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 MARCH 28, 1998.
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 May 8, 1998, there were 12,900,138 shares outstanding of the Registrant's
Common Stock (par value $0.001 per share).
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TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet
March 28, 1998 (Unaudited) and December 27, 1997 3
Consolidated Statement of Operations (Unaudited)
Three Months Ended March 28, 1998 and March 29, 1997 4
Consolidated Statement of Cash Flows (Unaudited)
Three Months Ended March 28, 1998 and March 29, 1997 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 12
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WILD OATS MARKETS, INC.
Consolidated Balance Sheet
(In thousands, except share data)
<TABLE>
<CAPTION>
March 28, December 27,
1998 1997
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 40,367 $ 46,686
Accounts receivable (less allowance
for doubtful accounts of $220 and
$214, respectively) 571 674
Inventories 22,556 21,539
Income tax receivable 316 317
Prepaid expenses and other current assets 952 735
Deferred income taxes 1,376 1,447
------------ -----------
Total current assets 66,138 71,398
------------ -----------
Property and equipment, net 65,884 56,285
Intangible assets, net 46,215 44,389
Deposits and other assets 834 841
Deferred income taxes 154 154
------------ -----------
$ 179,225 $ 173,067
============ ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 22,841 $ 22,487
Accrued liabilities 13,151 11,840
Current portion of long-term debt 9 8
------------ -----------
Total current liabilities 36,001 34,335
Long-term debt 464 467
Deferred income taxes 2,304 2,341
Other liabilities 929 801
------------ -----------
39,698 37,944
------------ -----------
Stockholders' equity:
Common stock: $.001 par value; 20,000,000
shares authorized; 12,828,660 and
12,745,971 issued and outstanding 13 13
Additional paid-in capital 138,493 136,815
Retained earnings (accumulated deficit) 1,130 (1,574)
Accumulated other comprehensive income (109) (131)
------------ -----------
Total stockholders' equity 139,527 135,123
------------ -----------
$ 179,225 $ 173,067
============ ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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WILD OATS MARKETS, INC.
Consolidated Statement of Operations
(In thousands, except per-share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 28, March 29,
1998 1997
<S> <C> <C>
Sales $ 91,603 $ 69,729
Cost of goods sold and occupancy costs 63,124 47,785
----------- -----------
Gross profit 28,479 21,944
Operating expenses:
Direct store expenses 20,228 16,025
Selling, general and administrative expenses 3,633 3,211
Pre-opening expenses 548 183
----------- -----------
Income from operations 4,070 2,525
Interest income, net 349 155
----------- -----------
Income before income taxes 4,419 2,680
Income tax expense 1,715 1,123
----------- -----------
Net income $ 2,704 $ 1,557
=========== ===========
Other comprehensive income (loss):
Foreign currency translation adjustment, net 22 (21)
----------- -----------
Other comprehensive income (loss), net 22 (21)
----------- -----------
Comprehensive income $ 2,726 $ 1,536
=========== ===========
Basic net income per common share $ 0.21 $ 0.15
=========== ===========
Diluted net income per common share $ 0.20 $ 0.15
=========== ===========
Average common shares issued 12,770 10,321
Dilutive effect of stock options 544 154
----------- -----------
Average shares outstanding assuming dilution 13,314 10,475
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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WILD OATS MARKETS, INC.
Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 28, March 29,
1998 1997
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 2,704 $ 1,557
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 2,771 1,884
Loss (gain) on disposal of property and equipment (5) 40
Deferred tax provision (benefit) 34 (2)
Change in assets and liabilities:
Inventories (856) (56)
Receivables and other assets (88) 390
Accounts payable 348 1,869
Accrued liabilities 2,032 1,516
----------- -----------
Net cash provided by operating activities 6,940 7,198
----------- -----------
Cash Flows From Investing Activities
Capital expenditures (12,132) (2,261)
Payment for purchase of acquired
entities, net of cash acquired (2,122) (8,892)
Proceeds from sales of equipment 108
----------- -----------
Net cash used by investing activities (14,146) (11,153)
----------- -----------
Cash Flows From Financing Activities
Payments on long-term debt (2) (1,067)
Principal payments under capitalized lease obligations (22)
Proceeds from issuance of common stock 867 104
----------- -----------
Net cash provided (used) by financing activities 865 (985)
----------- -----------
Effect of exchange rate changes on cash 22 (21)
----------- -----------
Net decrease in cash and cash equivalents (6,319) (4,961)
Cash and cash equivalents at beginning of period 46,686 16,404
----------- -----------
Cash and cash equivalents at end of period $ 40,367 $ 11,443
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 3 $ 25
=========== ===========
Cash paid for income taxes $ 513 $ 109
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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WILD OATS MARKETS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Accounting Policies
The consolidated balance sheet as of March 28, 1998, the consolidated
statement of operations for the three months ended March 28, 1998 and
March 29, 1997, as well as the consolidated statement of cash flows
for the three months ended March 28, 1998 and March 29, 1997 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
1997 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. New Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (FAS) No. 130, Reporting Comprehensive
Income, and FAS No. 131, Disclosure about Segments of an Enterprise
and Related Information. The Company adopted FAS No. 130 in 1998, and
the required presentation is shown in the consolidated balance sheet
and consolidated statement of operations herein. The Company will
adopt FAS No. 131 effective January 2, 1999; however, the Company does
not expect FAS No. 131 to materially affect financial statement
presentation.
