<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 27, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ___________
Commission file number 0-21577
WILD OATS MARKETS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1100630
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1645 BROADWAY
BOULDER, COLORADO 80302
(Address of principal executive offices, including zip code)
(303) 440-5220
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
As of November 5, 1997, there were 7,093,683 shares outstanding of the
Registrant's Common Stock (par value $0.001 per share).
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TABLE OF CONTENTS
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PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<C> <S> <C>
Consolidated Balance Sheet
September 27, 1997 (Unaudited) and December 28, 1996 3
Consolidated Statement of Operations (Unaudited)
Three and Nine Months Ended September 27, 1997 and September 28, 1996 4
Consolidated Statement of Cash Flows (Unaudited)
Nine Months Ended September 27, 1997 and September 28, 1996 5
Notes to Consolidated Financial Statements (Unaudited) 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
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2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WILD OATS MARKETS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
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<CAPTION>
SEPTEMBER 27, DECEMBER 28,
1997 1996
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,114 $ 16,404
Accounts receivable (less allowance
for doubtful accounts of $224 and
$299, respectively) 610 558
Inventories 19,185 15,464
Income tax receivable 316 800
Prepaid expenses and other current assets 638 319
Deferred income taxes 1,250 2,056
-------- --------
Total current assets 28,113 35,601
-------- --------
Property and equipment, net 47,105 35,736
Intangible assets, net 44,703 35,150
Deposits and other assets 1,006 416
Deferred income taxes 154 154
-------- --------
$121,081 $107,057
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,065 $ 16,845
Accrued liabilities 12,141 8,664
Notes payable 50
Current portion of long-term debt 35 110
-------- --------
Total current liabilities 31,241 25,669
Long-term debt 1,351 971
Deferred income taxes 1,893 1,157
Other liabilities 979 1,477
-------- --------
35,464 29,274
-------- --------
Stockholders' equity:
Common stock: $.001 par value; 20,000,000
shares authorized; 7,071,763 and
6,875,514 issued and outstanding 7 7
Additional paid-in capital 89,239 86,471
Accumulated deficit (3,545) (8,610)
Foreign currency translation adjustment (84) (85)
-------- --------
Total stockholders' equity 85,617 77,783
-------- --------
$121,081 $107,057
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Sales $79,955 $60,203 $226,361 $129,132
Cost of goods sold and occupancy costs 55,259 41,079 156,448 88,035
------- ------- -------- --------
Gross profit 24,696 19,124 69,913 41,097
Operating expenses:
Direct store expenses 18,582 15,416 52,252 32,252
Selling, general and administrative expenses 2,850 2,743 8,939 5,614
Pre-opening expenses 146 458 329 1,244
Non-recurring expenses 7,297 7,297
------- ------- -------- --------
Income from operations 3,118 (6,790) 8,393 (5,310)
Interest income (expense), net (16) (304) 215 (888)
------- ------- -------- --------
Income (loss) before income taxes 3,102 (7,094) 8,608 (6,198)
Income tax expense (benefit) 1,270 (1,689) 3,543 (1,295)
------- ------- -------- --------
Net income (loss) $ 1,832 $(5,405) $ 5,065 $ (4,903)
======= ========
Accretion of redeemable preferred stock 1,340 2,394
------- --------
Net loss allocable to common stock $(6,745) $ (7,297)
======= ========
Net income per common share $0.25 $0.71
======= ========
Pro forma net loss per common share $(1.05) $(1.14)
======= ========
Weighted average number
of common shares outstanding 7,325 7,159
======= ========
Pro forma weighted average number
of common shares outstanding 5,149 4,308
======= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 27, SEPTEMBER 28,
1997 1996
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 5,065 $ (4,903)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Write-off of assets in non-recurring expenses 5,746
Depreciation and amortization 6,500 3,799
Loss (gain) on disposal of property and equipment (560) 84
Deferred tax provision (benefit) 1,544 (29)
Deferred severance payment 476
Change in assets and liabilities:
Inventories (464) (1,831)
Receivables and other assets (462) (2,508)
Accounts payable 1,629 3,786
Accrued liabilities 847 2,361
-------- --------
Net cash provided by operating activities 14,575 6,505
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (12,809) (9,126)
Payment for purchase of acquired
entities, net of cash acquired (14,003) (13,139)
Proceeds from sales of property and equipment 566
-------- --------
Net cash used by investing activities (26,246) (22,265)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 3,445
