 than in 1994 due in part to the
opening of a significantly larger number of stores in 1995 than in 1994. 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. 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.
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 performance. Comparable
store sales results in the last half of 1995 and the first half of 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 and a competitive
store opening by Alfalfa's in Santa Fe, New Mexico. The Company experienced a
comparable store sales decrease in the first quarter of 1996 and there can be no
assurance that comparable store sales for any particular period will not
decrease in the future. As a result, following this offering, the Company's
comparable store sales could cause the price of the Common Stock to fluctuate
substantially. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
During late August 1996, the Company performed a thorough analysis of its
operations subsequent to the acquisition of Alfalfa's and made the following
decisions relating to its operations which resulted in an approximate $7.3
million non-recurring charge being recorded in the third quarter of 1996, of
which $5.7 million were non-cash write-downs. Specifically, as a direct result
of the July 1996 acquisition of Alfalfa's, the Company incurred the charge by:
(i) closing the Wild Oats Lawrence, Kansas store resulting in $849,000 in lease
cancellation costs and asset write-offs, as well as closing a regional bakery
and kitchen resulting in $203,600 in asset write-offs and lease adjustment
costs; (ii) moving out of its existing corporate headquarters and relocating to
Alfalfa's former corporate headquarters resulting in $711,500 in lease
cancellation costs, relocation costs and asset write-offs; and (iii)
consolidating certain information systems resulting in $276,500 in asset
write-offs. In addition, after operating the combined companies, management
closed the Alfalfa's Seattle, Washington store resulting in $4.8 million of
severance costs, lease cancellation costs and asset write-offs and to close a
restaurant in a Capers store, resulting in $425,000 in asset write-offs,
9
<PAGE> 12
both operations which at the time of the acquisition the Company had planned to
retain. The decisions related to these activities were made and announced in the
third quarter of 1996 and will be completed as soon as practicable. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Non-Recurring Charge" and Note 11 of Notes to Consolidated
Financial Statements of Wild Oats Markets, Inc.
POSSIBLE INABILITY TO MANAGE GROWTH
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 38 stores in seven states and Canada. The Company intends to open its
first store outside of the western U.S. (in Florida) in 1996. The Company has
closed the Alfalfa's Seattle, Washington store and the Wild Oats Lawrence,
Kansas store. The Company's continued growth may place a significant strain on
the Company's management, distribution capabilities, working capital, and
financial and management control systems. In order for the Company to manage its
expanding store base successfully, management will be required to anticipate the
changing demands of the Company's growing operations and to adapt systems and
procedures accordingly. There can be no assurance that the Company will
anticipate all of the changing demands that its expanding operations will impose
on such systems. To support its planned store growth, the Company will be
required to hire and train a greater number of store managers and store
employees than it has in the past, and there can be no assurance that the
training and supervision of a larger number of employees will not adversely
affect the performance of the Company's stores or the levels of customer service
that the Company seeks to maintain in such stores. The Company will also need to
continually evaluate the adequacy of its management information systems,
including its inventory control and distribution systems. Currently, certain
important functions, including certain store-level accounting and inventory
management systems, are processed manually. There can be no assurances that the
Company's current systems will be adequate for its future needs, or that the
Company will be successful in implementing new systems. Failure to upgrade its
information systems or unexpected difficulties encountered with these systems
during expansion could adversely affect the Company's business, financial
condition and results of operations. The Company's inability to manage growth
effectively could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Business--Management
Information Systems."
NEW MEXICO ANTI-TRUST PROCEEDINGS
In February 1996, Wild Oats received a Civil Investigative Demand and
Request for Production of Documents from the New Mexico Attorney General's
office alleging possible violations of New Mexico's anti-trust laws as a result
of the acquisition of Alfalfa's. The focus of the investigation is on the
effect, if any, of the acquisition on competition in New Mexico. In May 1996,
the Company received a letter from the New Mexico Attorney General's office
indicating that it would recommend that Wild Oats divest one of its three stores
in Santa Fe, New Mexico in connection with the acquisition. The Company replied
refuting the Attorney General's claim but has not received a response from the
Attorney General's office. The Attorney General's office has not taken any legal
action with respect to the acquisition. The Company believes that the
acquisition complies with federal and state anti-trust law and will continue to
vigorously defend its position in New Mexico. However, there can be no assurance
that the state of New Mexico will not take legal action with respect to the
acquisition, including, but not limited to, demanding the divestiture of one or
more stores in the Santa Fe market to a competitor of the Company. If the
Attorney General of New Mexico elects to take legal action and is successful,
such a result could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Business--Legal
Proceedings."
COMPETITION
The Company's competitors currently include other independent and
multi-unit natural foods supermarkets, smaller traditional natural foods stores,
conventional supermarkets and specialty grocery stores. A number of other
natural foods supermarkets offer a range of natural foods products similar to
those offered
10
<PAGE> 13
in the Company's stores. While certain conventional supermarkets, smaller
traditional natural foods stores and small specialty stores do not offer as full
a range of products as the Company, they do compete with Wild Oats in one or
more product categories. Many of the Company's competitors have been in business
longer and have greater financial or marketing resources than the Company and
may be able to devote greater resources to securing suitable locations and to
the sourcing, promotion and sale of their products. In addition, should any of
the Company's competitors reduce prices, the Company may be required to
implement price reductions in order to remain competitive, which could have an
adverse impact on its business, financial condition and results of operations.
As Wild Oats enters new geographic markets, its success will depend in part on
its ability to gain market share from established competitors. In addition,
traditional and specialty grocery stores may expand more aggressively in
marketing a broader range of natural foods and related products and thereby
compete directly with the Company for products, customers and locations. The
Company expects competition from both new and existing competitors to increase
in its markets and there can be no assurance that the Company will be able to
compete effectively in the future. See "Business--Competition."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its continued success will depend to a
significant extent upon the leadership and performance of Michael C. Gilliland,
Wild Oats' co-founder and the Chief Executive Officer of the Company, and S.M.
Hassan, Alfalfa's co-founder and the President of the Company. The loss of the
services of Mr. Gilliland, Mr. Hassan or other of the Company's key personnel
could have a material adverse effect upon the Company. There can be no assurance
that the Company will be able to attract and retain qualified employees. See
"Management."
POSSIBLE DISRUPTIONS OF PRODUCT SUPPLY
The Company's business is dependent on its ability to source products from
a small number of distributors and from a large number of relatively small
vendors on a timely basis and at competitive prices. Based on its previous
purchasing patterns, the Company anticipates that it will continue to purchase
approximately half of its products through one wholesale distributor. The
Company has no supply contracts with these parties and any vendor or distributor
could discontinue selling to the Company at any time. Any disruption in its
product supply could have a material adverse effect on its results of
operations. In addition, even where the Company has access to alternative
sources of supply, the failure of a vendor or distributor to meet the Company's
demands may temporarily disrupt store-level merchandise selection. See
"Business--Purchasing and Distribution."
GOVERNMENT REGULATION
The Company is subject to numerous federal, state and local laws,
regulations and ordinances regulating health and sanitation standards, food
labeling and handling, equal employment, minimum wages and licensing for the
sale of food and alcoholic beverages. Difficulties or failures in complying with
these regulations could adversely affect the operations of an existing store or
delay the opening of a new store.
In addition, from time-to-time, various federal, state and local
legislative and regulatory proposals are made to, among other things, increase
the minimum wage payable to employees, establish minimum store security
requirements and increase taxes on the retail sale of certain products. Changes
to such laws, regulations or ordinances may adversely affect the Company's
performance by increasing the Company's costs or affecting its sales of certain
products. Federal legislation raising the minimum wage in the future may
increase the Company's employee costs and adversely affect the Company's
profitability.
The Company also sells nutritional supplements, some of which are subject
to regulation by several federal, state and local agencies. There can be no
assurance that such agencies will not enact regulations that could have an
adverse effect on the Company's business, results of operations and financial
condition. In addition, recent legislation has required manufactures of
nutritional supplements to label ingredients in their products. Such legislation
could be enacted in the future which may adversely effect the Company's results
of operations. See "Business--Government Regulation."
11
<PAGE> 14
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE; NO
DIVIDENDS
Prior to this offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or,
if one develops subsequent to this offering, that it will be maintained. The
initial public offering price of the Common Stock was established by negotiation
among the Company, the Selling Stockholders and the representatives of the
Underwriters. See "Underwriting" for factors considered in determining the
initial public offering price. The market price of the shares of Common Stock
could be subject to significant fluctuations in response to the Company's
operating results and other factors, including announcements by its competitors.
In addition, the stock market in recent years has experienced extreme price and
volume fluctuations that often have been unrelated or disproportionate to the
operating performance of companies. These fluctuations, as well as a shortfall
in sales or earnings compared to public market analysts' expectations, changes
in analysts' recommendations or projections, and general economic and market
conditions, may adversely affect the market price of the Common Stock. The
Company has never paid any cash dividends and does not anticipate paying cash
dividends in the foreseeable future. See "Dividend Policy."
ADDITIONAL SHARES ELIGIBLE FOR FUTURE SALE IN THE PUBLIC MARKET
The sale of a substantial number of shares of Common Stock in the public
market following this offering could adversely affect the market price of the
Common Stock. Upon completion of this offering, the Company will have
outstanding an aggregate of 6,867,768 shares of Common Stock assuming: (i) no
exercise of the Underwriters' over-allotment option; and (ii) no exercise of
outstanding options and warrants. The 1,680,000 shares of Common Stock sold in
this offering will be freely tradable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), unless such shares are held by "affiliates" of the Company, as that term
is defined under the Securities Act and the Regulations promulgated thereunder.
The remaining 5,187,768 shares of Common Stock are "Restricted Shares" and
are subject to restrictions under the Securities Act. 4,517,911 Restricted
Shares are subject to lock-up agreements under which the holders have agreed not
to sell or otherwise dispose of any of their shares for a period of 180 days
after the date of this Prospectus without the prior written consent of
Montgomery Securities. Approximately 453,226 Restricted Shares will be eligible
for sale in the public market pursuant to Rule 144(k) under the Securities Act
as of the date of this Prospectus. These 453,226 shares are held by 64
stockholders. Beginning 90 days after the date of this Prospectus, approximately
166,663 Restricted Shares will be eligible for sale in the public market
pursuant to Rule 144 and Rule 701 under the Securities Act. Beginning 180 days
after the date of this Prospectus, approximately 549,532 Restricted Shares will
become available for sale in the public market subject to the volume and other
limitations of Rule 144. The remaining 4,018,347 Restricted Shares will begin to
be eligible for sale in April 1997. In addition, holders of approximately
4,421,103 shares of Common Stock and outstanding warrants for 2,678 shares of
Common Stock have registration rights with respect to such shares. The Company
intends to file a registration statement on Form S-8 90 days after the date of
this Prospectus to register 958,878 shares of Common Stock authorized for
issuance under the Company's equity incentive plans, of which options
exercisable for 659,979 shares are outstanding. See "Management--Stock Option
Plans," "Description of Capital Stock--Registration Rights," and "Shares
Eligible for Future Sale."
ANTI-TAKEOVER CONSIDERATIONS
The Company's Certificate of Incorporation and Bylaws contain provisions
which may have the effect of delaying, deferring or preventing a change in
control of the Company, may discourage bids for the Common Stock at a premium
over the market price of the Common Stock and may adversely affect the market
price of the Common Stock and the voting and other rights of the holders of the
Common Stock. These provisions include, but are not limited to, a classified
Board of Directors and the authority of the Board of Directors to issue up to
5,000,000 shares of preferred stock and to fix the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
further vote or action by the stockholders. The rights of the holders of Common
Stock will be subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future. The Company has
no present plans to issue
12
<PAGE> 15
shares of preferred stock. In addition, certain provisions of Delaware law
applicable to the Company could have the effect of discouraging certain attempts
to acquire the Company which could deprive the Company's stockholders of the
opportunities to sell their shares of Common Stock at prices higher than
prevailing market prices. See "Description of Capital Stock."
CONTROL BY OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
Following completion of this offering, directors, executive officers and
principal stockholders of the Company, and certain of their affiliates, will
beneficially own approximately 58.8% of the outstanding shares of Common Stock.
Accordingly, these persons, individually and as a group, will be able to
effectively control the Company and direct its affairs and business, including
any determination with respect to the acquisition or disposition of assets by
the Company, future issuances of Common Stock or other securities by the
Company, declaration of dividends in the Common Stock and the election of
directors. Such concentration of ownership may also have the effect of delaying,
deferring or preventing a change in control of the Company. Pursuant to an
agreement between the Company and certain investors, certain parties holding an
aggregate of 4,049,371 shares of Common Stock have agreed that for four years
after this offering they will vote their shares in favor of electing nominees of
certain investors to the Board of Directors and to the Audit and Compensation
Committees of the Board. See "Management--Board of Directors" and "Principal and
Selling Stockholders."
DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of Common Stock. Investors purchasing shares of
Common Stock in this offering will therefore incur immediate and substantial
dilution of $18.76 per share. See "Dilution."
13
<PAGE> 16
RECENT ACQUISITIONS AND NEW STORE OPENINGS
ALFALFA'S ACQUISITION
In July 1996, Wild Oats acquired Alfalfa's, a leading natural foods
supermarket chain headquartered in Boulder, Colorado. Prior to the acquisition,
Alfalfa's was a privately-owned company that operated 11 stores, including eight
Alfalfa's stores in Colorado, New Mexico and Washington and three Capers stores
in British Columbia, Canada. The Alfalfa's and Capers stores range in size from
6,200 to 25,000 square feet and offer a broad selection of natural and gourmet
foods and related products. For its fiscal year ended June 30, 1996, Alfalfa's
had sales of $85.6 million. Subsequent to the acquisition, the Company closed
the Alfalfa's Seattle, Washington store.
As a result of the acquisition, Wild Oats is the second largest natural
foods supermarket chain in North America and operates the largest natural foods
store base in the western United States. Through the acquisition of Alfalfa's,
the Company combined two natural foods retailers with similar operating
strategies and complementary store bases, increased the Company's penetration of
existing markets, entered new geographic markets and created a stronger platform
for future growth.
Alfalfa's stores and Wild Oats' stores overlap in four markets: Santa Fe,
New Mexico and Denver, Boulder and Fort Collins, Colorado. In 1995, Wild Oats
opened two stores in Denver and Alfalfa's opened one store in Santa Fe. The
opening of these additional stores resulted in a decline in sales and operating
results at the existing Wild Oats and Alfalfa's stores in those markets.
However, overall sales increased significantly in these markets and, over time,
the Company believes the affected stores will generally achieve store-level
contribution margins comparable to their prior levels on the lower base of
sales. As a result, the Company believes these markets are large enough to
support these stores and that 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 will contribute to the
Company's overall growth. See "Pro Forma Combined Condensed Financial Statements
(Unaudited)" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Management has begun the integration of Alfalfa's operations into Wild
Oats, including: (i) the consolidation and relocation of the Company's corporate
headquarters; (ii) the incorporation of the best practices of both companies
across certain store-level departments, particularly in the areas of perishables
and natural living; (iii) the creation and implementation of a single marketing
and private label strategy; and (iv) the selection and implementation of
combined point-of-sale and pricing information systems. The Company intends to
continue to conduct this integration in stages and expects to complete it by the
end of 1997. The Company believes the successful integration of Alfalfa's will
result in future operating efficiencies created by: (i) warehousing,
distribution and administrative economies of scale; (ii) improved merchandise
buying terms as a result of the Company's larger size; and (iii) the
implementation of coordinated merchandising and marketing strategies. In
connection with the acquisition, the Company recorded goodwill of approximately
$27.8 million which is being amortized on a straight-line basis over 40 years.
The Company anticipates that it will operate existing stores under their current
names and new stores primarily under the name Wild Oats. There can be no
assurance that the Company will not encounter unanticipated problems or
liabilities in connection with the integration of Alfalfa's or that the
integration will result in enhanced store operations or improved profitability.
See "Risk Factors--Potential Difficulties of Integrating Alfalfa's Operations."
OTHER 1996 ACQUISITIONS AND OPENINGS TO DATE
Salt Lake City Acquisition. In June 1996, the Company acquired the assets
of three natural foods stores ranging in size from 7,000 to 10,000 square feet
and operating as New Frontiers in Salt Lake City, Utah. The Company is currently
operating these stores and is in the process of remodeling them. The Company
anticipates renaming these stores Wild Oats when the remodeling is completed in
the fall of 1996.
New Store Openings. Through September 1996, the Company opened five
stores: (i) a 14,000 square foot store in West Hollywood, California in
February; (ii) a 9,000 square foot store in San Francisco,
14
<PAGE> 17
California in April; (iii) a 23,500 square foot store in Mission Viejo,
California in May; (iv) a 25,000 square foot store in St. Louis, Missouri in
August; and (v) a 7,900 square foot store in West Los Angeles, California in
September.
1995 ACQUISITIONS AND OPENINGS
Northern California Acquisitions. In April 1995, the Company acquired the
assets of two natural foods stores operating as Living Foods: (i) a 7,500 square
foot store in Berkeley; and (ii) an 8,500 square foot store in San Anselmo. The
Company remodeled these stores and renamed them Wild Oats at the end of 1995.
New Store Openings. In 1995, the Company opened five stores: (i) an 18,600
square foot store in Denver, Colorado in May; (ii) a 35,000 square foot store in
Greenwood Village, Colorado in August; (iii) an 8,200 square foot store in Santa
Monica, California in September; (iv) a 22,000 square foot store in Mission,
Kansas in October; and (v) a 22,000 square foot store in Albuquerque, New Mexico
in November.
15
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,400,000 shares of
Common Stock offered by the Company hereby are estimated to be $31.8 million
($36.3 million if the Underwriters' over-allotment option is exercised in full),
after deducting the estimated underwriting discount and offering expenses
payable by the Company. The Company will not receive any proceeds from the sale
of the 280,000 shares of Common Stock offered by the Selling Stockholders. See
"Principal and Selling Stockholders."
The Company intends to use approximately $17.7 million of the proceeds of
the offering to repay its bank indebtedness under the Company's revolving line
of credit (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. The repayment of the foregoing debt by the Company
will retire substantially all of the Company's indebtedness. Following this
offering, the Company will have approximately $20.0 million of available
borrowing capacity, subject to certain covenants and other restrictions
applicable to 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 approximately $14.1 million of remaining
net proceeds will be used to finance store openings and possible acquisitions
and for working capital and general corporate purposes. The Company intends to
open one additional store in the remainder of 1996 and anticipates opening or
acquiring seven stores in 1997. The Company's average capital expenditures to
open a store have ranged from approximately $1.0 million to $2.0 million over
the past 18 months, excluding inventory costs and initial operating losses. The
amounts and timing of such expenditures will depend upon the availability of new
store sites and other factors, many of which are beyond the Company's control.
Although the Company has no present commitments or agreements with respect to
any acquisitions, funds may be used in connection with future acquisitions if
such opportunities develop. Costs to acquire future stores, if any, are
impossible to predict and could vary materially from the cost of opening stores.
There can be no assurance that the Company will achieve its planned expansion in
existing markets or enter new markets. Pending such uses, the net proceeds of
this offering will be invested in short-term, interest-bearing securities. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DIVIDEND POLICY
The Company currently intends to retain any future earnings to finance the
growth and development of its business and therefore does not anticipate paying
any cash dividends in the foreseeable future. The payment of any future
dividends will be at the discretion of the Company's Board of Directors and will
depend upon, among other things, the future earnings, operations, capital
requirements and financial condition of the Company. In addition, the Revolving
Line contains various financial covenants which restrict, among other things,
the Company's ability to pay dividends. As of the date of this Prospectus, the
Company could not pay dividends under the terms of the Revolving Line. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
16
<PAGE> 19
CAPITALIZATION
The following table sets forth at June 29, 1996, the current debt and
capitalized lease obligations as well as the capitalization of the Company: (i)
on an actual basis; (ii) on a pro forma basis after giving effect to the sale of
876,016 shares of Series E Preferred Stock and the acquisition of Alfalfa's in
July 1996, the conversion of all outstanding shares of preferred stock into
Common Stock, the retirement of the Company's treasury stock in August 1996 and
the effect of a non-recurring charge of $7.3 million, net of estimated tax
effects; and (iii) on a pro forma as adjusted basis to give effect to the sale
of the 1,400,000 shares of Common Stock being offered by the Company hereby, and
the application of the estimated net proceeds therefrom. See "Pro Forma Combined
Condensed Financial Statements (Unaudited)."
<TABLE>
<CAPTION>
JUNE 29, 1996
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Notes payable and current portion of long-term debt,
including capitalized lease obligations............ $ 1,771 $ 2,031 $ 2,031
======== ======== ========
Long-term debt, including capitalized lease
obligations........................................ $17,592 $17,722 $ 60
-------- -------- --------
Redeemable convertible preferred stock, $.001 par
value.............................................. 18,009
-------- -------- --------
Stockholders' equity(1):
Common stock, $.001 par value...................... 3 5 6
Additional paid-in capital......................... 2,881 53,881 85,650
Retained deficit................................... (2,284) (7,243) (7,243)
Treasury stock..................................... (5,364)
-------- -------- --------
Total stockholders' equity (deficit)....... (4,764) 46,643 78,413
-------- -------- --------
Total capitalization..................... $30,837 $64,365 $78,473
======== ======== ========
</TABLE>
- ---------------
(1) Excludes 659,979 shares of Common Stock issuable upon exercise of options
outstanding under the Company's stock option plans as of August 1, 1996 (of
which 167,701 shares were vested as of such date), 171,207 shares reserved
for issuance pursuant to the Company's stock option plans and 6,191 shares
of Common Stock reserved for issuance upon exercise of outstanding warrants.
As of August 1, 1996, the weighted average exercise prices of the Company's
stock options and warrants were $13.18 and $16.50 per share, respectively.
See "Capitalization," "Management--Stock Option Plans" and Note 7 of Notes
to Consolidated Financial Statements of Wild Oats Markets, Inc.
17
<PAGE> 20
DILUTION
The pro forma net tangible book value of the Company at June 29, 1996, was
approximately $10.8 million or $1.99 per share. "Net tangible book value" per
share represents the amount of the Company's total tangible assets less total
liabilities, divided by the number of shares of Common Stock outstanding. After
giving effect to the sale by the Company of the 1,400,000 shares of Common Stock
offered hereby and the receipt of the estimated net proceeds therefrom, the pro
forma net tangible book value of the Company at June 29, 1996 would have been
approximately $42.6 million, or $6.24 per share. This represents an immediate
increase in such net tangible book value of $4.25 per share to existing
stockholders and an immediate dilution of $18.76 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share.......................... $25.00
Pro forma net tangible book value per share as of June 29,
1996........................................................ $ 1.99
Increase per share attributable to new investors............... 4.25
------
Pro forma net tangible book value per share after this
offering....................................................... 6.24
------
Dilution per share to new investors.............................. $18.76
======
</TABLE>
The following table summarizes on a pro forma basis as of June 29, 1996,
the differences between existing stockholders and the new investors with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average consideration paid per share
by the existing investors and by the investors purchasing shares of Common Stock
in this offering (based upon an initial public offering price of $25.00 per
share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing
stockholders(1)....... 5,428,046 79.5% $ 29,320,000 45.6% $5.40
New investors........... 1,400,000 20.5 35,000,000 54.4 25.00
--------- ------ ------------ ------
Total................. 6,828,046 100.0% $ 64,320,000 100.0%
========= ====== ============ ======
</TABLE>
- ---------------
(1) Sales by the Selling Stockholders in this offering will reduce the number
of shares held by the existing stockholders to 5,148,046 or 75.3% (or
5,089,546 or 71.9% if the over-allotment option is exercised in full) of
the total number of shares of Common Stock to be outstanding after this
offering, and will increase the number of shares to be purchased by new
investors to 1,680,000 or 24.7% (or 1,932,000 or 28.1% if the
over-allotment option is exercised in full) of the total shares of Common
Stock to be outstanding. See "Principal and Selling Stockholders."
The above tables and calculations include on a pro forma basis as of June
29, 1996 the sale by the Company of 876,016 shares of Series E Preferred Stock,
the acquisition of Alfalfa's in July 1996, the conversion of all outstanding
shares of preferred stock into Common Stock and assumes no exercise of
outstanding options or warrants. As of August 1, 1996, there were 659,979 shares
of Common Stock issuable upon exercise of options outstanding under the
Company's stock option plans (of which 167,701 shares were vested as of such
date), 171,207 shares reserved for issuance pursuant to the Company's stock
option plans and 6,191 shares of Common Stock reserved for issuance upon
exercise of outstanding warrants. As of August 1, 1996, the weighted average
exercise prices of the Company's stock options and warrants were $13.18 and
$16.50 per share, respectively. To the extent such options and warrants are
exercised in the future, there will be further dilution to new investors. See
"Capitalization," "Management--Stock Option Plans" and Note 7 to Consolidated
Financial Statements of Wild Oats Markets, Inc.
18
<PAGE> 21
SELECTED FINANCIAL AND OPERATING DATA OF WILD OATS MARKETS, INC.
(IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)
The statement of operations data for each of the three years in the period
ended December 30, 1995 and the balance sheet data as of December 31, 1994 and
December 30, 1995 have been derived from the audited financial statements of the
Company included elsewhere in this Prospectus that have been audited by Price
Waterhouse LLP, independent accountants. The balance sheet data as of December
31, 1991, January 2, 1993 and January 1, 1994 and the statement of operations
data for each of the two years in the period ended January 2, 1993 have been
derived from the audited financial statements of the Company not included in
this Prospectus. The selected financial data with respect to the six months
ended July 1, 1995 and June 29, 1996, are derived from unaudited financial
statements included elsewhere in this Prospectus. The unaudited financial
statements include all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair presentation of the
financial position and results of operations for those periods. Operating
results for the six months ended June 29, 1996 are not necessarily indicative of
the results that may be expected for the full year or for any future period. The
selected operating data for all periods presented below have been derived from
internal records of the Company's operations. The data set forth below should be
read in conjunction with the Consolidated Financial Statements of Wild Oats
Markets, Inc., including notes thereto, and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
FISCAL YEAR -------------------
------------------------------------------------------- JULY 1, JUNE 29,
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Sales............................................ $25,222 $36,638 $47,266 $65,219 $98,517 $42,785 $68,929
Cost of goods sold and occupancy costs........... 17,450 25,056 32,344 44,637 67,164 28,798 46,956
------- ------- ------- ------- ------- ------- -------
Gross profit..................................... 7,772 11,582 14,922 20,582 31,353 13,987 21,973
Direct store expenses............................ 5,725 8,723 11,007 15,685 25,072 9,927 16,836
------- ------- ------- ------- ------- ------- -------
Store contribution............................... 2,047 2,859 3,915 4,897 6,281 4,060 5,137
Selling, general and administrative expenses..... 833 1,049 1,824 2,317 4,465 1,984 2,871
Pre-opening expenses............................. 130 650 416 1,037 218 786
------- ------- ------- ------- ------- ------- -------
Income from operations........................... 1,084 1,160 1,675 2,580 779 1,858 1,480
Interest expense, net............................ 135 151 350 373 363 87 584
------- ------- ------- ------- ------- ------- -------
Income before income taxes....................... 949 1,009 1,325 2,207 416 1,771 896
Income tax expense(1)............................ 369 393 521 880 40 703 395
------- ------- ------- ------- ------- ------- -------
Net income(1).................................... $ 580 $ 616 $ 804 $ 1,327 $ 376 $ 1,068 $ 501
======= ======= ======= ======= ======= ======= =======
Unaudited net income per common share(2)(3)...... $ 0.10 $ 0.13
======= =======
Unaudited weighted average number of common
shares outstanding(2).......................... 3,864 3,886
======= =======
SELECTED OPERATING DATA(4):
Number of stores at end of period................ 6 9 11 14 21 17 27
Average square feet per store at end of period... 8,039 11,802 11,196 11,780 13,653 11,736 13,884
Average sales per square foot(5)................. $ 500 $ 434 $ 383 $ 435 $ 464 $ 485 $ 444
Comparable store sales increase(6)............... 8% 13% 5% 13% 7% 12% 0%
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit)........................ $ 1,193 $(1,400) $ (292) $ 3,278 $ 474 $ (497)
Total assets..................................... 4,534 6,763 9,873 24,053 38,376 47,907
Long-term debt, including capitalized lease
obligations.................................... 1,405 1,446 2,494 3,078 13,302 17,592
Redeemable convertible preferred stock........... 2,164 15,018 16,956 18,009
Stockholders' equity (deficit)................... 1,369 1,301 (358) (2,645) (4,209) (4,764)
</TABLE>
- ---------------
(1) On July 3, 1993, Wild Oats changed its corporate status from an S
corporation to a C corporation. Income tax expense and net income for 1991,
1992 and 1993 are shown pro forma to reflect income taxes for Wild Oats as
if it had been a C corporation for all periods presented.
(2) Unaudited net income per common share was computed, on a pro forma basis,
assuming conversion of all outstanding shares of preferred stock into Common
Stock, which will occur upon the completion of this offering. See Note 1 of
Notes to Consolidated Financial Statements of Wild Oats Markets, Inc.
(3) On a pro forma combined basis assuming the acquisition of Alfalfa's and New
Frontiers and the conversion of all outstanding shares of preferred stock,
pro forma combined net income per common share would have been $0.05 and
$0.30 for the respective periods. If, at the beginning of the year ended
December 30, 1995 and the six month period ended June 29, 1996, the Company
had sold a sufficient number of shares at $25.00 per share to repay the
indebtedness, and used the net proceeds therefor, supplemental pro forma
combined net income per common share would have been $0.10 and $0.33 for the
respective periods. See "Pro Forma Combined Condensed Financial Statements
(Unaudited)".
(4) Selected Operating Data for 1991, 1992 and 1993 excludes Lolita's Market, a
single store which the Company sold in 1993.
(5) Average sales per square foot is calculated by dividing total sales by the
weighted average gross square footage of stores open during the period. See
"Business--Properties."
