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UNITED STATESFreyaFinancial Printing Group
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 27, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-21577
WILD OATS MARKETS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1100630
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1645 BROADWAY
BOULDER, COLORADO 80302
(Address of principal executive offices, including zip code)
(303) 440-5220
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X ) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
As of March 9, 1998, the aggregate market value of the voting stock held by non-
affiliates (as defined by the regulations of the Securities and Exchange
Commission) of the Registrant was $285,242,307, based upon the closing sale
price of such stock on such date as reported on the Nasdaq National Market. As
of March 9, 1998, the total number of shares outstanding of the Registrant's
common stock, $.001 par value, was 12,807,889 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Stockholders for the fiscal year
ended December 27, 1997 have been incorporated by reference into Parts II and IV
of this report on Form 10-K. Portions of the definitive Proxy Statement for the
Registrant's Annual Meeting of Stockholders to be held on May 4, 1998, have been
incorporated by reference into Part III of this report.
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TABLE OF CONTENTS
PAGE
PART I.
Item 1. Business. 1
Item 2. Properties. 9
Item 3. Legal Proceedings. 11
Item 4. Submission of Matters to a Vote of Security Holders. 11
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. 11
Item 6. Selected Financial Data. 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 11
Item 8. Financial Statements and Supplementary Data. 11
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. 12
PART III.
Item 10. Directors and Executive Officers of the Registrant. 12
Item 11. Executive Compensation. 12
Item 12. Security Ownership of Certain Beneficial Owners
and Management. 12
Item 13. Certain Relationships and Related Transactions. 12
PART IV.
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. 12
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PART I.
ITEM 1. BUSINESS
Introduction
Wild Oats Markets, Inc. (the "Company" or "Wild Oats") is the second largest
natural foods supermarket chain in North America. As of March 9, 1998, the
Company operated 54 stores under the names "Wild Oats Community Market,"
"Alfalfa's Market," "Sunshine Grocery" and "Oasis Fine Foods" in 12 states:
Arizona, California, Colorado, Florida, Illinois, Kansas, Missouri, Nevada, New
Mexico, Oregon, Tennessee and Utah and under the name "Capers Whole Foods
Markets" in British Columbia, Canada. The Company is dedicated to providing a
broad selection of high quality natural and gourmet foods and related products
at competitive prices in an inviting and educational store environment
emphasizing customer service. 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.
Since acquiring its first natural foods store in 1987, Wild Oats has pursued
an aggressive growth strategy. The Company has grown from eleven natural foods
stores at the end of 1993 to 52 stores in twelve states and Canada at the end of
1997, representing a compound annual growth rate of 45%. The Company's sales
increased from $47.3 million in 1993 to $311.1 million in 1997, representing a
compound annual growth rate of 60%.
The Company's growth has been driven by the acquisition of independent and
small chain natural foods store operators, the opening of new stores and
positive comparable store sales growth. In 1997, Wild Oats acquired 9 stores,
opened four new stores and relocated one store. As a result of the Company's
aggressive growth, the Company has increased its penetration of existing
markets, entered new geographic markets and created a stronger platform for
future growth. During 1997, the Company successfully entered a number of new
regions, including Arizona, Illinois, Oregon and Tennessee. The Company believes
its growth has resulted in 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) coordinated
merchandising and marketing strategies.
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, natural and homeopathic medicines and naturally-based cleaning
agents. While sales growth in the traditional supermarket industry remained
relatively flat, from 1992 to 1996, the natural foods industry grew at a 21%
compound annual growth rate. According to The Natural Foods Merchandiser, a
leading industry publication, growth in the natural foods industry has
accelerated from a 15% increase in sales in 1992 to a 25% increase in 1996, when
the market reached $11.5 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 foods 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 6,700 independent natural/health
foods stores in 1996, and management believes that only 12% of these stores were
full-service, natural foods stores (defined as stores having a minimum of 8,000
square feet and generating at least 40% of their sales from food.) The Company
believes that the two largest natural foods retailers (Wild Oats and Whole Foods
Markets, Inc.) represented approximately 10% of the total natural foods dollars
spent by consumers in 1996. 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 store-keeping units ("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
and brands 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 preference of the local
market, in particular sourcing produce from local organic growers whenever
possible. The Company also operates regional commissary 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." The Company 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 staff and
high ratio of
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store staff to customers results in significantly higher levels of customer
service than in a conventional supermarket.
Extensive Community Involvement. The Company seeks to engender customer
loyalty by demonstrating its high degree of commitment to the local community.
In addition to the Company's national charitable contributions, 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 a
"Charity Work Benefit" 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 diverse 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
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 has
also introduced its "Wild Shopper Card" program under which the customer
receives additional discounts on selected items when his/her card is presented
at the register. 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
The Company has grown from eleven natural foods stores at the end of 1993 to
54 stores in 12 states and Canada as of March 9, 1998. The Company's growth
strategy is to increase sales and income through: (i) new store expansion; (ii)
acquisitions of existing compatible stores; and (iii) increased sales at
existing stores.
In fiscal 1998, the Company has acquired one store and opened two new stores
as of March 9, 1998, and plans to open or acquire up to nine more stores in
1998. The Company intends to continue its expansion strategy by increasing
penetration in existing markets and expanding into new regions which it believes
are currently underserved by natural foods retailers. While the Company believes
that most of its new store expansion will result from new store openings, it
continues to evaluate acquisition opportunities in both existing and new
markets.
The Company currently has leases signed or property acquired or identified and
under contract for eight new stores projected to be opened in fiscal 1998, and
three new sites and two relocations projected to be opened in fiscal 1999, as
follows:
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<TABLE>
<CAPTION>
Projected Projected
Site Name Opening Date Site Name Opening Date
- --------- -------------------------- --------- --------------------------
<S> <C> <C> <C>
1. Princeton, NJ 1998 8. Las Vegas, NV 1998
2. Santa Monica, CA 1998 9. Kansas City, MO 1999
3. Columbus, OH 1998 10. Miami, FL 1999
4. Denver, CO 1998 11. Eugene, OR 1999
5. Miami Beach, FL 1998 12. Santa Fe, NM* 1999
6. Hinsdale, IL 1998 13. Ft. Collins, CO* 1999
7. Dallas, TX 1998
*Relocation
</TABLE>
New Store Expansion. In fiscal 1997, the Company opened four new
stores in Sacramento and Laguna Beach, California; Buffalo Grove, Illinois; and
Lakewood, Colorado and relocated a store in Scottsdale, Arizona. The Company
closed its San Francisco, California, store in October 1997, and sold its Vail,
Colorado, store operations in December 1997. Through March 9, 1998, the Company
in 1998 had opened two new stores in Pinecrest, Florida, and Westminster,
Colorado.
Acquisitions of Existing Compatible Stores. During fiscal 1997, the
Company acquired nine natural foods stores: two in Eugene, Oregon; two in South
Florida; two in Memphis, Tennessee; and three in Phoenix and Scottsdale,
Arizona. In January 1998, the Company acquired one natural foods store in
Nashville, Tennessee.
Increased 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 expanded marketing programs and expanding
customer service.
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 educational levels, 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.
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, if the stores are to be renamed "Wild Oats
Community Market," they are not renamed 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.
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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.
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:
PRODUCT CATEGORY DESCRIPTION
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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;
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/ Fresh beef, lamb, pork, seafood and free-range poultry, as
Seafood well as value-added meat products such as stuffed peppers,
marinated meats and home-made sausages;
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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.
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 chocolate bars, gourmet breads, salsa, salad dressings,
vitamins, chips, pretzels, tortillas, juices, pasta, pasta sauces, oils, and
canned fruit. The Company intends to continue to expand its private label
product offerings on a selected basis, and anticipates doubling the number of
private label SKUs in the next twelve to eighteen months.
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, including
"buy one-get one free" items, that are rotated periodically. In 1997, the
Company introduced its "Wild Shopper Card" on a test basis at selected Colorado
stores. In 1998, the Company intends to introduce the "Wild Shopper Card" in
the remainder of its United States stores. The Company offers additional
savings on selected items each month when the customer presents his/her card at
the register. 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 and
informational signage are used extensively throughout the store. Most stores
offer cafe seating areas, espresso and fresh juice bars, in-store nutritional
consultants, 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. 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 stores' community bulletin board.
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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 10
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 3,000
suppliers, the Company purchases approximately 25% of its products from a single
wholesale distributor that operates multiple warehouses nationwide. The Company
believes that this distributor is able to service all of the Company's existing
stores as well as most of its future sites. As a result of its rapid growth,
the Company has been able to negotiate greater volume discounts with this
distributor and certain other vendors. The Company has no supply contracts with
the majority of these parties and any vendor or distributor could discontinue
selling to the Company at any time. The Company believes that it could develop
alternative sources of supply; however, any such termination may create a short-
term disruption in store-level merchandise selection. The Company has executed
favorable regional or national purchasing agreements with the manufacturers of
certain products, such as dairy and coffee, under which the Company receives
volume discounts and other incentives to
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buy larger quantities of product. The Company is a party to an interim buying
agreement with a distributor in Vancouver, British Columbia, Canada under which
the Company is obligated to purchase certain products from the distributor for
its existing Canadian stores, provided the purchase price is the lowest price
offered from the Company's various distributors in that region.