3. Business Combinations
In January 1998, the Company acquired the capital stock of an
operating natural foods grocery store in Nashville, Tennessee. The
purchase price for the acquisition was $2.1 million in cash. The
acquisition was accounted for using the purchase method, and the
excess of cost over the fair value of the assets acquired of $2.1
million was allocated to goodwill, which is being amortized on a
straight-line basis over 40 years.
4. Earnings Per Share
Earnings per share are calculated in accordance with the provisions of
FAS No. 128, Earnings Per Share. FAS No. 128 requires the Company to
report both basic earnings per share, which is based on the
weighted-average number of common shares outstanding, and diluted
earnings per share, which is based on the weighted-average number of
common shares outstanding and all dilutive potential common shares
outstanding, except where the effect of their inclusion would be
antidilutive (i.e., in a loss period).
5. Stockholder Rights Plan
The Company has adopted a stockholder rights plan having both
"flip-in" and "flip-over" provisions. Stockholders of record as of May
22, 1998 will receive the right ("Right") to purchase a fractional
share of preferred stock at a purchase price of $145 for each share of
common stock held. In addition, until the Rights become exercisable as
described below and in certain limited circumstances thereafter, the
Company will issue one Right for each share of common stock issued
after May 22, 1998. For the "flip-in provision," the Rights would
become exercisable only if a person or group acquires beneficial
ownership of 15% (the "Threshold Percentage") or more of the
outstanding common stock. Holdings of certain existing affiliates of
the Company are excluded from the Threshold Percentage. In that event,
all holders of Rights other than the person or group who acquired the
Threshold Percentage would be entitled to purchase shares of common
stock at a substantial discount to the then current market price. This
right to purchase common stock at a discount would be triggered as of
a specified number of days following the passing of the Threshold
Percentage. For the "flip-over" provision, if the Company was acquired
in a merger or other business combination or transaction, the holders
of such Rights would be entitled to purchase shares of the acquiror's
common stock at a substantial discount.
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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 1997 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 1997 Annual Report to Stockholders:
Uncertain Ability to Execute Growth Strategy
The Company's business has grown considerably in size and geographic scope,
increasing from eleven stores in 1993, to its current size of 56 stores in 15
states and Canada. Through May 6, 1998, the Company has acquired three natural
foods stores and opened two stores. During 1997, the Company opened four stores,
relocated one store and acquired nine stores. 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 results
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
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. 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 opened a
39,000-square-foot store in Boulder, Colorado, the location of the Company's
headquarters and three of its stores, in late February 1998. The impact on sales
at the Company's Boulder stores has been similar to the impact of the Company's
opening of a store in a market where the Company has an existing presence. While
the impact on sales at the Company's Boulder stores has been within the level
expected by management, at this time the Company cannot evaluate what long-term
impact increased competition from Whole Foods will have on its overall sales.
The Company's Boulder, Colorado stores account for less than 10% of the
Company's overall sales revenues. 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 Financial 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, 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. Additionally, the
opening of competing stores may have a similar adverse effect on 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.
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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 1996 were negatively affected 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. The Company expects that comparable store sales increases will be
negatively affected by planned cannibalization in the second and third quarters
of 1998 due to new stores in existing markets in Santa Monica and Denver.
Comparable store sales for the Company's Colorado and Canadian stores were
negatively affected in the second quarter of 1997 resulting from strikes at the
Company's major conventional competitors in those markets in the second quarter
of 1996, which resulted in increased sales in that quarter at the Company's
stores in those markets. There can be no assurance that comparable store sales
for any particular period will not decrease in the future. As a result, the
Company's comparable store sales could cause the price of the Common Stock to
fluctuate substantially.