(6) Sales of a store are deemed to be comparable commencing in the thirteenth
full month after the store was opened or acquired.
19
<PAGE> 22
SELECTED FINANCIAL AND OPERATING DATA OF ALFALFA'S, INC.
(IN THOUSANDS, EXCEPT OPERATING AND PER SHARE DATA)
The statement of operations data for each of the three years in the period
ended June 30, 1996 and the balance sheet data as of June 26, 1994, June 25,
1995 and June 30, 1996 have been derived from the audited financial statements
of Alfalfa's included elsewhere in this Prospectus that have been audited by
Deloitte & Touche LLP, independent auditors, with respect to the years ended
1994 and 1995; and Price Waterhouse LLP, independent accountants, with respect
to the year ended June 30, 1996. The selected balance sheet data as of June 26,
1994 has been derived from the audited financial statements of Alfalfa's not
included in this Prospectus. The selected operating data for all periods
presented below have been derived from internal records of Alfalfa's operations.
The data set forth below should be read in conjunction with the Consolidated
Financial Statements of Alfalfa's, Inc., including notes thereto, included
elsewhere in this Prospectus and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
1994 1995 1996(1)
------- ------- -------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.............................................................................. $45,880 $64,852 $85,623
Cost of goods sold and occupancy costs............................................. 30,491 43,379 58,492
------- ------- -------
Gross profit....................................................................... 15,389 21,473 27,131
Direct store expenses.............................................................. 11,437 16,165 22,158
------- ------- -------
Store contribution................................................................. 3,952 5,308 4,973
Selling, general and administrative expenses....................................... 1,754 3,266 4,362
Pre-opening expenses............................................................... 460 325 662
------- ------- -------
Income (loss) from operations...................................................... 1,738 1,717 (51)
Other income (expense)............................................................. (164) (173) (20)
------- ------- -------
Income (loss) before income taxes.................................................. 1,574 1,544 (71)
Income tax expense................................................................. 595 611 22
------- ------- -------
Net income (loss).................................................................. $ 979 $ 933 $ (93)
======= ======= =======
SELECTED OPERATING DATA:
Number of stores at end of period.................................................. 6 9 11
Average square feet per store at end of period..................................... 17,783 17,000 16,418
Average sales per square foot(2)................................................... $ 444 $ 486 $ 484
Comparable store sales increase(3)................................................. 8% 7% 3%
BALANCE SHEET DATA (AT PERIOD END):
Working capital (deficit).......................................................... $ (611) $ (68) $ (50)
Total assets....................................................................... 9,992 22,791 23,074
Long-term debt, including capitalized lease obligations............................ 1,650 626 130
Redeemable convertible preferred stock............................................. 8,216 9,011
Stockholders' equity............................................................... 3,246 6,363 5,503
</TABLE>
- ---------------
(1) Alfalfa's fiscal 1996 was a 53-week year.
(2) Average sales per square foot is calculated by dividing total sales by the
weighted average gross square footage of stores open during the period. See
"Business--Properties."
(3) Sales of a store are deemed to be comparable commencing in the thirteenth
full month after the store was opened or acquired.
20
<PAGE> 23
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
In June 1996, the Company acquired the assets of three natural foods stores
located in Salt Lake City, Utah operating as New Frontiers in a cash-for-assets
transaction. In July 1996, Wild Oats acquired all of the outstanding stock of
Alfalfa's, a natural foods supermarket chain headquartered in Boulder, Colorado.
In that transaction, Alfalfa's issued approximately 4,235,000 (post-split)
shares of its capital stock in exchange for shares of the Company's capital
stock; however, because the former Wild Oats stockholders controlled a majority
of the voting stock of the combined company following the acquisition, the
transaction was accounted for as a reverse acquisition with the Company as the
acquiror. Immediately after the closing of the acquisition, the Company
repurchased shares of its capital stock from former Alfalfa's stockholders who
had approved the acquisition contingent upon such repurchase. See "Recent
Acquisitions and New Store Openings."
The transactions referred to in the first paragraph were accounted for
using the purchase method of accounting. The pro forma combined condensed
balance sheet as of June 29, 1996 which follows gives effect to: (i) the
issuance of convertible redeemable Series E Preferred Stock (the proceeds of
which were used in the share redemption as described above); (ii) the purchase
accounting and estimated fair market value allocation of the net assets acquired
in the acquisition of Alfalfa's; and (iii) the conversion of all redeemable
convertible preferred stock into Common Stock to take place upon the
effectiveness of this offering, as if such events had occurred on that date. The
pro forma combined condensed statements of operation for the fiscal year 1995
and the six months ended June 29, 1996 which follow give effect to the impact of
the acquisitions of Alfalfa's and New Frontiers as if the transactions had
occurred at the beginning of those periods. The pro forma financial statements
do not give effect to other acquisitions which both individually and in the
aggregate were immaterial.
In the opinion of the Company all adjustments necessary to present fairly
such pro forma combined financial statements have been made. These unaudited pro
forma financial statements are not necessarily indicative of what actual results
would have been had the transactions occurred at the beginning of the respective
periods nor do they purport to indicate the results of future operations of the
Company. These unaudited pro forma financial statements should be read in
conjunction with the accompanying notes and the historical financial statements
and notes thereto of Wild Oats Markets, Inc., Alfalfa's, Inc., and New
Frontiers, respectively, included elsewhere in this Prospectus. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
21
<PAGE> 24
PRO FORMA COMBINED CONDENSED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL JUNE 29, 1996
--------------------------- ---------------------------
WILD OATS ALFALFA'S PRO FORMA PRO FORMA
JUNE 29, 1996 JUNE 30, 1996 ADJUSTMENTS COMBINED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......... $ 1,630 $ 3,591 $ 16,480 (a) $ 5,471
(16,230)(a)
Inventories....................... 9,849 3,273 (270)(e) 12,852
Accounts receivable net, prepaid
expenses and other current
assets.......................... 2,825 641 3,466
Deferred income taxes............. 490 419 909
------- ------- -------- -------
Total current assets......... 14,794 7,924 (20) 22,698
Property and equipment, net....... 23,329 11,845 (350)(b) 30,837
(3,987)(e)
Intangible assets, net............ 9,507 2,902 27,799 (b) 35,815
(2,902)(b)
(1,491)(e)
Deposits and other................ 277 403 2,311 (e) 2,991
------- ------- -------- -------
Total assets................. $47,907 $23,074 $ 21,360 $92,341
======= ======= ======== =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Accounts payable and accrued
liabilities..................... $13,520 $ 7,714 $ 954 (a) $23,710
1,522 (e)
Current portion of long-term
obligations..................... 1,771 260 2,031
------- ------- -------- -------
Total current liabilities.... 15,291 7,974 2,476 25,741
Long-term obligations............. 17,592 130 17,722
Deferred income taxes and other... 1,779 456 2,235
------- ------- -------- -------
Total liabilities............ 34,662 8,560 2,476 45,698
Redeemable convertible preferred
stock........................... 18,009 9,011 7,682 (a)
16,480 (a)
(9,011)(c)
(42,171)(d)
Stockholders' equity(1):
Common stock.................... 3 7 (7)(c) 5
2 (d)
Additional paid-in capital........ 2,881 3,118 (3,118)(c) 53,881
14,195 (a)
42,169 (d)
(5,364)(f)
Retained earnings (deficit)....... (2,284) 2,339 (2,339)(c) (7,243)
(4,959)(e)
Treasury stock.................... (5,364) 5,364 (f)
Foreign currency transition
adjustment...................... 39 (39)(c)
------- ------- -------- -------
Total stockholders' equity
(deficit).................. (4,764) 5,503 45,904 46,643
------- ------- -------- -------
Total liabilities and
stockholders' equity....... $47,907 $23,074 $ 21,360 $92,341
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of the pro forma combined condensed
balance sheet (unaudited).
22
<PAGE> 25
NOTES TO PRO FORMA COMBINED CONDENSED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS)
JUNE 29, 1996
(a) The total estimated purchase price was comprised of the following:
<TABLE>
<S> <C>
Acquisition of Alfalfa's common stock and options.............................. $25,925
Acquisition of Alfalfa's redeemable convertible Series A Preferred Stock....... 12,182
Costs associated with the acquisition (financing, legal, accounting and
related costs)............................................................... 954
-------
Total acquisition cost............................................... $39,061
=======
</TABLE>
The total acquisition cost was funded as follows:
<TABLE>
<S> <C>
Cash........................................................................... $16,230
Issuance of Wild Oats common stock and options................................. 14,195
Issuance of Wild Oats redeemable convertible Series D Preferred Stock.......... 7,682
Accrued expenses related to acquisition........................................ 954
-------
Total sources of funding............................................. $39,061
=======
</TABLE>
Cash was obtained through the issuance of Wild Oats redeemable convertible
Series E Preferred Stock to third parties resulting in net proceeds of
$16,480, of which $16,230 was used to redeem shares held by former
Alfalfa's shareholders.
(b) The estimated purchase price has been allocated to the assets acquired and
liabilities assumed, based on the estimate of the fair values of the assets
and liabilities, as follows:
<TABLE>
<CAPTION>
HISTORICAL ESTIMATE OF THE
COST BASIS ADJUSTMENTS FAIR VALUE
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash and cash equivalents..................... $ 3,591 $ 3,591
Inventories................................... 3,273 3,273
Accounts receivable, prepaid expenses and
other current assets........................ 641 641
Deferred income taxes......................... 419 419
Property and equipment, net................... 11,845 $ (350) 11,495
Intangible assets, net........................ 2,902 27,799 27,799
(2,902)
Deposits and other............................ 403 403
Accounts payable and accrued liabilities...... (7,714) (7,714)
Current portion of long-term obligations...... (260) (260)
Long-term obligations......................... (130) (130)
Deferred income taxes and other............... (456) (456)
------- ------- -------
Total............................... $14,514 $24,547 $39,061
======= ======= =======
</TABLE>
(c) Adjustment to eliminate the historical redeemable convertible preferred
stock and stockholders' equity of Alfalfa's.
(d) Adjustment to reflect the conversion of all redeemable convertible preferred
stock into Common Stock upon effectiveness of this offering.
(e) Adjustment to reflect a non-recurring charge of $7.3 million net of
estimated tax effects. Such charge has not been included in the Pro Forma
Combined Condensed Statement of Operations (Unaudited). See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Non-Recurring Charge."
(f) Adjustment to reflect the retirement of Wild Oats treasury stock.
23
<PAGE> 26
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------
WILD OATS ALFALFA'S NEW FRONTIERS FISCAL YEAR ENDED 1995
YEAR ENDED YEAR ENDED YEAR ENDED ---------------------------------
DECEMBER 30, DECEMBER 31, DECEMBER 31, PRO FORMA PRO FORMA
1995 1995 1995 ADJUSTMENTS COMBINED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Sales................................ $98,517 $73,770 $10,145 $182,432
Costs of goods sold and occupancy
costs.............................. 67,164 50,190 6,431 $ (70)(a) 123,715
------- ------- ------- ------- --------
Gross profit......................... 31,353 23,580 3,714 70 58,717
Direct store expenses................ 25,072 19,135 2,787 46,994
------- ------- ------- ------- --------
Store contribution................... 6,281 4,445 927 70 11,723
Selling, general and administrative
expenses........................... 4,465 3,790 215 622 (b) 8,770
53 (b)
(375)(c)
Pre-opening expenses................. 1,037 987 2,024
------- ------- ------- ------- --------
Income (loss) from operations........ 779 (332) 712 (230) 929
Interest expense, net................ 363 85 17 465
------- ------- ------- ------- --------
Income (loss) before income taxes.... 416 (417) 695 (230) 464
Income tax expense (benefit)......... 40 (224) 261 175 (d) 252
------- ------- ------- ------- --------
Net income (loss).................... $ 376 $ (193) $ 434 $(405) $ 212
======= ======= ======= ======= ========
Unaudited pro forma net income per
share.............................. $0.10 $ 0.05
======= ========
Unaudited pro forma weighted average
number of common shares
outstanding........................ 3,864 4,267
======= ========
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------
WILD OATS ALFALFA'S NEW FRONTIERS SIX MONTHS ENDED JUNE 29, 1996
SIX MONTHS SIX MONTHS FIVE MONTHS ---------------------------------
ENDED JUNE 29, ENDED JUNE 30, ENDED MAY 31, PRO FORMA PRO FORMA
1996 1996 1996 ADJUSTMENTS COMBINED
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Sales................................ $68,929 $45,091 $ 4,735 $118,755
Costs of goods sold and occupancy
costs.............................. 46,956 30,390 2,986 $ (35)(a) 80,297
------- ------- ------- ------- --------
Gross profit......................... 21,973 14,701 1,749 35 38,458
Direct store expenses................ 16,836 11,305 1,114 29,255
------- ------- ------- ------- --------
Store contribution................... 5,137 3,396 635 35 9,203
Selling, general and administrative
expenses........................... 2,871 2,225 104 311 (b) 5,349
26 (b)
(188)(c)
Pre-opening expenses................. 786 786
------- ------- ------- ------- --------
Income from operations............... 1,480 1,171 531 (114) 3,068
Interest expense, net................ 584 5 3 592
------- ------- ------- ------- --------
Income before income taxes........... 896 1,166 528 (114) 2,476
Income tax expense................... 395 486 198 90 (d) 1,169
------- ------- ------- ------- --------
Net income........................... $ 501 $ 680 $ 330 $(204) $ 1,307
======= ======= ======= ======= ========
Unaudited pro forma net income per
share.............................. $ 0.13 $ 0.30
======= ========
Unaudited pro forma weighted average
number of common shares
outstanding........................ 3,886 4,290
======= ========
</TABLE>
The accompanying notes are an integral part of the pro forma combined condensed
statement
of operations (unaudited)
24
<PAGE> 27
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
(IN THOUSANDS)
(a) Elimination of depreciation related to assets written off in Alfalfa's
acquisition of $350, depreciated over a five year life on a straight-line
basis.
(b) Amortization of the incremental excess of the acquisition cost over the
related net book value of assets acquired, over 40 years on a straight-line
basis, for the following acquisitions:
<TABLE>
<CAPTION>
AMORTIZATION
-----------------------------
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 29,
EXCESS 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Alfalfa's ($27,799 less $2,902)....... $24,897 $622 $311
New Frontiers......................... 2,100 53 26
</TABLE>
(c) Elimination of salaries and benefits of Alfalfa's employees terminated as a
direct result of the acquisition ($305) and discontinuance of ESOP
contributions and related costs ($70).
(d) Tax effect of pro forma adjustments.
25
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
Wild Oats acquired its first natural foods store in Boulder, Colorado in
1987 and opened the first Wild Oats Market in Boulder in 1988. In recent years,
the Company has pursued an aggressive growth strategy and it currently operates
38 stores. Since inception, the Company has opened 17 stores and acquired 23
stores (including 11 Alfalfa's stores). The Company has closed the Alfalfa's
Seattle, Washington store and the Wild Oats Lawrence, Kansas store.
Store Openings and Acquisitions. 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 in a given period. The
Company incurs significant pre-opening costs with each store opening (as
described below). In addition, new stores typically experience operating losses
during the first six to 12 months of operation. 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. Therefore, the opening of a significant number
of stores in any period will have an adverse effect on the Company's results of
operations for that period. The Company opened five stores in 1995 (all in the
last seven months of the year) and three stores in the first half of 1996. This
represents the greatest concentration of store openings in any 13 month period
in the Company's history. While store openings contributed to an increase in the
Company's overall sales during these periods, net income decreased, largely as a
result of pre-opening costs (which aggregated approximately $1.0 million in 1995
and $786,000 in the first half of 1996), and initial operating losses at these
new stores.
Upon the acquisition of a natural foods store, the Company immediately
benefits from an existing sales base and, in most cases, profitable store-level
operations. The Company seeks to improve the profitability of acquired single
stores or small chains by integrating them into its volume purchase discount
programs and by implementing certain financial controls and marketing
strategies. To date, all of the Company's acquisitions have been accounted for
by the purchase method, resulting in the recording of goodwill which is
amortized on a straight-line basis over a period of 40 years.
In the second half of 1996, the Company has opened two stores and intends
to open one additional store. The Company anticipates opening or acquiring seven
stores in 1997. The Company believes that most of its future store growth will
be through store openings; however, it will continue to pursue acquisitions of
natural foods retailers where attractive opportunities exist. There can be no
assurance that the Company will achieve its planned expansion in existing
markets or entrance into new markets. See "Risk Factors--Uncertain Ability to
Execute Growth Strategy" and "--New Mexico Anti-Trust Proceedings."
Store Format and Clustering Strategy. The Company operates two store
formats: supermarket and urban. The supermarket format is generally 15,000 to
35,000 square feet, and typically generates higher sales and store contribution
than the 5,000 to 15,000 square foot urban format stores. The Company's results
of operations have been and will continue to be affected by the mix of
supermarket and urban format stores opened or acquired and whether stores are
being opened in markets where the Company has an existing presence. The Company
expects to focus primarily on opening or acquiring supermarket format stores in
the future but will consider additional urban stores when appropriate
opportunities exist. The Company pursues a strategy of clustering its stores
within each of its markets in order to more fully penetrate these markets,
achieve regional operating and marketing efficiencies and enhance name
recognition. The Company believes this strategy has resulted in increased
overall sales in each of its markets. In the past when the Company has opened a
store in a market where it had an existing presence, it has experienced a
decline in sales and operating results at its existing Wild Oats and Alfalfa's
stores in these markets. However, over time, the Company believes the affected
stores will generally achieve store-level contribution margins comparable to
their prior levels on a lower base of sales. The Company intends to continue to
pursue its store clustering strategy and expects these trends to continue. See
"Risk Factors--Uncertain Ability to Execute Growth Strategy."
26
<PAGE> 29
Comparable Store Sales Results. Sales of a store are deemed to be
comparable commencing in the thirteenth full month after the store was opened or
acquired. The Company believes its comparable store sales increases through 1995
resulted from growth in the natural foods industry and improved execution of the
Company's operating strategy and were affected by the small size of the
Company's comparable store base and the timing of additions to the comparable
store base. Comparable store sales results in the last half of 1995 and the
first half of 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 described above and a competitive store opening by Alfalfa's in Santa
Fe, New Mexico. While the Company continually seeks to increase sales at
existing stores, it may not achieve comparable store sales increases at the same
rates as it had prior to 1996. Furthermore, the Company experienced a comparable
store sales decrease in the first quarter of 1996 and there can be no assurance
comparable store sales will not decrease in the future. See "Risk
Factors--Fluctuations in Financial Results; Non-Recurring Charge."
Pre-Opening Expenses. Pre-opening expenses include labor, rent, utility,
supplies and certain other costs incurred prior to a store's opening. The costs
are accrued during the pre-opening period and are expensed in full when the
store opens. Pre-opening expenses have averaged approximately $250,000 per store
over the past 18 months, 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.
ACQUISITION OF ALFALFA'S
The Company completed the acquisition of Alfalfa's 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. In 1995,
Wild Oats opened two stores in Denver, Colorado and Alfalfa's opened one store
in Santa Fe, New Mexico. The opening of these additional stores resulted in a
decline in sales and operating results at the existing Wild Oats and Alfalfa's
stores in those markets. However, overall sales increased significantly in these
markets and, over time, the Company believes the affected stores will generally
achieve store-level contribution margins comparable to prior levels on the lower
base of sales. As a result, the Company believes these markets are large enough
to support these stores and further believes that planned cannibalization
resulting from the implementation of the Company's store clustering strategy
will contribute to the Company's overall growth.
The Company believes that the successful integration of Alfalfa's will
result in future operating efficiencies created by: (i) warehousing,
distribution and administrative economies of scale; (ii) improved merchandise
buying terms as a result of the Company's larger size; and (iii) the
implementation of coordinated merchandising and marketing strategies. Alfalfa's
achieved increases in operating income for the four consecutive years prior to
fiscal 1996 when it experienced an operating loss largely as a result of pre-
opening expenses and initial operating losses at its newly-opened stores.
Subsequent to the acquisition, the Company closed the Alfalfa's Seattle,
Washington store.
In connection with the acquisition, the Company recorded goodwill 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 Alfalfa's
successfully and to enhance the profitability of the acquired business. There
can be no assurance that the Company will be successful in this regard. See
"Risk Factors--Potential Difficulties of Integrating Alfalfa's Operations," "Pro
Forma Combined Condensed Financial Statements (Unaudited)" and Note 2 of Notes
to the Consolidated Financial Statements of Wild Oats Markets, Inc.
NON-RECURRING CHARGE
During late August 1996, the Company performed a thorough analysis of its
operations subsequent to the acquisition of Alfalfa's and made the following
decisions relating to its operations which resulted in an approximate $7.3
million non-recurring charge being recorded in the third quarter of 1996, of
which $5.7 million were non-cash write-downs. Specifically, as a direct result
of the July 1996 acquisition of
27
<PAGE> 30
Alfalfa's, the Company incured the charge by: (i) closing the Wild Oats
Lawrence, Kansas store resulting in $849,000 in lease cancellation costs and
asset write-offs, as well as closing a regional bakery and kitchen resulting in
$203,600 in asset write-offs and lease adjustment costs; (ii) moving out of its
existing corporate headquarters and relocating to Alfalfa's former corporate
headquarters resulting in $711,500 in lease cancellation costs, relocation costs
and asset write-offs; and (iii) consolidating certain information systems
resulting in $276,500 in asset write-offs. In addition, after operating the
combined companies, management closed the Alfalfa's Seattle, Washington store
resulting in $4.8 million of severance costs, lease cancellation costs and asset
write-offs and to close a restaurant in a Capers store, resulting in $425,000 in
asset write-offs, both operations which at the time of the acquisition the
Company had planned to retain. The decisions related to these activities were
made and announced in the third quarter of 1996 and will be completed as soon as
practicable. The Company does not believe that the closing of the two stores
will have a material effect on the Company's future operating results. See "Risk
Factors--Fluctuations in Financial Results; Non-Recurring Charge" and Note 11 of
Notes to Consolidated Financial Statements of Wild Oats Markets, Inc.
OTHER
Effective July 3, 1993, Wild Oats revoked its S corporation election for
income tax reporting purposes and became taxable as a C corporation.
Accordingly, the presentation of net income and net income per share for 1993
reflects a provision for income taxes on a pro forma basis as if Wild Oats had
been liable for federal and state income taxes throughout the periods presented.
RESULTS OF OPERATIONS OF WILD OATS
The following table sets forth for the periods indicated, certain selected
income statement data expressed as a percentage of sales:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
---------------
FISCAL YEAR JULY
------------------------- 1, JUNE 29,
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold and occupancy costs......... 68.4 68.4 68.2 67.3 68.1
----- ----- ----- ----- -----
Gross profit................................... 31.6 31.6 31.8 32.7 31.9
Direct store expenses.......................... 23.3 24.0 25.4 23.2 24.4
----- ----- ----- ----- -----
Store contribution............................. 8.3 7.6 6.4 9.5 7.5
Selling, general and administrative expenses... 3.9 3.5 4.4 4.6 4.2
Pre-opening expenses........................... 0.9 1.1 0.5 1.1
----- ----- ----- ----- -----
Income from operations......................... 3.5 4.1 0.9 4.4 2.2
Interest expense, net.......................... 0.7 0.6 0.4 0.2 0.8
----- ----- ----- ----- -----
Income before income taxes..................... 2.8 3.5 0.5 4.2 1.4
Income tax expense............................. 1.1 1.4 1.6 0.6
----- ----- ----- ----- -----
Net income..................................... 1.7% 2.1% 0.5% 2.6% 0.8%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 29, 1996 COMPARED TO SIX MONTHS ENDED JULY 1, 1995
Sales in the first half of fiscal 1996 increased 61.0% to $68.9 million
from $42.8 million in the first half of fiscal 1995. This increase was primarily
due to the opening of three stores in the first half of fiscal 1996, one store
late in the first half of fiscal 1995, and four stores in the second half of
fiscal 1995. Comparable store sales were flat in the first half of fiscal 1996
compared to the first half of fiscal 1995, reflecting the impact of the planned
cannibalization of existing stores sales in Albuquerque, New Mexico and Denver,
Colorado and Kansas City, Missouri resulting from the Company's opening of
stores in those markets, as well as the effects of a store opening in Santa Fe,
New Mexico by Alfalfa's. In the second quarter of fiscal 1996 comparable store
sales at certain of the Company's stores in Colorado were positively affected as
a result of a strike by employees at the two largest conventional supermarket
chains in the region.
28
<PAGE> 31
Gross profit consists primarily of sales less cost of goods sold and
occupancy costs. Gross profit in the first half of fiscal 1996 increased 57.1%
to $22.0 million from $14.0 million in the first half of fiscal 1995. As a
percentage of sales, gross profit declined to 31.9% in the first half of fiscal
1996 from 32.7% in the first half of fiscal 1995. Merchandise gross profit
(sales minus cost of sales) increased slightly, which was more than offset by
higher occupancy costs as a percentage of sales at the Company's new stores.
Direct store expenses in the first half of fiscal 1996 increased 69.7% to
$16.8 million from $9.9 million in the first half of fiscal 1995, primarily due
to the increased number of stores. As a percentage of sales, direct store
expenses increased to 24.4% in the first half of fiscal 1996 from 23.2% in the
first half of fiscal 1995 primarily due to higher expenses as a percentage of
sales at the new stores.
Selling, general and administrative expenses increased to $2.9 million in
the first half of fiscal 1996 from $2.0 million in the first half of fiscal
1995. As a percentage of sales, general and administrative expenses decreased
slightly to 4.2% in the first half of fiscal 1996 from 4.6% in the first half of
fiscal 1995 due to increased leverage of the general and administrative expense
on a larger sales base.
Wild Oats incurred $786,000 in pre-opening expenses in the first half of
fiscal 1996 related to the opening of three stores, compared to $218,000 in the
first half of fiscal 1995 related to the opening of one store.
Net interest expense in the first half of fiscal 1996 increased to $584,000
from $87,000 in the first half of fiscal 1995 as a result of higher levels of
indebtedness incurred to fund store openings.
FISCAL 1995 COMPARED TO FISCAL 1994
Sales in fiscal 1995 increased 51.1% to $98.5 million from $65.2 million in
fiscal 1994. This increase was primarily due to the opening of five stores and
the acquisition of two additional stores in fiscal 1995, and reporting a full
year of operations for two stores which had been open for only part of fiscal
1994. Comparable store sales increased 7% in fiscal 1995 and accounted for $5.3
million of the increase in sales. Wild Oats believes comparable store sales
results were negatively affected in the second half of fiscal 1995 by a
competitive entrant into the Santa Fe, New Mexico market, as well as planned
cannibalization of existing store sales in Albuquerque, New Mexico and Denver,
Colorado and Kansas City, Missouri.
Gross profit in fiscal 1995 increased 51.9% to $31.3 million from $20.6
million in fiscal 1994. As a percentage of sales, gross profit increased
slightly to 31.8% in fiscal 1995 from 31.6% in fiscal 1994. Both merchandise
gross profit and occupancy costs remained relatively flat as a percentage of
sales in fiscal 1995, reflecting operating efficiencies at mature stores which
were offset by lower merchandise margins and higher occupancy costs as a
percentage of sales at the five stores opened in fiscal 1995 and the Company's
Santa Fe, New Mexico stores.
Direct store expenses in fiscal 1995 increased 59.9% to $25.1 million from
$15.7 million in fiscal 1994. This increase was primarily due to expenses of
five stores opened and two stores acquired in fiscal 1995 and reporting of a
full year of operations for two stores which had been open for only part of
fiscal 1994. As a percentage of sales, direct store expenses increased to 25.4%
in fiscal 1995 from 24.0% in fiscal 1994, primarily due to higher expenses as a
percentage of sales at the five stores opened in fiscal 1995.
Selling, general and administrative expenses increased to $4.5 million in
fiscal 1995 from $2.3 million in fiscal 1994. As a percentage of sales, selling,
general and administrative expenses increased to 4.4% in fiscal 1995 from 3.5%
in fiscal 1994 due to the addition of central and regional support staff to
support store growth and expansion into new geographic markets.
Wild Oats incurred $1.0 million in pre-opening expenses in fiscal 1995
related to the five stores that opened throughout the year. No pre-opening
expenses were incurred in fiscal 1994 as pre-opening expenses for the one store
opened in January 1994 were expensed in December 1993 since the store was ready
to open at that time.
Net interest expense in fiscal 1995 decreased to $363,000 from $373,000 in
fiscal 1994 as a result of lower average levels of indebtedness.
29
<PAGE> 32
FISCAL 1994 COMPARED TO FISCAL 1993
Sales in fiscal 1994 increased 37.8% to $65.2 million from $47.3 million in
fiscal 1993. This increase was primarily due to the opening of one store and the
acquisition of two stores in fiscal 1994, and reporting a full year of
operations for two stores which had been open for only part of fiscal 1993.
Comparable store sales increased 13% in fiscal 1994 and accounted for $5.6
million of the increase in sales. Wild Oats attributes the increase in
comparable store sales to the relatively high comparable sales experienced by
two new stores operating in their second full year in fiscal 1994 and to a
continued increase in consumer interest in natural foods.
Gross profit in fiscal 1994 increased 38.3% to $20.6 million from $14.9
million in fiscal 1993. As a percentage of sales, gross profit remained flat at
31.6% in fiscal 1994 and fiscal 1993. Merchandise gross profit increased in
fiscal 1994 due to increased purchase discounts, which were offset by higher
occupancy costs as a percentage of sales resulting primarily from the opening of
one store in January 1994.
Direct store expenses in fiscal 1994 increased 42.7% to $15.7 million from
$11.0 million in fiscal 1993. This increase was attributable primarily to
expenses of one store opened and two stores acquired in fiscal 1994 and
reporting of a full year of operations for two stores which had been open for
only part of fiscal 1993. As a percentage of sales, direct store expenses
increased to 24.0% in fiscal 1994 from 23.3% in fiscal 1993 primarily due to
higher expenses as a percentage of sales for the store opened in January 1994.