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 of produce and
grocery items 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 six commissary kitchens in Santa Fe, New Mexico, Denver,
Colorado, Phoenix, Arizona, Pinecrest, Florida and Los Angeles and San
Francisco, California, as well as a bakery in Denver, Colorado. 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, including "buy one-get one
free" and "two for one" pricing promotions. In the fourth quarter of 1997, the
Company introduced the "Wild Shopper Program(TM)," a customer loyalty program
that gives frequent customers discounts on purchases when they use their "Wild
Shopper Card," at its Colorado stores and plans to implement the program
nationwide in 1998. 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. The Company recently introduced a multifaceted promotional program to
its vendors for 1998 which allows for different degrees of promotional
participation and commits vendors to full year expenditures in advance. In
exchange for participation in the Company's new promotional program, commencing
in 1998 vendors will receive access to national advertising programs, detailed
feedback on volume movement and the ability for longer term production planning.
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. The Company purchased a
software system to convert the store level point-of-sale and pricing systems to
one system and to track product movement, and is in the process of installing
new hardware to run such software and implement such system. The Company has
converted more than half of its stores to the new hardware and anticipates that
the remaining stores will be converted by the end of 1998. All new stores will
be using the new hardware and system going forward. Certain Wild Oats stores
are not currently on an automated point-of-sale and pricing system. The Company
is currently implementing new, faster credit card processing systems Company-
wide to reduce transaction time at the cash register and the cost to the Company
of individual credit card transactions. The Company has designed and is in the
process of implementing a wide-area network to allow faster data transmissions
between the Company's headquarters and stores, and between the stores and the
Company's credit card processor. These new systems are expected to be
operational in all of
8
<PAGE>
the Company's stores by the third quarter of 1998. In the first quarter of 1998,
the Company purchased new accounting, payroll and human resources software to
improve the efficiency of the Company's accounting and payroll systems. The
Company has determined that all of its major computer systems are year 2000
compliant and that the cash registers being installed in the Company's stores
are year 2000 compliant. The Company is currently requesting year 2000
compliance certification from its major vendors, service providers and financial
institutions. The Company does not anticipate that it will incur any material
expense related to year 2000 compliance in any financial year.
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. 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. 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 Markets, Inc., a publicly-traded company based in Texas which, as of
January 18, 1998, had 82 stores and gross annual sales of approximately $1.1
billion. The Company currently competes with Whole Foods in California,
Colorado, Florida and Illinois. In the first quarter of 1998, Whole Foods
opened a 39,000 square foot store in Boulder, Colorado, where the Company's
headquarters and three of its stores are currently located. At this time the
Company cannot evaluate what, if any, long-term impact increased competition
from Whole Foods will have on its overall sales from its Boulder stores. The
Company's Boulder, Colorado stores account for less than 10% of the Company's
overall sales revenues.
EMPLOYEES
As of March 9, 1998, the Company employed 2,362 individuals full-time and
2,221 individuals part-time. Approximately 4,372 of the Company's employees are
engaged at the store-level and 211 are devoted to regional administrative and
corporate activities. The Company believes that it maintains a good
relationship with its employees. One small group of employees at one of its
acquired stores was unionized at the time of the store's acquisition and
continues to be unionized. The Company anticipates that in the future one or
more of its stores may be the subject of attempted organizational campaigns by
labor unions representing grocery industry workers, and that from time to time
certain of its stores may be picketed by local labor unions relating to area
wage and benefit standards.
Trademarks
Wild Oats(R), and Wild Oats Community Markets(R) are federally registered
trademarks and Alfalfa's Market(TM), Oasis Fine Foods(TM), Sunshine Grocery(TM)
and Capers Whole Foods Market(TM) are trademarks owned by the Company.
Item 2. PROPERTIES
The Company currently leases an aggregate of approximately 14,500 square feet
for its corporate offices in Boulder, Colorado. The lease for the corporate
headquarters 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
Company's 13,500 square foot warehouse in Denver 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 the majority of its currently operating stores. The Company
currently has leases signed or property acquired or under contract for eight new
stores projected to be opened in 1998, and an additional three sites and two
relocations projected to be opened in 1999. In 1997, the Company purchased real
9
<PAGE>
property in Westminster, Colorado and Hinsdale, Illinois, for the construction
of new stores opened in the first quarter of 1998 and projected to be opened in
the third quarter of 1998, respectively, and a ground leasehold interest in
Denver, Colorado, for the construction of a new store projected to be opened in
the third quarter of 1998. The Company also purchased the real property
underlying its Fort Collins, Colorado, Alfalfa's Market store, and has executed
a contract to purchase additional property in Fort Collins, Colorado. The
Company anticipates that it will sell all or substantially all of the real
property it currently owns under sale and leaseback transactions, where the
purchaser will lease the properties back to the Company under market terms.
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.
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 March 9, 1998.
[MAP OF THE UNITED STATES APPEARS HERE]
<TABLE>
<CAPTION>
ARIZONA COLORADO ILLINOIS OREGON
- ------- -------- -------- ------
<S> <C> <C> <C>
Phoenix (2) Aurora Buffalo Grove Eugene (2)
Scottsdale (1) Boulder (3)
Colorado Springs
CALIFORNIA Denver (4) KANSAS TENNESSEE
- ---------- Fort Collins (2) ------ ---------
Berkeley Greenwood Village Mission Memphis (2)
Mission Viejo Lakewood Nashville
Laguna Beach Littleton
Los Angeles Westminster MISSOURI
Pasadena -------- UTAH
Sacramento FLORIDA Kansas City ----
San Anselmo ------- St. Louis Salt Lake City (3)
Santa Monica Boca Raton
Sunnyvale Fort Lauderdale NEVADA BRITISH COLUMBIA,
West Hollywood Pinecrest ------ -----------------
West Palm Beach Las Vegas (2) CANADA
------
NEW MEXICO Vancouver (2)
---------- West Vancouver
Albuquerque (2)
Santa Fe (3)
</TABLE>
10
<PAGE>
Item 3. 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. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
PART II.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market under the
symbol "OATS".
The following are the quarterly high and low sales prices (adjusted for the 3-
for-2 split described below) for the Company's common stock on the Nasdaq
National Market from October 22, 1996, the date of the Company's initial public
offering, through December 27, 1997, the end of fiscal 1997:
<TABLE>
<CAPTION>
High Low
------ ------
<S> <C> <C>
Fourth Quarter 1996 $18.00 $12.00
First Quarter 1997 13.00 8.58
Second Quarter 1997 19.08 9.25
Third Quarter 1997 21.00 14.75
Fourth Quarter 1997 29.00 19.42
</TABLE>
As of March 9, 1998, the Company's common stock was held by 839
stockholders of record. No cash dividends have been declared previously on the
Company's common stock, and the Company does not anticipate declaring a cash
dividend in the near future. On January 7, 1998, the Company effected a 3-for-2
stock split of its common stock for securities held of record as of December
22, 1997.
Item 6. SELECTED FINANCIAL DATA
The information included under the caption "Selected Financial Data" from the
Company's 1997 Annual Report to Stockholders is incorporated herein by
reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information included under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's 1997
Annual Report to Stockholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information included in the financial statements and footnotes thereto
in the Company's 1997 Annual Report to Stockholders is incorporated herein by
reference.
11
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information included under the captions "Election of Directors" and
"Executive Compensation-Management-Executive Officers" in the Company's
definitive Proxy Statement in connection with the Annual Meeting of stockholders
to be held May 4, 1998, to be filed with the Commission on or before April 27,
1998, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information included under the caption "Executive Compensation" in the
Company's definitive Proxy Statement in connection with the Annual Meeting of
stockholders to be held May 4, 1998, to be filed with the Commission on or
before April 27, 1998, is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information included under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive Proxy Statement in
connection with the Annual Meeting of stockholders to be held May 4, 1998, to be
filed with the Commission on or before April 27, 1998, is incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information included under the caption "Directors and Executive
Officers - Certain Transactions" in the Company's definitive Proxy Statement in
connection with the Annual Meeting of stockholders to be held May 4, 1998, to be
filed with the Commission on or before April 27, 1998, is incorporated herein by
reference.
PART IV.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) The following are filed as a part of this Report on Form 10-K:
(1) Consolidated Statement of Operations
Consolidated Balance Sheet
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
Consolidated Statement of Cash Flows
(2) Schedule II - Valuation and Qualifying Accounts
(b) Reports on Form 8-K. One report on Form 8-K was filed on November 14,
1997, supplementing the financial information contained in the Registrant's
Annual Report on Form 10-K for the year ended December 28, 1996. The report
included a Pro Forma Condensed Statement of Operations (unaudited) for the year
ended December 28, 1996.