Payments on long-term debt (1,099) (2,044)
Proceeds from issuance of preferred stock,
net of stock issuance costs 16,495
Proceeds from issuance of common stock 2,479 88
Purchase of treasury stock (29)
-------- --------
Net cash provided by financing activities 1,380 17,955
-------- --------
Effect of exchange rate changes on cash 1
-------- --------
Net increase (decrease) in cash and cash equivalents (10,290) 2,195
Cash and cash equivalents at beginning of period 16,404 1,150
-------- --------
Cash and cash equivalents at end of period $ 6,114 $ 3,345
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 106 $ 894
======== ========
Cash paid for income taxes $ 225 $ -
======== ========
Supplemental schedule of non-cash investing and
financing activities:
Acquisition of property with
seller-financed long-term debt $ 480
========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING POLICIES
The consolidated balance sheet as of September 27, 1997, the consolidated
statement of operations for the three and nine months ended September 27,
1997 and September 28, 1996, as well as the consolidated statement of cash
flows for the nine months ended September 27, 1997 and September 28, 1996
have been prepared without an audit. In the opinion of management, all
adjustments, consisting only of normal, recurring adjustments necessary for
a fair presentation thereof, have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with financial
statements and notes thereto included in the Company's 1996 Annual Report
to Stockholders. The results of operations for interim periods presented
are not necessarily indicative of the operating results for the full year.
2. BUSINESS COMBINATIONS
In February and March 1997, in three separate transactions, the Company
acquired the assets and assumed certain liabilities of six operating
natural foods supermarkets: two in south Florida, two in Eugene, Oregon
and two in Memphis, Tennessee. The purchase price for these acquisitions
aggregated $9.9 million and consisted of $8.9 million in cash and 61,195
shares of the Company's common stock valued at approximately $979,000. The
acquisitions were accounted for using the purchase method, and the excess
of cost over the fair value of the net assets acquired of $7.8 million was
allocated to goodwill, which is being amortized on a straight-line basis
over 40 years.
On June 30, 1997, the Company acquired the assets of three operating
natural foods supermarkets in Phoenix and Scottsdale, Arizona. The
purchase price for this acquisition aggregated approximately $5.1 million
in cash. The acquisition was accounted for using the purchase method, and
the excess of cost over the fair value of the net assets acquired of $2.5
million was allocated to goodwill, which is being amortized on a straight-
line basis over 40 years.
3. Pro Forma Net Income Per Share
Pro forma net income per common share is computed based on the weighted
average number of common shares outstanding during the three and nine
months ended September 28, 1996 and gives effect to the reverse merger with
Alfalfa's, Inc. as of January 1, 1996 and to certain adjustments described
below. Common equivalent shares are not included in the per-share
calculation where the effect of their inclusion would be antidilutive
(i.e., in a loss period), except that, in conformity with SEC requirements,
common shares and common share equivalents issued during the 12-month
period prior to the filing of the Company's initial public offering in
October 1996 have been included in the calculation as if they were
outstanding for all periods using the treasury stock method. Additionally,
all outstanding shares of convertible preferred stock are assumed to have
been converted to common stock at the time of their issuance. The
Company's historical capital structure is not indicative of its structure
following the closing of its October 1996 initial public offering, due to
the automatic conversion of convertible preferred stock into common stock.
Accordingly, net income per common share has been presented on a pro forma
basis only for the three and nine months ended September 28, 1996.
4. NET INCOME PER SHARE
Net income per share of common stock is computed using the weighted average
number of shares of common stock and common stock equivalents, consisting
of stock options and warrants, outstanding during each period. The
dilutive effect of such common stock equivalents is computed using the
treasury stock method.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings per Share ("FAS 128"),
which is required to be adopted by the Company at the end of 1997. At that
time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive
effect of stock options will be excluded. If the provisions of FAS 128 were
adopted for the three and nine months ended September 27, 1997, then the
Company's pro forma basic earnings per share would have been $0.26 and
$0.73, respectively.