Selling, general and administrative expenses increased to $2.3 million in
fiscal 1994 from $1.8 million in fiscal 1993. As a percentage of sales, selling,
general and administrative expenses decreased to 3.5% in fiscal 1994 from 3.9%
in fiscal 1993 due to increased leverage of general and administrative expenses
on a larger sales base.
There were no pre-opening expenses in fiscal 1994 because pre-opening
expenses for the store opened in January 1994 were expensed in December 1993
when construction of that store was completed and the store was ready to open.
Wild Oats incurred $416,000 in pre-opening expenses in fiscal 1993 related to
stores opened in January 1993 and January 1994.
Net interest expense in fiscal 1994 increased to $373,000 from $350,000 in
fiscal 1993 as a result of higher average levels of indebtedness.
RESULTS OF OPERATIONS OF ALFALFA'S
The following table sets forth for the periods indicated certain selected
income statement data expressed as a percentage of sales:
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Sales............................................................. 100.0% 100.0% 100.0%
Cost of goods sold and occupancy costs............................ 66.5 66.9 68.3
----- ----- -----
Gross profit...................................................... 33.5 33.1 31.7
Direct store expenses............................................. 24.9 24.9 25.9
----- ----- -----
Store contribution................................................ 8.6 8.2 5.8
Selling, general and administrative expenses...................... 3.8 5.0 5.1
Pre-opening expenses.............................................. 1.0 0.5 0.8
----- ----- -----
Income (loss) from operations..................................... 3.8 2.7 (0.1)
Other income (expense), net....................................... (0.4) (0.3)
----- ----- -----
Income (loss) before income taxes................................. 3.4 2.4 (0.1)
Income tax expenses............................................... 1.3 0.9
----- ----- -----
Net income (loss)................................................. 2.1% 1.5% (0.1)%
===== ===== =====
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
Sales in fiscal 1996 increased 31.9% to $85.6 million from $64.9 million in
fiscal 1995. The increase was attributable primarily to the opening of two
stores early in fiscal 1996, and a full year of operation for a store opened
late in fiscal 1995. Comparable store sales increased 3% in fiscal 1996 and
accounted for $2.4 million
30
<PAGE> 33
of the increase in sales. Comparable store sales were negatively impacted by the
opening of two Wild Oats stores in Denver, Colorado. In the last quarter of
fiscal 1996 comparable store sales at certain of the Alfalfa's stores in
Colorado were positively affected as a result of a strike by employees at the
two largest conventional supermarket chains in the region. In addition, fiscal
1996 was a 53-week year.
Gross profit in fiscal 1996 increased 26.0% to $27.1 million from $21.5
million in fiscal 1995. As a percentage of sales, gross profit decreased to
31.7% in fiscal 1996 from 33.1% in fiscal 1995, reflecting the effect of the
opening of stores by Wild Oats in certain of Alfalfa's existing markets and
lower merchandise margins and higher occupancy costs as a percentage of sales at
the new stores opened in fiscal 1996.
Direct store expenses in fiscal 1996 increased 37.0% to $22.2 million from
$16.2 million in fiscal 1995, primarily due to the opening of three stores. As a
percentage of sales, direct store expenses increased to 25.9% in fiscal 1996
from 24.9% in fiscal 1995. This increase is attributed to higher expenses as a
percentage of sales at the three new stores.
Selling, general and administrative expenses increased to $4.4 million in
fiscal 1996 from $3.3 million in fiscal 1995. As a percentage of sales, selling,
general and administrative expenses remained relatively flat at 5.1% in fiscal
1996 as compared to 5.0% in fiscal 1995.
Alfalfa's incurred $662,000 in pre-opening expenses in fiscal 1996
attributable to the opening of two stores, compared to $325,000 in pre-opening
expenses for one store in fiscal 1995.
Other income (expense) in fiscal 1996 decreased to $20,000 from $173,000 in
fiscal 1995 primarily due to the reduced interest expense on lower average
levels of indebtedness.
FISCAL 1995 COMPARED TO FISCAL 1994
Sales in fiscal 1995 increased 41.4% to $64.9 million from $45.9 million in
fiscal 1994. The increase was attributable primarily to the acquisition of two
stores in fiscal 1995, and reporting a full year of operations for one store
which had been open for only part of fiscal 1994. Alfalfa's Seattle, Washington
store, which was opened near the end of fiscal 1995, did not materially affect
sales in fiscal 1995. Comparable store sales increased 7% in fiscal 1995 and
accounted for $3.3 million of the increase in sales.
Gross profit in fiscal 1995 increased 39.6% to $21.5 million from $15.4
million in fiscal 1994. As a percentage of sales, gross profit decreased
slightly to 33.1% in fiscal 1995 from 33.5% in fiscal 1994. Gross margins were
somewhat negatively impacted by the opening of a store by Wild Oats in Denver,
Colorado.
Direct store expenses in fiscal 1995 increased 42.1% to $16.2 million from
$11.4 million in fiscal 1994, due to the acquisition of two stores. As a
percentage of sales, direct store expenses remained constant at 24.9% in fiscal
1995 and fiscal 1994.
Selling, general and administrative expenses increased to $3.3 million in
fiscal 1995 from $1.8 million in fiscal 1994. As a percentage of sales, selling,
general and administrative expenses increased to 5.0% in fiscal 1995 from 3.8%
in fiscal 1994 due to the centralization of retail support operations, the
expansion of the commissary to support the growth of new stores and the
increased overhead from the expansion into a new geographic market through the
acquisition of Capers in Vancouver, British Columbia.
Pre-opening expenses in fiscal 1995 were $325,000 and were incurred in
connection with one store opening in the last month of the fiscal year, compared
with fiscal 1994 pre-opening expenses which were $460,000 and which were
incurred in connection with one store opening and the amortization of the
remaining capitalized pre-opening expenses associated with two store openings
which occurred in fiscal 1993.
Other income (expense) increased to $173,000 in fiscal 1995 from $164,000
in fiscal 1994, primarily due to the prepayment of interest in connection with
the conversion of shareholder notes to equity in February 1995.
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
31
<PAGE> 34
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 pre-opening 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. For example, the Company's profitability
was lower in 1995 than in 1994 due in part to the opening of a significantly
larger number of stores in 1995 than in 1994. 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. 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.
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.
Comparable store sales results in the last half of 1995 and the first half of
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 and a
competitive store opening by Alfalfa's in Santa Fe, New Mexico. The Company
experienced a comparable store sales decrease in the first quarter of 1996 and
there can be no assurance that comparable store sales for any particular period
will not decrease in the future. See "Risk Factors--Fluctuations in Financial
Results; Non-Recurring Charge."
During late August 1996, the Company performed a thorough analysis of its
operations subsequent to the acquisition of Alfalfa's and made the following
decisions relating to its operations which resulted in an approximate $7.3
million non-recurring charge being recorded in the third quarter of 1996, of
which $5.7 million were non-cash write-downs. Specifically, as a direct result
of the July 1996 acquisition of Alfalfa's, the Company incurred the charge by:
(i) closing the Wild Oats Lawrence, Kansas store resulting in $849,000 in lease
cancellation costs and asset write-offs, as well as closing a regional bakery
and kitchen resulting in $203,600 in asset write-offs and lease adjustment
costs; (ii) moving out of its existing corporate headquarters and relocating to
Alfalfa's former corporate headquarters resulting in $711,500 in lease
cancellation costs, relocation costs and asset write-offs; and (iii)
consolidating certain information systems resulting in $276,500 in asset
write-offs. In addition, after operating the combined companies, management
closed the Alfalfa's Seattle, Washington store resulting in $4.8 million of
severance costs, lease cancellation costs and asset write-offs and to close a
restaurant in a Capers store, resulting in $425,000 in asset write-offs, both
operations which at the time of the acquisition the Company had planned to
retain. The decisions related to these activities were made and announced in the
third quarter of 1996 and will be completed as soon as practicable. The Company
does not believe that the closing of the two stores will have a material effect
on the Company's future operating results. See "Risk Factors--Fluctuations in
Financial Results; Non-Recurring Charge" and Note 11 of Notes to Consolidated
Financial Statements of Wild Oats Markets, Inc.
32
<PAGE> 35
The following table sets forth statement of operations and selected
operating data for each of Wild Oats and Alfalfa's last six fiscal quarters and
the percentage of sales represented by the line items presented. The quarterly
statement of operations data and selected operating data set forth below were
derived from unaudited financial statements of Wild Oats and Alfalfa's, which in
the opinion of management of the Company contain all adjustments (consisting
only of normal recurring adjustments) necessary for a fair presentation thereof.
WILD OATS MARKETS, INC.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------
APRIL 1, JULY 1, SEPTEMBER 30, DECEMBER 30, MARCH 30, JUNE 29,
1995 1995 1995 1995 1996 1996
------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales................................... $19,426 $23,359 $25,724 $30,008 $32,237 $36,692
Gross profit............................ 6,369 7,618 8,191 9,175 10,060 11,913
Store contribution...................... 1,989 2,071 1,120 1,101 2,283 2,854
Pre-opening expenses.................... 218 403 416 254 532
Income (loss) from operations........... 1,006 852 (380) (699) 687 793
Net income (loss)....................... 599 469 (277) (415) 246 255
SELECTED OPERATING DATA:
Number of stores at end of period....... 14 17 19 21 22 27
Comparable store sales increase
(decrease) (1)........................ 13% 12% 7% 1% (3)% 2%
AS A PERCENTAGE OF SALES:
Sales................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit............................ 32.8 32.6 31.8 30.6 31.2 32.5
Store contribution...................... 10.2 8.9 4.4 3.7 7.1 7.8
Pre-opening expenses.................... -- 0.9 1.6 1.4 0.8 1.4
Income (loss) from operations........... 5.2 3.6 (1.5) (2.3) 2.1 2.2
Net income (loss)....................... 3.1% 2.0% (1.1)% (1.4)% 0.8% 0.7%
</TABLE>
ALFALFA'S, INC.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------
APRIL 2, JUNE 25, SEPTEMBER 24, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
------------- ------------- ------------- ------------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.............................. $16,910 $16,328 $19,692 $20,840 $20,239 $24,852
Gross profit....................... 5,721 5,429 6,124 6,305 6,287 8,415
Store contribution................. 1,462 1,407 636 940 1,091 2,306
Pre-opening expenses............... 325 668 (6)
Income (loss) from operations...... 775 116 (1,103) (120) 29 1,143
Net income (loss).................. 483 97 (679) (94) 2 678
SELECTED OPERATING DATA:
Number of stores at end of
period........................... 8 9 11 11 11 11
Comparable store sales increase
(decrease)(1).................... 8% (1)% (2)% (2)% (5)% 21%(2)
AS A PERCENTAGE OF SALES:
Sales.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit....................... 33.8 33.2 31.1 30.3 31.1 33.9
Store contribution................. 8.6 8.6 3.2 4.5 5.4 9.3
Pre-opening expenses............... 2.0 3.4
Income (loss) from operations...... 4.6 0.7 (5.6) (0.6) 0.1 4.6
Net income (loss).................. 2.9% 0.6% (3.4)% (0.5)% 2.7%
</TABLE>
- ---------------
(1) Sales of a store are deemed to be comparable commencing in the thirteenth
full month after the store was opened or acquired.
(2) Reflects the effect on comparable stores sales of certain Alfalfa's stores
of a strike by employees of the two largest conventional supermarkets in
Colorado as well as the inclusion of an additional week in fiscal 1996
(which was a 53-week year compared with fiscal 1995 which was a 52-week
year).
33
<PAGE> 36
LIQUIDITY AND CAPITAL RESOURCES
Wild Oats' primary sources of capital have been cash flow from operations,
trade payables, bank indebtedness, and the sale of convertible debt and equity
securities. Primary uses of cash have been the financing of store openings and
acquisitions. The following table presents a summary of the Company's cash flows
for fiscal 1993, 1994 and 1995 and the first half of fiscal 1996:
<TABLE>
<CAPTION>
SIX
MONTHS
FISCAL YEAR ENDED
------------------------------- JUNE 29,
1993 1994 1995 1996
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net cash provided by operating activities......... $2,051 $1,529 $ 4,626 $2,302
Net cash used by investing activities............. (1,444) (4,268) (17,042) (5,844)
Net cash provided by financing activities......... 642 7,559 7,153 4,022
------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents..................................... $1,249 $4,820 $(5,263) $ 480
======= ======= ======= =======
</TABLE>
Net cash provided by operating activities was $2.1 million, $1.5 million
and $4.6 million in fiscal 1993, 1994 and 1995, respectively, and $2.3 million
in the first half of fiscal 1996. Net income increased in fiscal 1994 but cash
provided by operating activities decreased primarily as a result of a decrease
in accounts payable. Net income decreased in fiscal 1995 but net cash provided
by operating activities increased as a result of increased depreciation and
amortization as well as increased accounts payable in connection with the
initial inventory acquired for the five stores opened in fiscal 1995. The
Company typically receives extended payment terms from vendors in connection
with store openings. Cash flow from operations decreased in the first half of
fiscal 1996 as a result of a decrease in net income related to the initial
operating losses at stores opened in the last half of fiscal 1995 and the first
half of fiscal 1996. As demonstrated in fiscal 1995, 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.
Net cash used by investing activities was $1.4 million, $4.3 million and
$17.0 million in fiscal 1993, 1994 and 1995, respectively, and $5.8 million in
the first half of fiscal 1996. These expenditures related primarily to the
acquisition and opening of two, three and seven stores in fiscal 1993, 1994 and
1995, respectively, and six stores in the first half of fiscal 1996.
Net cash provided by financing activities was $642,000, $7.6 million and
$7.2 million in fiscal 1993, 1994 and 1995, respectively, and $4.0 million in
the first half of fiscal 1996. In fiscal 1993, the Company received net proceeds
of $2.0 million from the sale of preferred stock and $1.3 million from increased
borrowings net of repayment of debt. In connection with the preferred stock
financing, the Company used $1.0 million to repurchase shares of Common Stock
from one of the Company's founders. In fiscal 1994, the Company received net
proceeds of $12.4 million from the sale of preferred stock and $125,000 from the
sale of common stock. In connection with the preferred stock financing, the
Company used $4.3 million to repurchase shares of common stock from two
stockholders. In addition, the Company reduced its borrowings by $3.5 million.
Net cash provided by financing activities in fiscal 1995 and the first half of
fiscal 1996 consisted primarily of increased borrowings.
The Company acquired Alfalfa's in July 1996 in a stock-for-stock
transaction. Immediately prior to the acquisition, the Company received net
proceeds of $16.5 million from the sale of preferred stock. The proceeds from
this financing were used to repurchase shares of capital stock from certain
former stockholders of Alfalfa's and a stockholder of Wild Oats upon the closing
of the acquisition.
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 June 29,
1996, the Company had borrowings outstanding under the Revolving Line of
approximately $17.3 million. The Company intends to use a portion of the net
proceeds from this offering to repay amounts outstanding on the Revolving Line.
Following this offering the Company will have approximately $20.0 million of
available borrowing capacity, subject to certain covenants and other
restrictions applicable to the Revolving Line. Further, in July 1996 the Company
received a commitment from its lender to increase its borrowing capacity
34
<PAGE> 37
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 $4.5 million in
the second half of fiscal 1996 to open three stores (two of which have been
opened). 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. Pre-opening 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.
The Company believes that the net proceeds of this offering, together with
cash generated from operations and funds available under the Revolving Line,
will be sufficient to satisfy its cash requirements through fiscal 1997.
35
<PAGE> 38
BUSINESS
INTRODUCTION
Wild Oats is the second largest natural foods supermarket chain in North
America with the largest natural foods store base in the western United States.
The Company currently operates 38 stores under the names "Wild Oats" and
"Alfalfa's" in seven states, including California, Colorado, Kansas, Missouri,
Nevada, New Mexico, Utah and under the name "Capers" in British Columbia,
Canada. The Company is dedicated to providing a broad selection of high quality
natural and gourmet foods and related products at "down to earth" competitive
prices in an inviting and educational store environment emphasizing customer
service. The Company's stores range in size from 5,000 to 35,000 square feet and
feature natural alternatives in virtually every product category found in
conventional supermarkets, providing consumers with a one-stop, full-service
shopping alternative to both conventional supermarkets and traditional health
food stores.
The Company grew from six natural foods stores located primarily in
Colorado at the end of 1991, to 21 stores in six states at the end of 1995,
representing a compound annual growth rate of 36.8%. During this period, the
Company's sales increased from $25.2 million to $98.5 million, representing a
compound annual growth rate of 40.6%. This growth resulted from the acquisition
of independent and small chain natural foods store operators, the opening of new
stores and positive comparable store sales growth. In the first half of 1996,
the Company opened three new stores and acquired three additional stores and
sales increased 61.0% to $68.9 million from $42.8 million in the first half of
1995. In July 1996, Wild Oats completed the acquisition of Alfalfa's, a leading
natural foods supermarket chain that operated 11 stores in three states and
Canada. From fiscal 1994 to fiscal 1996 Alfalfa's grew from six to 11 stores,
representing a compound annual growth rate of 35.4%. During this same period
sales increased from $45.9 million to $85.6 million, representing a compound
annual growth rate of 36.6%. Through the acquisition of Alfalfa's, the Company
combined two natural foods retailers with similar operating strategies and
complementary store bases, increased the Company's penetration of existing
markets, entered new geographic markets and created a stronger platform for
future growth. The Company has closed the Alfalfa's Seattle, Washington store
and the Wild Oats Lawrence, Kansas store. On a pro forma basis, after giving
effect to the Company's acquisition of three stores in the first half of 1996,
and the acquisition of Alfalfa's, the Company had sales of $182.4 million in
1995 and $118.8 million in the first half of 1996.
NATURAL FOODS INDUSTRY
Natural foods are defined as foods which are minimally processed, free of
artificial ingredients, preservatives and other non-naturally occurring
chemicals and, in general, are as near to their whole, natural state as
possible. Most natural products fall into the food category, but the natural
foods industry also encompasses a number of other categories such as
naturally-based cosmetics, toiletries and personal care items, vitamins and
herbal supplements, naturally-based cleaning agents, and natural and homeopathic
medicines. While sales growth in the traditional supermarket industry remained
relatively flat, the natural foods industry has grown at a 17% compound annual
growth rate since 1990. According to The Natural Foods Merchandiser, a leading
industry publication, growth in the natural foods industry has accelerated from
a 10% increase in sales in 1991 to a 22% increase in each of 1994 and 1995, when
the market reached $9.1 billion. The Company believes that this growth reflects
a broadening of the natural foods 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, the Company believes that a growing segment of the
population now attributes added value to high quality natural products and is
willing to pay a premium for such products. Indeed, while early growth in the
industry was attributed to more educated, wealthier consumers, there is
increasing evidence that the mainstream consumer is driving much of the recent
growth. Further, according to industry data, the natural foods industry
comprises less than 3% of the total supermarket industry, allowing for
significant potential to continue to expand the customer base.
Traditional natural foods stores, offering only vitamins, dietary
supplements, herbs and a limited selection of natural foods product lines, first
emerged over 50 years ago. Over the years, as consumer demand for natural foods
has increased, the number of natural foods stores has grown and the product mix
has expanded. More
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distributors and vendors have entered the natural foods industry and many more
natural products have become available. In response to increasing supply and
demand, larger format natural foods stores have emerged, offering virtually
every product category found in a conventional supermarket, including grocery,
produce, meat, poultry, seafood, dairy, frozen, deli, bakery, health and body
care and household items. Today, natural foods stores offer a one-stop,
full-service grocery shopping alternative to conventional supermarkets and
appeal to a broader, more mainstream customer base than the traditional natural
foods store.
The Company believes that the appeal of natural foods supermarkets is based
on the quality of the total shopping experience. Many natural foods stores
develop a personal relationship with their customers because there is typically
more interaction between the customer and the store staff than in a conventional
supermarket. The Company believes that conventional supermarkets historically
have had only limited success in competing in the natural foods segment because
they are largely dependent on national brands. As a result, while conventional
supermarkets may carry a limited selection of natural food products, it is
difficult for them to duplicate the inventory of natural foods stores which
carry a more comprehensive selection of natural products sourced from a large
number of independent vendors.
The natural foods industry is highly fragmented. According to The Natural
Foods Merchandiser, there were approximately 6,600 independent natural/health
foods stores in 1995, which generated approximately $6.1 billion of the total
$9.1 billion of natural food sales. Only 13% of these 6,600 stores were
full-service, natural foods stores (defined as stores having a minimum of 5,000
square feet and offering a full range of product categories, including fresh
meat and seafood). The Company believes that the two largest natural foods
retailers (Wild Oats and Whole Foods Markets, Inc., including subsequent
acquisitions) represented on a pro forma basis approximately 10% of the total
natural foods dollars spent by consumers in 1995. There has been considerable
consolidation in the industry as natural foods supermarket chains have acquired
smaller independent competitors. The Company believes natural foods
supermarkets, with their extensive product offerings and broad customer appeal,
will continue to lead the overall growth and consolidation in the natural foods
industry.
OPERATING STRATEGY
The Company's objective is to become the grocery store of choice both for
natural foods shoppers and quality-conscious consumers in each of its markets by
emphasizing the following key elements of its operating strategy:
Destination Format. The Company's stores are one-stop, full-service
supermarkets for customers seeking high quality natural and gourmet foods and
related products. In most of its stores, the Company offers between 10,000 and
25,000 SKUs of natural products in virtually every product category found in a
conventional supermarket. The Company's 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. The Company seeks to offer the highest
quality products throughout its merchandise categories and emphasizes unique
products not typically found in conventional supermarkets. The Company's strict
quality standards require products to be minimally processed, free of
preservatives, artificial colors and chemical additives, and not tested on
animals. Each store tailors its product mix to meet the preferences of the local
market, in particular sourcing produce from local organic growers whenever
possible. The Company also operates regional kitchens and bakeries that provide
its stores with fresh bakery items and a unique assortment of prepared foods for
the quality and health-conscious consumer.
Educational and Entertaining Store Environment. At Wild Oats, shopping is
"theater." Each store strives to create a fun, friendly and educational
environment that makes grocery shopping enjoyable and encourages shoppers to
spend more time in the store and to purchase new products. In order to enhance
customers' understanding of natural foods and how to prepare them, the Company
trains its store staff to educate customers as to the benefits and quality of
its products and prominently features 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. The Company believes its knowledgeable store
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staff and high ratio of store staff to customers results in significantly higher
levels of customer service than in a conventional supermarket.
Extensive Community Involvement. The Company also seeks to engender
customer loyalty by demonstrating its high degree of commitment to the local
community. Each store makes significant monetary and in-kind contributions to
local not-for-profit organizations through programs such as "5% Days," where
each store donates 5% of its gross sales one day each month to a local
not-for-profit group, and "Charity Work Benefits" where the Company pays
employees for time spent working for local charities.
Flexible Store Format. The Company's flexible store format enables it to
customize its stores to specific site characteristics and to meet the unique
needs of a variety of markets. The Company's supermarket format stores are
adapted in size and product selection to suburban markets and its urban format
stores are designed to appeal in size and product selection to more densely
populated urban markets. The Company believes that this flexible store format
strategy allows it to operate successfully in a diverse set of markets, enabling
it to reach a broader customer base and increase market penetration.
Competitive Pricing. The Company seeks to offer products at prices which
are at or below those of other natural foods stores. The Company has implemented
a "down to earth" 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. The Company believes these pricing programs broaden its consumer
appeal and encourage its customers to fill more of their shopping needs at the
Company's stores.
Motivated Staff. The Company has 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 and other financial performance criteria. In addition, the Company
generally hires individuals dedicated to the concept of natural foods and a
healthy lifestyle. The Company believes that these practices translate into a
satisfied and motivated staff and a high level of customer service.
GROWTH STRATEGY
Wild Oats is the second largest natural foods supermarket chain in North
America. To date, the Company has focused its growth in the western half of the
U.S. and has built the largest store base in that region. The Company's growth
strategy is to increase sales and income through: (i) new store expansion; (ii)
increased sales at existing stores; and (iii) realization of operating
efficiencies from the acquisition of Alfalfa's.
New Store Expansion. The Company has grown from six stores at the end of
1991 to 38 stores currently, through a combination of both new store openings
and acquisitions. Since its inception, the Company has opened 17 stores and
acquired 23 stores (including 11 Alfalfa's stores). The Company has closed the
Alfalfa's Seattle, Washington store and the Wild Oats Lawrence, Kansas store.
Wild Oats plans to open one additional store in the remainder of 1996 and to
open or acquire seven stores in 1997. The Company intends to continue to
strengthen its position in the western United States and to expand to new
regions, such as Florida, which it believes are currently underserved by natural
foods retailers. While the Company believes that most of its new store expansion
will result from store openings, it continues to evaluate acquisition
opportunities in both existing and new markets. The Company has signed a lease
for one store in Florida planned to open in 1996 and for two stores in Northern
and Southern California planned to open in 1997. There can be no assurance that
the Company will achieve its planned expansion in existing markets or enter new
markets. The Company intends to operate new stores primarily under the Wild Oats
name.
Historically, the Company has pursued a strategy of clustering stores
within each of its markets in order to more fully penetrate these markets,
achieve operating efficiencies and enhance name recognition. The Company
believes this strategy has resulted in increased overall sales in each of its
markets. In the past when the Company has opened a store in a market in which it
had an existing presence, the Company has experienced a decline in the revenue
and operating results at certain of its existing stores in that market. However,
over time, the Company believes the affected stores generally will achieve store
contribution margins comparable to prior levels on the lower base of sales. The
Company intends to continue to pursue its
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store clustering strategy and expects these trends to continue. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's expansion plans depend on a number of factors. See "Risk
Factors--Uncertain Ability to Execute Growth Strategy" for a discussion of
certain of the risks associated with the Company's ability to achieve its
planned expansion.
Increase Sales at Existing Stores. The Company believes that historical
growth in sales at the Company's existing stores reflects continued strong
growth in the natural foods industry as well as improved execution of the
Company's operating strategy. The Company continually seeks to increase sales at
its existing stores and has undertaken several initiatives designed to increase
comparable store sales. The Company is seeking 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 standardized marketing programs and expanding
customer service. See "Risk Factors--Fluctuations in Financial Results;
Non-Recurring Charge," "Business--Products" and "--Marketing."
Realization of Operating Efficiencies from the Acquisition of
Alfalfa's. The Company believes that the successful integration of Alfalfa's
will result in future operating efficiencies created by warehousing,
distribution and administrative economies of scale, improved merchandise buying
terms, and the implementation of coordinated merchandising and marketing
strategies. The Company believes that the integration of the best operating,
merchandising and marketing practices of Wild Oats and Alfalfa's will create the
potential for increased productivity and profitability at the Company's stores.
For example, Wild Oats has a deep selection and expertise in natural living
products such as vitamins, supplements and body care items while Alfalfa's is
recognized for the variety and quality of its perishables, especially in its
deli, bakery, and meat departments. The Company has begun to improve and expand
the merchandise offerings in its stores and believes it can continue to enhance
the merchandising in both stores. There can be no assurance that the Company
will not encounter unanticipated problems or liabilities in connection with the
integration of Alfalfa's. See "Risk Factors--Potential Difficulties of
Integrating Alfalfa's Operations," "Recent Acquisitions and New Store Openings"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Acquisition of Alfalfa's."
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STORE LOCATIONS
The following map and store list show the number of stores that the Company
operates in each state and the cities in which the Company's stores are located
as of October 2, 1996.
LOGO
<TABLE>
<CAPTION>
CALIFORNIA COLORADO KANSAS NEVADA
- ---------- -------- ------ ------
<S> <C> <C> <C>
Berkeley Aurora Mission Las Vegas (2)
Mission Viejo Boulder (3)
Pasadena Colorado Springs
San Francisco Denver (4)
San Anselmo Fort Collins (2) MISSOURI NEW MEXICO
Santa Monica Greenwood Village -------- ----------
West Hollywood Littleton Kansas City Albuquerque (2)
West Los Angeles Vail St. Louis Santa Fe (3)
UTAH BRITISH COLUMBIA, CANADA
- ---- ------------------------
Salt Lake City (3) Vancouver (2)
West Vancouver
</TABLE>
SITE SELECTION AND STORE FORMAT
Prior to opening or acquiring a store, the Company analyzes the local
market, including: (i) certain demographic data, such as education level,
average income, population density and age distribution; (ii) certain lifestyle
data, such as the levels of cultural awareness, physical exercise, health
consciousness and environmental awareness in the community; and (iii) the
existing competition. In addition to performing internal market analysis, the
Company frequently engages an outside consultant to conduct additional market
studies and validate internal sales forecasts. The Company's flexible strategy
allows it to open stores in a variety of locations and adapt its store layout
and merchandise selection to accommodate specific site characteristics, regional
themes and local cultural traditions. The Company seeks locations of
approximately 15,000 to 35,000 square feet for its supermarket format stores and
generally seeks to be either an anchor tenant in a regional neighborhood
shopping center or a stand-alone store with high visibility, easy access and
plenty of parking. The Company seeks locations of approximately 5,000 to 15,000
square feet for urban format stores and generally seeks to be in the commercial
district of densely populated residential areas with convenient parking and a
high level of foot traffic.
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When the Company acquires a store it remodels the store in accordance with
the Company's specifications. These acquired stores remain in operation while
they are being remodeled and are not renamed "Wild Oats" until the remodeling is
completed. The timing and cost of the remodel of each store varies depending on
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. The Company typically
requires eight to 16 weeks to remodel a store.
PRODUCTS
The Company offers its customers a broad selection of unique, high quality
products that are natural alternatives to those found in conventional
supermarkets. The Company typically does not offer well known national brands
and focuses instead on a comprehensive selection of natural products within each
category. Although the core merchandise assortment is similar at each of the
Company's stores, individual stores adapt the product mix to reflect local and
regional preferences. 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, 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, and in other markets, a store may focus more on bulk
foods, produce and staple grocery items. The Company and its stores regularly
introduce new high quality and locally grown products in its merchandise
selection to minimize overlap with products carried by conventional
supermarkets.