(c) Exhibits
The following exhibits to this Form 10-K are filed pursuant to the
requirements of Item 601 of Regulation S-K:
12
<PAGE>
EXHIBIT
Number DESCRIPTION OF DOCUMENT
- ------ -----------------------
3(i).1.(a) Amended and Restated Certificate of Incorporation of the
Registrant. (1)
3(i).1.(b) Certificate of Correction to Amended and Restated Certificate
of Incorporation of the Registrant. (1)
3(ii).1 Amended and Restated By-Laws of the Registrant. (1)
4.1 Reference is made to Exhibits 3(i).1 through 3(ii).1.
4.2 Specimen stock certificate. (2)
10.1 Form of Indemnity Agreement between the Registrant and its
directors and executive officers, with related schedule. (2)
10.2* 1996 Equity Incentive Plan, including forms of Options granted to
employees and non-employee directors thereunder. (2)
10.3* 1996 Employee Stock Purchase Plan. (2)
10.4* 1993 Stock Option Plan. (2)
10.5* 1991 Stock Option Plan. (2)
10.6* Employee Stock Ownership Plan. (2)
10.7* Employment Agreement between Registrant and Michael C. Gilliland,
dated July 12, 1996, as amended. (2)
10.8* Employment Agreement between Registrant and Elizabeth C. Cook,
dated July 12, 1996, as amended. (2)
10.9 Warrant to purchase Series C Preferred Stock issued to Montgomery
Securities dated November 14, 1994. (2)
10.10 Amended and Restated Stockholders Agreement among the Registrant
and certain parties named therein dated August 1996. (2)
10.11 Registration Rights Agreement between the Registrant and certain
parties named therein dated July 12, 1996. (2)
10.12 Credit Agreement between the Registrant, Bank One, Indianapolis,
National Association and Wells Fargo Bank dated as of April 15,
1997. (3)
10.13 Lease Agreement between Registrant and Bway Property Limited
Partnership for the property located at 1645 Broadway, Boulder,
CO dated October 5, 1992. (2)
10.14 Lease Agreement between Registrant and Bway Property Limited
Partnership for the property located at 1651 Broadway, Boulder,
CO dated October 11, 1982. (2)
10.15 Amendment to Lease Agreements between Registrant and Bway Property
Limited Partnership dated March 9, 1995 for the properties
located at 1645 and 1651 Broadway, Boulder, CO. (2)
10.16 Lease Agreement between Registrant and Overland Outfitters, Inc.
for the property located at 1655 Broadway, Boulder, CO dated April
10, 1989. (2)
10.17 Lease between Registrant and AGF Property Management Corp. for the
property located at 1111-23 South Washington Street, Denver, CO
dated October 12, 1994. (2)
10.18* Employment Agreement between Registrant and James Lee, dated
September 30, 1996. (2)
10.19 Agreement and Plan of Merger between the Registrant, Alfalfa's,
Inc. and WO Holdings, Inc. dated June 4, 1996. (2)
13.1+ Registrant's 1997 Annual Report to Stockholders.
21.1+ List of subsidiaries
23.1+ Consent of Price Waterhouse LLP.
27.1+ Financial Data Schedule.
________________________________
*Management Compensation Plan
13
<PAGE>
+Included herewith
(1) Incorporated by reference from the Registrant's Form 10-K for the year
ended December 28, 1996. (File No. 0-21577)
(2) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (File No. 333-11261) filed on August 30, 1996
(3) Incorporated by reference from the Registrant's Form 10-Q for the quarter
ended June 28, 1997 (File No. 0-21577)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
By /s/ Mary Beth Lewis
----------------------
Mary Beth Lewis
Executive Officer, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ MICHAEL GILLILAND Chief Executive Officer
- ---------------------- and Director
/s/ JAMES W. LEE President and Chief Operating
- ----------------- Officer
/s/ MARY BETH LEWIS Chief Financial Officer
- --------------------
/s/ JOHN A. SHIELDS Chairman
- --------------------
/s/ ELIZABETH C. COOK Executive Vice President
- ---------------------- and Director
/s/ DAVID M. CHAMBERLAIN Vice Chairman
- --- ---------------------
/s/ BRIAN K. DEVINE Director
- --------------------
/s/ DAVID L. FERGUSON Director
- ----------------------
/s/ JAMES B. MCELWEE Director
- ---------------------
14
<PAGE>
SCHEDULE II
WILD OATS MARKETS, INC.
Valuation and Qualifying Accounts
(IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Charged Balance at
Allowance for Doubtful Accounts Beginning to End
for the Fiscal Year Ended: of Year Expenses Write-Offs of Year
<S> <C> <C> <C> <C>
December 31, 1994 $ 37 $ $ $ 37
December 30, 1995 37 85 (75) 47
December 28, 1996 47 252 299
December 27, 1997 299 273 (358) 214
</TABLE>
15
<PAGE>
EXHIBIT 13.1
WILD OATS MARKETS, INC,
SELECTED FINANCIAL DATA
in thousands, except per-share amounts and number of stores
The following data for the five fiscal years ended December 27, 1997, are
derived from the consolidated financial statements of the Company. The
following data should be read in conjunction with the Company's consolidated
financial statements, related notes thereto and other financial information
included elsewhere in this Annual Report.
<TABLE>
<CAPTION>
FISCAL YEAR 1997 1996 1995 1994 1993
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
SALES $311,077 $192,493 $98,517 $65,219 $47,266
COST OF GOODS SOLD AND OCCUPANCY COSTS 215,156 130,957 67,164 44,637 32,344
GROSS PROFIT 95,921 61,536 31,353 20,582 14,922
DIRECT STORE EXPENSES 71,516 48,317 25,072 15,685 11,007
STORE CONTRIBUTION 24,405 13,219 6,281 4,897 3,915
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 11,488 8,977 4,465 2,317 1,824
PRE-OPENING EXPENSES 1,099 1,763 1,037 416
NON-RECURRING EXPENSES (1) 7,035
INCOME (LOSS) FROM OPERATIONS 11,818 (4,556) 779 2,580 1,675
INTEREST EXPENSE (INCOME), NET (113) 904 363 373 350
INCOME (LOSS) BEFORE INCOME TAXES 11,931 (5,460) 416 2,207 1,325
INCOME TAX EXPENSE (BENEFIT) (2) 4,895 (977) 40 880 347
NET INCOME (LOSS) (2) 7,036 (4,483) 376 1,327 978
ACCRETION OF REDEEMABLE PREFERRED STOCK 2,396 1,937 484 134
NET INCOME (LOSS) ALLOCABLE TO COMMON STOCK $ 7,036 $ (6,879) $(1,561) $ 843 $ 844
BASIC NET INCOME (LOSS) PER COMMON SHARE (3) $0.67 $(1.35) $(0.45) $0.24 $0.23
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 10,568 5,078 3,483 3,534 3,622
DILUTED NET INCOME (LOSS) PER COMMON SHARE (3) $0.64 $(1.35) $(0.45) $0.24 $0.23
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 10,957 5,078 3,483 3,552 3,627
NUMBER OF STORES AT END OF PERIOD 52 40 21 14 11
BALANCE SHEET DATA:
WORKING CAPITAL (DEFICIT) $ 37,063 $ 9,932 $ 474 $ 3,278 $ (292)
TOTAL ASSETS 173,067 107,057 38,376 24,053 9,873
LONG-TERM DEBT (INCLUDING CAPITALIZED LEASES) 467 971 13,302 3,078 2,494
REDEEMABLE CONVERTIBLE PREFERRED STOCK 16,956 15,018 2,164
STOCKHOLDERS' EQUITY (DEFICIT) 135,123 77,783 (4,209) (2,645) (358)
</TABLE>
(1) IN 1996, THE COMPANY RECORDED $7.0 MILLION IN NON-RECURRING EXPENSES. SEE
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS." EXCLUDING NON-RECURRING EXPENSES, UNAUDITED PRO FORMA BASIC
AND DILUTED NET LOSS PER COMMON SHARE WOULD HAVE BEEN $(0.31) AND $(0.31),
RESPECTIVELY, IN 1996.
(2) 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 1993
ARE SHOWN ON AN HISTORICAL BASIS.
(3) EARNINGS PER SHARE ARE CALCULATED IN ACCORDANCE WITH STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 128. SEE NOTE 1 OF THE NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS.
<PAGE>
WILD OATS MARKETS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Annual Report contains certain forward-looking statements regarding the
Company's future results of operations and performance. Certain factors that may
have a significant effect on the Company's future results and performance are as
follows:
Uncertain Ability to Execute Growth Strategy
The Company's business has grown considerably in size and geographic scope,
increasing from 11 stores in 1993, to its current size as of March 9, 1998, of
54 stores in 12 states and Canada. 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. Acquisitions involve a number
of 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 may 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.
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.
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.
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 plans a detailed
response to the USDA on the proposed rules prior to the expiration of the
comment period, and has commenced a campaign to educate consumers and solicit
consumer response. 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.
Background
Store Openings, Relocations, Closings and Acquisitions
In 1997, the Company opened four new stores in Sacramento and Laguna Beach,
California, Buffalo Grove, Illinois, and Denver, Colorado. The Company also
completed the acquisition of nine existing natural foods grocery stores: two in
Boca Raton and West Palm Beach, Florida, two in Eugene, Oregon, two in Memphis,
Tennessee, and three in Phoenix and Scottsdale, Arizona. Additionally, during
the fourth quarter of 1997, the Company closed one store in San Francisco,
California and relocated one store in Scottsdale, Arizona. In December 1997,
the Company sold one store in Vail, Colorado for approximately $326,000. 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, 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 Company's ability to execute its operating strategy
effectively, changes in consumer preferences for natural foods and general
economic conditions. 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 the acquisition date, generate lower gross margins and store
contribution margins than the Company average, due to their substan-
<PAGE>
WILD OATS MARKETS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
tially 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 the addition of a high concentration of acquired
stores, such as in the first six months of 1997, or new store openings in
existing markets 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 its stores on an ongoing basis and
may, from time to time, make decisions regarding closures, relocations or
remodels in accordance with such evaluations.
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.
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. 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, the Company has
experienced a decline in the sales 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 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.
Comparable Store Sales Results Sales of a store are deemed to be comparable
commencing in the thirteenth full month of operations for both new and acquired
stores. 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.
Pre-Opening Expenses Pre-opening expenses include labor, rent, utilities,
supplies and certain other costs incurred prior to a store's opening. The costs
are deferred 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.