6
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5. NON-RECURRING ITEMS DURING THE NINE MONTHS ENDED SEPTEMBER 27, 1997
On May 2, 1997, S.M. Hassan, the former president of the Company,
voluntarily terminated his employment. Pursuant to an employment agreement
with the Company dated July 12, 1996, Mr. Hassan will receive severance of
approximately $476,000 payable over the next three years. The Company
accrued the full amount of this severance obligation in the second quarter
of 1997.
On June 26, 1997, the Company sold the land and building formerly occupied
by its Lawrence, Kansas store for a net gain of $565,000.
6. YEAR 2000
As the year 2000 approaches, the Company recognizes the need to ensure its
operations will not be adversely impacted by Year 2000 software failures.
The Company is addressing this issue to ensure the availability and
integrity of its financial systems and the reliability of its operational
systems. The Company has processes for evaluating and managing the risks
and costs associated with this problem. The Company will continue to make
certain investments in its software systems and applications to ensure that
they are Year 2000 compliant. The financial impact to the Company is not
anticipated to be material in any single year.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains forward-looking statements within the context of Section
21E of the Securities Exchange Act of 1934, as amended. Each and every forward-
looking statement involves a number of risks and uncertainties, including the
Risk Factors specifically delineated and described in the Company's 1996 Annual
Report to Stockholders and those Risk Factors that have been specifically
expanded or modified below. The actual results that the Company achieves may
differ materially from any forward-looking statements due to such risks and
uncertainties. Words such as "believes", "anticipates", "expects", "intends",
and similar expressions are intended to identify forward-looking statements, but
are not the exclusive means of identifying such statements. The Company
undertakes no obligation to update any forward-looking statements in order to
reflect events or circumstances that may arise after the date of this report.
Certain of the Risk Factors are hereby restated, modified and expanded in
accordance with the following section references that correlate to the
corresponding sections of the Company's 1996 Annual Report to Stockholders:
UNCERTAIN ABILITY TO EXECUTE GROWTH STRATEGY (AMENDED)
The Company's business has grown considerably in size and geographic scope,
increasing from nine stores located primarily in Colorado in 1992, to its
current size of 51 stores in 12 states and Canada. The Company acquired three
stores and opened one store during the quarter ended September 27, 1997. The
Company also acquired six stores and opened one store during the first half of
1997. During 1996, the Company opened seven stores, including one store
originally scheduled to open in 1997, and acquired 13 stores. The Company
anticipates opening one additional new store and relocating one store during the
remainder of 1997. The Company also anticipates that it may acquire one or more
operating natural foods grocery stores during the remainder of 1997. The
Company's ability to implement its growth strategy depends to a significant
degree upon its ability to open or acquire stores in existing and new markets
and to integrate and operate those stores profitably. While the Company plans
to expand primarily through the opening of new stores, it will continue to
pursue acquisitions of natural foods retailers where attractive opportunities
exist. The Company's growth strategy is dependent upon a number of factors,
including its ability to: (i) access adequate capital resources; (ii) expand
into regions where it has no operating experience; (iii) identify markets that
meet its site selection criteria; (iv) locate suitable store sites and negotiate
acceptable lease terms; (v) locate acquisition targets and negotiate acceptable
acquisition terms; (vi) hire, train and integrate management and store
employees; (vii) recruit, train and retain regional pre-opening and support
teams; and (viii) expand its distribution and other operating systems. In
addition, the Company pursues a strategy of clustering stores in each of its
markets to increase overall sales, achieve operating efficiencies and further
penetrate markets. In the past, when the Company has opened a store in a market
where it had an existing presence, the Company has experienced a decline in the
sales and operating results at certain of its existing stores in these markets.
The Company intends to continue to pursue its store clustering strategy and
expects the sales and operating result trends for other stores in an expanded
market to continue to experience temporary declines related to the clustering of
stores. Further, acquisitions involve a number of additional risks, such as
short-term negative effects on the Company's reported operating results,
diversion of management's attention, unanticipated problems or legal
liabilities, and the integration of potentially dissimilar operations, some or
all of which could have a material adverse effect on the Company's business,
results of operations and financial condition. There can be no assurance that
the Company will achieve its planned expansion in existing markets, enter new
markets, or operate or integrate its existing, newly-opened or newly-acquired
stores profitably. If the Company fails to do so, the Company's business,
results of operations and financial condition will be materially and adversely
affected. In addition, the Company's ability to execute its growth strategy is
partially dependent upon the demographic trends and market conditions in the
natural foods industry and any change in those trends and conditions could
adversely affect the Company's future growth rate.