Wild Oats has historically had a deep selection and expertise in natural
living, whereas Alfalfa's has been recognized for the variety and quality of its
deli, bakery and meat departments. As part of the integration, the Company is
currently improving and expanding the merchandise selection in each of these
categories to incorporate the best merchandising practices of both companies. In
addition, the Company intends to continue to expand and enhance its prepared
food and in-store cafe environment. The Company believes that consumers are
increasingly seeking convenient, healthy, "ready-to-eat" meals and that by
increasing its commitment to this category it can provide an added service to
its customers, broaden its customer base, and further differentiate itself from
conventional supermarkets and traditional natural foods stores.
Quality Standards. The Company's objective is to offer products which meet
the following standards: free of preservatives, artificial colors, chemical
additives and added hormones; organically grown, whenever possible; minimally
processed; and not tested on animals. The Company continually evaluates new
products, quality issues and controversial ingredients and frequently counsels
store managers on compliance with the Company's strict product standards.
Product Categories. The Company's stores typically feature the following
product categories:
<TABLE>
<CAPTION>
PRODUCT CATEGORY DESCRIPTION
- ------------------------- -----------------------------------------------------------------
<S> <C>
Grocery.................. Pastas, canned goods, cereals, cooking oils, juices, salad
dressings, crackers, chips, pretzels, cookies, baking items,
sodas, bottled waters, and beer and wine in selected stores. Many
products are formulated for special diets and are identified as
fat-free, low-sodium, wheat-free or dairy-free;
Natural Living........... Vitamins, supplements, herbs and body care items such as
shampoos, lotions, cosmetics, deodorants, dental care products,
nutritional supplements, herbal tinctures, bulk herbs and
homeopathic remedies as well as a selection of health-related
books and magazines;
Prepared Foods........... Hot entrees, salads, sushi, wraps, pizza and pasta which can be
taken out or, in the larger stores, eaten in the store's cafe
seating area. Most stores feature full-service delis as well as
espresso and fresh juice bars;
Produce.................. Majority of produce is organically grown, although the
availability varies, and is sourced seasonally from local organic
farmers whenever possible. All produce is clearly labeled as to
whether it was grown organically or commercially;
</TABLE>
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<TABLE>
<CAPTION>
PRODUCT CATEGORY DESCRIPTION
- ------------------------- -----------------------------------------------------------------
<S> <C>
Dairy/Frozen............. Dairy products, both organic and commercial, such as yogurt,
milk, cheese, eggs, soy milk, soy foods, and fresh juices, and
frozen products such as ice cream, frozen yogurt, entrees,
vegetables, desserts, juices, meat and meat substitutes;
Meat/Poultry/Seafood..... Fresh beef, lamb, pork, seafood and free-range poultry, as well
as value-added meat products such as stuffed peppers, marinated
meats and home-made sausages;
Baked Goods.............. Muffins, cakes, breads and pies, which are supplied by both the
Company's bakeries and outside vendors, and signature items
including a proprietary line of private label gourmet breads;
Bulk Products............ Generally between 200 and 500 SKUs of bulk products, including
beans, pastas, grains, rice, coffee, granolas, snacks, nuts,
flours, seeds, dried fruits, soaps, detergents, shampoos and
conditioners; and
General Merchandise...... Environmentally-friendly cleaning compounds, housewares, kitchen
tools, recycled paper products and other natural household items,
as well as selected gift items, such as natural fiber clothing,
greeting cards and decorative glassware.
</TABLE>
Private Label. The natural foods industry is highly fragmented and
characterized by many small independent vendors. As a result, the Company
believes that its 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,
the Company has developed a private label program in order to build brand
loyalty to specific products based on its relationship with its customers and
its reputation as a natural foods authority. Through this program, Wild Oats has
successfully introduced a number of high quality, unique private label products,
such as non-dairy rain forest chocolate bars, gourmet breads, salsa, salad
dressings, all-natural vitamins, chips, pretzels, tortillas, fresh juices,
pasta, pasta sauces, oils, and canned fruit. The Company intends to continue to
expand its private label product offerings on a selected basis.
Pricing. In general, natural and gourmet foods and related products have
higher costs of production and correspondingly higher retail prices than
conventional grocery items. The Company's pricing strategy has been to maintain
prices that are at or below those of its natural foods competitors while
educating its customers as to the higher quality and added value of its products
so as to differentiate them from conventional products. Like most conventional
supermarkets, the Company regularly features dozens of sale items that are
rotated periodically. In addition, the Company has an ongoing "down to earth"
competitive pricing program that consistently features a natural foods item in
each major product category at a price that is competitive with or lower than
its conventional equivalent. The Company regularly monitors the prices at its
natural foods and conventional supermarket competitors to ensure its prices
remain competitive.
STORE ENVIRONMENT
At Wild Oats, shopping is "theater." Each store strives to create a fun,
friendly and educational environment that makes grocery shopping enjoyable and
encourages shoppers to spend more time in the store and to purchase new
products. In order to enhance customers' understanding of natural foods and how
to prepare them, the Company trains its store staff to educate customers as to
the benefits and quality of its products and prominently features educational
brochures and newsletters as well as an in-store consumer information
department. Product brochures, recipe card areas, food sampling stations,
informational signage and, in certain stores, an educational computer kiosk, are
used extensively throughout the store. Most 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 Wild Oats shopping experience.
In addition, each store features a monthly calendar of special events such as
educational presentations, children's events, cooking classes, live music, prize
drawings and dog washes. Certain departments are remerchandised several times a
year according to seasonal themes or different marketing campaigns, such as Rain
Forest Month or Organic Harvest Month.
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The stores also sponsor many community-related activities such as presentations
on health and safety as well as fund-raising drives for local organizations. The
Company encourages and receives feedback from its customers through its
suggestion boxes and posts responses on the store's community bulletin board.
COMPANY CULTURE AND STORE OPERATIONS
Company Culture. The Company's culture is embodied in its "Four Areas of
Responsibility": responsibility to its customers, its staff, its community and
its bottom line. In particular, Wild Oats believes that knowledgeable, satisfied
and motivated staff members have a direct impact on store performance and
overall profitability. Wild Oats encourages active participation and open
communication among all staff members and advocates store-level participation in
a variety of marketing, merchandising and operating decisions. The Company has
made a substantial commitment to staff education and has created an in-house
training program which consists of an intensive orientation for new hires and
mandatory monthly and quarterly education programs for the general staff. The
Company generally hires individuals dedicated to the concept of natural foods
and a healthy lifestyle and seeks to promote store-level employees to positions
of increasing responsibility.
Management and Employees. The Company's stores are organized into seven
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 the Company's
senior management. The Company's regional directors are responsible for, and
frequently visit, their cluster of stores to monitor financial performance and
ensure adherence to the Company's operating standards. The typical staff of a
Wild Oats store consists of one store manager, ten department managers and
between 25 to 200 additional hourly staff members, most of whom work full time.
Store and department managers are responsible for the operations of individual
stores including recruiting and hiring store personnel, communicating financial
results nightly, coordinating merchandise ordering, distribution and receiving,
and to a limited extent, supplementing their stores merchandise mix with
regional and other products suited for their specific market. The accounting
department provides a detailed monthly financial analysis of every department in
each store which is reviewed by both the store and regional managers. The
Company maintains a staff of corporate level department specialists including
Natural Living, Prepared Foods, Produce, Meat/Poultry/Seafood and Grocery
coordinators who manage centralized buying programs and assist in store-level
merchandising, pricing and staff training to ensure Company-wide adherence to
product standards and store concept.
All regional directors and store managers and certain store-level staff
participate in an incentive plan that ties compensation awards to the
achievement of specified store-level sales, profitability and other financial
performance criteria. The Company also seeks to foster enthusiasm and dedication
in its staff members through comprehensive benefits packages including health
insurance and wellness programs as well as an employer matching 401(k) plan and
Equity Incentive Plans.
PURCHASING AND DISTRIBUTION
The Company has a centralized purchasing function which sets product
standards, approves products and negotiates volume purchase discount
arrangements with distributors and vendors. Individual store purchases are
handled through its 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
the Company's established product standards and allowing each store to benefit
from the Company's 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 the Company purchases products from more than 1,000
suppliers, the Company purchases nearly half of its products from a single
wholesale distributor which operates warehouses in Colorado and California. The
Company believes that this distributor is able to service all of the Company's
existing stores as well as any future sites. As a result of the Alfalfa's
acquisition, the Company was able to negotiate greater volume discounts with
this distributor and certain other vendors. The Company has no supply contracts
with these parties and any vendor or distributor could discontinue selling to
the Company at any time. The Company believes that it could develop alternative
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<PAGE> 46
sources of supply; however, any such termination may create a short-term
disruption in store-level merchandise selection. See "Risk Factors--Possible
Disruptions of Product Supply."
Most products are delivered directly to the stores by vendors and
distributors. The Company currently operates a consolidated warehouse facility
in Denver which receives and distributes truck load purchases and distributes
products that cannot be delivered directly to the stores by outside vendors. The
Company maintains a small fleet of local delivery vans and over-the-road trucks.
As the Company enters new markets it will review the need for additional
warehouse and distribution facilities.
The Company operates four off-site kitchens in Santa Fe, New Mexico and
Denver, Colorado and Los Angeles and San Francisco, California as well as a
bakery in Denver, Colorado. The Company is in the process of closing an off-site
kitchen in Boulder which it expects to complete by the end of 1996. These
facilities produce deli food, take out food, bakery products and certain private
label items exclusively for sale in the Company's stores. Each kitchen can make
daily deliveries to stores within a hundred mile radius of the facility. The
Company intends to add new kitchens as it expands into new markets.
MARKETING
The Company's marketing programs are primarily focused on in-store customer
education and information. The Company believes that its customers are more
responsive to the quality of the shopping experience, issue-based marketing and
word-of-mouth advertising than to price-based marketing and traditional media
advertising. As a result, the Company focuses on consumer education and
emphasizes the benefits and quality of its products such as the fact that an
item is organic or grown locally. The Company uses a variety of media, including
in-store fliers, newspaper inserts and promotional brochures in which it
promotes the depth of its merchandise selection, benefits of natural products,
and "down to earth" competitive prices. When the Company first enters a new
market, the Company executes an intense marketing campaign to build awareness of
its new store and its selection of natural products. After the initial campaign,
this advertising is replaced by the marketing strategies described above. The
Company's advertising costs historically have been less than 1.5% of sales.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems have been designed to provide
detailed store-level financial data, including sales, gross margin, payroll and
store contribution, to regional and store managers and to the Company's
headquarters on a timely basis. Currently, certain store-level accounting and
inventory management systems are processed manually. In addition, the Company is
in the process of transferring Alfalfa's accounting functions to the Company's
system. The Company intends to convert the currently different Wild Oats and
Alfalfa's point-of-sale and pricing systems to one system. Certain of the Wild
Oats stores do not have automated point-of-sale and pricing systems. The Company
is in the process of evaluating point-of-sale and pricing systems and
anticipates selecting and installing one system by the end of 1997 for use at
all stores. Although the Company believes that a combined system can be
implemented without significant disruptions in its operations or financial
reporting, there can be no assurance that such disruption will not occur. The
Company may need to upgrade its information systems to meet the demands of its
growing operations. See "Risk Factors--Possible Inability to Manage Growth."
COMPETITION
The Company's competitors currently include other independent and
multi-unit natural foods supermarkets, smaller traditional natural foods stores,
conventional supermarkets and specialty grocery stores. A number of other
natural foods supermarkets offer a range of natural foods products similar to
those offered in the Company's stores. The Company believes 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. The Company believes that its primary competitor is Whole
Foods Market, Inc., a publicly-traded company based in Texas. The Company
competes with Whole Foods in California. While certain conventional
supermarkets, smaller traditional natural foods stores and small specialty
stores do not offer as full a range of products as the Company, they do compete
with Wild Oats in one or more product categories. Many of the Company's
competitors have been in business longer and have greater financial or marketing
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resources than the Company and may be able to devote greater resources to
securing suitable locations and to the sourcing, promotion and sale of their
products. In addition, should any of the Company's competitors reduce prices,
the Company may be required to implement price reductions in order to remain
competitive, which could have an adverse impact on its business, financial
condition and results of operations. As Wild Oats enters new geographic markets,
its success will depend in part on its ability to gain market share from
established competitors. In addition, traditional and specialty grocery stores
may expand more aggressively in marketing a broader range of natural foods and
related products and thereby compete directly with the Company for products,
customers and locations. The Company expects competition from both new and
existing competitors to increase in its markets and there can be no assurance
that the Company will be able to compete effectively in the future. See "Risk
Factors--Competition."
EMPLOYEES
As of July 27, 1996, the Company employed 1,963 full-time individuals and
933 part-time individuals. Approximately 2,900 of the Company's employees are
engaged at the store-level and 120 are devoted to regional administrative and
corporate activities. The Company believes that it maintains good relations with
its employees. The Company's success will depend in large part upon its ability
to attract and retain these and future employees. The Alfalfa's store in
Seattle, Washington, which the Company recently closed, was subject to an
informational picket by a local union. There was no unionization vote and the
Company is not aware of other union organizing activities at its other locations
PROPERTIES
The Company currently leases an aggregate of approximately 11,500 square
feet for its corporate offices in two locations in Boulder, Colorado. The
Company is currently consolidating its headquarters into one facility. The lease
for the corporate headquarters into which the Company is moving covers 6,500
square feet, expires in October 2006 and has a renewal option for an additional
six year term. The rental payment is a fixed base rate. The lease for the space
where the Company formerly operated covers 5,141 square feet and will terminate
in six months. The lease for Company's warehouse expires in August 1999 and is
subject to two renewal options of three years each. The rental payment is a
fixed base rate.
The Company leases all of its stores. The Company's leases typically
provide for a ten-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. See Note 9 of
Notes to Consolidated Financial Statements of Wild Oats Markets, Inc.
The Company periodically evaluates the location and productivity of its
stores and may close, consolidate or relocate stores from time-to-time. The
following is a list of the Company's stores as of October 2, 1996.
<TABLE>
<CAPTION>
APPROXIMATE
GROSS
SQUARE
TERRITORY/STORE LOCATION DATE OPENED/ACQUIRED FOOTAGE
- ------------------------- ------------------------- ------------------------- ----------
<S> <C> <C> <C>
NORTHERN CALIFORNIA
Wild Oats Berkeley Berkeley, CA Acquired April 1995 7,500
Wild Oats San Anselmo San Anselmo, CA Acquired April 1995 8,500
Wild Oats San Francisco San Francisco, CA Opened April 1996 9,000
SOUTHERN CALIFORNIA
Wild Oats Mission Viejo Mission Viejo, CA Opened May 1996 23,500
Wild Oats Pasadena Pasadena, CA Opened January 1994 15,000
Wild Oats Santa Monica Santa Monica, CA Opened September 1995 8,200
Wild Oats West Hollywood West Hollywood, CA Opened February 1996 14,000
Wild Oats West Los
Angeles Los Angeles, CA Opened September 1996 7,900
</TABLE>
45
<PAGE> 48
<TABLE>
<CAPTION>
APPROXIMATE
GROSS
SQUARE
TERRITORY/STORE LOCATION DATE OPENED/ACQUIRED FOOTAGE
- ------------------------- ------------------------- ------------------------- ----------
<S> <C> <C> <C>
COLORADO
Wild Oats Aurora Aurora, CO Acquired February 1990 8,000
Wild Oats Vegetarian Boulder, CO Acquired October 1987 6,500
Wild Oats Boulder Boulder, CO Opened February 1988 12,900
Alfalfa's Boulder Boulder, CO Acquired July 1996 25,000
Wild Oats Colorado
Springs Colorado Springs, CO Opened November 1992 16,700
Alfalfa's Cherry Creek Denver, CO Acquired July 1996 17,000
Wild Oats Denver Denver, CO Acquired February 1990 6,300
Wild Oats Washington Park Denver, CO Opened May 1995 18,600
Alfalfa's Capitol Hill Denver, CO Acquired July 1996 22,000
Wild Oats Fort Collins Fort Collins, CO Acquired September 1988 5,000
Alfalfa's Fort Collins Fort Collins, CO Acquired July 1996 14,000
Wild Oats Orchard Greenwood Village, CO Opened August 1995 35,000
Alfalfa's Littleton Littleton, CO Acquired July 1996 22,500
Alfalfa's Vail Vail, CO Acquired July 1996 6,200
MIDWEST
Wild Oats Mission Mission, KS Opened October 1995 22,000
Wild Oats Kansas City Kansas City, MO Acquired March 1993 5,000
Wild Oats St. Louis St. Louis, MO Opened August 1996 20,500
NEW MEXICO
Wild Oats Albuquerque Albuquerque, NM Opened May 1992 28,000
Wild Oats Juan Tabo Albuquerque, NM Opened November 1995 22,000
Wild Oats St. Francis Santa Fe, NM Opened January 1991 15,000
Wild Oats St. Michael Santa Fe, NM Opened January 1992 9,000
Alfalfa's Santa Fe Santa Fe, NM Acquired July 1996 20,000
UTAH/NEVADA
Wild Oats Las Vegas East Las Vegas, NV Acquired July 1994 10,400
Wild Oats Las Vegas West Las Vegas, NV Acquired July 1994 16,400
Wild Oats Salt Lake East Salt Lake City, UT Acquired June 1996 10,000
Wild Oats Salt Lake
Holladay Salt Lake City, UT Acquired June 1996 8,800
Wild Oats Salt Lake South Salt Lake City, UT Acquired June 1996 7,000
CANADA
Capers Vancouver, B.C. Acquired in July 1996 17,500
Capers Vancouver, B.C. Acquired in July 1996 8,100
Capers West Vancouver, B.C. Acquired in July 1996 11,800
</TABLE>
46
<PAGE> 49
LEGAL PROCEEDINGS
From time-to-time, the Company is involved in lawsuits that the Company
considers to be in the normal course of its business, none of which has resulted
in any material losses to date. The Company is also subject to an anti-trust
investigation with respect to its compliance with New Mexico anti-trust laws.
The focus of the investigation is on the effect, if any, of the acquisition on
competition in New Mexico. In May 1996, the Company received a letter from the
New Mexico Attorney General's office indicating that it would recommend that
Wild Oats divest one of its three stores in Santa Fe, New Mexico in connection
with the acquisition. The Company replied refuting the Attorney General's claim
but has not received a response from the Attorney General's office. The Attorney
General's office has not taken any legal action with respect to the acquisition.
The Company believes that the acquisition complies with federal and state
anti-trust law and will continue to vigorously defend its position in New
Mexico. However, there can be no assurance that the state of New Mexico will not
take legal action with respect to the acquisition, including, but not limited
to, demanding the divestiture of one or more stores in the Santa Fe market to a
competitor of the Company. If the Attorney General of New Mexico elects to take
legal action and is successful, such a result could have a material adverse
effect on the Company's business, results of operations and financial condition.
See "Risk Factors-- New Mexico Anti-Trust Proceedings."
GOVERNMENT REGULATION
The Company is subject to numerous federal, state and local laws,
regulations and ordinances regulating health and sanitation standards, food
labeling and handling, equal employment, minimum wages and licensing for the
sale of food and alcoholic beverages. Difficulties or failures in complying with
these regulations could adversely affect the operations of an existing store or
delay the opening of a new store.
In addition, from time-to-time, various federal, state and local
legislative and regulatory proposals are made to, among other things, increase
the minimum wage payable to employees, establish minimum store security
requirements and increase taxes on the retail sale of certain products. Changes
to such laws, regulations or ordinances may adversely affect the Company's
performance by increasing the Company's costs or affecting its sales of certain
products. Although the Company currently pays all of its non-exempt employees
hourly wages which are above the minimum wage level, federal legislation raising
the minimum wage in the future may increase the Company's employee costs and
adversely affect the Company's profitability.
The Company also sells nutritional supplements, some of which are subject
to regulation by several federal, state and local agencies. There can be no
assurance that such agencies will not enact regulations that could have an
adverse effect on the Company's business, results of operations and financial
condition. In addition, recent legislation has required manufactures of
nutritional supplements to label ingredients in their products. Such legislation
could be enacted in the future which may adversely effect the Company's results
of operations. See "Risk Factors--Government Regulation."
47
<PAGE> 50
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- --------------------------------------------------------
<S> <C> <C>
Michael C. Gilliland(1).......... 37 Chief Executive Officer and Director
S.M. Hassan...................... 48 President and Director
Elizabeth C. Cook(1)(2).......... 37 Vice President, General Counsel, Secretary and Director
Mary Beth Lewis.................. 38 Treasurer and Chief Financial Officer
James W. Lee..................... 45 Chief Operations Officer
Bennett L. Bertoli............... 43 Director of Real Estate
John A. Shields.................. 53 Chairman of the Board
David M. Chamberlain(3).......... 53 Vice Chairman of the Board
Peter D. Behrendt................ 57 Director
Barnet M. Feinblum(3)............ 48 Director
David L. Ferguson(2)(3).......... 41 Director
M. Laird Koldyke(3).............. 35 Director
James B. McElwee(2)(3)........... 44 Director
</TABLE>
- ---------------
(1) Michael C. Gilliland and Elizabeth C. Cook are husband and wife.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
Michael C. Gilliland co-founded the Company and has been the Chief
Executive Officer and a Director of the Company since its inception in July
1987. Mr. Gilliland also served as its President and Chairman of the Board from
inception until July 1996. Prior to forming the Company in 1987, Mr. Gilliland
was involved in several entrepreneurial ventures.
S.M. Hassan has been the President and a Director of the Company since July
1996. Mr. Hassan was a co-founder of Alfalfa's and served as its President and
Chief Executive Officer from November 1989 to July 1996. Mr. Hassan was Vice
President and Secretary of Alfalfa's from 1978 to 1989.
Elizabeth C. Cook co-founded the Company and has been Vice President,
General Counsel, Secretary and Director of the Company since its inception in
July 1987. Prior to that, from 1983 to 1987, Ms. Cook was tax counsel on staff
with the Atlantic Richfield Company.
Mary Beth Lewis has been Chief Financial Officer and Treasurer of the
Company since September 1992. From August 1986 until August 1992, Ms. Lewis was
an audit manager for Price Waterhouse LLP. Ms. Lewis is a Certified Public
Accountant.
James W. Lee joined the Company as its Chief Operations Officer in October
1996. Mr. Lee was Group Vice President, Store Operations -- Central Division of
Ralphs Grocery Company ("Ralphs") from February 1993 to September 1996. He was
also Group Vice President, Store Operations -- Southern Division from February
1991 to January 1993 and Vice President, Store Operations -- Northern Division
from February 1988 to January 1991 with Ralphs.
Bennett L. Bertoli has been Director of Real Estate of the Company since
February 1991. From February 1991 until July 1996, Mr. Bertoli was a Director of
the Company. From May 1984 until January 1991, Mr. Bertoli was an attorney in
private practice. From 1981 until 1984, Mr. Bertoli was in the land acquisition
department of the Atlantic Richfield Company.
John A. Shields has been Chairman of the Board of the Company since July
1996. Mr. Shields was a member of the Board of Directors of Alfalfa's from June
1995 to July 1996. He has been Chairman of the Board and Chief Executive Officer
of Delray Farms Markets, a chain of produce, meat and deli markets, since
January 1994. From 1983 until 1993, Mr. Shields was President and Chief
Executive Officer of First National Supermarkets. He is currently a director of
DIY Home Warehouse, Inc., Homeland Stores, Inc. and Shore Bank and Trust
Company.
David M. Chamberlain has been the Vice Chairman of the Board of the Company
since July 1996 and a Director of the Company since July 1994. Since October
1994, Mr. Chamberlain has been President, Chairman and CEO of Genesco, Inc., a
men's shoe wholesaler/retailer company. From May 1994 to
48
<PAGE> 51
October 1994, Mr. Chamberlain was a principal of Consumer Focus Partners, a
private investment firm. Prior to that, from October 1983 until May 1993, he was
with Shaklee Corp., a nutritional products company, serving as President and
Chief Executive Officer from December 1985 to May 1992, serving as President and
Chief Executive Officer from December 1985 to May 1992 and as Chairman
thereafter. From 1969 to 1983, Mr. Chamberlain held various general management
and marketing positions with Nabisco Brands, Inc. and the Quaker Oats Company.
He is currently a Director of Mrs. Fields, Inc.
Peter D. Behrendt has been a Director of the Company since July 1994. Mr.
Behrendt joined Exabyte Corporation, a tape storage company, in July 1987 as its
President, and additionally was named its Chief Executive Officer in July 1990
and Chairman of the Board in January 1992. Prior to joining Exabyte, Mr.
Behrendt spent 26 years with IBM Corporation, most recently as Director of
Quality and Product Assurance, Information Systems and Communications Products
Group. Mr. Behrendt serves on the Board of Directors of Western Digital
Corporation and InFocus Systems.
Barnet M. Feinblum has been a Director of the Company since July 1996. Mr.
Feinblum was a Director of Alfalfa's from June 1983 to July 1996. Since 1995,
Mr. Feinblum has been the President and Chief Executive Officer of Horizon
Organic Dairy, Inc., an organic dairy products company. From July 1993 to
January 1995, Mr. Feinblum was the President of Natural Venture Partners, Inc. a
corporation investing in natural foods companies. Mr. Feinblum was with
Celestial Seasonings, Inc., an herbal tea company, where he held several
positions from 1976 to 1993, including Chairman, President and CEO.
David L. Ferguson has been a Director of the Company since November 1994
and has been a general partner of Chase Capital Partners (the general partner of
Chase Venture Capital Associates, L.P. -- "Chase") since 1989. Prior to joining
Chase Capital Partners, he was a member of the mergers and acquisitions groups
of Prudential Securities, Inc. from 1987 to 1989 and Bankers Trust New York
Corporation from 1985 to 1987. Mr. Ferguson currently serves as a director of
Thompson PBE, Inc.
M. Laird Koldyke has been a Director of the Company since July 1996. Mr.
Koldyke was a Director of Alfalfa's from January 1995 until July 1996. Mr.
Koldyke has been with Frontenac Company, the general partner of Frontenac VI
Limited Partnership ("Frontenac"), a private equity firm since 1988, serving as
an associate from July 1988 until December 1992 and a general partner since
January 1993. He serves as a director of Einstein/Noah Bagel Corp.
James B. McElwee has been a Director of the Company since July 1993. Since
November 1992, Mr. McElwee has been a general partner of Weston Presidio Capital
(the general partner of Weston Presidio Offshore Capital C.V. -- "Weston"). From
July 1979 until November 1992, he was Senior Vice President and a Managing
Director of the Security Pacific Venture Capital Group.
BOARD OF DIRECTORS
The Company currently has eleven authorized directors. In August 1996, the
Company's Board of Directors approved, subject to stockholder approval, the
amendment of the Company's Amended and Restated Certificate of Incorporation to
provide for, among other things, a classified Board of Directors. In accordance
with the terms of such Amended and Restated Certificate of Incorporation the
terms of office of the Board of Directors will be divided into three classes:
Class I, whose term will expire at the annual meeting of stockholders to be held
in 1997 and who will initially be Peter D. Behrendt, Michael C. Gilliland, S.M.
Hassan and Barnet M. Feinblum; Class II, whose term will expire at the annual
meeting of stockholders to be held in 1998 and who will initially be M. Laird
Koldyke, John A. Shields and a director to be designated by Chase; and Class
III, whose term will expire at the annual meeting of stockholders to be held in
1999 and who will initially be David M. Chamberlain, Elizabeth C. Cook, David L.
Ferguson and James B. McElwee. At each annual meeting of stockholders beginning
with the 1997 annual meeting, the successors to directors whose terms will then
expire will be elected to serve from the time of election and qualification
until the third annual meeting following election and until their successors
have been duly elected and qualified.
Pursuant to the Stockholders Agreement dated as of July 12, 1996 among the
Company and certain investors (the "Stockholders Agreement"), the Company's
Board of Directors consists of: (i) Mr. McElwee as the representative designated
by the holders of the Company's Series A Preferred Stock; (ii) Mr. Ferguson as
the representative designated by the holders of the Company's Series C Preferred
Stock; (iii) Mr. Koldyke
49
<PAGE> 52
as the representative designated by the holders of the Company's Series D
Preferred Stock; (iv) one representative to be designated by the holders of the
Company's Series E Preferred Stock; (v) Mr. Hassan; (vi) Ms. Cook; (vii) Mr.
Gilliland; (viii) Mr. Feinblum; (ix) Mr. Shields; and (x) two independent
directors who are currently Messrs. Behrendt and Chamberlain. Certain parties to
the Stockholders Agreement, holding in the aggregate 4,049,371 shares of Common
Stock, have agreed that for four years after this offering, they will vote their
shares in favor of a nominee of Chase to be elected to the Company's Board of
Directors and to the Audit and Compensation Committees and will vote to elect
the nominee of Weston to the Audit and Compensation Committees. See "Certain
Transactions."
COMMITTEES
The Board of Directors currently has three standing committees, the Audit
Committee, the Compensation Committee and the Non-Officer Stock Option
Administration Committee (currently consisting of Elizabeth C. Cook) which
administers the Company's Incentive Plan for non-officer employees.
The Audit Committee consists of Elizabeth C. Cook, David L. Ferguson and
James B. McElwee. The Audit Committee makes recommendations to the Board
regarding the selection of independent auditors, reviews the results and scope
of the audit and other services provided by the Company's independent certified
public accountants and reviews the Company's balance sheet, statement of
operations and statement of cash flows for each interim period.
The Compensation Committee consists of David M. Chamberlain, Barnet M.
Feinblum, David L. Ferguson, M. Laird Koldyke and James B. McElwee. The
Compensation Committee administers the Company's compensation program and makes
recommendations to the Board concerning salaries and incentive compensation for
employees and consultants of the Company.
DIRECTORS' COMPENSATION
Each of the Company's non-employee directors is entitled to be reimbursed
for reasonable out-of-pocket expenses incurred in connection with attendance at
each regular or special meeting of the Board of Directors.