Results of Operations
The following table sets forth for the periods indicated, certain selected
income statement data expressed as percentages of sales:
<TABLE>
<CAPTION>
Fiscal Year Ended 1997 1996 1995
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of goods sold
and occupancy costs 69.2 68.0 68.2
----- ----- -----
Gross profit 30.8 32.0 31.8
Direct store expenses 23.0 25.1 25.4
----- ----- -----
Store contribution 7.8 6.9 6.4
Selling, general and
administrative expenses 3.6 4.7 4.4
Pre-opening expenses 0.4 0.9 1.1
Non-recurring expenses 3.7
----- ----- -----
Income (loss) from operations 3.8 (2.4) 0.9
Interest expense, net 0.4 0.4
----- ----- -----
Income (loss) before income taxes 3.8 (2.8) 0.5
Income tax expense (benefit) 1.6 (0.5)
----- ----- -----
Net income (loss) 2.2% (2.3)% 0.5%
===== ===== =====
</TABLE>
Fiscal 1997 Compared to Fiscal 1996
Sales Sales for the fiscal year ended December 27, 1997, increased 61.6% to
$311.1 million from $192.5 million in 1996. The increase was primarily due to
the acquisition of nine stores, the opening of four new stores, and the
relocation of one store, as well as the inclusion of a full year of sales for
the seven new stores opened and 13 stores acquired in 1996. Comparable store
sales increased 5% for 1997, as compared to 2% for 1996 and contributed $42.0
million to the increase in sales. 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.
Gross Profit Gross profit for the fiscal year ended December 27, 1997,
increased 55.9% to $95.9 million from $61.5 million in 1996. The increase in
gross profit on a dollar basis is primarily attributable to the acquisition of
nine stores and the opening of four new stores. As a percentage of sales, gross
profit decreased to 30.8% from 32.0% in the same period in 1996 due to
aggressive pricing programs on advertised items instituted in 1997 and a related
increase in the number of lower-margin items offered for sale in the Company's
stores, and the effect of acquiring nine stores in the first six months of 1997.
Direct Store Expenses Direct store expenses for the fiscal year ended
December 27, 1997, increased 48.0% to $71.5 million from $48.3 million in 1996.
The increase in direct store expenses is attributable to the increase in the
number of stores operated by the Company. As a percentage of sales, direct store
expenses decreased to 23.0% from 25.1% in the same period in 1996 due to the
matured performance of the new stores opened in 1996.
Selling, General and Administrative Expenses Selling, general and
administrative expenses for the fiscal year ended December 27, 1997, increased
28.0% to $11.5 million from $9.0 million in 1996. The increase is primarily
attributable to the acquisition of nine stores and the opening of four new
stores during 1997. As a percentage of sales, selling, general and
administrative expenses decreased to 3.6% from 4.7% in 1996 as a result of
completing the consolidation of the overhead structure of Alfalfa's Inc.
("Alfalfa's") begun in July 1996 (when the Company acquired ten Alfalfa's
natural foods retail stores, including three Capers stores in Vancouver, British
Columbia).
<PAGE>
WILD OATS MARKETS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Pre-Opening Expenses Pre-opening expenses for the fiscal year ended December
27, 1997 decreased 37.7% to $1.1 million from $1.8 million in 1996. The decrease
in pre-opening expenses is attributable to the decrease in the number of new
stores opened (i.e., four in 1997, as compared to seven in 1996).
Net Interest Expense (Income), Net Net interest income for the fiscal year
ended December 27, 1997, was $113,000, as compared to net interest expense of
$904,000 in 1996. Net interest income during 1997 is attributable to the
investment of the proceeds from the Company's public stock offerings in October
1996 and December 1997 and to lower levels of indebtedness incurred to fund
store openings and acquisitions.
Fiscal 1996 Compared to Fiscal 1995
Sales Sales for the fiscal year ended December 28, 1996, increased 95.4% to
$192.5 million from $98.5 million in 1995. The increase was primarily due to the
acquisition of the Alfalfa's stores, the acquisition of three stores in Salt
Lake City, Utah, the opening of seven new stores, and the reporting of a full
year of operations for the five new stores opened in 1995. Comparable store
sales increased 2% for 1996, as compared to 7% for 1995 and contributed $1.6
million to the increase in sales. Comparable store sales results for the fiscal
year ended December 28, 1996, were negatively affected primarily by planned
cannibalization (i.e., 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.
Gross Profit Gross profit for the fiscal year ended December 28, 1996,
increased 96.3% to $61.5 million from $31.3 million in 1995. The increase in
gross profit on a dollar basis is primarily attributable to the acquisition of
the Alfalfa's stores and the opening of seven new stores. There was no material
change in gross profit as a percentage of sales during the fiscal year.
Direct Store Expenses Direct store expenses for the fiscal year ended
December 28, 1996, increased 92.7% to $48.3 million from $25.1 million in 1995.
The increase in direct store expenses is attributable to the increase in the
number of stores operated by the Company. As a percentage of sales, direct store
expenses decreased to 25.1% from 25.4% in the same period in 1995 due to the
matured performance of the new stores opened in 1995.
Selling, General and Administrative Expenses Selling, general and
administrative expenses for the fiscal year ended December 28, 1996, increased
101.1% to $9.0 million from $4.5 million in 1995. The increase is primarily
attributable to the acquisition of the Alfalfa's stores and the opening of seven
new stores during 1996. As a percentage of sales, selling, general and
administrative expenses increased to 4.7% from 4.4% in 1995 as a result of
combining and then beginning the consolidation of the overhead structure of
Alfalfa's.
Pre-Opening Expenses Pre-opening expenses for the fiscal year ended December
28, 1996, increased 70.0% to $1.8 million from $1.0 million in 1995. The
increase in pre-opening expenses is attributable to an increase in the number of
new stores opened (i.e., seven in 1996, as compared to five in 1995), as well as
to increased costs for travel for pre-opening arrangements and staff training
for those stores opened in new or less-developed geographic regions.
Net Interest Expense (Income), Net Net interest expense for the fiscal year
ended December 28, 1996, increased 149.0% to $904,000 from $363,000 in 1995. The
increase is attributable to the higher levels of indebtedness incurred to fund
store openings and acquisitions.
Non-Recurring Expenses During 1996, the Company performed a thorough
analysis of its operations subsequent to the acquisition of Alfalfa's and made
certain decisions relating to its operations which resulted in a $7.0 million
non-recurring charge being recorded, of which $5.7 million were non-cash write-
offs. The charge is attributable to (i) closing the Wild Oats store in Lawrence,
Kansas, resulting in approximately $800,000 in lease-cancellation costs and
asset write-offs, as well as closing a regional bakery and kitchen, resulting in
approximately $200,000 in asset write-offs and lease adjustment costs; (ii)
moving out of the Company's existing corporate headquarters and relocating to
the former Alfalfa's corporate headquarters, resulting in approximately $700,000
in lease-cancellation costs, relocation costs and asset write-offs; and (iii)
consolidating certain information systems, resulting in approximately $300,000
in asset write-offs. In addition, after operating the combined companies,
management closed the Alfalfa's Seattle, Washington store, resulting in
approximately $4.5 million of severance costs, lease-cancellation costs and
asset write-offs, and a restaurant in a Capers store, resulting in approximately
$500,000 of severance costs, lease-cancellation costs and asset write-offs. At
the time of the Alfalfa's acquisition, the Company had planned to retain the
Seattle store and Vancouver restaurant operation.
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, the purchase of
real property, new store openings and acquisitions.
Net cash provided by operating activities was $19.7 million during 1997 and $9.5
million during 1996. Cash provided by operating activities increased during
this period primarily as a result of an increase in net income before
depreciation expense. Net cash provided by operating activities was $9.5
million during 1996 and $4.6 million during 1995. Net income decreased during
1996 as compared to 1995, but cash provided by operating activities increased
during this period primarily as a result of non-cash asset write-offs, an
increase in depreciation and amortization expense related to assets acquired
during 1996, an increase in accrued liabilities related to the non-recurring
expenses during the period and an increase in trade payables related to new
store openings for which the Company typically receives extended payment terms
from vendors. The Company has not required significant external financing to
support inventory requirements at its existing and new stores because it has
been able to rely on vendor financing for most of the inventory costs, and
anticipates that vendor financing will continue to be available for new store
openings.
Net cash used by investing activities was $37.6 million during 1997 as compared
to $27.3 million during 1996. The increase is due to the acquisition of nine
stores and the opening of four new stores during 1997, as well as the
construction costs incurred for six new stores in development which are expected
to open during the first six months of 1998. Net cash used by investing
activities was $27.3 million during 1996 as compared to $17.0 million during
1995 due to the Alfalfa's acquisition, other minor acquisitions and the opening
of seven new stores during 1996.
Net cash provided by financing activities was $48.2 million during 1997 and
$33.1 million during 1996. The increase is due to increased proceeds from
stock option exercises during 1997 and to net proceeds of $46.5 million from the
sale of 2.1 million shares of the Company's common stock pursuant to a public
stock offering in December 1997. Net cash provided by financing activities was
$33.1 million during 1996 and $7.2 million during 1995. The increase is due to
net proceeds of $31.4 million from the sale of 2.1 million shares of the
Company's common stock during its initial public offering in October 1996 and
net proceeds of $16.5 million from the July 1996 sale of Series E convertible
preferred
<PAGE>
WILD OATS MARKETS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
stock, the proceeds of which were used to fund a portion of the purchase price
of Alfalfa's.
In April 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
revolving line agreement includes certain financial and other covenants, as well
as restrictions on payments of dividends. As of December 27, 1997, there were
no borrowings outstanding under this facility.
The Company spent approximately $38.2 million (inclusive of acquisitions) during
1997, and anticipates that it will spend approximately $25 million (exclusive of
acquisitions) during 1998 for new store construction, purchases of real
property, development, remodels and maintenance capital expenditures. The
Company's average capital expenditures to open a leased 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.
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 the Company
plans to construct new stores or relocate certain existing stores. The Company
also purchased real property underlying a previously leased store. The Company
constructed one new store that opened in early March 1998, and plans to
construct two 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 2.0 million). 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-and-leaseback
transactions under which the Company will lease the stores from the purchaser of
the property. If the Company is not successful in locating and negotiating
acceptable transactions with one or more parties for the sale 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 or the purchase prices of
previous acquisitions. 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 fiscal 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 and hardware 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.