COMPETITION
The Company believes its primary competitor in the natural foods grocery store
market is Whole Foods Market, Inc. ("Whole Foods"), a publicly traded company
based in Texas. Whole Foods has announced that in January 1998 it will open a
39,000-square-foot store in Boulder, Colorado, the location of the Company's
headquarters and three of its stores. Whole Foods' management also has
announced that it intends to seek additional store sites in other cities in
which the Company has stores. If Whole Foods is successful in opening stores in
locations in which the Company has or intends to open stores, the Company's
sales and operating results at such stores may be materially adversely affected.
FLUCTUATIONS IN OPERATING RESULTS (AMENDED)
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,
mix and cost 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. A variety of factors
affect the Company's comparable store sales results, including, among others,
the relative proportion of new stores to mature stores, the opening of stores by
the Company or its competitors in markets where the Company has existing stores,
the timing of promotional events, the Company's ability to execute its operating
strategy effectively, changes in consumer preferences for natural foods and
general economic conditions. Past increases in comparable store sales may not
be indicative of future operating performance. Due to the foregoing factors,
the Company believes that period-to-period comparisons of its operating results
are not necessarily meaningful and that such comparisons cannot be relied upon
as indicators of future financial performance.
8
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OWNERSHIP AND SALE OF REAL PROPERTY
In the fourth quarter of 1996 and in 1997, the Company purchased, or entered
into contracts to purchase, four parcels of real property for the construction
of new stores or the relocation of existing stores. The Company intends to
construct three new stores on real property purchased by the Company or subject
to a ground lease acquired by the Company. There can be no assurance that the
Company will be successful in constructing the planned stores within the
Company's projected budgets or on the schedules currently anticipated. Failure
to complete these projects on time or within budget could have a material
adverse impact on the Company's business, results of operations and financial
condition. The Company anticipates that, after construction of the stores on
the acquired properties is completed, it will sell the land and buildings in one
or more sale-leaseback transactions under which the Company will lease the
stores from the purchaser of the property. There can be no assurance that the
Company will be successful in locating and negotiating acceptable transactions
with one or more parties for the sale-leaseback of the properties currently
owned by the Company, which may result in unplanned long-term uses of the
Company's cash that would otherwise be available to fund operations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected
income statement data expressed as a percentage of sales:
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<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1997 1996 1997 1996
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Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold and occupancy costs 69.1 68.2 69.1 68.2
----- ----- ----- -----
Gross margin 30.9 31.8 30.9 31.8
Direct store expenses 23.2 25.6 23.1 25.0
Selling, general and administrative expenses 3.6 4.6 4.0 4.3
Pre-opening expenses 0.2 0.8 0.1 1.0
Non-recurring expenses 12.1 5.7
----- ----- ----- -----
Income (loss) from operations 3.9 (11.3) 3.7 (4.2)
Interest income (expense), net - (0.5) 0.1 (0.7)
----- ----- ----- -----
Income (loss) before income taxes 3.9 (11.8) 3.8 (4.9)
Income tax expense (benefit) 1.6 (2.8) 1.6 (1.0)
----- ----- ----- -----
Net income (loss) 2.3% (9.0)% 2.2% (3.9)%
===== ===== ===== =====
</TABLE>
Store Openings and Acquisitions. In the third quarter of 1997, the Company
acquired three stores in Phoenix and Scottsdale, Arizona and opened one new
store in Laguna Beach, California. During the first half of 1997, the Company
acquired six stores: two in south Florida, two in Eugene, Oregon, and two in
Memphis, Tennessee, and the Company also opened a new store in Sacramento,
California. The Company opened one new store in Buffalo Grove, Illinois in
November 1997 and plans to open one additional store and relocate one store in
Scottsdale, Arizona during the remainder of 1997. The Company anticipates that
it also may acquire one or more operating natural foods grocery stores during
the remainder of 1997. The Company's results of operations have been and will
continue to be affected by, among other things, the number, timing and mix of
store openings, acquisitions or closings. New stores build their sales volumes
and refine their merchandise selection gradually and, as a result, generally
have lower gross margins and higher operating expenses as a percentage of sales
than more mature stores. The Company anticipates that the new stores opened in
1997 will experience operating losses for the first six to 12 months of
operation, in accordance with historic trends. Further, acquired stores, while
generally profitable as of acquisition date, generate lower gross margins and
store contribution margins than the Company average, due to their substantially
lower volume purchase discounts. Over time, typically six months, as the Company
sells through the acquired inventories and implements its volume purchase
discounts, the Company expects that the gross margin and store contribution
margin of the acquired stores will approach the Company average. The Company
anticipates that a high concentration of acquired stores, such as in the first
nine months of 1997, will have a temporary negative impact on the Company's
consolidated gross margin and store contribution margin. The Company will
continue to evaluate the profitability of all of its stores on an ongoing basis
and may, from time to time, make decisions regarding closures, relocations or
remodels in accordance with such evaluations. As part of this strategy, in the
fourth quarter of 1997, the Company closed one store and plans to relocate one
store.