STOCK OPTION PLANS
1996 EQUITY INCENTIVE PLAN
The Company's 1996 Equity Incentive Plan (the "Incentive Plan") was adopted
by the Board of Directors in August 1996 as an amendment and restatement of the
Company's 1996 Stock Option Plan. There are currently 366,817 shares of Common
Stock 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 nonstatutory stock
options, restricted stock purchase awards and stock bonuses to employees,
directors and consultants. The Incentive Plan is administered by the
Compensation Committee which has delegated to a Non-Officer Stock Option
Administration Committee (currently consisting of Elizabeth C. Cook) the
authority to determine with respect to employees (other than officers) the
recipients and types of awards to be granted, including the exercise price,
number of shares subject to the award and the exercisability thereof.
The terms of stock options granted under the Incentive Plan generally may
not exceed 10 years. 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 date of the option grant and the exercise price for a
nonstatutory stock option cannot be less than 85% of the fair market value of
the Common Stock on the date of option grant.
Upon certain changes in control of the Company, all outstanding awards
under the Incentive Plan shall be continued, assumed or substituted by the
surviving entity. If the surviving entity determines not to continue, assume or
substitute such awards, and with respect to persons then performing services as
employees, directors or consultants, the time during which such awards may be
exercised shall be accelerated and the awards terminated if not exercised prior
to such change of control.
50
<PAGE> 53
The Board of Directors has the authority to amend or terminate the
Incentive Plan, subject to stockholder approval when necessary under the
requirements of the Internal Revenue Code of 1986, as amended (the "Code") or
Section 16 of the Securities Exchange Act of 1934 (the "Exchange Act"), provided
that no such actions shall impair rights under outstanding awards.
As of August 1, 1996, no shares of Common Stock had been issued upon the
exercise of options granted under the Incentive Plan, options to purchase
195,610 shares of Common Stock at a weighted average exercise price of $16.83
were outstanding and 171,207 shares remained available for future grant. The
Incentive Plan will terminate in June 2006 unless sooner terminated by the Board
of Directors. As of August 1, 1996, no stock bonuses or restricted stock
purchase awards had been granted under the Incentive Plan.
1993 STOCK OPTION PLAN
The Company's 1993 Stock Option Plan (the "1993 Plan") was adopted by the
Board of Directors in August 1993. 383,176 shares of Common Stock were reserved
for issuances under the 1993 Plan. In August 1996, the Board of Directors
designated all shares formerly available for issuance under the 1993 Plan to be
available for issuance under the Incentive Plan and amended the 1993 Plan to
provide that any shares of Common Stock that are subject to an option which
expires or otherwise terminates prior to exercise shall be transferred to the
Incentive Plan.
The terms of stock options granted under the 1993 Plan generally may not
exceed 10 years. The exercise price of options granted under the 1993 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 date of the option grant and the exercise price for a
nonstatutory stock option cannot be less than 85% of the fair market value of
the Common Stock on the date of option grant.
Upon certain changes in control of the Company, all outstanding options
under the 1993 Plan shall be continued, assumed or substituted by the surviving
entity. If the surviving entity determines not to continue, assume or substitute
such options, the time during which such options may be exercised shall be
accelerated and the options terminated if not exercised prior to such change of
control.
1991 STOCK OPTION PLAN
The 1991 Option Plan (the "1991 Plan") was adopted by the Board of
Directors of Alfalfa's in August 1991. In connection with the acquisition of
Alfalfa's, the vesting of all options granted under the 1991 Plan was
accelerated. There are currently 81,193 shares subject to vested options. In
August 1996, the Board of Directors designated all shares formerly available for
issuance under the 1991 Plan to be available for issuance under the Incentive
Plan and amended the 1991 Plan to provide that any shares of Common Stock that
are subject to an option which expires or otherwise terminates prior to exercise
shall be transferred to the Incentive Plan.
The terms of stock options granted under the 1991 Plan generally may not
exceed 10 years. The exercise price of options granted under the 1991 Plan
cannot be less than 100% of the fair market value of the Common Stock on the
date of the option grant.
EMPLOYEE STOCK PURCHASE PLAN
In August 1996, the Company's Board of Directors approved the Employee
Stock Purchase Plan (the "Purchase Plan") covering an aggregate of 127,692
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 Code. Under the
Purchase Plan, the Board of Directors may authorize participation by eligible
employees, including officers, in periodic offerings following the adoption of
the Purchase Plan. The offering period for any offering will be no more than 27
months. The Board has currently authorized an offering commencing on the
effectiveness of the initial public offering of the Company's Common Stock and
ending June 30, 1997, and sequential six-months 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 for at least six months preceding the
beginning of the offering. Employees can have up to 15% of their earnings
withheld pursuant to
51
<PAGE> 54
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. Employees may end their participation in the offering at
any time during the offering, and participation ends automatically on
termination of employment.
In the event of certain changes of control, the Company and the Board of
Directors has discretion to provide that each right to purchase Common Stock
will be assumed or an equivalent right substituted by the successor corporation,
or the Board may shorten an offering and provide for all sums collected by
payroll deductions to be applied to purchase stock immediately prior to the
change in control. The Purchase Plan will terminate at the Board's direction.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Chamberlain, Feinblum, Ferguson, Koldyke and McElwee currently
serve as members of the Compensation Committee. Mr. Ferguson is a general
partner of Chase Capital Partners. Mr. Koldyke is a general partner of Frontenac
Company, the general partner of Frontenac. Mr. McElwee is a general partner of
Weston Presidio Capital. See "Certain Transactions" for a description of certain
transactions involving these entities. Compensation of Messrs. Behrendt,
Chamberlain, Feinblum, Ferguson, Koldyke, McElwee and Shields, is determined by
the entire Board of Directors with a view to attracting and retaining talented
individuals to serve as directors.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation of the Company's
President and Chief Executive Officer and the three next most highly compensated
executive officers (collectively, the "Named Executive Officers") for services
rendered in fiscal 1995:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1995 ANNUAL
COMPENSATION
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY BONUS COMPENSATION
- ---------------------------------------------------------- -------- ------- ------------
<S> <C> <C> <C>
Michael C. Gilliland...................................... $148,936 -- $6,132(2)
President and Chief Executive
Officer
Elizabeth C. Cook......................................... 144,631 -- 7,343(3)
Vice President, General Counsel, and Secretary
Mary Beth Lewis........................................... 90,174 $15,000 --
Treasurer and Chief Financial
Officer
</TABLE>
- ---------------
(1) Mr. Gilliland served as the Company's President until July 1996. In July
1996, S.M. Hassan was appointed as President of the Company. Mr. Hassan's
annual salary is $150,000; his bonus and long term compensation are to be
determined by the Compensation Committee.
(2) Other compensation for Mr. Gilliland included: $1,496 in the form of health
insurance premiums, $864 in the form of automobile insurance premiums, and
$3,772 in the form of a matching contribution to Mr. Gilliland's account
under the Company's 401(k) plan.
(3) Other compensation for Ms. Cook included: $1,496 in the form of health
insurance premiums, $2,231 in the form of automobile insurance premiums and
$3,616 in the form of a matching contribution to Ms. Cook's account under
the Company's 401(k) plan.
OPTION GRANTS
The Company did not grant options to purchase shares of the Company's
Common Stock to any of the Named Executive Officers in the fiscal year ended
December 30, 1995.
52
<PAGE> 55
The following table sets forth, as of December 30, 1995: (i) the number of
unexercised options; and (ii) the value of unexercised in-the-money options
(i.e., options for which the fair market value of the Common Stock exceeds the
exercise price) held by the Named Executive Officers.
YEAR END OPTION VALUE TABLE
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 30, 1995 (#) DECEMBER 30, 1995
NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(2)
- ---------------------------------------------- ----------------------------- -----------------------------
<S> <C> <C>
Michael C. Gilliland.......................... / /
Elizabeth C. Cook............................. / /
Mary Beth Lewis............................... 3,911/11,000 $39,227/$57,859
</TABLE>
- ---------------
(1) On August 1, 1996, the Company granted: (i) Mr. Gilliland an option to
purchase 26,602 shares of Common Stock; (ii) Ms. Lewis an option to purchase
12,414 shares of Common Stock; and (iii) Mr. Hassan an option to purchase
17,735 shares of Common Stock.
(2) Based on the deemed fair market value of the Company's Common Stock at
December 30, 1995, less the exercise price payable per share.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with Messrs. Gilliland and
Hassan and Ms. Cook (each an "Executive") on July 12, 1996 (the "Employment
Agreements"). The Employment Agreements provide that each Executive will be
entitled to: (i) receive a base salary of $150,000, subject to increase as
determined by the Compensation Committee; (ii) participate in a cash bonus and
stock option program, with terms and related performance criteria to be
determined by the Compensation Committee; (iii) participate in any other
employee benefit programs for which the Company's senior executives are
eligible; and (iv) receive four weeks of paid vacation per year. The Employment
Agreements with Messrs. Gilliland and Hassan have two year terms, and the
Employment Agreement with Ms. Cook has a one year term, all subject to automatic
one year renewal periods, unless terminated: (i) by reason of the Executive's
death or disability; (ii) with or without cause, as defined in the Employment
Agreements and as determined by the Company's Board of Directors; or (iii) by
the Executive's written resignation. Upon termination of their respective
Employment Agreements, for any reason during the initial term, and by the
Company without cause or by the Executive for a material breach by the Company
during any subsequent renewal period, Messrs. Gilliland and Hassan will each be
entitled to receive three times his then effective annual base salary rate and
health insurance benefits for three years (two years in the case of Mr. Hassan
if the termination occurs after the initial two year term) and Ms. Cook will be
entitled to receive one and a half times her then effective annual base salary
rate and health insurance benefits for two years. Each Employment Agreement also
contains a non-compete provision which prohibits the Executive from rendering
services to any supermarket, food store or retailer of health and beauty aids
located within ten miles of a Company store or soliciting any of the Company's
employees to leave the Company during the term of the agreement or for three
years after the agreement is terminated (in the case of Ms. Cook, for two years
after the agreement is terminated).
The Company entered into an employment agreement with Mr. Lee on October 1,
1996. Mr. Lee's employment agreement provides for (i) base salary of $225,000,
subject to increase as determined by the Company's board of directors; (ii) a
car to be provided by the Company, including reimbursement for related
automobile expenses; (iii) an annual bonus of up to 50% of his base salary,
based on the Company achieving certain earnings targets; (iv) the Company to pay
all expenses related to medical and dental insurance coverage; and (v) four
weeks paid vacation per year. Mr. Lee's employment agreement has a one year term
and is subject to extension by the Company for an additional year. Mr. Lee's
employment is subject to termination upon (i) his death or permanent disability;
(ii) his voluntary resignation, (iii) his discharge for cause; or (iv) 30 days
after written notice by the Company. If the Company elects to terminate Mr.
Lee's employment without cause during the term of the agreement, it will be
obligated to pay him one year's salary. Mr. Lee's employment agreement also
provides non-competition and confidentiality obligations.
53
<PAGE> 56
401(K) PLAN
As of July 1, 1994, the Company adopted 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 ($9,500 in 1996) 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. The trustees under
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 Code so that contributions to the 401(k) Plan,
and income earned on the 401(k) Plan contributions are not taxable until
withdrawn, and so that the contributions by the Company will be deductible when
made.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company will indemnify its directors
and executive officers and may indemnify its other officers, employees and other
agents to the fullest extent not prohibited by Delaware law. The Company is also
empowered under its Bylaws to enter into indemnification contracts with its
directors and officers and to purchase insurance on behalf of any person it is
required or permitted to indemnify. Pursuant to this provision, the Company has
entered into indemnity agreements with each of its directors and executive
officers.
In addition, the Company's Certificate of Incorporation provides that, to
the fullest extent permitted by Delaware law, the Company's directors will not
be liable for monetary damages for breach of the directors' fiduciary duty of
care to the Company or its stockholders. This provision in the Certificate of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances equitable remedies, such as an injunction or other forms of
non-monetary relief, would remain available under Delaware law. Each director
will continue to be subject to liability for breach of the director's duty of
loyalty to the Company or its stockholders, for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
any transaction from which the director derived an improper personal benefit and
for improper distributions to stockholders. This provision also does not affect
a director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws.
There is no pending litigation or proceeding involving a director or
officer of the Company as to which indemnification is being sought, nor is the
Company aware of any pending or threatened litigation that may result in claims
for indemnification by any director or officer.
54
<PAGE> 57
CERTAIN TRANSACTIONS
In July 1996, the Company sold 876,016 shares of its Series E Preferred
Stock, par value $.001 (the "Series E Financing") to a group of investors,
including 797,341 shares to Chase and 60,067 shares to Weston, at a price per
share of $18.81. David L. Ferguson, a general partner of Chase and James B.
McElwee, a general partner of Weston are both directors of the Company.
In November 1994, the Company sold 557,067 and 175,917 shares of its Series
C Preferred Stock, par value $.001, to Chase and Weston, respectively, at a
price per share of $17.10. The Company also issued two warrants to purchase
1,285 and 1,393 shares of Series B Preferred Stock, respectively, to Weston.
Additionally, in July 1993, the Company sold 298,730 shares of its Series A
Preferred Stock, par value $.001, to Weston at a price per share of $7.05.
In July 1996, in connection with the acquisition of Alfalfa's, Frontenac
received 12,355 shares of the Company's Common Stock and 408,336 shares of the
Company's Series D Preferred Stock, par value $.001 in exchange for certain
shares of Alfalfa's which Frontenac had previously purchased. M. Laird Koldyke,
a director of the Company, is also a general partner of Frontenac Company, which
is the general partner of Frontenac.
In connection with the acquisition of Alfalfa's and the Series E Financing,
the Company entered into the Stockholders Agreement and a Registration Rights
Agreement dated as of July 12, 1996 by and among certain investors (the
"Registration Rights Agreement"). The Stockholders Agreement also provides that,
until consummation of this offering, the Company's Board of Directors shall
consist of eleven Directors as follows: (i) Mr. McElwee as the representative
designated by the holders of the Company's Series A Preferred Stock; (ii) Mr.
Ferguson as the representative designated by the holders of the Company's Series
C Preferred Stock; (iii) Mr. Koldyke as the representative designated by the
holders of the Company's Series D Preferred Stock; (iv) one representative to be
designated by the holders of the Company's Series E Preferred Stock; (v) Mr.
Hassan; (vi) Mr. Gilliland; (vii) Ms. Cook; (viii) Mr. Feinblum; (ix) Mr.
Shields; and (x) two independent directors who are currently Messrs. Behrendt
and Chamberlain.
Upon the consummation of this offering, the Stockholders Agreement will be
amended and restated (the "Restated Stockholders Agreement") to terminate the
provisions of the Stockholders Agreement which do not survive this offering by
their terms. The surviving provisions include, among other things, that for four
years after this offering, the holders of 4,049,371 shares of Common Stock shall
be obligated to vote their shares in favor of a nominee of Chase to be elected
to the Company's Board of Directors, Audit and Compensation Committees and shall
vote to elect the nominee of Weston to the Audit and Compensation.
The Registration Rights Agreement provides that certain holders of the
Company's securities will have the right to request the Company to register
certain securities with the Securities and Exchange Commission. See "Description
of Capital Stock--Registration Rights."
In March 1995 the Company paid Messrs. Gilliland and Clapp and Ms. Cook
approximately $88,000, $88,000 and $93,000, respectively, in satisfaction of
certain notes which the Company had issued between 1992 and 1995 in connection
with loans made to the Company for working capital. The notes had original
principal amounts of approximately $235,000, $276,000 and $235,000,
respectively, and had annual compound interest rates of 9% to 10%. See
"Principal and Selling Stockholders."
Messrs. Gilliland and Clapp and Ms. Cook own Pretty Good Groceries, Inc. a
Colorado company ("PGG") which operates two grocery stores in Boulder, Colorado.
The Company provides certain accounting, legal and administrative service to PGG
for a monthly fee of $1,000. PGG also purchases certain items through the
Company's volume 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. In July 1993, the Company
sold the assets of a certain convenience store to PGG for $214,000 in cash.
Messrs. Gilliland and Hassan and Ms. Cook have employment agreements with
the Company. See "Management--Employment Agreements."
55
<PAGE> 58
The Company purchases Horizon Organic Dairy, Inc. organic dairy products
from various distributors. Mr. Feinblum is the President and Chief Executive
Officer of Horizon Organic Dairy, Inc.
All future transactions between the Company and its officers, directors,
principal stockholders and affiliates will be on terms no less favorable to the
Company than may be obtained from unaffiliated third parties.
56
<PAGE> 59
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of August 1, 1996, and as
adjusted to reflect the sale of the Common Stock being offered hereby by: (i)
each Selling Stockholder; (ii) each person (or group of affiliated persons) who
is known by the Company to own beneficially more than 5% of the Common Stock;
(iii) each of the Company's directors; (iv) each of the Named Executive
Officers; and (v) all directors and executive officers of the Company as a
group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO AFTER
THE OFFERING(1)(2) NUMBER OF SHARES THE OFFERING(1)(2)
--------------------- TO BE SOLD ---------------------
NAME NUMBER PERCENT IN THE OFFERING NUMBER PERCENT
- ------------------------------------------ --------- ------- ---------------- --------- -------
<S> <C> <C> <C> <C> <C>
Michael C. Gilliland(3)................... 1,602,060 29.3% 102,502 1,499,558 21.8%
Wild Oats Markets, Inc.
1645 Broadway
Boulder, CO 80302
Elizabeth C. Cook(4)...................... 1,602,060 29.3 102,502 1,499,558 21.8
Wild Oats Markets, Inc.
1645 Broadway
Boulder, CO 80302
Chase Capital Partners(5)................. 1,247,086 22.8 0 1,247,086 18.2
380 Madison Avenue, 12th Floor
New York, NY 10017
Mark R. Clapp............................. 601,353 11.0 136,500 464,853 6.8
2147 Kincaid
Boulder, CO 80304
Weston Presidio Offshore Capital
C.V.(6)................................. 537,392 9.8 0 537,392 7.8
343 Sansome Street, Suite 1210
San Francisco, CA 94104-1316
Frontenac VI Limited Partnership(7)....... 420,691 7.7 0 420,691 6.1
135 South LaSalle
Suite 3800
Chicago, IL 60603
S.M. Hassan(8)............................ 116,299 2.1 0 116,299 1.7
John A. Shields(9)........................ 39,338 * 0 39,338 *
David M. Chamberlain(10).................. 12,189 * 0 12,189 *
Peter D. Behrendt(11)..................... 9,651 * 0 9,651 *
Barnet M. Feinblum(12).................... 35,847 * 0 35,847 *
David L. Ferguson(5)...................... 1,247,086 22.8 0 1,247,086 18.2
M. Laird Koldyke(7)....................... 420,691 7.7 0 420,691 6.1
James B. McElwee(6)....................... 537,392 9.8 0 537,392 7.8
Mary Beth Lewis(13)....................... 5,867 * 0 5,867 *
Barry L. Perzow(14)....................... 29,149 * 3,000 26,149 *
David Wilkinson........................... 32,198 * 32,198 0 0
Bennett Bertoli(15)....................... 62,958 1.2 5,800 57,158 *
All directors and executive officers as a
group (11 persons)(16).................. 4,121,573 74.3 280,000 3,981,073 57.4
</TABLE>
- ---------------
* Less than one percent.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options, warrants and convertible notes currently exercisable
or convertible, or exercisable or convertible within 60 days of October
15, 1996, are deemed outstanding for computing the percentage of the
person or entity holding such securities but are not outstanding for
computing the percentage of any other person or entity. Except as
indicated by footnote, and subject to community property laws where
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them. The information set forth in the table has
been adjusted to reflect the effects of the automatic conversion, on the
closing date of this offering, of outstanding shares of all series of
preferred stock into shares of Common Stock. See "Description of Capital
Stock."
57
<PAGE> 60
(2) Percentage of ownership is based on 5,467,768 shares of Common Stock
outstanding before the offering and 6,867,768 shares of Common Stock
outstanding after the offering.
(3) Consists of 494,846 shares held by Mr. Gilliland, 494,846 shares held
by Elizabeth C. Cook, 6,860 shares held by the Ian Patrick Gilliland 1993
Trust, 598,648 shares held by the Gilliland(C)ook Family Investments,
L.P. and 6,860 shares held by the Stella Elizabeth Gilliland 1993 Trust.
Mr. Gilliland disclaims beneficial ownership to the 612,368 shares held
by the trusts. Assuming the exercise of the over-allotment option in
full, the number of shares owned after the offering by Mr. Gilliland
would be 1,441,057, which represents 21.0%.
(4) Consists of 494,846 shares held by Ms. Cook, 494,846 shares held by
Michael C. Gilliland, 6,860 shares held by the Ian Patrick Gilliland 1993
Trust, 598,648 shares held by the Gilliland(C)ook Family Investments,
L.P. and 6,860 shares held by the Stella Elizabeth Gilliland 1993 Trust.
Ms. Cook disclaims beneficial ownership of the 612,368 shares held by the
trusts. Assuming the exercise of the over-allotment option in full, the
number of shares owned after the offering by Mr. Cook would be 1,441,057,
which represents 21.0%.
(5) Consists of 1,247,086 shares held of record by Chase Venture Capital
Associates, L.P., a California limited partnership ("CVCA"). The general
partner of CVCA is Chase Capital Partners, a New York general partnership
("CCP"), of which Mr. Ferguson is one of several general partners. Mr.
Ferguson disclaims beneficial ownership of the shares owned by CVCA
except to the extent of his pecuniary interest therein arising from his
general partnership interest therein. The amount in the table excludes an
aggregate of 107,322 shares over which CVCA holds a proxy but which are
owned of record and beneficially by a separate partnership and limited
liability company; CVCA has no pecuniary interest in, or dispositive
authority over such shares and disclaims any beneficial interest therein.
(6) Consists of 534,714 shares and 2,678 shares issuable upon the exercise
of warrants held by Weston. Mr. McElwee is a general partner of Weston
Presidio Capital, the general partner of Weston. Mr. McElwee disclaims
beneficial ownership of the shares held by Weston except to the extent of
his pecuniary interest therein arising from his general partnership
interest therein.
(7) Consists of 420,691 shares held by Frontenac. Mr. Koldyke is a general
partner of Frontenac Company, the general partner of Frontenac. Mr.
Koldyke disclaims beneficial ownership of the shares held by Frontenac
except to the extent of his pecuniary interest therein arising from his
general partnership interest therein.
(8) Consists of 103,970 shares and 12,329 shares subject to stock options
that are exercisable within sixty (60) days of October 15, 1996 held by
Mr. Hassan.
(9) Consists of 30,531 shares and 8,807 shares subject to stock options
that are exercisable within sixty (60) days of October 15, 1996 held by
Mr. Shields.
(10) Consists of 7,619 shares and 4,570 shares subject to stock options that
are exercisable within sixty (60) days of October 15, 1996 held by Mr.
Chamberlain.
(11) Consists of 5,081 shares and 4,570 shares subject to stock options that
are exercisable within sixty (60) days of October 15, 1996 held by Mr.
Behrendt.
(12) Consists of 27,040 shares and 8,807 shares subject to stock options
that are exercisable within sixty (60) days of October 15, 1996 held by
Mr. Feinblum.
(13) Consists of 5,867 shares subject to stock options exercisable within
sixty (60) days of October 15, 1996 held by Ms. Lewis.
(14) Consists of 22,103 shares and 7,056 shares subject to stock options
that are exercisable within sixty (60) days of October 15, 1996 held by
Mr. Perzow. Mr. Perzow was formerly an officer and director of Alfalfa's.
(15) Consists of 57,091 shares and 5,867 shares subject to stock options
exercisable within sixty (60) days of October 15, 1996 held by Mr.
Bertoli.
(16) Includes shares included pursuant to Notes 3, 4, 5, 6, 7, 8, 9, 10, 11,
12, 13, 14 and includes 2,678 shares of Common Stock issuable upon the
exercise of warrants and 50,817 shares subject to stock options that are
exercisable within sixty (60) days of October 15, 1996.
58
<PAGE> 61
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Amended and Restated Certificate of Incorporation
and Bylaws is a summary and is qualified in its entirety by the provisions of
the Amended and Restated Certificate of Incorporation and Bylaws, which have
been filed as exhibits to the Company's Registration Statement, of which this
Prospectus is a part.
Upon the closing of this offering, the Company's authorized capital stock
will consist of 20,000,000 shares of Common Stock, $.001 par value per share,
and 5,000,000 shares of preferred stock, $.001 par value per share.
COMMON STOCK
As of September 30, 1996, there were 5,467,768 shares of Common Stock
outstanding held by approximately 139 holders of record. The holder of each
share of Common Stock shall have the right to one vote on such matters and in
such manner as may be provided by law. The holders of Common Stock are not
entitled to cumulative voting rights with respect to the election of directors,
and as a consequence, minority stockholders will not be able to elect directors
on the basis of their votes alone. Subject to the prior rights of holders of all
classes of stock at the time outstanding having prior rights as to dividends,
the holders of Common Stock are entitled to receive, when and as declared by the
Board of Directors, out of any assets of the Company legally available therefor,
such dividends as may be declared from time to time by the Board of Directors.
See "Dividend Policy." In the event of a liquidation, dissolution or winding up
of the Company, whether voluntary or involuntary, holders of the Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any then outstanding preferred
stock. Holders of Common Stock have no preemptive rights and no right to convert
their Common Stock into any other securities. There are no redemption or sinking
fund provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of preferred stock in one or more
series and to determine or alter the designations, preferences, and relative,
participating, optional or other rights, and such qualifications, limitations or
restrictions thereof, as shall be stated in resolutions adopted by the Board of
Directors and as may be permitted by the General Corporation Law of the State of
Delaware. The issuance of preferred stock could adversely affect the voting
power of holders of Common Stock and the likelihood that such holders will
receive dividend payments and payments upon liquidation and could have the
effect of delaying, deferring or preventing a change in control of the Company.
The Company has no present plan to issue any shares of preferred stock. See
"Risk Factors--Anti-Takeover Considerations."
WARRANTS
The Company has outstanding warrants to purchase an aggregate of 6,191
shares of Common Stock at weighted average exercise price of $16.50 per share
which expire November 14, 1999.
REGISTRATION RIGHTS
Upon the closing of this offering, the Company's Series A, B, C, D and E
Preferred Stock will be converted into an aggregate of 2,325,487 shares of the
Company's Common Stock (the "Preferred Shares"). The Company has entered into a
registration rights agreement (the "Registration Rights Agreement") with: (i)
the holders of the Preferred Shares; (ii) Mark R. Clapp, Elizabeth C. Cook,
Michael C. Gilliland, S.M. Hassan and Barry Perzow (together, "the Additional
Holders"); and (iii) the holders of certain outstanding warrants, covering in
the aggregate 4,423,781 outstanding shares of Common Stock (the "Warrant
Shares"). The Preferred Shares, the shares held by the Additional Holders and
the Warrant Shares are referred to collectively herein as the "Registrable
Securities." The Registration Rights Agreement provides that six months after
the effective date of the Company's first registration statement and upon the
request from a holder or holders owning more than 60% of the shares issued upon
conversion of any particular
59
<PAGE> 62
series of preferred stock, the Company shall: (i) give notice to the other
holders of Registrable Securities of the receipt of a request for registration
and such holders' right to participate in such registration: and (ii) effect a
registration under the Act of all Registrable Securities requested to be
included in such registration (a "Demand Registration"). The holders of shares
of Common Stock issued upon the conversion of each respective series of
preferred stock are limited to two Demand Registrations per series of preferred
stock and all such registrations are subject to underwriter cutback. Once during
any twelve month period the Company may defer its obligation to effect a Demand
Registration for up to 90 days if the Company's Board of Directors believes it
would be detrimental to the Company to file a registration statement at that
time.
In addition, after the Company becomes eligible to file a registration
statement on Form S-3, upon the request from an Additional Holder or a holder or
holders owning more than 60% of the shares issued upon conversion of any
particular series of preferred stock, the Company will be obligated to file a
registration statement on Form S-3 covering the shares held by the holders
requesting such registration and such other Registrable Securities as may be
requested to be included in such registration (a "Form S-3 Registration").
The Registration Rights Agreement also provides that the Company is
obligated to pay the expenses of (i) any Demand Registration, (ii) three Form
S-3 Registrations covering shares issued upon conversion of any particular
series of preferred stock, and (iii) three Form S-3 Registrations covering
shares held by the Additional Holders.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Delaware Law"), an anti-takeover law. In general,
the statute prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
For purposes of Section 203, a "business combination" includes a merger, asset
sale or other transaction resulting in a financial benefit to the interested
stockholder, and an "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years prior, did own) 15% or
more of the corporation's voting stock. The Company's Certificate of
Incorporation provides that the authorized number of directors may be changed
only by resolution of the Board of Directors.
Upon the closing of this offering, the Company's Amended and Restated
Certificate of Incorporation (the "Certificate") will provide that any action
required or permitted to be taken by stockholders of the Company must be
effected at a duly called annual or special meeting of the stockholders and may
not be effected by a consent in writing. Special meetings of the stockholders of
the Company may be called only by the Board of Directors, the Chairman of the
Board or the Chief Executive Officer. The Company's Amended and Restated
Certificate of Incorporation will also provide that the authorized number of
directors may be changed only by resolution of the Board of Directors, and that
directors can only be removed for cause by a majority vote of the stockholders.
In addition, the Company's Amended and Restated Certificate of Incorporation
will provide for the classification of the Board of Directors into three
classes, only one of which shall be elected at any given annual meeting. These
provisions may have the effect of delaying, deterring or preventing a change in
control of the Company or depressing the market price of Common Stock or
discouraging hostile takeover bids in which stockholders of the Company could
receive a premium for their shares of Common Stock.
TRANSFER AGENT AND REGISTRAR
Norwest Bank Minneapolis, N.A. has been appointed as the transfer agent and
registrar for the Company's Common Stock.