New Accounting Pronouncements
In June 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. FAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The Company will adopt FAS No. 130 in 1998
and does not expect such adoption to have a material impact on the Company's
results of operations.
In June 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. FAS No. 131 is effective
for fiscal years beginning after December 15, 1997, and the Company will adopt
FAS No. 131 in 1998. Currently, the Company is evaluating the changes, if any,
that adoption of this standard will have on its reporting.
Cautionary Statement Regarding Forward-Looking Statements
This Annual Report contains "forward-looking statements," within the meaning of
the Private Securities Litigation Reform Act of 1995, that involve known and
unknown risks. Such forward-looking statements include statements as to the
Company's plans to acquire or open additional stores, the anticipated
performance of new or acquired stores, the impact of competition and other
statements containing the words "believes," "anticipates," "estimates,"
"expects," "may," "intends" and words of similar import or statements of
management's opinion. These forward-looking statements and assumptions involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, market performance or achievements of the Company to differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. Important factors that could cause
such differences include, but are not limited to, changes in economic or
business conditions in general or affecting the natural foods industry in
particular, changes in product supply, changes in the competitive environment in
which the Company operates, competition for and the availability of sites for
new stores and potential acquisition candidates, changes in the Company's
management information needs, changes in customer needs and expectations and
governmental actions. 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 Annual Report.
<PAGE>
WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
in thousands, except per-share amounts
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 27, DECEMBER 28, DECEMBER 30,
1997 1996 1995
<S> <C> <C> <C>
Sales $311,077 $192,493 $98,517
Cost of goods sold and occupancy costs 215,156 130,957 67,164
-------- -------- -------
Gross profit 95,921 61,536 31,353
Operating expenses
Direct store expenses 71,516 48,317 25,072
Selling, general and administrative expenses 11,488 8,977 4,465
Pre-opening expenses 1,099 1,763 1,037
Non-recurring expenses 7,035
-------- -------- -------
Income (loss) from operations 11,818 (4,556) 779
Interest expense (income), net (113) 904 363
-------- -------- -------
Income (loss) before income taxes 11,931 (5,460) 416
Income tax expense (benefit) 4,895 (977) 40
-------- -------- -------
Net income (loss) 7,036 (4,483) 376
Accretion of redeemable preferred stock 2,396 1,937
-------- -------- -------
Net income (loss) allocable to common stock $ 7,036 $ (6,879) $(1,561)
======== ======== =======
Basic net income (loss) per common share $0.67 $(1.35) $(0.45)
======== ======== =======
Weighted average number of common
shares outstanding 10,568 5,078 3,483
======== ======== =======
Diluted net income (loss) per common share $0.64 $(1.35) $(0.45)
======== ======== =======
Weighted average number of common
shares outstanding 10,957 5,078 3,483
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
WILD OATS MARKETS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 27, DECEMBER 28,
1997 1996
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 46,686 $ 16,404
Inventories, net 21,539 15,464
Accounts receivable (net
of allowance
for doubtful accounts
of $214 and $299) 674 558
Income tax receivable 317 800
Prepaid expenses and
other current assets 735 319
Deferred income taxes 1,447 2,056
--------- ---------
Total current assets 71,398 35,601
Property and equipment, net 56,285 35,736
Intangible assets, net 44,389 35,150
Deposits and other assets 841 416
Deferred income taxes 154 154
--------- ---------
$173,067 $107,057
========= =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 22,487 $ 16,845
Accrued liabilities 11,840 8,664
Notes payable 50
Current portion of
long-term obligations 8 110
--------- ---------
Total current
liabilities 34,335 25,669
Long-term debt 467 971
Deferred income taxes 2,341 1,157
Other long-term obligations 801 1,477
--------- ---------
37,944 29,274
--------- ---------
Commitments and
contingencies (Notes 10
and 11)
Stockholders' equity:
Common stock; $.001 par
value; 20,000,000
shares authorized; 12,745,971 and 10,313,271 issued
and outstanding 13 10
Additional paid-in
capital 136,815 86,468
Accumulated deficit (1,574) (8,610)
Foreign currency
translation adjustment (131) (85)
--------- ---------
Total stockholders'
equity 135,123 77,783
--------- ---------
$173,067 $107,057
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
in thousands, except share and per-share amounts
<TABLE>
<CAPTION>
Additional Foreign Stockholders'
Common Stock Treasury Stock Paid-in Accumulated Currency Equity
Shares Amount Shares Amount Capital Deficit Translation (Deficit)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994 4,084,101 $ 4 601,527 $ (5,342) $ 2,863 $ (170) $ (2,645)
Common stock options
exercised
($4.70 to $11.40 per
share) 860 4 4
Repurchase of common stock 860 (7) (7)
Accretion of redeemable
preferred stock (1,937) (1,937)
Net income 376 376
------------ -------- --------- ------- ------- ---------- --------- --------
Balance at December 30,
1995 4,084,961 4 602,387 (5,349) 2,867 (1,731) (4,209)
Issuance of common stock
($11.13 per share) 1,175,132 1 13,086 13,087
Initial public offering of
common stock
($16.67 per share), net
of issuance costs 2,100,000 2 31,400 31,402
Accretion of redeemable
preferred stock (2,396) (2,396)
Conversion of redeemable
convertible preferred
stock into shares of
common stock 3,484,213 3 43,099 43,102
Issuance of stock options 1,109 1,109
Common stock options
exercised
($4.70 to $11.40 per
share) 76,380 298 298
Repurchase of common stock 5,028 (42) (42)
Retirement of treasury
stock (607,415) (607,415) 5,391 (5,391)
Net loss (4,483) (4,483)
Foreign currency
translation adjustment $ (85) (85)
------------ -------- --------- ------- ------- ---------- --------- --------
Balance at December 28,
1996 10,313,271 10 86,468 (8,610) (85) 77,783
Issuance of common stock
($10.67 to $14.17 per
share) 101,564 1,117 1,117
Public offering of common
stock
($22.48 per share), net
of issuance costs 2,083,542 2 46,536 46,538
Common stock options and
warrants
exercised ($2.65 to
$12.67 per share) 247,594 1 2,694 2,695
Net income 7,036 7,036
Foreign currency
translation adjustment (46) (46)
------------ -------- --------- ------- ------- ---------- --------- --------
Balance at December 27,
1997 12,745,971 $13 - $ - $136,815 $ (1,574) $(131) $135,123
============ ======== ========= ======= ======= ========== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
in thousands
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 27, DECEMBER 28, DECEMBER 30,
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $ 7,036 $ (4,483) $ 376
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 8,947 7,019 2,078
Loss (gain) on disposal
of property and
equipment and
settlement of
property-related
obligation (1,060) 110 241
Deferred tax provision
(benefit) 1,737 (863) 834
Deferred severance 476
Change in assets and
liabilities:
Inventories (2,818) (4,239) (3,363)
Receivables and other
assets (376) (1,529) (1,385)
Accounts payable 4,762 3,001 5,098
Accrued liabilities 1,015 4,737 747
------------- --------------- -----------
Net cash provided by
operating activities 19,719 9,499 4,626
------------- --------------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures (24,151) (13,174) (14,213)
Payment for purchase of
acquired
entities, net of cash
acquired (14,003) (14,109) (2,829)
Proceeds from sale of
property and equipment 566
------------- --------------- -----------
Net cash used by
investing activities (37,588) (27,283) (17,042)
------------- --------------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net proceeds (payments) on
line of credit (12,486) 13,236
Payments on long-term debt (1,448) (2,029) (5,938)
Principal payments under
capitalized leases (60) (88) (142)
Proceeds from issuance of redeemable
preferred stock, net 16,068
Proceeds from issuance of
common stock, net 49,705 31,700 4
Purchase of treasury stock (42) (7)
------------- --------------- -----------
Net cash provided by
financing activities 48,197 33,123 7,153
------------- --------------- -----------
Effect of exchange rate on
cash (46) (85)
------------- --------------- -----------
Net increase (decrease) in cash and cash
equivalents 30,282 15,254 (5,263)
Cash and cash equivalents
at beginning of year 16,404 1,150 6,413
------------- --------------- -----------
Cash and cash equivalents
at end of year $ 46,686 $ 16,404 $ 1,150
============= =============== ==========
Supplemental disclosure of
cash flow information:
Cash paid for interest $ 182 $ 1,099 $ 380
============= =============== ==========
Cash paid for income
taxes $ 1,456 $ 809 $ 668
============= =============== ==========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Preferred stock, common stock and options issued and total debt and liabilities
incurred and assumed in acquisitions for 1997 and 1996 aggregated $3.4 million
and $34.3 million, respectively. Conversion of preferred stock into common stock
and the accretion of preferred stock in 1996 and 1995 aggregated $43.1 million,
$2.4 million, and $1.9 million, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
Wild Oats Markets, Inc. ("Wild Oats" or the "Company"), headquartered in
Boulder, Colorado, owns and operates natural foods supermarkets in the United
States and Canada. The Company also operates bakeries, commissary kitchens, and
warehouses that supply the retail stores. The Company's operations are
concentrated in one market segment--grocery stores--and are geographically
concentrated in the western and central United States. Management considers a
downturn in this market segment and geographic location to be unlikely.
Principles of Consolidation
The Company's consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, Alfalfa's Canada, Inc. All significant
intercompany accounts and transactions have been eliminated.