SALES. Sales for the three months ended September 27, 1997 increased 32.8% to
$80.0 million from $60.2 million for the same period in 1996. Sales for the
nine months ended September 27, 1997 increased 75.3% to $226.4 million from
$129.1 million for the same period in 1996. The increase was primarily due to
the acquisition of three stores and the opening of one new store in the third
quarter of 1997 and to the acquisition of six stores and the opening of one new
store in the first six months of 1997, as well as the inclusion of the 13 stores
acquired and seven new stores opened in 1996. Comparable store sales increased
6% for the third quarter of 1997 and 5% for the nine months then ended, based on
both new and acquired stores that have been operating longer than 12 months.
The comparable store sales increase for the nine months includes a comparison
against significant sales increases in the Company's Colorado and Vancouver,
British Columbia store bases in the second quarter of 1996 resulting from a
strike at conventional supermarkets in those regions. Exclusive of the strike
comparison, comparable stores sales increased 6% for the nine months.
GROSS PROFIT. Gross profit for the three months ended September 27, 1997
increased 29.1% to $24.7 million from $19.1 million for the same period in 1996.
Gross profit for the nine months ended September 27, 1997 increased 70.1% to
$69.9 million from $41.1 million for the same period in 1996. The increase in
gross profit is primarily attributable to the acquisition of three stores and
the opening of one new store during the third quarter and to the acquisition of
six stores and the opening of one new store during the first six months of 1997,
as well as the inclusion of the 13 stores acquired and seven new stores opened
in 1996. Gross profit as a percentage of sales for the three months ended
September 27, 1997 decreased to 30.9% from 31.8% for the same period in 1996.
Gross profit as a percentage of sales for the nine months ended September 27,
1997 decreased to 30.9% from 31.8% for the same period in 1996. The decrease is
attributable to lower initial gross margins contributed by the three stores
acquired and the one new store opened in the third quarter of 1997 and to the
six stores acquired and one new store opened in the first six months of 1997, as
well as pricing discounts related to the Company's
9
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expanded product promotion program begun in the first quarter of 1997. The
Company expects this lower gross margin trend to continue for the remainder of
1997.
DIRECT STORE EXPENSES. Direct store expenses for the three months ended
September 27, 1997 increased 20.5% to $18.6 million from $15.4 million for the
same period in 1996. Direct store expenses for the nine months ended September
27, 1997 increased 62.0% to $52.3 million from $32.3 million for the same period
in 1996. The increase in direct store expenses is attributable to the increase
in the number of stores operated by the Company. Direct store expenses as a
percentage of sales for the three months ended September 27, 1997 decreased to
23.2% from 25.6% for the same period in 1996. Direct store expenses as a
percentage of sales for the nine months ended September 27, 1997 decreased to
23.1% from 25.0% for the same period in 1996. The decrease is due to the matured
performance of the new stores opened in 1996, as well as greater leverage of
payroll and certain fixed costs over higher sales volumes.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended September 27, 1997 increased
3.9% to $2.9 million from $2.7 million for the same period in 1996. Selling,
general and administrative expenses for the nine months ended September 27, 1997
increased 59.2% to $8.9 million from $5.6 million for the same period in 1996.