60
<PAGE> 63
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding an
aggregate of 6,867,768 shares of Common Stock assuming: (i) no exercise of the
Underwriters' over-allotment option; and (ii) no exercise of outstanding options
and warrants. Of these shares, the 1,680,000 shares of Common Stock sold in this
offering, will be freely tradable without restriction or further registration
under the Securities Act, unless such shares are held by "affiliates" of the
Company, as that term is defined under the Securities Act and the Regulations
promulgated thereunder.
The remaining 5,187,768 shares of Common Stock are "Restricted Shares" and
are subject to restrictions under the Securities Act. 4,517,911 Restricted
Shares are subject to lock-up agreements under which the holders have agreed not
to sell or otherwise dispose of any of their shares for a period of 180 days
after the date of this Prospectus without the prior written consent of
Montgomery Securities. Approximately 453,226 Restricted Shares will be eligible
for sale in the public market pursuant to Rule 144(k) under the Securities Act
as of the date of this Prospectus. These 453,226 shares are held by 64
stockholders. Beginning 90 days after the date of this Prospectus, approximately
166,663 Restricted Shares will be eligible for sale in the public market
pursuant to Rule 144 and Rule 701 under the Securities Act. Beginning 180 days
after the date of the Prospectus, approximately 549,532 Restricted Shares will
become available for sale in the public market subject to the volume and other
limitations of Rule 144. The remaining 4,018,347 Restricted Shares will begin to
be eligible for sale beginning in April 1997.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
restricted shares for at least two years is entitled to sell, within any
three-month period commencing 90 days after the effective date of this offering,
a number of shares that does not exceed the greater of: (i) 1% of the then
outstanding shares of Common Stock (approximately 68,678 shares immediately
after this offering); or (ii) the average weekly trading volume in the Common
Stock during the four calendar weeks preceding such sale, subject to the filing
of a Form 144 with respect to such sale and certain other limitations and
restrictions. In addition, a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least three years,
would be entitled to sell such shares under Rule 144(k) without regard to the
volume limitations described above.
Any employee, officer, director or consultant of the Company who purchased
his or her shares pursuant to a written compensatory plan or contract is
entitled to rely on the resale provisions of Rule 701, which permits
non-affiliates to sell their Rule 701 shares without having to comply with the
public-information, holding-period, volume-limitation or notice provisions of
Rule 144 and permits affiliates to sell their Rule 701 shares without having to
comply with Rule 144's holding period restrictions, in each case commencing 90
days after the Effective Date.
The Company intends to file a registration statement on Form S-8 under the
Securities Act to register 958,878 shares of Common Stock reserved for issuance
under the Company's equity incentive plans and the Purchase Plan 90 days after
the effective date of this offering, thus permitting the resale of such shares
by non-affiliates in the public market without restriction under the Securities
Act. Such registration statements will become effective immediately upon filing.
At August 1, 1996, options to purchase 659,979 shares of Common Stock were
outstanding under the Company's equity incentive plans, of which options for
167,701 shares of Common Stock were exercisable, and no shares of Common Stock
had been issued under the Purchase Plan.
Prior to this offering, there has been no public market for the Common
Stock of the Company, and any sale of substantial amounts in the open market may
adversely affect the market price of the Common Stock offered hereby.
61
<PAGE> 64
UNDERWRITING
The Underwriters named below, represented by Montgomery Securities and
Smith Barney Inc. (the "Representatives"), have severally agreed, subject to the
terms and conditions set forth in the Underwriting Agreement (the "Underwriting
Agreement") by and among the Company, the Selling Stockholders and the
Underwriters, to purchase from the Company and the Selling Stockholders the
number of shares of Common Stock indicated below opposite their respective
names, at the initial public offering price less the underwriting discount set
forth on the cover page of this Prospectus. The Underwriting Agreement provides
that the obligations of the Underwriters are subject to certain conditions
precedent and that the Underwriters are committed to purchase all of the shares
if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
---------------------------------------------------------------------- ---------
<S> <C>
Montgomery Securities................................................. 445,000
Smith Barney Inc...................................................... 445,000
Alex. Brown & Sons Incorporated....................................... 70,000
Donaldson, Lufkin & Jenrette Securities Corporation................... 70,000
Hambrecht & Quist LLC................................................. 70,000
PaineWebber Incorporated.............................................. 70,000
Robertson, Stephens & Company LLC..................................... 70,000
Adams, Harkness & Hill, Inc. ......................................... 40,000
William Blair & Company, L.L.C. ...................................... 40,000
EVEREN Securities, Inc. .............................................. 40,000
Hanifen, Imhoff Inc. ................................................. 40,000
Kirkpatrick, Pettis, Smith, Polian Inc. .............................. 40,000
Needham & Company, Inc. .............................................. 40,000
Piper Jaffray Inc. ................................................... 40,000
Southwest Securities, Inc. ........................................... 40,000
Stifel, Nicolaus & Company, Incorporated.............................. 40,000
Sutro & Co. Incorporated.............................................. 40,000
H.C. Wainwright & Co., Inc. .......................................... 40,000
---------
Total....................................................... 1,680,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose initially to offer the shares of Common Stock to
the public at the public offering price set forth in the cover page of this
Prospectus. The Underwriters may allow selected dealers a concession of not more
than $1.00 per share and the Underwriters may allow, and such dealers may
reallow, a concession not in excess of $0.10 per share to certain dealers. After
the initial public offering, the public offering price and other selling terms
may be changed by the Representatives. The Common Stock is offered subject to
receipt and acceptance by the Underwriters, and to certain other conditions,
including the right to reject orders in whole or in part.
The Company and certain Selling Stockholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of 193,499 and 58,501 additional shares
of Common Stock, respectively, to cover overallotment options, if any, at the
same price as the initial shares to be purchased by the Underwriters. To the
extent that the Underwriters exercise this option, each of the Underwriters will
be committed, subject to certain conditions, to purchase such additional shares
in approximately the same proportion as set forth in the above table.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act, or will contribute to payments
the Underwriters may be required to make in respect thereof.
The Company's executive officers, directors and certain other stockholders
of the Company holding an aggregate of 4,517,911 shares of Common Stock, 2,678
warrants to purchase shares of Common Stock and options to purchase 156,635
shares of Common Stock, have agreed that they will not directly or indirectly
62
<PAGE> 65
offer to sell, sell or otherwise dispose of any of such Common Stock or any
securities convertible into or exchangeable therefor for a period of 180 days
after the date of this Prospectus without the prior written consent of
Montgomery Securities. The Company has agreed not to sell any shares of Common
Stock for a period of 180 days from the date of this Prospectus without the
prior written consent of Montgomery Securities, except pursuant to the Company's
equity incentive plans. See "Shares Eligible for Future Sale."
The Representatives have informed the Company that the Underwriters do not
expect to make sales to accounts over which they exercise discretionary activity
in excess of 5% of the number of shares of Common Stock offered hereby.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price was determined by
negotiations among the Representatives of the Underwriters, the Company and the
Selling Stockholders. Among the factors considered in such negotiation was the
history of, and the prospects for, the Company and the industry in which it
competes, an assessment of the Company's management, its past and present
earnings and the trend of such earnings, the prospects for future earnings of
the Company, the present state of the Company's development, the general
condition of securities markets at the time of this offering and the market
price of publicly traded stock of comparable companies in recent periods.
Montgomery Securities owns 12,060 shares of Common Stock and warrants to
purchase 3,513 shares of Common Stock at a price of $21.32 per share. Montgomery
Securities will not participate as a selling stockholder in this offering. In
addition, Montgomery Securities performed investment banking and financial
advisory services on behalf of the Company in connection with certain of the
Company's private financings, for which such firm received customary fees.
63
<PAGE> 66
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Cooley Godward LLP, Boulder, Colorado. Certain legal matters relating
to the offering will be passed upon for the Underwriters by Brobeck, Phleger &
Harrison LLP, Palo Alto, California.
EXPERTS
The consolidated financial statements of Wild Oats Markets, Inc. as of
December 30, 1995 and December 31, 1994 and for each of the three years in the
period ended December 30, 1995, the consolidated financial statements of
Alfalfa's, Inc. as of June 30, 1996 and for the year then ended, the combined
statements of operations and retained earnings and cash flows for Kathy's
Natural Foods Ranch Markets for the period from January 1, 1994 through July 13,
1994 and the year ended December 31, 1993, and the combined financial statements
of New Frontiers as of December 31, 1995 and 1994 and for each of the three
years in the period ended December 31, 1995 included in this Prospectus have
been so included in reliance on the reports of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of Alfalfa's, Inc. and its
subsidiaries as of June 25, 1995 and for the years ended June 25, 1995 and June
26, 1994 included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement (the "Registration Statement")
under the Act with respect to the Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules thereto. For further information with respect to
the Company and such Common Stock, reference is made to the Registration
Statement and the schedules and exhibits filed as a part thereof. Statements
contained in this Prospectus regarding the contents of any contract or any other
document are not necessarily complete and, in each instance, reference is hereby
made to the copy of such contract or document filed as an exhibit to the
Registration Statement. The Registration Statement, including exhibits thereto,
may be inspected without charge at the Securities and Exchange Commission's
principal office in Washington, D.C., and copies of all or any part thereof may
be obtained from the Public Reference Section, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, on payment of the
prescribed fees. The Securities and Exchange Commission also maintains a site on
the World Wide Web that contains reports, proxy and information statements, and
other information regarding the Company. The address for such site is
http://www.sec.gov.
64
<PAGE> 67
WILD OATS MARKETS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WILD OATS MARKETS, INC.
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheet............................................................ F-3
Consolidated Statement of Operations.................................................. F-4
Consolidated Statement of Changes in Stockholders' Equity (Deficit)................... F-5
Consolidated Statement of Cash Flows.................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
ALFALFA'S, INC.
Report of Independent Accountants..................................................... F-17
Independent Auditor's Report.......................................................... F-18
Consolidated Balance Sheet............................................................ F-19
Consolidated Statement of Operations.................................................. F-21
Consolidated Statement of Changes in Stockholders' Equity............................. F-22
Consolidated Statement of Cash Flows.................................................. F-23
Notes to Consolidated Financial Statements............................................ F-24
KATHY'S NATURAL FOODS RANCH MARKETS
Report of Independent Accountants..................................................... F-31
Combined Statement of Operations and Retained Earnings................................ F-32
Combined Statement of Cash Flows...................................................... F-33
Notes to Combined Financial Statements................................................ F-34
NEW FRONTIERS
Report of Independent Accountants..................................................... F-36
Combined Balance Sheet................................................................ F-37
Combined Statement of Operations...................................................... F-38
Combined Statement of Changes in Stockholders' Equity................................. F-39
Combined Statement of Cash Flows...................................................... F-40
Notes to Combined Financial Statements................................................ F-41
</TABLE>
F-1
<PAGE> 68
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Wild Oats Markets, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of changes in stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Wild Oats Markets, Inc. and its subsidiaries at December
31, 1994 and December 30, 1995 and the results of their operations and their
cash flows for each of the three years in the period ended December 30, 1995, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards 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 provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Boulder, Colorado
February 9, 1996, except for Note 2,
as to which the date is July 14, 1996
and Note 1, paragraph three, as to which
the date is October 15, 1996
F-2
<PAGE> 69
WILD OATS MARKETS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 29,
1996
PRO FORMA
DECEMBER 31, DECEMBER 30, JUNE 29, STOCKHOLDERS'
1994 1995 1996 EQUITY
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 6,413 $ 1,150 $ 1,630
Inventories, net........................................... 4,426 7,789 9,849
Accounts receivable (net of allowance for doubtful accounts
of $37, $47 and $48 (unaudited))........................ 90 378 753
Income tax receivable...................................... 166 1,367 1,306
Prepaid expenses and other current assets.................. 147 464 766
Deferred income taxes...................................... 252 343 490
------- ------- -------
Total current assets.................................... 11,494 11,491 14,794
Property and equipment, net.................................. 6,516 19,318 23,329
Intangible assets, net....................................... 5,928 7,309 9,507
Deposits..................................................... 115 258 277
------- ------- -------
$24,053 $38,376 $47,907
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................... $ 3,370 $ 8,468 $ 9,629
Accrued wages and employee costs........................... 742 1,230 2,020
Accrued sales and property taxes........................... 416 793 899
Deferred charges and other accruals........................ 538 444 972
Notes payable.............................................. 1,610
Current portion of long-term debt.......................... 2,998 96
Current portion of capitalized lease obligations........... 152 82 65
------- ------- -------
Total current liabilities............................... 8,216 11,017 15,291
Long-term debt............................................... 2,940 13,236 17,532
Capitalized lease obligations................................ 138 66 60
Deferred income taxes........................................ 386 1,310 1,779
------- ------- -------
11,680 25,629 34,662
------- ------- -------
Commitments (Note 9)
Redeemable convertible preferred stock; $.001 par value;
1,194,922 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; none pro forma
(unaudited)................................................ 15,018 16,956 18,009
------- ------- -------
Stockholders' equity (deficit):
Common stock (equivalent shares basis); $.001 par value;
4,445,397 shares authorized; 2,722,734, 2,723,307,
2,724,770 and 3,399,344 (unaudited) issued; 2,321,716,
2,321,716, 2,321,716 (unaudited) and 3,399,344 pro forma
(unaudited) outstanding................................. 3 3 3 $ 4
Additional paid-in capital................................. 2,864 2,868 2,881 15,527
Retained (deficit)......................................... (170) (1,731) (2,284) (2,329)
Treasury stock, at cost, 401,018, 401,591, 403,054 and none
pro forma (unaudited) shares............................ (5,342) (5,349) (5,364)
------- ------- ------- -------
Total stockholders' equity (deficit)............... (2,645) (4,209) (4,764) $13,202
------- ------- ------- =======
$24,053 $38,376 $47,907
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 70
WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
------------------------------------------ ---------------------------
JANUARY 1, DECEMBER 31, DECEMBER 30, JULY 1, JUNE 29,
1994 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales.............................. $47,266 $65,219 $98,517 $42,785 $68,929
Cost of goods sold and occupancy
costs............................ 32,344 44,637 67,164 28,798 46,956
------- ------- ------- ------- -------
Gross profit.................. 14,922 20,582 31,353 13,987 21,973
Operating expenses:
Direct store expenses............ 11,007 15,685 25,072 9,927 16,836
Selling, general and
administrative expenses....... 1,824 2,317 4,465 1,984 2,871
Pre-opening expenses............. 416 1,037 218 786
------- ------- ------- ------- -------
Income from operations........ 1,675 2,580 779 1,858 1,480
Interest expense................. 350 373 363 87 584
------- ------- ------- ------- -------
Income before income taxes.... 1,325 2,207 416 1,771 896
Income tax expense............ 347 880 40 703 395
------- ------- ------- ------- -------
Net income......................... 978 1,327 376 1,068 501
Accretion of redeemable preferred
stock............................ 134 484 1,937 948 1,054
------- ------- ------- ------- -------
Net income (loss) allocable to
common stock..................... $ 844 $ 843 $(1,561) $ 120 $ (553)
======= ======= ======= ======= =======
Pro forma presentation -- unaudited
(Note 8):
Income before tax --
historical.................... $ 1,325
Income tax expense -- pro
forma......................... 521
-------
Net income -- pro forma.......... 804
Accretion of redeemable preferred
stock............................ 134
-------
Net income allocable to common
stock -- pro forma (unaudited)... $ 670
=======
Unaudited income per
common share (Note 1)............ $ 0.10 $ 0.13
======= =======
Unaudited weighted average number
of common shares outstanding
(Note 1)......................... 3,864 3,886
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 71
WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK TREASURY STOCK ADDITIONAL RETAINED STOCKHOLDERS'
------------------------- ------------------------- PAID-IN EARNINGS (DEFICIT)
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 2,
1993.................. 2,489,423 $3 $1,612 $ (314) $ 1,301
Repurchase of common
stock................. 149,364 $(1,050) (1,050)
Stockholder draws....... (1,494) (1,494)
Payments on stock
subscription
receivable............ 42 42
Accretion of redeemable
preferred stock....... (134) (134)
Net income.............. 978 978
--------- --- ------- ------- ------ ------- -------
Balance at January 1,
1994.................. 2,489,423 3 149,364 (1,050) 1,654 (964) (357)
Issuance of common stock
($9.84 per share)..... 12,700 125 125
Issuance of common stock
($14.06 per share).... 4,139 58 58
Issuance of warrants to
purchase preferred
stock................. 27 27
Conversion of note
payable into shares of
common stock.......... 216,472 1,000 1,000
Repurchase of common
stock................. 251,654 (4,292) (4,292)
Accretion of redeemable
preferred stock....... (484) (484)
Stockholder draws....... (49) (49)
Net income.............. 1,327 1,327
--------- --- ------- ------- ------ ------- -------
Balance at December 31,
1994.................. 2,722,734 3 401,018 (5,342) 2,864 (170) (2,645)
Common stock options
exercised ($7.05 to
$17.10 per share)..... 573 4 4
Repurchase of common
stock................. 573 (7) (7)
Accretion of redeemable
preferred stock....... (1,937) (1,937)
Net income.............. 376 376
--------- --- ------- ------- ------ ------- -------
Balance at December 30,
1995.................. 2,723,307 3 401,591 (5,349) 2,868 (1,731) (4,209)
Common stock options
exercised ($7.05 to
$17.10 per share)..... 1,463 13 13
Repurchase of common
stock................. 1,463 (15) (15)
Accretion of redeemable
preferred stock....... (1,054) (1,054)
Net income.............. 501 501
--------- --- ------- ------- ------ ------- -------
Balance at June 29, 1996
(Unaudited)........... 2,724,770 $3 403,054 $(5,364) $2,881 $(2,284) $(4,764)
========= === ======= ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 72
WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
-------------------------------------------- ----------------------------
JANUARY 1, DECEMBER 31, DECEMBER 30, JULY 1, JUNE 29,
1994 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................ $ 978 $ 1,327 $ 376 $ 1,068 $ 501
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization........... 1,019 1,301 2,078 764 1,810
Loss on disposal of equipment........... 63 57 241 43 59
Deferred tax provision.................. 133 51 834 173 322
Change in assets and liabilities:
Inventories............................. (956) (570) (3,363) (1,095) (1,477)
Receivables and other assets............ (324) (224) (1,385) 100 (777)
Accounts payable........................ 1,045 (618) 5,098 2,893 619
Accrued liabilities..................... 93 205 747 582 1,245
---------- ---------- ---------- ---------- ----------
Net cash provided by operating
activities......................... 2,051 1,529 4,626 4,528 2,302
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................... (1,444) (1,907) (14,213) (3,663) (5,344)
Payment for purchase of acquired entities,
net of cash acquired.................... (2,361) (2,829) (2,829) (500)
---------- ---------- ---------- ---------- ----------
Net cash used by investing
activities......................... (1,444) (4,268) (17,042) (6,492) (5,844)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term debt.............. 2,333 3,095 13,236 4,046
Payments on long term debt................ (1,046) (3,546) (5,938) (3,465)
Principal payments under capitalized lease
obligations............................. (172) (143) (142) (77) (22)
Proceeds from preferred stock issuance,
net of stock issuance costs............. 2,029 12,369
Proceeds from issuance of common stock.... 125 4 2 13
Purchase of treasury stock................ (1,050) (4,292) (7) (3) (15)
Repayment of stock subscription
receivable.............................. 42
Stockholder draws......................... (1,494) (49)
---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities............... 642 7,559 7,153 (3,543) 4,022
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents............................. 1,249 4,820 (5,263) (5,507) 480
Cash and cash equivalents at beginning
of year................................. 344 1,593 6,413 6,413 1,150
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents at end of
year.................................... $ 1,593 $ 6,413 $ 1,150 $ 906 $ 1,630
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 73
WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Wild Oats Markets, Inc. (the "Company"), headquartered in Boulder,
Colorado, owns and operates natural foods supermarkets in the western
United States. The Company also operates bakeries, kitchens, and a
warehouse that supply the retail stores. The Company's operations are
concentrated in one market segment, grocery stores; however, management
considers a downturn in this market segment to be unlikely.
Prior to 1995, the consolidated financial statements included the accounts
of Wild Oats Markets, Inc. and its wholly-owned subsidiaries, The Wild
Side, Inc., Kathy's Natural Foods Ranch Market, Inc., and Kathy's Natural
Foods Ranch Market-West, Inc. All significant intercompany accounts and
transactions were eliminated upon consolidation. In 1995, all three
subsidiaries were dissolved and all assets and liabilities were absorbed by
the Company.
STOCK SPLIT
In connection with a proposed initial public offering of the Company's
common stock, a 1.7735 for 1 stock split has been approved and was
consummated 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.
FISCAL YEAR
The Company reports its financial results on a fifty-two or fifty-three
week fiscal year ending on the Saturday closest to December 31. Each fiscal
quarter consists of a thirteen week period, with one fourteen week period
in a fifty-three week year. All fiscal years presented were fifty-two week
periods.
STATEMENT OF CASH FLOWS
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less
to be cash equivalents. For these investments, fair market value
approximates cost. The Company paid $350,000, $426,000 and $380,000 in
interest charges in 1993, 1994 and 1995, respectively. The Company paid
income taxes of $262,000, $991,000 and $668,000 in 1993, 1994 and 1995,
respectively.
In May 1996, the Company acquired substantially all of the combined assets
of three related natural foods retail stores. Consideration for these
acquisitions was $500,000 in cash, $1.7 million in notes payable and
assumption of certain liabilities of $916,000.
In April 1995, the Company, in two separate transactions, acquired the
assets of two related but not commonly controlled California Limited
Partnerships. Consideration for these acquisitions was $2.8 million in cash
which was the net effect on cash and cash equivalents.
In July 1994, the Company acquired the outstanding stock of two commonly
controlled corporations. Consideration for this acquisition was in the form
of $2.8 million in cash, $3.6 million in notes payable, and $85,000 in
stock and warrants. The net effect on cash and cash equivalents at
acquisition date was a net use of $2.4 million after considering $396,000
of cash acquired in the transaction.
F-7
<PAGE> 74
WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Inventories are net of a reserve of approximately $146,000 and
$300,000 for 1994 and 1995, respectively.
DEPRECIATION AND AMORTIZATION
Property and equipment are recorded at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the respective
assets (three to seven years). Leasehold improvements are amortized on a
straight line basis over the shorter of the useful life of the asset or the
lease term. Maintenance and repairs are expensed as incurred and
improvements are capitalized.
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 $667,000 and $942,000 for 1994 and 1995, respectively. The
carrying value of goodwill is assessed for recoverability by management
based on an analysis of undiscounted expected future cash flows from the
related acquired entities. The Company believes that there has been no
impairment thereof as of December 30, 1995.
PRE-OPENING EXPENSES
Pre-opening expenses are included in other assets and consist primarily of
labor costs, rent, utilities, supplies, and other expenses incurred in
connection with the opening of a new store. Pre-opening expenses are
deferred until the stores' opening date, at which time such costs are
expensed in full.
ADVERTISING
Advertising is expensed as incurred. Advertising expense was $521,000,
$568,000 and $1.3 million for 1993, 1994 and 1995, respectively.
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 financial statements
and accompanying notes. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of," which requires losses to be recorded
on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement No. 121 also
addresses the accounting for long-lived assets that are expected to be
disposed. The Company adopted Statement No. 121 in the first quarter of
1996 and the effect of adoption was not material.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation," which requires that the Company's financial
statements include certain disclosures about stock-based employee
compensation arrangements. As allowed by Statement No. 123, the Company
will continue to apply the accounting provisions of Accounting Principles
Board Opinion No. 25; accordingly, the adoption of Statement No. 123 will
have no effect on future reported net income or earnings per share.
F-8
<PAGE> 75
WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTERIM FINANCIAL DATA
The interim financial data as of June 29, 1996 and for the six months ended
July 1, 1995 and June 29, 1996 is unaudited; however, in the opinion of
management of the Company, the interim data includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results for the interim periods presented. All data
presented in these notes at such date and for such periods is unaudited.
UNAUDITED PRO FORMA SHAREHOLDERS' EQUITY
The Board of Directors authorized management of the Company to file a
registration statement with the Securities and Exchange Commission ("SEC")
permitting the Company to sell shares of its common stock to the public. If
the Company's initial public offering is consummated under the terms
presently anticipated, all of the redeemable convertible preferred stock
outstanding will automatically convert into 1,038,457 shares of common
stock. In addition, in August 1996, the Company retired its outstanding
treasury stock. Unaudited pro forma shareholders' equity as of June 29,
1996, as set forth on the accompanying balance sheet, is adjusted for the
anticipated conversion of preferred stock and aforementioned retirement of
treasury stock.
UNAUDITED EARNINGS PER SHARE
Earnings per common share were computed, on a proforma basis, based on the
weighted average number of the Company's common shares outstanding on an
equivalent share basis giving effect to the reverse merger with Alfalfa's
Inc. (see Note 2). The Company's historical capital structure is not
indicative of its prospective structure due to the automatic conversion of
convertible preferred stock into common stock concurrent with the closing
of the Company's anticipated initial public offering. Accordingly,
historical net income (loss) per common share is not considered meaningful
and has not been presented herein.
Pro forma net income (loss) per common share is computed based on the
weighted average number of common shares outstanding and gives effect 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, except that, in conformity with SEC requirements,
common and common equivalent shares issued during the twelve-month period
prior to the filing of the Company's proposed 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including
cash, short-term trade receivables and payables and long-term debt,
approximate their fair values.
2. ACQUISITION OF ALFALFA'S INC.
On January 18, 1996, the Company signed a letter of intent to acquire
Alfalfa's, Inc., a natural foods supermarket chain located in Boulder,
Colorado. The acquisition closed on July 14, 1996. The total acquisition
cost was $39.1 million and was made up of $16.2 million of cash, issuance
of 783,421 shares of common stock and options to acquire 124,101 shares of
common stock valued at $14.2 million, issuance of 408,336 shares of
redeemable convertible Series D Preferred Stock valued at $7.7 million and
$1.0 million of acquisition related costs. The transaction was structured
so that Alfalfa's issued shares of its capital stock for shares of the
Company's capital stock; however, as the Company's shareholders controlled
a majority of the voting stock of the combined companies following the
acquisition, the
F-9
<PAGE> 76
WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
transaction was accounted for as a reverse acquisition with the Company as
the acquiror. Accordingly, all common shares and prices per share disclosed
in these financial statements have been adjusted on an equivalent share
basis. Immediately after the closing of the acquisition, the Company
repurchased shares of its capital stock from former Alfalfa's stockholders
who had approved the acquisition contingent upon such repurchase.
3. OTHER BUSINESS COMBINATIONS
On May 31, 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 cash and
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 value of the acquired assets
and liabilities at the acquisition date 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>
On April 22, 1995, the Company acquired the assets of a California Limited
Partnership operating a natural foods supermarket in northern California,
in exchange for $2.1 million in cash. The acquisition was accounted for
using the purchase method and the excess of cost over fair value of the
assets acquired of $1.4 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.......................................................... $ 302
Equipment............................................................... 447
Current liabilities..................................................... (15)
Goodwill................................................................ 1,369
------
$2,103
======
</TABLE>
In addition, on April 22, 1995, the Company acquired the assets of a second
California Limited Partnership operating a natural foods supermarket in
northern California, in exchange for $726,000 in cash. The acquisition was
accounted for using the purchase method and the excess of cost over fair
value of the assets acquired of $313,000 was allocated to goodwill, which
is being amortized on a straight-line basis over 40 years. The fair values
of the assets and liabilities at the date of acquisition are as follows (in
thousands):
<TABLE>
<S> <C>
Current assets............................................................ $262
Equipment................................................................. 160
Current liabilities....................................................... (9)
Goodwill.................................................................. 313
----
$726
====
</TABLE>
F-10
<PAGE> 77
WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 14, 1994, the Company acquired all of the outstanding stock of two
related corporations, located in Las Vegas, Nevada, each operating a
natural foods store under the name Kathy's Natural Foods Ranch Market, at a
total cost of $6.5 million. Consideration for the acquisition was in the
form of $2.8 million in cash, $3.6 million in notes payable, and $85,000 in
stock and warrants. The acquisition was accounted for using the purchase
method and resulted in goodwill of $5.8 million, which is being amortized
on a straight-line basis over 40 years. The fair values of the Kathy's
Natural Foods Ranch Markets assets and liabilities at the date of
acquisition are as follows (in thousands):
<TABLE>
<S> <C>
Current assets....................................................... $ 1,423
Property and equipment............................................... 1,239
Other assets......................................................... 80
Goodwill............................................................. 5,837
Current liabilities.................................................. (1,168)
Notes payable........................................................ (855)
Other liabilities.................................................... (90)
-------
$ 6,466
=======
</TABLE>
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,
except that in accordance with generally accepted accounting principles the
operations of the business acquired on May 31, 1996 have been excluded from
the 1994 pro forma results (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
--------------------------------------- ---------------------------------------
DECEMBER 31, 1994 DECEMBER 30, 1995 JULY 1, 1995 JUNE 29, 1996
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Sales................... $83,577 $111,304 $50,125 $73,742
Net income.............. 1,791 1,852 2,597 1,011
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 30, 1995
----------------- -----------------
<S> <C> <C>
Machinery and equipment................................ $ 5,833 $14,634
Leasehold improvements................................. 2,260 5,192
Land and building...................................... 338 338
Construction in progress............................... 436 3,022
Less: accumulated depreciation and amortization........ (2,351) (3,868)
------- -------
$ 6,516 $19,318
======= =======
</TABLE>
The amounts shown above include $618,338 and $338,016 of machinery and
equipment which are accounted for as capitalized leases and which have
accumulated amortization of $380,454 and $227,727 at fiscal year end 1994
and 1995, respectively.
F-11
<PAGE> 78
WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. NOTES PAYABLE AND LONG-TERM DEBT
At June 29, 1996, the Company had a short-term note payable of $1.6 million
which bears interest at an annual rate of 7% and matures on August 31,
1996.