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 December 1997, the United States Department of Agriculture ("USDA")
published, pursuant to the Organic Food Production Act of 1990, its proposed
National Organic Program rules, under which the USDA proposes to regulate the
production, handling, labeling and sale of products bearing the "organic" label.
The Company believes that the rules as published substantially weaken the
current standards for organic food production and labeling, and may undermine
consumer confidence in the quality of certain of the foods sold in its stores.
The rules also may add additional expense to the Company's cost of private label
and in-store prepared foods sold by the Company. The Company submitted a
detailed response to the USDA during the comment period. If the rules are
adopted as currently proposed, such rules could have an adverse effect on the
Company's business, results of operations and financial condition.
Ownership and Sale of Real Property
In 1997 and in the fourth quarter of 1996, 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 has constructed
one, and intends to construct or remodel three more 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.
Anti-Takeover Considerations
The Company has adopted a stockholder rights plan having both "flip-in" and
"flip-over" provisions. Stockholders of record as of May 22, 1998 will receive
the right (a "Right") to purchase a fractional share of preferred stock at a
purchase price of $145 for each share of Common Stock held. In addition, until
the Rights become exercisable as described below and in certain limited
circumstances thereafter, the Company will issue one Right for each share of
Common Stock issued after May 22, 1998. For the "flip-in provision," the Rights
would become exercisable only if a person or group acquires beneficial ownership
of 15% (the "Threshold Percentage") or more of the outstanding Common Stock.
Holdings of certain existing affiliates of the Company are excluded from the
Threshold Percentage. In that event, all holders of Rights other than the person
or group who acquired the Threshold Percentage would be entitled to purchase
shares of Common Stock at a substantial discount to the then current market
price. This right to purchase Common Stock at a discount would be triggered as
of a specified number of days following the passing of the Threshold Percentage.
For the "flip-over" provision, if the Company was acquired in a merger or other
business combination or transaction, the holders of such Rights would be
entitled to purchase shares of the acquiror's common stock at a substantial
discount.
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Results of Operations
The following table sets forth, for the periods indicated, certain selected
income statement data expressed as a percentage of sales:
Three Months Ended
March 28, March 29,
1998 1997
Sales 100.0% 100.0%
Cost of goods sold and occupancy costs 68.9 68.5
------------ ----
Gross margin 31.1 31.5
Direct store expenses 22.1 23.0
Selling, general and administrative expenses 4.0 4.6
Pre-opening expenses 0.6 0.3
--------- ---
Income from operations 4.4 3.6
Interest income, net 0.4 0.2
------------ ---
Income before income taxes 4.8 3.8
Income tax expense 1.9 1.6
------------ ---
Net income 2.9% 2.2%
========= =========
Store Openings, Closings, Relocations and Acquisitions. During the first quarter
of 1998, the Company opened two new stores in Westminster, Colorado and Miami,
Florida, and acquired one store in Nashville, Tennessee. During the second
quarter of 1998, as of May 8, 1998, the Company had opened one new store in
Princeton, New Jersey and had acquired two stores in Columbus, Ohio and New York
City, New York. The Company plans to open as many as six additional new stores
and relocate four stores during the remainder of 1998. The Company anticipates
that it also may acquire one or more operating natural foods grocery stores
during the remainder of 1998. 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 1998 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 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 first quarter in 1998, the Company sold a store
in Vail, Colorado, and in the second quarter of 1998, the Company consolidated
its stores in Fort Collins, Colorado by closing one store located there.
Sales. Sales for the three months ended March 28, 1998 increased 31.4% to $91.6
million from $69.7 million for the same period in 1997. The increase was
primarily due to the opening of two new stores and the acquisition of one store
in the first quarter of 1998, and the inclusion of four new stores opened, one
relocated store, and nine stores acquired in 1997. Comparable store sales
increased 5% for the first quarter of 1998, based on both new and acquired
stores that have been operating longer than 12 months. The Company expects its
comparable store sales increases to fluctuate from 2% to 6% in the remaining
quarters of 1998 due to planned cannibalization in certain markets as well as
competition. See "Risk Factors--Fluctuations in Financial Results".
