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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 26, 1998
OR
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO _________.
Commission file number 0-21577
WILD OATS MARKETS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1100630
(State or other jurisdiction of (I.R.S. Employer Number)
Identification incorporation or
organization)
3375 MITCHELL LANE
BOULDER, COLORADO 80301-2244
(Address of principal executive offices, including zip code)
(303) 440-5220
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No (_)
As of November 4, 1998, there were 13,066,342 shares outstanding of the
Registrant's Common Stock (par value $0.001 per share).
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TABLE OF CONTENTS
<TABLE>
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PAGE
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheet
September 26, 1998 (Unaudited) and December 27, 1997 3
Consolidated Statement of Operations (Unaudited)
Three and Nine Months Ended September 26, 1998 and September 27, 1997 4
Consolidated Statement of Cash Flows (Unaudited)
Nine Months Ended September 26, 1998 and September 27, 1997 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WILD OATS MARKETS, INC.
Consolidated Balance Sheet
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 26, DECEMBER 27,
1998 1997
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 24,110 $ 46,686
Accounts receivable (less allowance
for doubtful accounts of $167 and
$214, respectively) 1,324 674
Inventories 25,125 21,539
Income tax receivable 281 317
Prepaid expenses and other current assets 1,499 735
Deferred income taxes 984 1,447
-------- --------
Total current assets 53,323 71,398
-------- --------
Property and equipment, net 88,334 56,285
Intangible assets, net 51,556 44,389
Deposits and other assets 938 841
Deferred income taxes 339 154
-------- --------
$194,490 $173,067
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,719 $ 22,487
Accrued liabilities 16,700 11,848
-------- --------
Total current liabilities 44,419 34,335
Long-term debt 467
Deferred income taxes 1,158 2,341
Other liabilities 2,065 801
-------- --------
47,642 37,944
-------- --------
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000
shares authorized; no shares
issued and outstanding
Common stock, $.001 par value; 20,000,000
shares authorized; 13,046,512 and
12,745,971 shares issued and outstanding 13 13
Additional paid-in capital 140,128 136,815
Retained earnings (accumulated deficit) 6,922 (1,574)
Accumulated other comprehensive income (215) (131)
-------- --------
Total stockholders' equity 146,848 135,123
-------- --------
$194,490 $173,067
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 26, September 27 September 26, September 27,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Sales $96,796 $79,955 $287,062 $226,361
Cost of goods sold and occupancy costs 66,662 55,259 197,486 156,448
------- ------- -------- -------
Gross profit 30,134 24,696 89,576 69,913
Operating expenses:
Direct store expenses 20,824 18,582 63,073 52,252
Selling, general and administrative expenses 3,632 2,850 11,259 8,939
Pre-opening expenses 802 146 1,783 329
Non-recurring expenses 393
------- ------- -------- -------
Income from operations 4,876 3,118 13,068 8,393
Interest income (expense), net 76 (16) 600 215
------- ------- -------- -------
Income before income taxes 4,952 3,102 13,668 8,608
Income tax expense 1,951 1,270 5,359 3,543
------- ------- -------- -------
Net income 3,001 1,832 8,309 5,065
------- ------- -------- -------
Other comprehensive income:
Foreign currency translation adjustment, net (113) (5) (84)
------- ------- -------- -------
Comprehensive income $ 2,888 $ 1,827 $ 8,225 $ 5,065
======= ======= ======== =======
Basic net income per common share $ 0.23 $ 0.17 $ 0.64 $ 0.49
======= ======= ======== =======
Diluted net income per common share $ 0.22 $ 0.17 $ 0.62 $ 0.47
======= ======= ======== =======
Average common shares outstanding 13,034 10,557 12,937 10,431
Dilutive effect of stock options 390 431 484 307
------- ------- -------- -------
Average common shares outstanding assuming dilution 13,424 10,988 13,421 10,738
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 26, September 27,
1998 1997
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 8,309 $ 5,065
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 9,359 6,500
Loss (gain) on disposal of property and equipment (106) (560)
Deferred tax provision 71 1,544
Deferred severance payment 476
Change in assets and liabilities:
Inventories (2,105) (464)
Receivables and other assets (259) (462)
Accounts payable 5,022 1,629
Accrued liabilities 5,576 847
-------- --------
Net cash provided by operating activities 25,867 14,575
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (39,420) (12,809)
Payment for purchase of acquired
entities, net of cash acquired (9,585) (14,003)
Proceeds from sales of equipment 566
-------- --------
Net cash used by investing activities (49,005) (26,246)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on long-term debt (861) (1,099)
Proceeds from issuance of common stock 1,517 2,479
-------- --------
Net cash provided by financing activities 656 1,380
-------- --------
Effect of exchange rate changes on cash (94) 1