Long-term debt outstanding consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
Notes payable to banks:
Due February 1, 2002, bearing interest, at the Company's
option, at the prime rate or LIBOR plus 1.75% ($5,236 at
8.25% and $8,000 at 7.625%, respectively, at December
30, 1995), secured by inventory and fixed assets........ $13,236
Due September 1995, bearing interest at prime plus 2.0%
(8.75% at December 31, 1994), secured by inventories and
equipment............................................... $ 713
Due December 1998, bearing interest at prime plus 1.75%
(10.25% at December 31, 1994), secured by property and
equipment............................................... 1,300
Due March 1996, bearing interest at 9%, secured by land and
building................................................ 400
Due March 1998, bearing interest at prime plus 1.5% (9.0%
at December 31, 1994), secured by property and
equipment............................................... 253
Due April 1995, bearing interest at 9%, secured by property
and equipment........................................... 69
Notes payable to corporations and individuals:
Due April 1995 to October 1995, non-interest bearing,
secured by shares of stock of an acquired entity........ 1,920
Due March 1997 to March 2004, bearing interest at 10%,
unsecured............................................... 773
Due January 1996, bearing interest at 9%, secured by
property and equipment.................................. 119
Due March 1996, bearing interest at 9%, secured by
property................................................ 14
Notes payable to stockholders:
Due May 1995-August 1997, bearing interest at 9%-10%,
unsecured............................................... 172
Due February 1997, bearing interest at 9%, secured by
inventory, fixtures and equipment....................... 94
Other notes payable.......................................... 111
------- -------
5,938 13,236
Less current portion......................................... (2,998)
------- -------
$ 2,940 $13,236
======= =======
</TABLE>
At December 30, 1995, the Company has no debt maturing between the years
1996 and 2000. Fair market value of debt outstanding at December 30, 1995
approximates its carrying value.
In March 1995, the Company entered into a credit agreement for a $20.0
million revolving line of credit. The facility has a three year draw
period, after which the commitment will reduce over a four year period. The
line bears interest, at the Company's option, at the prime rate or LIBOR
plus 1.75%. As of December 30, 1995, the Company had $13.2 million
outstanding on this line of credit. The line of credit agreement includes
certain financial and other covenants, as well as restrictions on payments
of dividends.
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On November 15, 1994, the Company issued 739,727 shares of Series C
Preferred Stock at $17.05 per share. On July 3, 1993, the Company issued
298,730 shares of Series A Preferred Stock at $7.03 per share. The
preferred stock has a liquidation preference of $7.03 per share plus
accrued dividends at 12% compounded annually for Series A and $17.05 per
share plus accrued dividends at 12% compounded
F-12
<PAGE> 79
WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
annually for Series C, participates in dividends declared on a pro rata
basis with common stock, and converts, at the option of the holder, into
common stock at a ratio of one to one. The preferred stock, by its terms,
converts to common stock at the closing of an initial public offering. If
not converted prior to September 30, 1997 for Series A and December 31,
1999 for Series C, upon election by the holders, the Company shall redeem
all outstanding preferred stock. The redemption price shall include the
original stock issue price plus an amount equal to a 12% return compounded
annually and is then payable in sixteen equal quarterly installments. Such
amounts would be payable as follows (in thousands):
<TABLE>
<S> <C>
1997..................................................... $ 426
1998..................................................... 851
1999..................................................... 2,259
2000..................................................... 6,483
2001..................................................... 6,058
2002..................................................... 5,632
2003..................................................... 4,224
-------
$25,933
=======
</TABLE>
During 1994, as consideration for providing certain bridge financing, the
Company issued two warrants to an existing stockholder to purchase an
aggregate of 2,678 shares of Series B Preferred Stock. The warrants have a
five year term and an exercise price of $9.84 to $10.59 per share,
respectively. The Series B Preferred Stock has all of the same rights,
terms and privileges as Series A Preferred Stock.
Also during 1994, as consideration for investment advisory services related
to the placement of Series C Preferred Stock, the Company issued a
five-year warrant to a Series C stockholder to purchase 3,513 shares of
Series C Preferred Stock at an exercise price of $21.32 per share.
The above warrants were valued at $27,000, which was recorded as additional
paid-in capital in 1994.
7. STOCK OPTIONS
The Company has an Incentive Stock Option Plan ("Plan") pursuant to which
incentive stock options to purchase up to 491,614 shares of the Company's
common stock may be issued to employees, officers and directors. Under the
Plan, stock options are granted at an exercise price not less than the fair
value of the stock on the date of grant, as determined by the Company's
board of directors. Outstanding options vest over a period of five years
and expire ten years from the date of grant. Options are only exercisable
during a thirty day period after termination. As of December 30, 1995, no
options were exercisable under the Plan.
Following is a summary of stock option transactions:
<TABLE>
<CAPTION>
QUALIFIED NON-QUALIFIED EXERCISE PRICE
------------ ------------- --------------
<S> <C> <C> <C>
Outstanding as of January 2, 1993.................
Granted........................................... 184,843 $ 7.05
Forfeited......................................... (3,370) $ 7.05
--------
Outstanding as of January 1, 1994................. 181,473 $ 7.05
Granted........................................... 85,004 23,815 $ 7.05-17.10
Forfeited......................................... (45,224) (1,774) $ 7.05- 9.87
-------- -------
Outstanding as of December 31, 1994............... 221,253 22,041 $ 7.05-17.10
Granted........................................... 115,100 $ 17.10
Forfeited......................................... (44,128) $ 7.05-17.10
Exercised......................................... (573) $ 7.05-17.10
-------- -------
Outstanding as of December 30, 1995............... 291,652 22,041 $ 7.05-17.10
======== =======
</TABLE>
F-13
<PAGE> 80
WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES
Effective July 3, 1993, the Company revoked its S corporation election. The
pro forma amounts below for the year ended January 1, 1994 are presented as
if the Company had been a taxable entity for the entire year.
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
JANUARY 1, YEAR ENDED
JANUARY 1, 1994 ---------------------------
1994 PRO FORMA DECEMBER 31, DECEMBER 30,
HISTORICAL (UNAUDITED) 1994 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Current: Federal.......................... $187 $522 $707 $(791)
State............................ 27 76 122 (3)
---- ---- ---- ----
214 598 829 (794)
---- ---- ---- ----
Deferred: Federal......................... 116 (67) 40 825
State........................... 17 (10) 11 9
---- ---- ---- ----
133 (77) 51 834
---- ---- ---- ----
$347 $521 $880 $ 40
==== ==== ==== ====
</TABLE>
Income taxes as reflected in the Consolidated Statement of Operations
differ from the amounts computed by applying the statutory federal
corporate tax rate to income as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------
JANUARY 1, DECEMBER 31, DECEMBER 30,
1994 1994 1995
------------- ------------ ------------
<S> <C> <C> <C>
Statutory tax rate................................... 34.0% 34.0% 34.0%
State income taxes, net of federal income tax
benefit............................................ 1.1 3.6 3.8
Tax effect of non-deductible goodwill................ 1.1 4.7
Non taxable S corporation income..................... (21.4)
Effect of conversion to C corporation................ 10.0
Disposal of assets................................... (30.7)
Other, net........................................... 2.5 1.2 (2.2)
---- ---- ----
Effective tax rate................................... 26.2% 39.9% 9.6%
==== ==== ====
</TABLE>
F-14
<PAGE> 81
WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
Deferred tax assets
Inventory related............................................ $ 74 $ 165
Property related............................................. 32
Accruals..................................................... 196 168
Net operating loss carry forward............................. 102
----- -------
Total deferred tax assets................................. 302 435
----- -------
Deferred tax liabilities
Property related............................................. (418) (1,310)
Pre-opening costs............................................ (18) (92)
----- -------
Total deferred tax liabilities............................ (436) (1,402)
----- -------
Net deferred tax liability..................................... $(134) $ (967)
===== =======
</TABLE>
The tax years 1993 through 1995 are open for examination by the Internal
Revenue Service (IRS). The Company's federal income tax return for 1994 is
currently under examination by the IRS. No formal report has been issued to
date. It is management's belief that the outcome of the examination will
not have an adverse effect on the Company's consolidated financial
statements.
9. COMMITMENTS
The Company has several noncancelable 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
$1.2 million, $1.8 million and $2.6 million during 1993, 1994 and 1995,
respectively.
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments as of December 30,
1995 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES TOTAL
---------------- ---------------- ----------------
<S> <C> <C> <C>
Fiscal year ending
1996.................................... $ 92 $ 3,549 $ 3,641
1997.................................... 59 3,957 4,016
1998.................................... 9 3,704 3,713
1999.................................... 3,419 3,419
2000.................................... 3,204 3,204
Thereafter.............................. 19,336 19,336
----- ------- -------
Total minimum lease payments.............. 160 $37,169 $37,329
======= =======
Less amount representing interest......... (13)
-----
Present value of minimum capital lease
payments................................ 147
Less current portion...................... (81)
-----
$ 66
=====
</TABLE>
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 1993, 1994 and
1995, the Company paid contingent rentals of $115,000, $165,000 and
$158,000, respectively.
F-15
<PAGE> 82
WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. RELATED PARTY TRANSACTIONS
On July 4, 1993, the Company sold the assets of a small convenience store
to a company controlled by a related party for gross proceeds of $200,000
resulting in an after tax gain of $57,000.
11. SUBSEQUENT EVENTS (UNAUDITED)
In July 1996, in connection with the acquisition of Alfalfa's, the Company
amended and restated its Certificate of Incorporation to give effect to the
following: (i) the Series A Preferred Stock and Series C Preferred Stock
liquidation preferences were amended to reduce the dividend to 10%
compounded annually, respectively; and (ii) the Series A Preferred Stock
redemption election date was amended to be December 31, 1999.
Also, in July 1996, immediately prior to the acquisition of Alfalfa's, the
Company sold 862,724 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 stockholders. In addition, as part of the
consideration in the acquisition of Alfalfa's, the Company issued Series D
Preferred Stock. Both the Series D and E have the same liquidation
preference of $18.81 per share plus all of the same rights, preferences and
privileges as the Series A and C Preferred Stock.
Further, in July 1996, the Company received a commitment from its lender to
increase its borrowing capacity under its revolving line of credit to $40.0
million.
As of August 1996, the Company had paid off a short-term note payable with
a principal balance of $1.6 million and interest of $23,000. The Company
incurred no penalty for early repayment of the note.
During late August 1996, the Company's Board of Directors made the
following decisions relating to the Company's operations, which are
expected to result in an approximate $7.3 million non-recurring charge
being recorded in the three months ending September 28, 1996. Specifically,
as a direct result of the July 1996 acquisition of Alfalfa's, the Company
expects to incur $2.0 million by: (1) closing the Wild Oats Lawrence,
Kansas store as well as a regional bakery and kitchen; (2) moving out of
its existing corporate headquarters and relocating to Alfalfa's; and (3)
consolidating certain information systems, thereby abandoning certain Wild
Oats hardware and software. In addition, after operating the combined
businesses, management has decided to close the Alfalfa's Seattle,
Washington store and a restaurant in a Capers Store which at the time of
the acquisition it had planned to retain. These closures are expected to
result in the remaining $5.3 million of the charge. Components of the
non-recurring charge are expected to consist primarily of lease
cancellation costs ($1.1 million), employee severance and relocation costs
($467,000) and losses on disposal or abandonment of certain assets ($5.8
million).
The Company is under investigation by the New Mexico Assistant Attorney
General alleging possible violations of anti-trust laws as a result of the
acquisition of Alfalfa's. The Company replied refuting the Attorney
General's claim. The Company believes that the acquisition complies with
federal and state anti-trust laws and will continue to vigorously defend
its position in New Mexico. The New Mexico Attorney General has taken no
legal action with respect to the acquisition and the outcome of this matter
cannot be determined.
F-16
<PAGE> 83
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Wild Oats Markets, Inc.
In our opinion, the accompanying consolidated balance sheet and related
consolidated statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Alfalfa's, Inc. and its subsidiaries at June 30, 1996 and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. 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
of these statements in accordance with generally accepted auditing standards
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 audit provides a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boulder, Colorado
August 15, 1996, except for
Note 1, paragraph three,
as to which the date
is October 15, 1996
F-17
<PAGE> 84
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Alfalfa's Inc. and Subsidiaries
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Alfalfa's,
Inc. and subsidiaries, as of June 25, 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended June 25, 1995 and June 26, 1994. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Alfalfa's Inc., and
subsidiaries as of June 25, 1995, and the results of their operations and their
cash flows for the years ended June 25, 1995 and June 26, 1994 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
September 6, 1995 (October 15, 1996 as
to the third paragraph of
Note 1)
F-18
<PAGE> 85
ALFALFA'S, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 25, 1995 JUNE 30, 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 1,875 $ 3,591
Certificate of deposit............................................. 1,500
Accounts receivable less allowance for doubtful accounts of $33 and
$57............................................................. 99 234
Due from Wild Oats Markets, Inc.................................... 316
Due from Stockholders.............................................. 35 21
Income tax receivable.............................................. 134
Inventories, net................................................... 3,065 3,273
Prepaid expenses and other current assets.......................... 101 70
Deferred income taxes.............................................. 220 419
------- -------
Total current assets............................................ 7,029 7,924
------- -------
Property and equipment, net.......................................... 12,152 11,845
------- -------
Other assets:
Goodwill, net...................................................... 2,956 2,902
Pre-opening expenses............................................... 494
Deposits and other................................................. 76 95
Note receivable from employee...................................... 48 48
Deferred income taxes.............................................. 36 260
------- -------
Total other assets.............................................. 3,610 3,305
------- -------
$22,791 $23,074
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE> 86
ALFALFA'S, INC.
CONSOLIDATED BALANCE SHEET (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 25, 1995 JUNE 30, 1996
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 4,712 $ 4,931
Accrued wages and employee costs................................... 1,554 1,743
Other accrued expenses............................................. 393 719
Income taxes payable............................................... 6 321
Current deferred income taxes...................................... 67
Current installments of long-term debt............................. 365 260
------- -------
Total current liabilities....................................... 7,097 7,974
Long-term debt....................................................... 626 130
Deferred rent........................................................ 408 316
Deferred income taxes................................................ 81 140
------- -------
8,212 8,560
------- -------
Commitments (Note 7)
Redeemable convertible Series A Preferred Stock $1.00 par value;
authorized 8,867,500 shares for Series A and Series B combined;
354,700 shares designated, 317,898 shares issued and outstanding... 8,216 9,011
------- -------
Stockholders' equity:
Convertible Series B Preferred Stock; $1.00 par value; authorized
8,867,500 shares for Series A and Series B combined; 60,000
shares designated, 57,143 shares issued and outstanding at June
25, 1995 and none issued and outstanding at June 30, 1996....... 57
Common stock (equivalent share basis), $.005 par value; authorized
70,411,937 shares; 1,263,318 shares issued and outstanding at
June 25, 1995; 1,465,375 shares issued and outstanding at June
30, 1996........................................................ 6 7
Additional paid-in capital......................................... 3,059 3,118
Retained earnings.................................................. 3,226 2,339
Foreign currency translation adjustment............................ 15 39
------- -------
Total stockholders' equity...................................... 6,363 5,503
------- -------
$22,791 $23,074
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE> 87
ALFALFA'S, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------
JUNE 26, 1994 JUNE 25, 1995 JUNE 30, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Sales................................................ $45,880 $64,852 $85,623
Cost of goods sold and occupancy costs............... 30,491 43,379 58,492
------- ------- -------
Gross profit....................................... 15,389 21,473 27,131
Operating expenses:
Direct store expenses.............................. 11,437 16,165 22,158
Selling, general and administrative expenses....... 1,754 3,266 4,362
Pre-opening expenses............................... 460 325 662
------- ------- -------
Total operating expenses........................ 13,651 19,756 27,182
------- ------- -------
Income (loss) from operations........................ 1,738 1,717 (51)
------- ------- -------
Other income (expense):
Interest income.................................... 45 140 56
Interest expense................................... (162) (313) (76)
Other expense, net................................. (47)
------- ------- -------
Total other income (expense).................... (164) (173) (20)
------- ------- -------
Income (loss) before income taxes.................... 1,574 1,544 (71)
Income tax expense................................... 595 611 22
------- ------- -------
Net income (loss).................................... 979 933 (93)
Accretion of redeemable preferred stock.............. 259 794
------- ------- -------
Net income (loss) allocable to common stock.......... $ 979 $ 674 $ (887)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE> 88
ALFALFA'S, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES B
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------------ ------------------------------ PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, June 27, 1993... 1,115,374 $6 $ 673 $1,573
Shares contributed to
ESOP.................... 2,247 15
Net income............... 979
--------- --- ------ ------
Balance, June 26, 1994... 1,117,621 6 688 2,552
Shares contributed to
ESOP.................... 2,813 30
Exercise of common stock
options................. 28,165 121
Issuance of common stock
for purchase of Canadian
subsidiary.............. 151,840 1,777
Issuance of Series B
Preferred Stock upon
conversion of
stockholder notes....... 57,143 57 943
Repurchase of common
stock................... (37,121) (500)
Accretion of redeemable
preferred stock......... (259)
Net income............... 933
Foreign currency
translation
adjustment..............
-------- --- --------- --- ------ ------
Balance, June 25, 1995... 57,143 57 1,263,318 6 3,059 3,226
Exercise of common stock
options................. 880 3
Conversion of Series B
Preferred Stock to
common stock............ (57,143) (57) 201,177 1 56
Accretion of redeemable
preferred stock......... (794)
Net loss................. (93)
Foreign currency
translation
adjustment..............
-------- --- --------- --- ------ ------
Balance, June 30, 1996... 1,465,375 $7 $3,118 $2,339
======== === ========= === ====== ======
<CAPTION>
FOREIGN TOTAL
CURRENCY STOCKHOLDERS'
TRANSLATION EQUITY
------------- -------------
<S> <C> <C>
Balance, June 27, 1993... $2,252
Shares contributed to
ESOP.................... 15
Net income............... 979
------
Balance, June 26, 1994... 3,246
Shares contributed to
ESOP.................... 30
Exercise of common stock
options................. 121
Issuance of common stock
for purchase of Canadian
subsidiary.............. 1,777
Issuance of Series B
Preferred Stock upon
conversion of
stockholder notes....... 1,000
Repurchase of common
stock................... (500)
Accretion of redeemable
preferred stock......... (259)
Net income............... 933
Foreign currency
translation
adjustment.............. $15 15
--- ------
Balance, June 25, 1995... 15 6,363
Exercise of common stock
options................. 3
Conversion of Series B
Preferred Stock to
common stock............
Accretion of redeemable
preferred stock......... (794)
Net loss................. (93)
Foreign currency
translation
adjustment.............. 24 24
--- ------
Balance, June 30, 1996... $39 $5,503
=== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-22
<PAGE> 89
ALFALFA'S, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------
JUNE JUNE
26, JUNE 25, 30,
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................................. $ 979 $ 933 $ (93)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization.................................... 1,367 1,245 2,251
Loss (gain) on disposal of equipment............................. 57 10 (2)
Deferred income taxes............................................ (357) (32) (431)
Deferred rent.................................................... (23) 195 (92)
Other............................................................ 17 30
Change in assets and liabilities:
Accounts receivable............................................ 30 (167) (303)
Inventories.................................................... (81) (597) (208)
Prepaid expenses and other..................................... (33) (13) 31
Accounts payable............................................... 890 724 219
Accrued expenses and income taxes payable...................... 970 66 830
------- ------- -------
Net cash provided by operating activities................. 3,816 2,394 2,202
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of subsidiary, net of cash acquired.................... (1,019)
Additions to property and equipment................................ (1,623) (6,442) (1,855)
Proceeds from disposal of equipment................................ 10 3 7
Deferred costs, deposits and other................................. (50) (532) 475
Investment in affiliate............................................ (373)
(Purchase) sale of certificate of deposit.......................... (1,500) 1,500
------- ------- -------
Net cash provided by (used in) investing activities....... (2,036) (9,490) 127
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of redeemable convertible Series A Preferred
Stock............................................................ 7,958
Principal payments on long-term debt............................... (290) (901) (601)
Proceeds from exercise of stock options............................ 121 3
Payment for repurchase of common stock............................. (500)
------- ------- -------
Net cash (used in) provided by financing activities....... (290) 6,678 (598)
Effect of exchange rate changes on cash............................ 4 (15)
------- ------- -------
Net increase (decrease) in cash and cash equivalents............... 1,490 (414) 1,716
Cash and cash equivalents, beginning of year....................... 799 2,289 1,875
------- ------- -------
Cash and cash equivalents, end of year............................. $ 2,289 $ 1,875 $ 3,591
======= ======= =======
NONCASH FINANCING ACTIVITIES
Issuance of $1,000 in Series B Preferred Stock upon conversion of
subordinated debt in fiscal 1995
Issuance of $1,777 of common stock to acquire subsidiary in fiscal
1995
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-23
<PAGE> 90
ALFALFA'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPLES OF CONSOLIDATION
Alfalfa's, Inc. (the "Company") owns and operates natural foods
supermarkets in Colorado, New Mexico, Washington, and Canada. The Company
also operates a commissary that supplies the retail stores. The Company's
operations are concentrated in one market segment, grocery stores; however,
management considers a downturn in this market segment unlikely.
The consolidated financial statements include the financial statements of
Alfalfa's, Inc. and its wholly owned subsidiaries in the United States and
Canada. All significant intercompany balances and transactions have been
eliminated upon consolidation.
STOCK SPLIT
In connection with a proposed initial public offering, a 1.7735 for 1 split
of the Company's stock has been approved and was consummated 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.
FISCAL YEAR
The Company reports its financial results on a fifty-two or fifty-three
week fiscal year, ending on the last Sunday in June. Each fiscal quarter
consists of a thirteen week period with one fourteen week period in a
fifty-three week year. Fiscal years 1994 and 1995 were fifty-two week
periods and fiscal year 1996 was a fifty-three week period.
STATEMENT OF CASH FLOWS
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. For these investments, fair market
value approximates cost. Cash equivalents consist of a money market account
with a balance of approximately $1.7 million at June 25, 1995 and $2.7
million at June 30, 1996. The Company paid $160,000, $299,000 and $85,000
in interest charges in 1994, 1995 and 1996, respectively. The Company paid
income taxes of $702,000, $1.1 million and $6,000 in 1994, 1995 and 1996,
respectively.
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. Inventories are net of a reserve for shrinkage of $0 for
1995 and $500,000 for 1996.
DEPRECIATION AND AMORTIZATION
Property, equipment and leasehold improvements are stated at cost.
Depreciation and amortization are calculated on a straight-line basis over
the estimated useful lives of the respective assets, ranging from three to
ten years. Leasehold improvements are amortized on a straight-line basis
over the shorter of the estimated useful life of the asset, or the lease
term. Repairs and maintenance are charged to expense as incurred.
F-24
<PAGE> 91
ALFALFA'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOODWILL
Goodwill resulting from the excess of purchase price over allocated fair
values in the acquisition of the Canadian subsidiary (Note 3) is amortized
over a period of forty years using the straight-line method, and is shown
net of accumulated amortization of $71,000 and $147,000 for 1995 and 1996,
respectively. The carrying value of goodwill is assessed for recoverability
by management based on an analysis of undiscounted future expected cash
flows from the related acquired entities. The Company believes that there
has been no impairment thereof as of June 30, 1996.
PRE-OPENING EXPENSES
Expenses associated with the development and opening of new stores are
deferred until the stores' opening date, at which time such costs are
expensed in full. These costs consist primarily of labor costs, supplies
and other expenses.
ADVERTISING
Advertising is expensed as incurred. Advertising expense was $221,000,
$396,000 and $571,000 for fiscal years ended 1994, 1995 and 1996
respectively.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's Canadian subsidiary is the
Canadian dollar. Translation into U.S. dollars is performed for balance
sheet accounts at year-end rates while income and expense accounts are
translated at average exchange rates. Adjustments resulting from the
translation are reflected as a separate component of stockholders' equity.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including
cash, accounts receivable, accounts payable, and long-term debt approximate
their fair values.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of," which requires losses to be recorded
on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement No. 121 also
addresses the accounting for long-lived assets that are expected to be
disposed. The Company will adopt Statement No. 121 in the first quarter of
fiscal 1997 and, based on current circumstances, does not believe the
effect of adoption will be material.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation," which requires that the Company's financial
statements include certain disclosures about stock-based employee
compensation arrangements. As allowed by Statement No. 123, the Company
will continue to apply the accounting provisions of Accounting Principles
Board Opinion No. 25; accordingly, the adoption of Statement No. 123 will
have no effect on future reported net income.
F-25
<PAGE> 92
ALFALFA'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATIONS
Certain amounts in the June 26, 1994 and June 25, 1995 financial statements
have been reclassified to conform to June 30, 1996 presentation.
2. ACQUISITION BY WILD OATS MARKETS, INC.
On July 14, 1996, the Company was acquired by Wild Oats Markets, Inc.
("Wild Oats"), a natural foods supermarket chain located in Boulder,
Colorado. The stockholders of the Company received consideration of
approximately $38.1 million, which included $16.2 million in cash (which
was paid to repurchase shares held by certain stockholders who had approved
the acquisition contingent upon such repurchase), and 783,421 shares of
common and 408,336 shares of redeemable convertible preferred stock of the
combined company, in exchange for 100% of the outstanding common and
preferred stock of the Company. The Company issued shares of its capital
stock for the outstanding shares of Wild Oats' capital stock; however, as
the Wild Oats' stockholders controlled a majority of the voting stock of
the combined companies following the acquisition, the transaction was
accounted for as a reverse acquisition with Wild Oats as the acquiror. In
connection with this acquisition, Wild Oats agreed to reimburse the Company
for the costs it incurred related thereto. Accordingly, $316,000 is
reflected as due from Wild Oats on the Company's consolidated balance
sheet.
3. ALFALFA'S CANADA, INC.
In fiscal 1994, the Company invested in the stock of Capers Management
Holdings, Inc. (Capers). The Company purchased 190,000 shares (19%) of
common stock and 259 shares of preferred stock for total costs and expenses
of C$509,000 (US$373,000). Capers owns and operates retail natural foods
stores which specialize in high quality natural foods in Vancouver, British
Columbia. The investment was accounted for at cost.
On July 23, 1994, Alfalfa's Canada, Inc., a wholly-owned subsidiary of the
Company, purchased the remaining outstanding common and preferred stock of
Capers for $1.1 million in cash plus 43,129 shares of the Company's common
stock. The total purchase price, including expenses, of approximately $3.1
million has been allocated to the assets and liabilities of Capers based on
fair values. The purchase price associated with the acquisition exceeded
the fair value of the net assets acquired and has been assigned to
goodwill. The net assets and results of operations are included in the
Company's consolidated financial statements from the date of acquisition.
4. GEOGRAPHICAL INFORMATION
Since the Company's fiscal 1995 acquisition of Capers, as discussed in Note
3, it operates in two geographical regions. A breakdown of the Company's
operations between these regions follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JUNE 25, 1995
--------------------------------------------
US CANADA CONSOLIDATED
------------ ------------ ------------
<S> <C> <C> <C>
Sales.................................... $50,097 $14,755 $64,852
Income from operations................... 1,655 62 1,717
Other income (expense)................... (102) (71) (173)
Income (loss) before income taxes........ 1,553 (9) 1,544
Total assets at June 25, 1995............ 15,945 6,846 22,791
</TABLE>
F-26
<PAGE> 93
ALFALFA'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1996
--------------------------------------------
US CANADA CONSOLIDATED
------------ ------------ ------------
<S> <C> <C> <C>
Sales.................................... $64,433 $21,190 $85,623
Income (loss) from operations............ (203) 152 (51)
Other income (expense)................... 44 (64) (20)
Income (loss) before income taxes........ (158) 87 (71)
Total assets at June 30, 1996............ 16,088 6,986 23,074
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 25, 1995 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Equipment........................................................ $ 8,729 $ 9,868
Leasehold improvements........................................... 8,864 9,568
Land............................................................. 44 44
Less: accumulated depreciation and amortization.................. (5,485) (7,635)
------- -------
$12,152 $11,845
======= =======
</TABLE>
6. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 25, 1995 JUNE 30, 1996
------------- -------------
<S> <C> <C>
Notes to bank, interest at bank's prime rate plus 1%
cross-collateralized by accounts receivable, inventories,
equipment, and the assignment of officers' life insurance
policies. Principal payments of $21,667 plus interest are due
monthly through December 1997.................................. $ 650 $ 390
Note payable to Canadian bank, interest at bank's cost of funds
rate plus 2.75%, collateralized by all real and immovable
property, all furniture, machinery, equipment and other
tangible personal property. Principal payments C$12,000 to
C$25,500 plus interest are payable monthly through April
1998........................................................... 341
Less current portion............................................. (365) (260)
----- -----
Long-term debt................................................... $ 626 $ 130
===== =====
</TABLE>
The Company has a $300,000 revolving line of credit at a bank, bearing
interest at the bank's prime rate (8.25% at June 30, 1996) plus 1%. No
amounts were outstanding at June 25, 1995 or June 30, 1996. The revolving
line of credit is cross-collateralized by accounts receivable, inventories,
equipment, and the assignment of officers' life insurance policies. The
revolving line of credit expires November 30, 1996.
The revolving line of credit and the notes to the bank contain covenants
which limit other borrowings, acquisitions of the Company's stock, capital
expenditures, expansion of operations to additional locations, selling any
substantial part of the Company's assets or operations, and require
maintenance of a cash flow coverage ratio, consolidated debt to worth
ratio, net income before taxes ratio, and other matters.