Fiscal Year
The Company reports its financial results on a 52- or 53-week fiscal year ending
on the Saturday closest to December 31. Each fiscal quarter consists of a 13-
week period, with one 14-week period in a 53-week year. All fiscal years
presented were 52-week periods.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Such cash equivalents
aggregated $40.2 million and $12.3 million at December 27, 1997 and December 28,
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.
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 $2.8 million and $1.6 million at December 27, 1997 and December
28, 1996, 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 27, 1997.
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 store's
opening date, at which time such costs are expensed in full.
Advertising
Advertising is expensed as incurred. Advertising expense was $4.0 million, $2.7
million, and $1.3 million for 1997, 1996 and 1995, respectively.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash and
cash equivalents, short-term trade receivables and payables and long-term debt,
approximate their fair values.
Use of Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Foreign Currency Translation
The functional currency for the Company's Canadian subsidiary is the Canadian
dollar. Translation into U.S. dollars is performed for balance-sheet accounts
at year-end rates for monetary items and historical rates for non-monetary
items. Income and expense accounts are translated at average exchange rates.
Adjustments resulting from the translation are reflected as a separate component
of stockholders' equity.
Earnings Per Share
Earnings per share are calculated in accordance with the provisions of Statement
of Financial Accounting Standards ("FAS") No. 128, Earnings Per Share, effective
for 1997. 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). All prior years' earnings (loss) per
share data herein have been recalculated to reflect the provisions of FAS No.
128. A reconciliation of the basic and diluted per-share computations is as
follows (in thousands, except per-share data):
<TABLE>
<CAPTION>
Year Ended Dec. 27, Dec. 28, Dec. 30,
1997 1996 1995
<S> <C> <C> <C>
Basic earnings (loss) per
common share computation:
Net income (loss) allocable to
common stock $ 7,036 $(6,879) $(1,561)
Average common shares issued 10,568 5,078 3,483
Earnings (loss) per common share $ 0.67 $ (1.35) $ (0.45)
======= ======== ========
Diluted earnings (loss) per
common share computation:
Net income (loss) allocable to
common stock $ 7,036 $(6,879) $(1,561)
Average common shares issued 10,568 5,078 3,483
Incremental shares from
assumed conversions:
Stock options 389
------- -------- --------
Total dilutive average
common shares issued 10,957 5,078 3,483
------- -------- --------
Diluted earnings (loss)
per common share $ 0.64 $ (1.35) $ 0.45
======= ======== ========
</TABLE>
Due to the Company's net loss allocable to common stock in 1996 and 1995,
diluted loss per share is the same as basic. In 1996, dilutive securities not
included in the calculation consisted of stock options and warrants convertible
into 1,028,178 shares of common stock. Weighted average shares outstanding
related thereto would have been 5,333,000. In 1995, dilutive securities not
included in the calculation consisted of stock options and warrants convertible
into 552,199 shares of common stock and Series A and C redeemable convertible
preferred stock shares which were in turn convertible into 1,557,686 shares of
common stock. Weighted average shares outstanding related thereto would have
been 5,215,000.
<PAGE>
WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued 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. FAS No. 130
is effective for fiscal years beginning after December 15, 1997. The Company
will adopt FAS No. 130 in 1998 and does not expect such adoption to have a
material impact on the Company's results of operations.
In June 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. FAS No. 131 is effective
for fiscal years beginning after December 15, 1997, and the Company will adopt
FAS No. 131 in 1998. Currently, the Company is evaluating the changes, if any,
that adoption of this standard will have on its reporting.
2. Business Combinations
1997
In February, March and June 1997, in four separate transactions, the Company
acquired the assets and assumed certain liabilities of nine operating natural
foods supermarkets: two in south Florida, two in Eugene, Oregon, two in
Memphis, Tennessee, and three in Phoenix and Scottsdale, Arizona. The purchase
price for these acquisitions aggregated $15.0 million and consisted of $14.0
million in cash and 91,793 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 assets acquired of
$10.3 million was allocated to goodwill, which is being amortized on a straight-
line basis over 40 years.
The fair values of the acquired assets and liabilities of these acquisitions are
as follows (in thousands):
<TABLE>
<S> <C>
Current assets ($27 of cash) $ 3,304
Equipment 3,782
Other assets 23
Liabilities (2,460)
Goodwill 10,338
-------
$14,987
=======
</TABLE>
1996
In July 1996, the Company acquired all of the outstanding common and preferred
stock of Alfalfa's for $39.1 million, consisting of $16.2 million of cash,
issuance of 1,175,132 shares of common stock and options to acquire 186,152
shares of common stock valued at $14.2 million, issuance of 612,504 shares of
redeemable convertible Series D preferred stock valued at $7.7 million and $1.0
million of acquisition-related costs. The acquisition was accounted for using
the purchase method, and the excess of cost over the fair value of the assets
acquired of $27.8 million was allocated to goodwill, which is being amortized on
a straight-line basis over 40 years.
In May 1996, the Company acquired substantially all of the combined assets of
three related natural foods retail stores in Salt Lake City, Utah, in exchange
for total consideration of $2.2 million consisting of $500,000 in cash and $1.7
million in promissory notes. The acquisition was accounted for using the
purchase method, and the excess of cost over 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.
The fair values of the acquired assets and liabilities of these acquisitions are
as follows (in thousands):
<TABLE>
<S> <C>
Current assets ($3,591 of cash) $ 8,507
Equipment 12,030
Other assets 523
Liabilities (9,738)
Goodwill 29,899
-------
$41,221
=======
</TABLE>
1995
In April 1995, the Company acquired the assets of two independent California
limited partnerships, each operating a natural foods supermarket in northern
California, in exchange for $2.8 million in cash. The acquisitions were
accounted for using the purchase method, and the excess of cost over fair value
of the assets acquired of $1.7 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 are as follows (in thousands):
<TABLE>
<S> <C>
Current assets $ 564
Equipment 607
Current liabilities (24)
Goodwill 1,682
------
$2,829
======
</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 (in
thousands):
<TABLE>
<CAPTION>
Year Ended Dec. 27, Dec. 28, Dec. 30,
1997 1996 1995
<S> <C> <C> <C>
Sales $330,543 $242,318 $111,304
Net income (loss) 7,554 (3,677) 1,852
Net income (loss) allocable to
common stock 7,554 (6,073) (85)
Basic earnings (loss) per share $ 0.71 $ (1.20) $ (0.02)
Diluted earnings (loss) per share $ 0.69 $ (1.20) $ (0.02)
</TABLE>
The unaudited pro forma results above are not necessarily representative of the
actual results that would have occurred or may occur in the future, if the
transactions had been in effect on the dates indicated. The pre-merger
historical results of the acquired businesses discussed above are not reflected
in the Company's historical financial statements. Earnings per share are
calculated in accordance with FAS No. 128. See Note 1.
3. Property and Equipment
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
Dec. 27, Dec. 28,
1997 1996
<S> <C> <C>
Machinery and equipment $ 37,604 $28,415
Leasehold improvements 18,898 12,781
Land and building 685 44
Construction in progress 14,983 2,624
--------- -------
Less accumulated depreciation 72,170 43,864
and amortization (15,885) (8,128)
--------- -------
$ 56,285 $35,736
========= =======
</TABLE>
The amounts shown above include $310,000 and $339,000 of machinery and equipment
which are accounted for as capitalized leases and which have accumulated
amortization of $258,000 and $280,000 at December 27, 1997 and December 28,
1996, respectively.
<PAGE>
WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued
4. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
Dec. 27, Dec. 28,
1997 1996
<S> <C> <C>
Accrued wages and employee costs $ 6,345 $4,660
Accrued sales and property taxes 1,931 1,640
Deferred charges and other accruals 3,564 2,364
------- -------
$11,840 $8,664
======= =======
5. Notes Payable and Long-Term Debt
Long-term debt outstanding consists of the following (in thousands):
Dec. 27, Dec. 28,
1997 1996
Notes payable to banks:
Due December 31, 2003, bearing interest,
at the Company's option, at the prime
rate or LIBOR plus 1.25% (8.25% at
December 28, 1996), secured by inventory
and fixed assets $ 750
Notes payable to corporations and individuals:
Due in monthly installments of $4,635
(including interest) through April 2017,
bearing interest at 10%, secured by
fixed assets, penalty for early repayment $ 475
Due June 2005, bearing interest at
10%, unsecured, repaid in 1997 271
Capitalized leases 60
------- -------
475 1,081
Less current portion (8) (110)
------- -------
$ 467 $ 971
======= =======
</TABLE>
In April 1997, the Company increased its revolving line of credit from $20.0
million to $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 December 27, 1997, there were
no borrowings outstanding under this facility.
Scheduled maturities of long-term debt as of December 27, 1997 are as follows
(in thousands):
1998 $ 56
1999 56
2000 56
2001 56
2002 56
Thereafter 795
------
1,075
Less interest (600
------
$ 475
======
6. Income Taxes
Income tax expense (benefit) consists of the following (in thousands):
Year Ended Dec. 27, Dec. 28, Dec. 30,
1997 1996 1995
Current: Federal $2,571 $(114) $ (791)
State 587 (3)
------ ------ ------
3,158 (114) (794)
------ ------ ------
Deferred: Federal 1,728 (705) 825
State 9 (158) 9
------ ------ ------
1,737 (863) 834
------ ------ ------
$4,895 $(977) $ 40
====== ====== ======
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 Dec. 27, Dec. 28, Dec. 30,
1997 1996 1995
<S> <C> <C> <C>
Statutory tax rate 34.0% (34.0%) 34.0%
State income taxes, net of federal
income tax benefit 4.6 (3.8) 3.8
Tax effect of non-deductible goodwill 6.7 14.3 4.7
Disposal of assets (30.7)
Other, net (4.3) 5.6 (2.2)
----- ------ ------
Effective tax rate 41.0% (17.9%) 9.6%
===== ====== ======
</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>
Dec. 27, Dec. 28,
1997 1996
<S> <C> <C>
Deferred tax assets
Inventory related $ 326 $ 386
Accruals 1,076 1,209
Other 408 249
Net operating loss carry forward 904
------- -------
Total deferred tax assets 1,810 2,748
------- -------
Deferred tax liabilities
Property related (2,550) (1,695)
------- -------
Total deferred tax liabilities (2,550) (1,695)
------- -------
Net deferred tax asset (liability) $ (740) $ 1,053
======= =======
</TABLE>
During 1997, the Company fully utilized U.S. net operating loss carryforwards of
approximately $1.9 million. Additionally, during 1997, the Company utilized
state net operating loss carryforwards of approximately $4.1 million and, as of
December 27, 1997, had state net operating loss carryforwards of approximately
$137,000.