Gross Profit. Gross profit for the three months ended March 28, 1998 increased
29.8% to $28.4 million from $21.9 million for the same period in 1997. The
increase in gross profit is primarily attributable to the acquisition of one
store and the opening of two new stores during the first quarter and to the
inclusion of four new stores opened, one relocated store, and nine stores
acquired in 1997. Gross profit as a percentage of sales for the three months
ended March 28, 1998 decreased to 31.1% from 31.5% for the same period in 1997.
The decrease is attributable to the Company's monthly product promotional
programs and a related increase in the number of lower-margin items offered for
sale in the Company's stores.
Direct Store Expenses. Direct store expenses for the three months ended March
28, 1998 increased 26.2% to $20.2 million from $16.0 million for the same period
in 1997. 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 March 28, 1998 decreased to 22.1%
from 23.0% for the same period in 1997. The decrease is due to the matured
performance of the new stores opened in 1997, as well as improved control of
direct store expenses, particularly payroll costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 28, 1998 increased
13.1% to $3.6 million from $3.2 million for the same period in 1997. 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 March 28, 1998 decreased to 4.0% from 4.6% for the
same period in 1997. The decrease is the result of greater leverage of overhead
expenses over higher sales volumes.
Pre-Opening Expenses. Pre-opening expenses for the three months ended March 28,
1998 increased 199.5% to $548,000 from $183,000 in the same period in 1997.
Pre-opening expenses as a percentage of sales for the three months ended March
28, 1998 increased to 0.6% from 0.3% for the same period in 1997. The increase
is attributed to the opening of two new stores in the first quarter of 1998, as
compared to the opening of one new store in the first quarter of 1997.
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Net Interest Income. Net interest income for the three months ended March 28,
1998 increased 125.2% to $349,000 from $155,000 for the same period in 1997. Net
interest income as a percentage of sales for the three months ended March 28,
1998 increased to 0.4% from 0.2% for the same period in 1997. The change is
attributable to the investment of the net proceeds from the Company's public
offerings in December 1997 and October 1996 and to lower levels of indebtedness
incurred to fund new store openings and acquisitions.
Liquidity and Capital Resources
The Company's primary sources of capital have been cash flow from operations,
trade payables, bank indebtedness, and the sale of equity securities. Primary
uses of cash have been the financing of new store development, new store
openings, acquisitions and purchases of real property.
Net cash provided by operating activities was $6.9 million during the three
months ended March 28, 1998 and $7.2 million during the comparable period in
1997. Cash provided by operating activities decreased during this period due to
increases in inventories for new store openings and as a result of 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 $14.1 million during the three months
ended March 28, 1998 as compared to $11.2 million during the comparable period
in 1997. The increase is due to the opening of two new stores in the first
quarter of 1998 as compared to one new store in the first quarter of 1997, as
well as the construction costs incurred for new stores in development which are
expected to open in the remainder of 1998.
Net cash provided by financing activities was $865,000 during the three
months ended March 28, 1998, as compared to net cash used by financing
activities of $985,000 during the comparable period in 1997. The change is
attributed to increased proceeds of stock option exercises during the first
quarter of 1998 and to the repayment of debt during the first quarter of 1997.
The Company has a revolving line of credit of $40.0 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 May 8,
1998, there were no borrowings outstanding under this facility.
The Company spent approximately $12.1 million during the first quarter of 1998
for new store development, remodels and maintenance capital expenditures,
exclusive of any acquisitions. The Company anticipates that it will spend
approximately $25.0 million during 1998 for new store development, remodels and
maintenance capital expenditures, exclusive of any acquisitions. Six new store
openings and four store relocations are planned for the remainder of 1998. The
Company's average capital expenditures to open a store, including leasehold
improvements, equipment and fixtures, have ranged from approximately $1.0
million to $3.0 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.
Therefore, the Company anticipates that its average capital expenditures per
store will increase over time by approximately $500,000.
In 1997 and in the fourth quarter of 1996, the Company purchased, or entered
into contracts to purchase, real property or ground leases on which it intends
to construct new stores or relocate certain existing stores. The Company also
purchased real property underlying an existing store. The Company constructed
one new store that opened in March 1998 and plans to construct or remodel three
additional new stores in 1998. Construction of stores requires substantially
greater cash outlays than the remodeling of existing buildings (i.e., $3.5 to
$6.0 million as compared to $1.0 to $3.0 million). 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. If the Company is not successful
in locating and negotiating acceptable transactions with one or more parties for
the sales and leaseback of the properties currently owned by the Company, this
may result in unplanned, long-term uses of the Company's cash that otherwise
would be available to fund operations. Additionally, unexpected permitting and
construction delays could result in greater or longer-term cash outlays.