Maturities of long-term debt as of June 30, 1996 are summarized as follows
(in thousands):
<TABLE>
<S> <C>
FISCAL YEAR
1997.................................................................. $260
1998.................................................................. 130
----
Total................................................................. $390
====
</TABLE>
F-27
<PAGE> 94
ALFALFA'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LEASES
The Company has entered into noncancelable operating leases primarily for
operating facilities and equipment. These leases generally contain renewal
provisions at the option of the Company, and some call for yearly increases
based on published indices and for additional contingent rentals based on
sales. Rental expense for leases which contain base rental abatement and
escalation clauses is recognized on a straight-line basis, resulting in
deferred rent. Total rental expense (consisting of minimum rent and
contingent rent) for operating leases during the fiscal years ended June
26, 1994, June 25, 1995 and June 30, 1996, was $1.4 million, $1.9 million
and $2.9 million, respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of June 30, 1996
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
---------------------------------
<S> <C>
1997............................. $ 2,111
1998............................. 1,930
1999............................. 1,850
2000............................. 1,691
2001............................. 1,175
Thereafter....................... 4,004
-------
Total minimum lease payments..... $12,761
=======
</TABLE>
Minimum rentals in the table above do not include contingent rentals, which
may become due under certain lease terms that provide that rentals may be
increased based on a percentage of sales. During fiscal years 1994, 1995
and 1996, the Company paid contingent rentals of $4,407, $28,742, and
$23,627, respectively.
8. INCOME TAXES
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
JUNE 26, 1994 JUNE 25, 1995 JUNE 30, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Income taxes currently payable:
Federal...................................... $ 868 $500 $ 311
State........................................ 84 77 48
Foreign...................................... 66 94
----- ---- -----
952 643 453
Deferred income taxes.......................... (357) (32) (431)
----- ---- -----
Total.......................................... $ 595 $611 $ 22
===== ==== =====
</TABLE>
Pre tax income (loss) for the U.S. and Canadian components was $1.6 million
and ($9,000), respectively, for fiscal year 1995 and ($158,000) and
$87,000, respectively, for fiscal year 1996.
Income taxes as reflected in the Consolidated Statement of Operations
differ from the amounts computed by applying the statutory federal
corporate tax rate to income as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------------
JUNE 26, 1994 JUNE 25, 1995 JUNE 30, 1996
------------- ------------- -------------
<S> <C> <C> <C>
Statutory tax rate................................. 34.0% 34.0% 34.0%
State income taxes, net of federal income tax
benefit.......................................... 3.3 3.3 3.3
Tax effect of nondeductible goodwill............... .2 2.6 (52.3)
Foreign taxes and other............................ .3 (.3) (16.0)
----- ----- -----
Effective tax rate................................. 37.8% 39.6% (31.0)%
===== ===== =====
</TABLE>
F-28
<PAGE> 95
ALFALFA'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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):
<TABLE>
<CAPTION>
JUNE 25, JUNE 30,
-------- --------
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Inventory related................................................... $ 32 $224
Accruals............................................................ 68 32
Vacation liability.................................................... 145 175
Tenant inducement..................................................... 83 48
Property related...................................................... 257
Other................................................................. 12 10
---- ----
Total deferred tax assets............................................. $340 $746
==== ====
Deferred tax liabilities:
Prepaid expenses.................................................... $ 18 $ 5
Pre-opening costs................................................... 79
Deferred rent....................................................... 14
Property related.................................................... 135 184
Other............................................................... 4
---- ----
Total deferred tax liability.......................................... $232 $207
==== ====
</TABLE>
At the date of the Capers acquisition (Note 3), a subsidiary of Capers had
net operating loss carryforwards, and the Company provided a valuation
allowance against the related deferred tax asset. In the period subsequent
to the acquisition through June 25, 1995, the subsidiary used such
carryforwards to reduce its tax liability by $60,000. The valuation
allowance related to the carryforwards has been eliminated, and goodwill
has been reduced by $60,000 to reflect the utilization of the
pre-acquisition carryforwards.
9. REDEEMABLE PREFERRED STOCK
In 1995, the Company issued 317,898 shares of redeemable convertible Series
A Preferred Stock for proceeds (net of offering costs of $542,000) of $8.0
million. Each share of Series A Preferred Stock is convertible into one
share of common stock and has equivalent voting rights. The Series A
Preferred Stock carries a liquidation preference of $8.5 million which may
be increased to $12.8 million in certain circumstances if liquidation were
to occur prior to August 31, 1996. The Series A Preferred Stock is
redeemable at the option of the holder at a price of $26.74 per share plus
8% per annum from the date of issuance on or after August 31, 2000 at which
date the redemption value will be approximately $13.0 million. The
difference between the original proceeds and the carrying value represents
accretion.
10. STOCKHOLDERS' EQUITY
Under the original terms of the Stockholder Notes, the holders were allowed
to convert such notes into common stock at any time prior to November 4,
1995 at $4.97 per share. In 1995, the Company offered to pay all interest
which would be earned on the Stockholder Note through November 4, 1995 if
the holders exchanged the Stockholder Notes for convertible Series B
Preferred Stock in February 1995 at $17.50 per share. All Stockholder Notes
were exchanged for 57,143 shares of Series B Preferred Stock, and the
Company paid the holders a total of $76,000 (representing interest on the
Stockholder Notes through November 4, 1995), which is recorded as interest
expense. Each share of Series B Preferred Stock is convertible into one
share of common stock and has equivalent voting rights. All shares of
Series B Preferred Stock were converted into common stock on November 5,
1995.
F-29
<PAGE> 96
ALFALFA'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 1995, the Company purchased 37,121 shares of common stock from
the Chief Executive Officer at a price of $13.47 per share.
The Company has an incentive stock option plan (ISOP). The Company may
grant up to 193,633 shares of common stock at a price not less than fair
market value as of the grant date. Participants will vest 25% at the first
12-month anniversary date and 2.083% per month thereafter.
The ISOP activity is as follows:
<TABLE>
<CAPTION>
EXERCISE
SHARES PRICE
------- -------------
<S> <C> <C>
Outstanding as of June 27, 1993................................. 114,595 $3.98-$ 5.78
Granted......................................................... 29,924 $6.68-$ 8.59
Forfeited....................................................... (2,288) $ 3.98
-------
Outstanding as of June 26, 1994................................. 142,231 $3.98-$ 8.62
Granted......................................................... 28,165 $11.71
Forfeited....................................................... (1,761) $11.71
Exercised....................................................... (28,165) $3.98-$ 5.26
-------
Outstanding as of June 25, 1995................................. 140,470 $3.98-$11.71
Granted......................................................... 21,124 $13.47
Forfeited....................................................... (7,041) $3.98-$11.71
Exercised....................................................... (880) $ 3.98
-------
Options outstanding as of June 30, 1996......................... 153,673 $3.98-$13.47
=======
</TABLE>
The Company has an employee stock ownership plan (ESOP) which enables
eligible employees, as defined, to acquire shares of the Company's common
stock. The cost of the ESOP is borne by the Company through annual
contributions to its Employee Stock Ownership Trust (Trust) in amounts
determined by the Board of Directors. Shares of common stock acquired by
the ESOP are to be allocated among the employees and are held by the Trust
until distributed according to the terms of the ESOP. Shares held in trust
were 56,206 and 50,176 at June 25, 1995 and June 30, 1996, respectively. In
connection with the acquisition of the Company by Wild Oats, the Company's
ESOP plan will remain and all further contributions will be discontinued.
11. PROFIT SHARING PLAN
The Company has a 401(k) Profit Sharing Plan and Trust (the Plan).
Employees who have attained the age of 21 and have completed one year of
service are eligible to participate in the Plan. The Company may elect to
make matching contributions of 25% of participant contributions not to
exceed 4% of participant compensation. Matching contributions, if any, will
be made by the Company prior to the Plan's December 31 year end. Matching
contributions of $19,629, $23,130 and $34,159 were made in fiscal 1994,
1995 and 1996, respectively.
12. RELATED PARTIES
The Company has a note receivable dated March 20, 1995 in the amount of
C$67,000 (US $48,000) related to a loan made to an employee. The employee
secured the note by a pledge of 2,082 shares of the Company's common stock.
The unpaid principal bears interest at the rate of 7% per annum which is
due on March 22, 2005.
F-30
<PAGE> 97
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Wild Oats Markets, Inc.
In our opinion, the accompanying combined statements of operations and
retained earnings, and of cash flows present fairly, in all material respects,
the results of operations and cash flows of Kathy's Natural Foods Ranch Markets
(See Note 1) for the year ended December 31, 1993 and the period from January 1,
1994 through July 13, 1994, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards 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 provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Boulder, Colorado
August 29, 1996
F-31
<PAGE> 98
KATHY'S NATURAL FOODS RANCH MARKETS
COMBINED STATEMENT OF OPERATIONS AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1994
YEAR ENDED THROUGH
DECEMBER 31, 1993 JULY 13, 1994
----------------- -----------------
<S> <C> <C>
Sales........................................................ $6,101 $6,351
Cost of goods sold and occupancy costs....................... 3,998 4,210
------ ------
Gross profit............................................ 2,103 2,141
Operating expenses:
Direct store expenses...................................... 1,446 1,609
Selling, general and administrative expenses............... 56 35
------ ------
Income from operations.................................. 601 497
Interest expense............................................. 57 92
------ ------
Income before income taxes.............................. 544 405
Income tax expense........................................... 185 138
------ ------
Net income................................................... 359 267
Retained earnings -- beginning of period..................... 464 818
Cash dividend declared....................................... (5)
------ ------
Retained earnings -- end of period........................... $ 818 $1,085
====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-32
<PAGE> 99
KATHY'S NATURAL FOODS RANCH MARKETS
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1,
YEAR ENDED 1994 THROUGH
DECEMBER 31, JULY 13,
1993 1994
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................................... $ 359 $267
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization...................................... 60 129
Deferred tax provision............................................. 34 3
Change in assets and liabilities:
Accounts and other receivables..................................... (50) (36)
Inventories........................................................ (11) (396)
Other assets....................................................... (6) (43)
Accounts payable................................................... 122 31
Accrued liabilities................................................ 9 18
------- -----
Net cash provided by (used in) operating activities............. 517 (27)
------- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures............................................... (1,648) (450)
Additions to intangibles........................................... (23)
------- -----
Net cash used by investing activities........................... (1,648) (473)
------- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term debt......................................... 1,176 437
Cash dividend........................................................ (5)
------- -----
Net cash provided by financing activities....................... 1,171 437
------- -----
Net increase (decrease) in cash...................................... 40 (63)
Cash at beginning of year............................................ 118 158
------- -----
Cash at end of year.................................................. $ 158 $ 95
======= =====
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-33
<PAGE> 100
KATHY'S NATURAL FOODS RANCH MARKETS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
These financial statements contain the combined accounts of Kathy's Natural
Foods Ranch Market-West, Inc. and Kathy's Natural Foods Ranch Market, Inc.
(referred to collectively as the "Company"). All significant intercompany
balances have been eliminated. The Company operates two natural foods
supermarkets in Las Vegas, Nevada. The Company's operations are
concentrated in one market segment, grocery stores; however, management
considers a downturn in this market segment to be unlikely.
ACQUISITION BY WILD OATS MARKETS, INC.
On July 14, 1994, the Company was acquired by Wild Oats Markets, Inc., a
natural foods supermarket company located in Boulder, Colorado, for a total
purchase price of $6.5 million.
STATEMENT OF CASH FLOWS
The Company paid $57,000 and $92,000 in interest charges for the year ended
December 31, 1993 and the period from January 1, 1994 though July 13, 1994,
respectively. The Company paid income taxes of $237,000 and $162,000 for
the year ended December 31, 1993 and the period from January 1, 1994
through July 13, 1994, respectively.
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.
DEPRECIATION AND AMORTIZATION
Property and equipment are recorded at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the respective
assets (three to seven years). Leasehold improvements are amortized on a
straight line basis over the shorter of the useful life of the asset, or
the lease term. Maintenance and repairs are expensed as incurred and
improvements are capitalized.
INTANGIBLE ASSETS
Intangible assets consist of loan fees, which are amortized using the
straight-line method over the term of the loan, which is 20 years.
ADVERTISING
Advertising is expensed as incurred. Advertising expense was $66,000 and
$181,000 for the year ended December 31, 1993 and the period from January
1, 1994 through July 13, 1994, respectively.
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 financial statements
and accompanying notes. Actual results could differ from those estimates.
2. LEASES
The Company has entered noncancelable operating leases primarily for
operating facilities and equipment. These leases generally contain renewal
provisions at the option of the Company, and some call for yearly increases
based on published indices and for additional contingent rentals based on
sales. Rental
F-34
<PAGE> 101
KATHY'S NATURAL FOODS RANCH MARKETS
NOTES TO COMBINED FINANCIAL STATEMENTS
expense for leases that contain based rental abatement and escalation
clauses is recognized on a straight-line basis, resulting in deferred rent.
Total rental expense (consisting of minimum rent and contingent rent) for
operating leases for the year ended December 31, 1993 and the period from
January 1, 1994 through July 13, 1994 was $133,000, and $62,000,
respectively.
Total rent expenses include contingent rentals, which may become due under
certain lease terms that provide that rentals may be increased based on a
percentage of sales. For the year ended December 31, 1993 and the period
from January 1, 1994 to July 13, 1994, the Company paid contingent rentals
of $30,000 and $9,000, respectively.
3. INCOME TAXES
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1994
YEAR ENDED THROUGH
DECEMBER 31, 1993 JULY 13, 1994
----------------- -----------------
<S> <C> <C>
Current -- Federal..................................... $220 $135
State...................................... -- --
Deferred -- Federal.................................... (35) 3
State..................................... -- --
----- -----
$185 $138
===== =====
</TABLE>
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):
Total income tax does not differ from the amount computed by applying the
U.S. Federal income tax rate of 34% to pretax income.
4. RELATED PARTY TRANSACTIONS
Interest expense of $24,000 and $22,000 for the year ended 1993 and the
period from January 1, 1994 through July 13, 1994, respectively, relates to
outstanding loans payable to a certain affiliate of the Company at an
approximate annual interest rate of 10%.
F-35
<PAGE> 102
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of Wild Oats Markets, Inc.
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
New Frontiers (See Note 1) at December 31, 1994 and 1995 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards 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 provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Boulder, Colorado
August 27, 1996
F-36
<PAGE> 103
NEW FRONTIERS
COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1994 1995 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $253 $ 439 $ 451
Accounts receivable...................................... 11 9 4
Inventories, net......................................... 303 521 546
Other.................................................... 11 5 28
Deferred income taxes.................................... 13 22 25
---- ------ ------
Total current assets............................. 591 996 1,054
Property and equipment, net................................ 220 287 273
Intangible assets, net..................................... 127 125
Deferred income taxes...................................... 27 43 47
Other noncurrent assets.................................... 2 55 41
---- ------ ------
$840 $1,508 $1,540
==== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................... $389 $ 607 $ 580
Sales tax payable........................................ 45 87 88
Accrued bonuses.......................................... 90 95 96
Other accrued liabilities................................ 44 88 98
Current portion of long-term debt........................ 31 29 67
---- ------ ------
Total current liabilities........................ 599 906 929
Long-term debt............................................. 81 534 480
---- ------ ------
680 1,440 1,409
---- ------ ------
Commitments (Note 6)
Stockholders' equity:
Common stock, no par value, 7,500 shares authorized,
3,000 shares issued and outstanding................... 3 3 3
Retained earnings........................................ 157 65 128
---- ------ ------
160 68 131
---- ------ ------
$840 $1,508 $1,540
==== ====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-37
<PAGE> 104
NEW FRONTIERS
COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, ----------------------
----------------------------------- MARCH 31, MARCH 31,
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales..................................... $5,642 $7,748 $10,145 $2,175 $2,781
Cost of goods sold and occupancy costs.... 3,570 4,842 6,431 1,351 1,737
------ ------ ------- ------ ------
Gross profit......................... 2,072 2,906 3,714 824 1,044
Operating expenses:
Direct store expenses................... 1,691 2,188 2,787 482 756
Selling, general and administrative
expenses............................. 73 120 215 50 64
------ ------ ------- ------ ------
Income from operations............... 308 598 712 292 224
Other expenses:
Interest expense........................ 8 11 17 2 2
------ ------ ------- ------ ------
Income before income taxes........... 300 587 695 290 222
Income tax expense........................ 111 218 261 113 89
------ ------ ------- ------ ------
Net income................................ $ 189 $ 369 $ 434 $ 177 $ 133
====== ====== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-38
<PAGE> 105
NEW FRONTIERS
COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------------ RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992............... 3,000 $3 $ 87 $ 90
Distribution to parent company............. (164) (164)
Net income................................. 189 189
----- -- ----- -----
Balance at December 31, 1993............... 3,000 3 112 115
Distribution to parent company............. (324) (324)
Net income................................. 369 369
----- -- ----- -----
Balance at December 31, 1994............... 3,000 3 157 160
Distribution to parent company............. (526) (526)
Net income................................. 434 434
----- -- ----- -----
Balance at December 31, 1995............... 3,000 3 65 68
Distribution to parent company............. (70) (70)
Net income................................. 133 133
----- -- ----- -----
Balance at March 31, 1996 (unaudited)...... 3,000 $3 $ 128 $ 131
===== == ===== =====
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-39
<PAGE> 106
NEW FRONTIERS
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income........................................ $189 $ 369 $ 434 $177 $133
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 69 69 109 19 16
Deferred tax provision.......................... (24) (17) (25) (6) (7)
Change in assets and liabilities:
Accounts receivable............................. 16 9 2 (43) 5
Inventories..................................... (108) (2) 37 (25) (25)
Other assets.................................... 4 (2) 6 (9)
Accounts payable................................ 144 109 174 60 (27)
Accrued liabilities............................. 96 29 91 (82) 12
----- ----- ----- ----- -----
Net cash provided by operating activities.... 386 564 828 100 98
----- ----- ----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures.............................. (295) (25) (17)
Payment for purchase of acquired entity, net of
cash acquired................................... (50)
----- ----- -----
Net cash used by investing
activities................................. (295) (25) (67)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term debt...................... 87 (47) (49) 28 (16)
Distributions to parent company................... (164) (324) (526) (7) (70)
----- ----- ----- ----- -----
Net cash used in (provided by) financing
activities................................. (77) (371) (575) 21 (86)
----- ----- ----- ----- -----
Net increase in cash and cash equivalents......... 14 168 186 121 12
Cash and cash equivalents at beginning of year.... 71 85 253 253 439
----- ----- ----- ----- -----
Cash and cash equivalents at end
of year......................................... $ 85 $ 253 $ 439 $374 $451
===== ===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-40
<PAGE> 107
NEW FRONTIERS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
New Frontiers (the "Company") operates three natural foods supermarkets in
Salt Lake City, Utah. The Company's operations are concentrated in one
market segment, grocery stores; however, management considers a downturn in
this market segment to be unlikely.
Prior to 1995, the combined financial statements included the accounts of
two New Frontiers' stores. In May of 1995, a third store was acquired by
the Company from Kathy's Natural Foods Ranch Market, Inc. All significant
intercompany balances have been eliminated.
ACQUISITION BY WILD OATS MARKETS, INC.
On May 31, 1996, the Company was acquired by Wild Oats Markets, Inc. a
natural foods supermarket chain located in Boulder, Colorado. Total
consideration for the sale was $3.1 million which consisted of cash,
promissory notes and the assumption of certain debt and accounts payable.
STATEMENT OF CASH FLOWS
For purposes of the Statement of Cash Flows, the Company considers all
highly liquid investments purchased with a maturity of three months or less
to be cash equivalents. For these investments, fair market value
approximates cost. The Company paid $8,000, $11,000 and $14,000 in interest
charges for the years ended December 31, 1993, 1994 and 1995, respectively.
The Company paid income taxes of $24,000, $16,000 and $26,000 for the years
ended December 31, 1993, 1994 and 1995, respectively.
In May 1995, the Company acquired the assets of a natural foods grocery
store in Salt Lake City, Utah. Consideration for the acquisition was in the
form of $50,000 cash and $501,000 in notes payable. The net effect on cash
and cash equivalents at acquisition date was a net use of $50,000 as no
cash was acquired in the transaction.
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. Inventories are net of a reserve for spoilage of
approximately $18,000, $18,000 and $27,000 at December 31, 1993, 1994 and
1995, respectively.
DEPRECIATION AND AMORTIZATION
Property and equipment are recorded at cost. Depreciation is computed on a
straight-line basis over the estimated useful lives of the respective
assets (three to seven years). Leasehold improvements are amortized on a
straight line basis over the shorter of the useful life of the asset, or
the lease term. Maintenance and repairs are expensed as incurred and
improvements are capitalized.
INTANGIBLE ASSETS
Intangible assets consist of goodwill and an agreement not to compete,
which are amortized using the straight-line method over 40 and 5 years,
respectively. Intangible assets are net of accumulated amortization of
$11,000 at December 31, 1995. The carrying value of goodwill is assessed
for recoverability by management based on an analysis of undiscounted
expected future cash flows from the related acquired entities. The Company
believes that there has been no impairment of goodwill as of December 31,
1995.
F-41
<PAGE> 108
NEW FRONTIERS
NOTES TO COMBINED FINANCIAL STATEMENTS
ADVERTISING
Advertising is expensed as incurred. Advertising expense was $146,000,
$197,000 and $260,000 for the years ended December 31, 1993, 1994 and 1995,
respectively.
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 financial statements
and accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including
cash, short-term trade receivables and payables and long-term debt,
approximate their fair values.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of", which requires losses to be recorded
on long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement No. 121 also
addresses the accounting for long-lived assets that are expected to be
disposed. The Company will adopt Statement No. 121 in the first quarter of
1996 and, based on current circumstances, does not believe the effect of
adoption will be material.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation", which requires that the Company's financial
statements include certain disclosures about stock-based employee
compensation arrangements. As allowed by Statement No. 123, the Company
will continue to apply the accounting provisions of Accounting Principles
Board Opinion No. 25; accordingly, the adoption of Statement No. 123 will
have no effect on future reported net income or earnings per share.
INTERIM FINANCIAL DATA
The interim financial data as of March 31, 1996 and for the three months
ended March 31, 1995 and 1996 is unaudited; however, in the opinion of
management of the Company, the interim data includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results for the interim periods presented. All data
presented in these notes at such date and for such periods is unaudited.
2. BUSINESS COMBINATIONS
On May 26, 1995, the Company acquired the assets of a natural foods grocery
store in Salt Lake City, Utah in exchange for total consideration of
$551,000 consisting of cash, a promissory note and assumption of certain
liabilities. The acquisition was accounted for using the purchase method
and the excess of cost over fair value of the assets acquired of $132,000
was allocated to goodwill, which is being amortized on a straight-line
basis over 40 years. The carrying value of the non-compete agreement is
F-42
<PAGE> 109
NEW FRONTIERS
NOTES TO COMBINED FINANCIAL STATEMENTS
being amortized over five years. The fair values of the Kathy's Natural
Foods Ranch Market, Inc. assets and liabilities at the date of acquisition
are as follows:
<TABLE>
<S> <C>
Current assets.................................................................. $254
Equipment....................................................................... 159
Current liabilities............................................................. (44)
Goodwill........................................................................ 132
Non-compete agreement........................................................... 50
----
$551
====
</TABLE>
The following unaudited pro forma combined results of operations of the
Company and the acquired store discussed above has been prepared as if the
transactions occurred as of the beginning of the respective periods (in
thousands):
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Sales.............................................................. $10,298 $11,076
Net Income......................................................... 676 614
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1994 1995
----- -----
<S> <C> <C>
Leasehold improvements.............................................. $ 244 $ 245
Equipment........................................................... 239 414
Less: accumulated depreciation...................................... (263) (372)
----- -----
$ 220 $ 287
===== =====
</TABLE>
4. LONG TERM DEBT
Long Term Debt is comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1994 1995
---- ----
<S> <C> <C>
Notes payable to banks:
Due March 5, 1995, bearing interest at 3.5% above lender's prime rate
(11.75% at December 31, 1995), secured by equipment................... $ 3
Due March 17, 1998, bearing interest at 2.25% above prime rate (10.5% at
December 31, 1995), secured by vehicles............................... 109 $ 80
Notes payable to corporations:
Due June 1, 2005, bearing interest at 10%, secured by inventory and
equipment............................................................. 438
Notes payable to individuals:
Due June 1, 2005, bearing interest at 10%, secured by inventory and
equipment............................................................. 45
---- ----
112 563
Less current portion.................................................... 31 29
---- ----
Long-term debt.......................................................... $ 81 $534
==== ====
</TABLE>
F-43
<PAGE> 110
NEW FRONTIERS
NOTES TO COMBINED FINANCIAL STATEMENTS
Fair value of debt outstanding at December 30, 1995 approximates its
carrying value. Maturities of long-term debt as of December 31, 1995 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------------------------------------
<S> <C>
1996........................................................................ $ 68
1997........................................................................ 71
1998........................................................................ 48
1999........................................................................ 43
2000........................................................................ 52
Thereafter.................................................................. 252
</TABLE>
5. INCOME TAXES
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Current.................................................
-- Federal $117 $203 $247
State...................................... 18 31 38
Deferred -- Federal..................................... (21) (14) (22)
State...................................... (3) (2) (2)
------- ------- -------
$111 $218 $261
======= ======= =======
</TABLE>
Income taxes as reflected in the Combined Statement of Operations differ
from amounts computed by applying the statutory federal corporate tax rate
to income as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate................................................. 34.0% 34.0% 34.0%
State income taxes, net of federal income tax benefit.............. 3.3 3.3 3.3
Other.............................................................. (.3) (.1) .3
---- ---- ----
37.0% 37.2% 37.6%
==== ==== ====
</TABLE>
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):
<TABLE>
<CAPTION>
DECEMBER
31,
-----------
1994 1995
--- ---
<S> <C> <C>
Deferred tax assets
Inventory related....................................................... $ 6 $10
Property related........................................................ 27 43
Vacation liability...................................................... 7 12
--- ---
Total deferred tax assets....................................... $40 $65
=== ===
</TABLE>
6. LEASES
The Company has entered noncancelable operating leases primarily for
operating facilities and equipment. These leases generally contain renewal
provisions at the option of the Company, and some call for yearly increases
based on published indices and for additional contingent rentals based on
sales. Rental expense for leases that contain base rental abatement and
escalation clauses is recognized on a straight-line basis. Total rental
expense (consisting of minimum rent and contingent rent) for operating
leases
F-44
<PAGE> 111
NEW FRONTIERS
NOTES TO COMBINED FINANCIAL STATEMENTS
during the fiscal years ended December 31, 1993, 1994, and 1995 was
$123,000, $192,000, and $264,000, respectively.
Future minimum lease payments under noncancelable operating leases as of
December 31, 1995, are summarized as follows (in thousands):
<TABLE>
<S> <C>
FISCAL YEAR
1996........................................................ $192
1997........................................................ 191
1998........................................................ 141
1999........................................................ 129
2000........................................................ 70
Thereafter.................................................. 224
----
Total minimum lease payments................................ $947
====
</TABLE>
Minimum rentals in the table above do not include contingent rentals, which
may become due under certain lease terms that provide that rentals may be
increased based on a percentage of sales. During 1993, 1994, and 1995, the
Company paid contingent rentals of $21,000, $53,000, and $71,000,
respectively.
7. SUBSEQUENT EVENTS
On May 31, 1996, as a condition of the acquisition agreement between the
Company and Wild Oats Markets, Inc., the Company paid off a note due March
17, 1998. The final payment was $68,000 consisting of principal of $67,000
and interest of $1,000. The Company incurred no penalty for early repayment
of this debt.
F-45
<PAGE> 112
Eleven photographs, including three pictures of store interiors, four
pictures of store exteriors, two pictures of private label products and two
pictures of informational signage. The informational signage includes the
following text: (i) "Our Wild Oath. We promise to ... make you happy! If you're
less than satisfied with any product, return it for a full refund or credit.
sell foods without artificial colors, flavors, or additives. support organic
farms that keep our earth, air, and water pure. sell the finest, freshest,
organically grown fruits and vegetables. make shopping fun! Enjoy free classes,
food festivals, & more. share at least 7.5% of our pre-tax profits with local
nonprofit groups. sell only earth-friendly cleansers; pure, natural
supplements; and gentle, cruelty-free body care products. give you the health
information you need to shop on the Wild Side!; and (ii)Botanical body care.
Skin your body's largest organ. Like a sponge, your skin absorbs everything put
on it. Treat yourself to the gentle essence of plant-based skin care. Nutrients
from nature, for your body. We will not sell products tested on animals" (also
contains photographs of plants).
<PAGE> 113
- ------------------------------------------------------
- ------------------------------------------------------
No dealer, representative or any other person has been authorized to give
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company, the Selling
Stockholders or by the Underwriters. Neither the delivery of this Prospectus nor
any sale made hereunder shall under any circumstances create any implication
that there has been no change in the affairs of the Company since the date
hereof. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities offered hereby by anyone in any jurisdiction
in which such offer or solicitation is not authorized or in which the person
making such offer or solicitation is not qualified to do so or to anyone to whom
it is unlawful to make such offer or solicitation.
--------------------------
TABLE OF CONTENTS
--------------------------
<TABLE>
<CAPTION>
Page
------
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 8
Recent Acquisitions and New Store
Openings............................. 14
Use of Proceeds........................ 16
Dividend Policy........................ 16
Capitalization......................... 17
Dilution............................... 18
Selected Financial and Operating Data
of Wild Oats Markets, Inc............ 19
Selected Financial and Operating Data
of Alfalfa's, Inc.................... 20
Pro Forma Combined Condensed Financial
Statements........................... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 26
Business............................... 36
Management............................. 48
Certain Transactions................... 55
Principal and Selling Stockholders..... 57
Description of Capital Stock........... 59
Shares Eligible for Future Sale........ 61
Underwriting........................... 62
Legal Matters.......................... 64
Experts................................ 64
Additional Information................. 64
Index to Financial Statements.......... F-1
----------------------------
</TABLE>
Until November 16, 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,680,000 SHARES
WILD OATS MARKETS LOGO
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MONTGOMERY SECURITIES
SMITH BARNEY INC.
October 22, 1996
- ------------------------------------------------------
- ------------------------------------------------------