7. Redeemable Convertible Preferred Stock
Upon the closing of the Company's initial public offering on October 22, 1996,
the Company's Series A, B, C, D and E redeemable convertible preferred stock
shares were converted into an aggregate of 3,484,213 shares of the Company's
common stock.
8. Capital Stock
The Company declared a 3:2 stock split for all stockholders of record as of
December 22, 1997, effective January 7, 1998. All shares and per-share prices
presented herein have been retroactively restated to reflect the stock split.
In December 1997, the Company completed a public offering of its common stock.
The proceeds from the sale of 2,083,542 shares of common stock at $22.48 per
share were approximately $46.5 million, net of the underwriting discount of $2.5
million and stock offering costs of $300,000.
The Company completed an initial public offering of its common stock on October
22, 1996. The proceeds from the sale of 2,100,000 shares of common stock at
$16.67 per share were approximately $31.4 million, net of the underwriting
discount of $2.5 million and stock offering costs of $1.1 million.
9. Stock Plans, Options and Warrants
Employee Stock Purchase Plan
In August 1996, the Company's board of directors approved and adopted the
Employee Stock Purchase Plan ("Purchase Plan") covering an aggregate of 191,538
shares of common stock. The Purchase Plan is
<PAGE>
WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued
intended to qualify as an employee stock purchase plan within the meaning of
Section 423 of the Internal Revenue Code. Under the Purchase Plan, the board of
directors may authorize participation by eligible employees, including officers,
in periodic offerings. The offering period for any offering will be no more than
27 months. The board authorized an offering commencing on the initial public
offering date of October 22, 1996 and ending June 30, 1997, and sequential six-
month offerings thereafter.
Employees are eligible to participate in the currently authorized offerings if
they have been employed by the Company or an affiliate of the Company
incorporated in the United States for at least six months preceding October 22,
1996. Employees can have up to 15% of their earnings withheld pursuant to the
Purchase Plan (10% under the currently authorized offerings) and applied on
specified purchase dates (currently the last day of each authorized offering) to
the purchase of shares of common stock. The price of common stock purchased
under the Purchase Plan will be equal to 85% of the lower of the fair market
value of the common stock on the commencement date of each offering or the
relevant purchase date. As of December 27, 1997, there were approximately
$126,000 of payroll deductions to be applied to purchase stock on December 31,
1997; as of December 28, 1996, there were approximately $49,000 of payroll
deductions which purchased 9,771 shares of common stock on June 30, 1997.
Employee Stock Ownership Plan
In conjunction with the acquisition of Alfalfa's in July 1996, the Company
assumed an employee stock ownership plan ("ESOP") for Alfalfa's employees who
were participants at the time of the acquisition. Following the acquisition,
the Company discontinued contributions to the ESOP. In January 1998, the Company
received a favorable determination letter from the Internal Revenue Service,
authorizing termination of the ESOP and distribution of the ESOP shares. The
75,078 shares of the Company's common stock held in trust as of December 27,
1997, were distributed to the ESOP participants, pursuant to the terms of the
ESOP, in February 1998.
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 1993 Stock Option Plan (the "1993 Plan"). The board designated all
shares formerly available for issuance under the 1993 Plan and the 1991 Option
Plan (the "1991 Plan") of Alfalfa's following the July 1996 acquisition of
Alfalfa's to be available for issuance under the Incentive Plan. The board also
amended the 1993 Plan and the 1991 Plan to transfer to the Incentive Plan any
shares of common stock that are subject to an option which expires or otherwise
terminates prior to exercise. At plan adoption, 1,235,147 shares of common
stock were reserved for issuance under the Incentive Plan.
The Incentive Plan provides for the grant of incentive stock options to
employees (including officers and employee-directors) and nonqualified stock
options, restricted stock purchase awards and stock bonuses to employees and
directors. The exercise price of options granted under the Incentive Plan is
determined by the board of directors, provided that the exercise price for an
incentive stock option cannot be less than 100% of the fair market value of the
common stock on the grant date and the exercise price for a nonqualified stock
option cannot be less than 85% of the fair market value of the common stock on
the grant date. Outstanding options generally vest ratably over a period of
five years and generally expire ten years from the grant date.
Warrants
During 1997, two warrants were exercised to purchase an aggregate of 4,017
shares of the Company's common stock for approximately $27,000. The warrants
had exercise prices of $6.56 to $7.06 per share, respectively.
A five-year warrant to purchase 5,269 shares of the Company's common stock at an
exercise price of $14.21 per share was outstanding at December 27, 1997.
Fair Values
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock plans. Accordingly, no compensation
expense has been recognized for these plans. Had compensation cost for these
plans been determined based on the fair value at the grant dates as prescribed
by FAS No. 123, Accounting for Stock-Based Compensation, the Company's net
income (loss) allocable to common stock and basic and diluted earnings (loss)
per share would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
Net income (loss) allocable to
<S> <C> <C> <C>
common stock
As reported $7,036 $(6,879) $(1,561)
Pro forma $6,730 $(7,309) $(1,881)
Basic earnings (loss) per share
As reported $ 0.67 $ (1.35) $ (0.45)
Pro forma $ 0.64 $ (1.44) $ (0.54)
Diluted earnings (loss) per share
As reported $ 0.64 $ (1.35) $ (0.45)
Pro forma $ 0.61 $ (1.44) $ (0.54)
</TABLE>
Earnings per share are calculated in accordance with FAS No. 128. See Note 1.
The fair value of the employees' purchase rights was estimated using the Black-
Scholes model with the following assumptions for 1997 and 1996, respectively: no
dividend yield for both years; expected lives of six and eight months; expected
volatility of 51 percent for both years; and risk-free interest rates of 5.5 and
5.6 percent. The weighted-average fair values of the purchase rights granted in
1997 and 1996 were $5.53 per share and $4.92 per share, respectively.
The fair value of each option grant under the Incentive Plan is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1997: no dividend yield;
expected lives of seven years; expected volatility of 49 percent; and risk-free
interest rate of 5.8%. The fair value of each option grant under the Incentive
Plan is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions used for grants in 1996
and 1995, respectively: no dividend yield for both years; expected lives of
seven years for both years; expected volatility of 51 percent for both years;
and risk-free interest rates ranging from 5.6 to 7.1% and from 6.2 to 6.8%.
<PAGE>
WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued
A summary of the status of the Company's Incentive Plan as of the 1997, 1996 and
1995 fiscal year ends and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Incentive Non-Qualified Price
<S> <C> <C> <C>
Outstanding as of
December 31, 1994 331,879 33,061 $ 6.13
Granted 172,650 $11.40
Forfeited (66,192) $ 6.72
Exercised (859) $ 5.14
-------- -------
Outstanding as of
December 30, 1995 437,478 33,061 $ 7.97
Granted 659,737 44,292 $10.07
Forfeited (64,311) $ 9.79
Exercised (76,380) $ 3.90
-------- -------
Outstanding as of
December 28, 1996 956,524 77,353 $ 9.42
Granted 224,962 70,517 $16.36
Forfeited (148,933) (2,001) $10.68
Exercised (230,367) (13,210) $ 7.06
-------- -------
Outstanding as of
December 27, 1997 802,186 132,659 $11.93
======== =======
</TABLE>
At December 27, 1997, options exercisable for 46,440 shares were available for
future grant under the Incentive Plan. At December 28, 1996 and December 30,
1995, options exercisable for 411,269 and 249,971 shares with weighted average
exercise prices of $7.38 and $6.93, respectively, were exercisable. The
weighted-average grant-date per-share fair values of options granted during
1997, 1996 and 1995 were $16.36, $11.27 and $11.40, respectively.
The following table summarizes information about incentive and nonqualified
stock options outstanding and exercisable at December 27, 1997:
Options Outstanding
<TABLE>
<CAPTION>
Weighted-
Range of Number Remaining Average
Exercise Outstanding Contractual Exercise
Prices Life Price
<S> <C> <C> <C>
$2.65-6.58 135,208 7.6 years $ 5.28
$7.81-12.67 631,295 9.2 $11.09
$16.67-21.17 94,142 9.5 $17.75
$22.67-27.29 74,200 9.9 $23.77
-------
934,845 9.0 $11.93
=======
Options Exercisable
Range of Number Weighted-Average
Exercise Prices Exercisable Exercise Price
$2.65-6.58 132,343 $ 5.38
$7.81-12.67 200,027 $11.03
$16.67-21.17 10,222 $16.70
$22.67-27.29 7,650 $24.00
-------
350,242 $10.82
=======
</TABLE>
10. Litigation
The Company is named as defendant in various actions and proceedings arising in
the normal course of business. In all of these cases, the Company is denying
the allegations and is vigorously defending against them and, in some cases, has
filed counterclaims. Although the eventual outcome of the various lawsuits
cannot be predicted, it is management's opinion that these lawsuits will not
result in liabilities that would materially affect the Company's financial
position or results of operations.