-------- --------
Net decrease in cash and cash equivalents (22,576) (10,290)
Cash and cash equivalents at beginning of period 46,686 16,404
-------- --------
Cash and cash equivalents at end of period $ 24,110 $ 6,114
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 237 $ 106
======== ========
Cash paid for income taxes $ 3,757 $ 225
======== ========
Supplemental schedule of noncash investing and
financing activities:
Short-term note receivable for sale of property $ 365
========
Acquisition of property with
seller-financed long-term debt $ 480
========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING POLICIES
The consolidated balance sheet as of September 26, 1998, the consolidated
statement of operations for the three and nine months ended September 26,
1998 and September 27, 1997, as well as the consolidated statement of cash
flows for the nine months ended September 26, 1998 and September 27, 1997
have been prepared without an audit. In the opinion of management, all
adjustments, consisting only of normal, recurring adjustments necessary for
a fair presentation thereof, have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with financial
statements and notes thereto included in the Company's 1997 Annual Report
to Stockholders. The results of operations for interim periods presented
are not necessarily indicative of the operating results for the full year.
2. NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("FAS") No. 130, Reporting Comprehensive
Income, and FAS No. 131, Disclosure about Segments of an Enterprise and
Related Information. The Company adopted FAS No. 130 in 1998, and the
required presentation is shown in the consolidated balance sheet and
consolidated statement of operations herein. The Company will adopt FAS
No. 131 effective January 3, 1999; however, the Company does not expect FAS
No. 131 to materially affect financial statement presentation.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. SOP 98-
1, which is effective for transactions in fiscal years beginning after
December 15, 1998, provides guidance on accounting for the costs of
computer software developed or obtained for internal use. The Company will
adopt SOP 98-1 for the 1999 fiscal year, but does not expect such adoption
to have a material effect on its reported financial results.
In April 1998, the AICPA issued SOP 98-5, Accounting for the Costs of
Start-Up Activities. SOP 98-5 provides guidance on how entities should
account for pre-opening costs, pre-operating costs, organization costs and
start-up costs. SOP 98-5 requires that the costs of start-up activities be
expensed as incurred. SOP 98-5 is effective for fiscal years beginning
after December 15, 1998, and the initial application should be reported as
a cumulative effect of a change in accounting principle. The Company will
adopt SOP 98-5 in fiscal 1999 and does not expect such adoption to have a
material impact on the Company's results of operations.
In June 1998, the FASB issued FAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. FAS No. 133, which is effective for
fiscal years beginning after June 15, 1999, requires all derivatives to be
recognized in the balance sheet as either assets or liabilities and
measured at fair value. In addition, all hedging relationships must be
reassessed and documented pursuant to the provisions of FAS No. 133. The
Company will adopt FAS No. 133 for the 2000 fiscal year, but does not
expect such adoption to materially affect financial statement presentation.
3. BUSINESS COMBINATIONS
During the second quarter of 1998, the Company acquired the assets of three
operating natural foods grocery stores in New York, New York, Santa
Barbara, California, and Victoria, British Columbia in exchange for $7.4
million in cash. The acquisitions were accounted for using the purchase
method, and the excess cost over the fair value of the net assets acquired
of $6.3 million was allocated to goodwill, which is being amortized on a
straight-line basis over 40 years.
Also during the second quarter of 1998, the Company issued 133,363 shares
of the Company's common stock in exchange for all of the common stock of
two companies operating natural foods grocery stores in Columbus, Ohio and
Little Rock, Arkansas. The acquisitions were accounted for as poolings of
interests, and, accordingly, the Company's consolidated financial
statements for the nine months ended September 26, 1998 include the
operations of the acquired stores, adjusted to conform with the Company's
accounting policies and presentation. The Company's financial statements
prior to 1998 were not restated based on the immaterial effect of the
poolings. Non-recurring, acquisition-related expenses of $393,000 were
recorded in conjunction with the poolings.
4. EARNINGS PER SHARE
Earnings per share are calculated in accordance with the provisions of FAS
No. 128, Earnings Per Share. FAS No. 128 requires the Company to report
both basic earnings per share, which is based on the weighted-average
number of common shares outstanding, and diluted earnings per share, which
is based on the weighted-average number of common shares outstanding and
all dilutive potential common shares outstanding, except where the effect
of their inclusion would be antidilutive (i.e., in a loss period).