The increase is the result of the additional central and regional support staff
and infrastructure that the Company has added to support its increased number of
stores. Selling, general and administrative expenses as a percentage of sales
for the three months ended September 27, 1997 decreased to 3.6% from 4.6% for
the same period in 1996. Selling, general and administrative expenses as a
percentage of sales for the nine months ended September 27, 1997 decreased to
4.0% from 4.3% as compared to the same period in 1996. The decrease is the
result of the reduction of certain marketing expenses as well as greater
leverage of overhead expenses over higher sales volumes.
PRE-OPENING EXPENSES. Pre-opening expenses for the three months ended
September 27, 1997 decreased 68.1% to $146,000 from $458,000 in the same period
in 1996. The decrease is attributed to the opening of one new store in the
third quarter of 1997 as compared to the opening of two new stores in the same
period of 1996. Pre-opening expenses for the nine months ended September 27,
1997 decreased 73.6% to $329,000 from $1.2 million for the same period in 1996.
The decrease is attributed to the opening of two new stores in the first nine
months of 1997 as compared to the opening of five new stores in the same period
in 1996.
NET INTEREST INCOME (EXPENSE). Net interest expense for the three months ended
September 27, 1997 decreased to $16,000 from $304,000 for the same period in
1996. Net interest income for the nine months ended September 27, 1997
increased to $215,000 from $888,000 of net interest expense for the same period
in 1996. The change is attributable to the investment of the net proceeds from
the Company's initial public offering in October 1996 and to the repayment of
substantially all of the Company's long-term debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital have been cash flow from operations,
trade payables, bank indebtedness, and the sale of equity securities. Primary
uses of cash have been the financing of new store development, new store
openings, acquisitions and purchases of real property.
Net cash provided by operating activities was $14.6 million during the nine
months ended September 27, 1997 and $6.5 million during the comparable period in
1996. Cash provided by operating activities increased during this period
primarily as a result of increases in net income before depreciation expense,
offset by decreases in trade payables due to accelerated payments on certain
accounts to take advantage of payment discounts. The Company has not required
significant external financing to support inventory requirements at its existing
and new stores because it has been able to rely on vendor financing for most of
the inventory costs, and anticipates that vendor financing will continue to be
available for new store openings.
Net cash used by investing activities was $26.2 million during the nine months
ended September 27, 1997 as compared to $22.3 million during the comparable
period in 1996. The increase is due to the acquisition of nine stores, the
opening of two new stores, and the purchase of three parcels of real property
during the first nine months of 1997, as well as the construction costs incurred
for new stores in development which are expected to open in the remainder of
1997 or during 1998.
Net cash provided by financing activities was $1.4 million during the nine
months ended September 27, 1997 and $18.0 million during the comparable period
in 1996. The decrease results from the Company funding its growth with the
proceeds of its October 1996 initial public offering of common stock and the
proceeds of stock option exercises, rather than bank debt.
On April 15, 1997, the Company increased its revolving line of credit to $40.0
million from $20.0 million. The facility has a seven-year term and bears
interest, at the Company's option, at the prime rate or LIBOR plus 1.25%. The
line of credit agreement includes certain financial and other covenants, as well
as restrictions on payments of dividends. As of November 10, 1997, there was
approximately $900,000 outstanding under this facility.
The Company anticipates that it will spend approximately $4.5 million during the
fourth quarter of 1997 for new store development, remodels and maintenance
capital expenditures, exclusive of any pending acquisitions. Two new store
openings and one store relocation are planned for the fourth quarter of 1997.
The Company further anticipates that it will spend approximately $20 to $25
million, exclusive of acquisitions, during 1998 for new store development,
remodels and maintenance capital expenditures. 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 24 months, excluding inventory costs and initial operating losses. The
Company expects to increase the average size of its new stores and increase the
number of its new store openings over time, and is using a greater proportion of
new and custom equipment in its stores. The Company expects that this will
result in an increase in the Company's average capital expenditures per new
store as early as the fourth quarter of 1997. The Company has also purchased
two parcels of real property and one ground lease on which it intends or has
already commenced to construct new stores. The Company anticipates that it will
spend approximately $15 million over the next 15 months to construct new stores
on these parcels of real property. The Company intends to sell certain of the
constructed stores in one or more sale-leaseback transactions in order to
recover the cash expended for the purchase of the underlying real property and
the building construction costs. There can be no assurance that the Company
will be successful in negotiating and consummating such transactions. The cost
of initial inventory for a new store has historically been approximately
10
<PAGE>
$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 pre-opening costs will depend
upon the availability of new store sites and other factors, including the
location of the store and whether it is in a new or existing market for 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. As of June 30,
1997, the Company had used all of the proceeds of its initial public offering.