11. 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 $10.9 million, $7.6 million and $2.6
million during 1997, 1996 and 1995, respectively.
Future minimum lease payments under noncancelable operating leases as of
December 27, 1997 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ending
<S> <C>
1998 $ 12,782
1999 12,225
2000 11,704
2001 10,822
2002 10,783
Thereafter 49,609
--------
Total minimum lease payments $107,925
========
</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 1997, 1996 and 1995, the Company paid
contingent rentals of $376,000, $270,000 and $158,000, respectively.
12. Non-Recurring Expenses
During 1996, the Company's Board of Directors made the following decisions
relating to the Company's operations, which resulted in an approximate $7.0
million non-recurring charge being recorded. Specifically, as a direct result
of the July 1996 acquisition of Alfalfa's, the Company incurred $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 closed the Alfalfa's Seattle,
Washington store and a restaurant in a Capers, Vancouver, British Columbia store
which, at the time of the acquisition, it had planned to retain. These closures
resulted in the remaining $5.0 million of the charge. Components of the non-
recurring charge consist primarily of lease cancellation costs ($1.0 million),
employee severance and relocation costs ($300,000) and losses on disposal or
abandonment of certain assets ($5.7 million).
Cash paid for employee severance, relocation and lease cancellation costs
related to the non-recurring charge totalled approximately $900,000 in 1997.
During 1997, management adjusted certain accruals related to the non-recurring
charge, including a $500,000 reduction following the settlement of a property-
related obligation. At December 27, 1997, there were no remaining accrued
liabilities related to the non-recurring charge.
13. 401(k) Plan
The Company maintains a tax qualified employee savings and retirement plan (the
"401(k) Plan") covering the Company's employees. Pursuant to the 401(k) Plan,
eligible employees may elect to reduce their current compensation by up to the
lesser of 15% of their annual compensation or the statutorily prescribed annual
limit ($9,500 in 1997) 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
<PAGE>
WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued
by the Company in an amount determined by the Company prior to the end of each
plan year. Total Company contributions during 1997, 1996 and 1995 were
approximately $256,000, $95,000 and $83,000, respectively. The trustees of the
401(k) Plan, at the direction of each participant, invest the assets of the
401(k) Plan in designated investment options. The 401(k) Plan is intend to
qualify under Section 401 of the Internal Revenue Code.
14. Quarterly Information (Unaudited)
The following interim financial information presents the 1997 and 1996
consolidated results of operations on a quarterly basis (in thousands, except
per-share amounts). Per-share amounts are based on average shares outstanding
during each quarter and may not add to the total for the year.
Quarter Ended 1997
<TABLE>
<CAPTION>
Dec. 27 Sept. 27 June 28 March 29
Statement of Operations Data:
<S> <C> <C> <C> <C>
Sales $84,716 $79,955 $76,677 $69,729
Gross profit 26,007 24,696 23,274 21,944
Net income 1,970 1,832 1,677 1,557
Basic earnings per
common share $ 0.18 $ 0.17 $ 0.16 $ 0.15
Diluted earnings
per common share $ 0.17 $ 0.17 $ 0.16 $ 0.15
</TABLE>
Quarter Ended 1996
<TABLE>
<CAPTION>
Dec. 28 Sep. 28 June 29 March 30
Statement of Operations Data:
<S> <C> <C> <C> <C>
Sales $63,360 $60,203 $36,692 $32,237
Gross profit 20,439 19,124 11,913 10,060
Net income (loss) allocable
to common stockholders 421 (6,745) (273) (282)
Basic earnings (loss)
per common share $ 0.05 $ (1.49) $ (0.08) $ (0.08)
Diluted earnings (loss)
per common share $ 0.05 $ (1.49) $ (0.08) $ (0.08)
</TABLE>
15. Subsequent Events
On December 28, 1997, the Company sold a store located in Vail, Colorado, for
approximately $108,000 in cash and $218,000 evidenced by a promissory note,
which was repaid in January 1998.
On January 19, 1998, the Company acquired the operations of a natural foods
supermarket in Nashville, Tennessee. The purchase price for this acquisition
aggregated $2.2 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.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders 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 (the
"Company") at December 27, 1997 and December 28, 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 27, 1997, 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.
[SIGNATURE OF PRICE WATERHOUSE LLP]
PRICE WATERHOUSE LLP
Boulder, Colorado
January 30, 1998
<PAGE>
WILD OATS MARKETS, INC.
MANAGEMENT'S STATEMENT OF RESPONSIBILITIES
The accompanying consolidated financial statements of Wild Oats Markets, Inc.
and its subsidiaries (the "Company") are prepared by the Company's management in
conformity with generally accepted accounting principles. Management is
responsible for the fairness of the financial statements, which include
estimates based on judgment.
The Company maintains accounting and other control systems which management
believes provide reasonable assurance that financial records are reliable for
the purposes of preparing financial statements, and that assets are properly
safeguarded and recorded. Underlying the concept of reasonable assurance is the
premise that the cost of control should not be disproportionate to the benefits
expected to be derived from control. The Company's internal control system is
reviewed by the independent accountants in connection with their audit of the
Company's consolidated financial statements.
The Audit Committee of the Board of Directors meets periodically with management
and the independent accountants to discuss the annual audit, internal control
and financial reporting matters. The independent accountants have direct access
to the Audit Committee.
<TABLE>
<CAPTION>
<S> <C> <C>
[Signature of Michael C. Gilliland] [Signature of James W. Lee] [Signature of Mary Beth Lewis]
Michael C. Gilliland James W. Lee Mary Beth Lewis
Chief Executive Officer President and Chief Operating Officer Vice President of Finance, Chief Financial
Officer and Treasurer
</TABLE>
STOCKHOLDER INFORMATION
MARKET INFORMATION AND DIVIDEND POLICY:
The Company's Common Stock is traded on the NASDAQ National Stock Market under
the symbol "OATS." Since the Company's initial public offering on October 22,
1996, the high and low prices per share of the Common Stock as reported on the
NASDAQ National Stock Market were $29.00 and $8.58, respectively. As of March 9,
1998, the Company's common stock was held by 839 holders of record. No cash
dividends have been declared previously on the Company's common stock and the
Company does not anticipate declaring a cash dividend in the near future.
ANNUAL MEETING:
The Company's Annual Meeting of Stockholders will be held at 1 pm (Mountain
Daylight time), on Monday, May 4, 1998, at:
Boulder Public Library Auditorium
1000 Canyon Boulevard
Boulder, CO 80302
FORM 10-K AND QUARTERLY STOCKHOLDER INFORMATION:
The Company's Annual Report on Form 10-K for the fiscal year ended December 27,
1997 may be obtained without charge by sending a written request to the address
below. Quarterly information is available to all stockholders immediately upon
its release, free of charge, via fax, by calling (303) 440-5220, extension 392,
or through access on the Internet at www.wildoats.com. To receive a copy by
mail, please send your written request to:
INVESTOR RELATIONS TRANSFER AGENT AND REGISTRAR
Wild Oats Markets, Inc. Norwest Bank Minnesota, N.A
1645 Broadway Shareowner Services
Boulder, CO 80302 161 North Concord Exchange
Post Office Box 738
South St. Paul, MN 55075
(612) 450-4062
EXECUTIVE OFFICERS AND BOARD OF DIRECTORS
EXECUTIVE OFFICERS
Michael C. Gilliland
Chief Executive Officer and Director
James W. Lee
President and Chief Operating Officer
Elizabeth C. Cook
Executive Vice President, Secretary and Director
Mary Beth Lewis
Vice President of Finance, Treasurer and
Chief Financial Officer
Freya R. Brier
Vice President of Legal and General Counsel
Ronald J. Feldman
Vice President of Real Estate
John E. Lauderbach
Vice President of Information Technology
John R. Weber
Vice President of Marketing and Purchasing
Peter F. Williams
Vice President of Human Resources
BOARD OF DIRECTORS
JOHN A. SHIELDS
Chairman of the Board
Chairman of the Board, Homeland Stores, Inc.
David M. Chamberlain
Vice Chairman of the Board
President and Chief Executive Officer, L. Kee & Co., Inc.
Brian K. Devine
Chairman, President and Chief Executive Officer
Petco Animal Supplies, Inc.
David L. Ferguson
General Partner, Chase Capital Partners
James B. McElwee
General Partner, Weston Presidio Capital
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet as of December 27, 1997 and the consolidated
statement of operations for the year ended December 27, 1997 and is qualified in
its entirety by reference to such consolidated financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> DEC-27-1997
<CASH> 46,686
<SECURITIES> 0
<RECEIVABLES> 888
<ALLOWANCES> 214
<INVENTORY> 21,539
<CURRENT-ASSETS> 71,398
<PP&E> 72,170
<DEPRECIATION> 15,885
<TOTAL-ASSETS> 173,067
<CURRENT-LIABILITIES> 34,335
<BONDS> 467
0
0
<COMMON> 13
<OTHER-SE> 135,110
<TOTAL-LIABILITY-AND-EQUITY> 173,067
<SALES> 311,077
<TOTAL-REVENUES> 311,077
<CGS> 215,156
<TOTAL-COSTS> 215,156
<OTHER-EXPENSES> 83,830
<LOSS-PROVISION> 273
<INTEREST-EXPENSE> (113)
<INCOME-PRETAX> 11,931
<INCOME-TAX> 4,895
<INCOME-CONTINUING> 7,036
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,036
<EPS-PRIMARY> 0.67
<EPS-DILUTED> 0.64
</TABLE>