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Form 10-Q contains forward-looking statements within the context of Section
21E of the Securities Exchange Act of 1934, as amended. Each and every forward-
looking statement involves a number of risks and uncertainties, including the
Risk Factors specifically delineated and described in the Company's 1997 Annual
Report to Stockholders and those Risk Factors that have been specifically
expanded or modified below. The actual results that the Company achieves may
differ materially from any forward-looking statements due to such risks and
uncertainties. Words such as "believes", "anticipates", "expects", "intends",
and similar expressions are intended to identify forward-looking statements, but
are not the exclusive means of identifying such statements. The Company
undertakes no obligation to update any forward-looking statements in order to
reflect events or circumstances that may arise after the date of this report.
Certain of the Risk Factors are hereby restated, modified and expanded in
accordance with the following section references that correlate to the
corresponding sections of the Company's 1997 Annual Report to Stockholders:
UNCERTAIN ABILITY TO EXECUTE GROWTH STRATEGY
The Company's business has grown considerably in size and geographic scope,
increasing from 11 stores in 1993, to its current size of 60 stores in 17 states
and Canada. The Company acquired six operating natural foods stores, opened
five new stores, and relocated one store during the nine months ended September
26, 1998. The Company also closed two stores in anticipation of relocations to
new sites and sold two stores, both in Colorado, during the nine months ended
September 26, 1998. During 1997, the Company opened four stores, relocated one
store and acquired nine stores. The Company's ability to implement its growth
strategy depends to a significant degree upon its ability to open or acquire
stores in existing and new markets and to integrate and operate those stores
profitably. While the Company plans to expand primarily through the opening of
new stores, it will continue to pursue acquisitions of natural foods retailers
where attractive opportunities exist. The Company's growth strategy is
dependent upon a number of factors, including its ability to: (i) access
adequate capital resources; (ii) expand into regions where it has no operating
experience; (iii) identify markets that meet its site selection criteria; (iv)
locate suitable store sites and negotiate acceptable lease terms; (v) locate
acquisition targets and negotiate acceptable acquisition terms; (vi) hire, train
and integrate management and store employees; (vii) recruit, train and retain
regional pre-opening and support teams; and (viii) expand its distribution and
other operating systems. In addition, the Company pursues a strategy of
clustering stores in each of its markets to increase overall sales, achieve
operating efficiencies and further penetrate markets. In the past, when the
Company has opened a store in a market where it had an existing presence, the
Company has experienced a decline in the sales and operating results at certain
of its existing stores in these markets. The Company intends to continue to
pursue its store clustering strategy and expects the sales and operating results
trends for other stores in an expanded market to continue to experience
temporary declines related to the clustering of stores. Further, acquisitions
involve a number of additional risks, such as short-term negative effects on the
Company's reported operating results, diversion of management's attention,
unanticipated problems or legal liabilities, and the integration of potentially
dissimilar operations, some or all of which could have a material adverse effect
on the Company's business, results of operations and financial condition. There
can be no assurance that the Company will achieve its planned expansion in
existing markets, enter new markets, or operate or integrate its existing,
newly-opened or newly-acquired stores profitably. If the Company fails to do
so, the Company's business, results of operations and financial condition will
be materially and adversely affected. In addition, the Company's ability to
execute its growth strategy is partially dependent upon the demographic trends
and market conditions in the natural foods industry and any change in those
trends and conditions could adversely affect the Company's future growth rate.
COMPETITION
As Wild Oats enters new geographic markets, its success will depend in part on
its ability to gain market share from established competitors and to compete
effectively with the entry of natural foods grocery competitors and expansion of
natural foods selections by conventional grocers into its existing markets. 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 store in Boulder, Colorado in February
1998. Whole Foods' management has announced that it intends to seek additional
store sites in other cities in which the Company has stores, and has announced
it has acquired sites in Denver, Colorado and Santa Fe, New Mexico, cities in
which the Company has several stores. If Whole Foods is successful in opening
stores in locations in which the Company has or intends to open stores, the
Company's sales and operating results at such stores may be materially adversely
affected.