The cost of initial inventory for a new store has historically been
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 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.
The Company believes that the net proceeds of its public stock offering in
December 1997, together with cash generated from operations and funds available
under the revolving line will be sufficient to satisfy its cash requirements,
exclusive of acquisitions, through 1998.
Year 2000 Issues
As the year 2000 approaches, the Company recognizes the need to ensure its
operations will not be adversely impacted by Year 2000 software or hardware
failures. The Company has determined that all of its major software and hardware
systems at its corporate headquarters are Year 2000 compliant. The Company is in
the process of installing point-of-sale hardware in its stores that are Year
2000 compliant. The Company also is in the process of verifying whether its
major suppliers, service providers, and financial institutions are Year 2000
compliant. 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.
-10-
<PAGE>
New Accounting Pronouncements
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("FAS") No. 130, Reporting Comprehensive Income.
FAS No. 130 establishes standards for the reporting and presentation of
comprehensive income and its components in a full set of general-purpose
financial statements. FAS No. 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. The Company adopted FAS No. 130 in 1998.
Also in 1997, the FASB issued FAS No. 131, Disclosure about Segments of an
Enterprise and Related Information. FAS No. 131 revises the current requirements
for reporting business segments by redefining such segments according to
management's disaggregation of the business for purposes of making operating
decisions and allocating internal resources. The Company will adopt FAS No. 131
effective January 2, 1999; however, the Company does not expect FAS No. 131 to
materially affect financial statement presentation.
In April 1998, the Accounting Standards Executive Committee issued Statement of
Position ("SOP") 98-5, Accounting for the Costs of Start-Up Activities. SOP 98-5
provides guidance on how entities should account for start-up costs, such as
pre-opening costs, pre-operating costs, organization costs and start-up costs.
SOP 98-5 requires that the costs of start-up activities be expensed as
incurred. SOP 98-5 is effective for fiscal years beginning after December 15,
1998, and the initial application should be reported as a cumulative effect of a
change in accounting principle. The Company will adopt SOP 98-5 in fiscal 1999
and does not expect such adoption to have a material impact on the Company's
results of operations.
-11-
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Alfalfa's Canada, Inc., the Company's Canadian subsidiary, is a defendant in a
suit brought in the Supreme Court of British Columbia, by one of its
distributors, Waysafer Wholefoods Limited and one of its principals, seeking
monetary damages for breach of contract and injunctive relief to enforce a
buying agreement for the three Canadian stores entered into by a predecessor of
Alfalfa's Canada, Inc. Under the buying agreement, the stores must buy products
carried by the plaintiff if such are offered at the current advertised price of
its competitors. The suit was filed in September 1996 but there has been no
active pursuit of the litigation to date. The Company does not believe its
potential exposure in connection with the suit to be material. There are no
other material pending legal proceedings to which the Company or its
subsidiaries are a party. From time to time, the Company is involved in lawsuits
that the Company considers to be in the normal course of its business.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
<S> <C>
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.*
27.1 Financial Data Schedule.
</TABLE>
* Incorporated by reference to the Registrant's Annual Report on Form
10-K for the year ended December 27, 1997 (File Number 0-21577).
(b) Reports on Form 8-K. There were no reports on Form 8-K for
the three-month period ended March 28, 1998.
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 eleventh day of May, 1998.
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>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of March 28, 1998 and the consolidated statement
of operations for the three months ended March 28, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> DEC-28-1997
<PERIOD-END> MAR-28-1998
<CASH> 40,367
<SECURITIES> 0
<RECEIVABLES> 791
<ALLOWANCES> 220
<INVENTORY> 22,556
<CURRENT-ASSETS> 66,138
<PP&E> 84,142
<DEPRECIATION> 18,258
<TOTAL-ASSETS> 179,225
<CURRENT-LIABILITIES> 36,001
<BONDS> 0
<COMMON> 13
0
0
<OTHER-SE> 139,514
<TOTAL-LIABILITY-AND-EQUITY> 179,225
<SALES> 91,603
<TOTAL-REVENUES> 91,603
<CGS> 63,124
<TOTAL-COSTS> 63,124
<OTHER-EXPENSES> 24,336
<LOSS-PROVISION> 73
<INTEREST-EXPENSE> (349)
<INCOME-PRETAX> 4,419
<INCOME-TAX> 1,715
<INCOME-CONTINUING> 2,704
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,704
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.20
</TABLE>