If the Company should complete any additional acquisitions in exchange for cash
during 1997, such acquisitions could be funded with borrowings under the
Company's revolving credit facility.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
Number DESCRIPTION OF DOCUMENT
------ -----------------------
3(i).1.(a) Amended and Restated Certificate of Incorporation
of Registrant.*
3(i).1.(b) Certificate of Correction to Amended and Restated
Certificate of Incorporation of the Registrant.*
3(ii).1 Amended and Restated By-Laws of Registrant.*
4.1 Reference is Made to Exhibits 3(i).1 Through 3(ii).1.*
4.2 Specimen Stock Certificate.*
11.1 Statement Regarding Computation of Net Income
Per Share and Pro Forma Net Loss Per Share.
27.1 Financial Data Schedule.
* Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 28, 1996 (File Number 0-21577).
(b) Reports on Form 8-K. There were no reports on Form 8-K for the three-
month period ended September 27, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boulder, County of
Boulder, State of Colorado, on the 11th day of November, 1997.
WILD OATS MARKETS, INC.
By /s/ Mary Beth Lewis
--------------------
Mary Beth Lewis
Executive Officer, Vice President of
Finance, Treasurer and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
12
<PAGE>
EXHIBIT 11.1
WILD OATS MARKETS, INC.
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE AND PRO FORMA NET LOSS
PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding 7,036,240 2,996,866 6,954,006 2,545,205
Weighted average number of shares of
preferred stock assumed converted to
common stock at the time of issuance 2,152,310 1,410,759
Common and common equivalent shares
issued, calculated using the
treasury stock method 288,619 204,553 351,793
---------- --------- ---------- -------------
Weighted average number of
common shares outstanding 7,324,859 7,158,559
Pro forma weighted average number of
common shares outstanding 5,149,176 4,307,757
Net income (loss) $1,832,000 $(5,405,000) $5,065,000 $(4,903,000)
========== =========== ============= =============
Net income per share $ 0.25 $ 0.71
========== =============
Pro forma net loss per share $ (1.05) $ (1.14)
=========== =============
</TABLE>
13
<PAGE>
EXHIBIT 11.1
WILD OATS MARKETS, INC.
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE AND PRO FORMA NET LOSS
PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Weighted average number of common
shares outstanding 7,036,240 2,996,866 6,954,006 2,545,205
Weighted average number of shares of
preferred stock assumed converted to
common stock at the time of issuance 2,152,310 1,410,759
Common and common equivalent shares
issued, calculated using the
treasury stock method 288,619 204,553 351,793
---------- --------- ---------- -------------
Weighted average number of
common shares outstanding 7,324,859 7,158,559
Pro forma weighted average number of
common shares outstanding 5,149,176 4,307,757
Net income (loss) $1,832,000 $(5,405,000) $5,065,000 $(4,903,000)
========== =========== ============= =============
Net income per share $ 0.25 $0.71
========== =============
Pro forma net loss per share $(1.05) $(1.14)
===========
</TABLE>
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 27, 1997 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> SEP-27-1997
<CASH> 6,114
<SECURITIES> 0
<RECEIVABLES> 834
<ALLOWANCES> 224
<INVENTORY> 19,185
<CURRENT-ASSETS> 28,113
<PP&E> 60,954
<DEPRECIATION> 13,849
<TOTAL-ASSETS> 121,081
<CURRENT-LIABILITIES> 31,241
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 85,610
<TOTAL-LIABILITY-AND-EQUITY> 121,081
<SALES> 226,361
<TOTAL-REVENUES> 226,361
<CGS> 156,448
<TOTAL-COSTS> 156,448
<OTHER-EXPENSES> 61,303
<LOSS-PROVISION> 217
<INTEREST-EXPENSE> 215
<INCOME-PRETAX> 8,608
<INCOME-TAX> 3,543
<INCOME-CONTINUING> 5,065
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,065
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.71
</TABLE>