FLUCTUATIONS IN FINANCIAL RESULTS
The Company's results of operations may fluctuate significantly from period-to-
period as the result of a variety of factors, including: (i) the number, timing,
mix and cost of store openings, acquisitions or closings; (ii) the ratio of
stores opened to stores acquired; (iii) the opening of stores by the Company or
its competitors in markets where the Company has existing stores; (iv)
comparable store sales results; (v) the ratio of urban format to supermarket
format stores; and (vi) seasonality in sales volume and sales mix in certain
geographic regions. 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 quarter will
have an adverse effect on the Company's results of operations. Conversely,
delays in opening of planned new stores may result in revenue shortfalls for
both the quarter and the year. 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.
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
7
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preferences for natural foods and general economic conditions. Past increases
in comparable store sales may not be indicative of future performance. The
Company's comparable store sales results have been negatively affected in the
past by planned cannibalization (the loss of sales at an existing store when the
Company opens a new store nearby) resulting from the implementation of the
Company's store clustering strategy. The Company expects that comparable store
sales increases have been or will continue to be negatively affected by planned
cannibalization in the fourth quarter of 1998 and throughout 1999 due to the
planned opening of new stores in several of the Company's existing markets
including Santa Monica, California and Denver, Colorado in 1998 and Phoenix,
Arizona, Kansas City, Missouri, St. Louis, Missouri, Las Vegas, Nevada and
Albuquerque, New Mexico, in 1999. There can be no assurance that comparable
store sales for any particular period will not decrease in the future.
GOVERNMENT REGULATION
The Company is subject to numerous federal, state and local laws, regulations
and ordinances regulating health and sanitation standards, food labeling and
handling, equal employment, minimum wages and licensing for the sale of food and
alcoholic beverages. Difficulties or failures in complying with these
regulations could adversely affect the operations of an existing store or delay
the opening of a new store.
In December 1997, the United States Department of Agriculture ("USDA")
published, pursuant to the Organic Food Production Act of 1990, its proposed
National Organic Program rules, under which the USDA proposes to regulate the
production, handling, labeling and sale of products bearing the "organic" label.
The Company believes that the rules as published substantially weaken the
current standards for organic food production and labeling, and may undermine
consumer confidence in the quality of certain of the foods sold in its stores.
The rules also may add additional expense to the Company's cost of private label
and in-store prepared foods sold by the Company. The Company submitted a
detailed response to the USDA during the comment period. If the rules are
adopted as currently proposed, such rules could have an adverse effect on the
Company's business, results of operations and financial condition.
In April 1998, the United States Food and Drug Administration ("FDA") published
a proposed amendment to the Dietary Supplement Health and Education Act of 1994.
The Company believes the proposed amendments could substantially limit the
consumer's access to important information on vitamins and supplements. The
Company submitted a response to the proposed amendment before the end of the FDA
comment period. If the proposed amendments are adopted as currently drafted,
information about, and perhaps access to, vitamins and supplements could be
restricted, which could have an adverse effect on the Company's business,
results of operations and financial condition.
OWNERSHIP AND SALE OF REAL PROPERTY
The Company has purchased, or entered into contracts to purchase, parcels of
real property for the construction or remodeling of new stores or the relocation
of existing stores. The Company also purchased a ground lease on undeveloped
real property. The Company has constructed two, and intends to construct or
remodel two more new stores on real property purchased or leased by the Company.
There can be no assurance that the Company will be successful in constructing
the planned stores within the Company's projected budgets or on the schedules
currently anticipated. Failure to complete these projects on time or within
budget could have a material adverse impact on the Company's business, results
of operations, including delays in realizing sales revenues, and financial
condition. The Company anticipates that, after construction or remodeling of
stores on certain of the acquired properties is completed, it will sell the land
and buildings in one or more sale-leaseback transactions under which the Company
will lease the stores from the purchaser of the property. There can be no
assurance that the Company will be successful in locating and negotiating
acceptable transactions with one or more parties for the sale-leaseback of the
properties currently owned by the Company, which may result in unplanned long-
term uses of the Company's cash that would otherwise be available to fund
operations.
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Results of Operations
The following table sets forth, for the periods indicated, certain selected
income statement data expressed as a percentage of sales:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold and occupancy costs 68.9 69.1 68.8 69.1
----- ----- ----- -----
Gross margin 31.1 30.9 31.2 30.9
Direct store expenses 21.5 23.2 22.0 23.1
Selling, general and administrative expenses 3.8 3.6 3.9 4.0
Pre-opening expenses 0.8 0.2 0.6 0.1
Non-recurring expenses 0.1
----- ----- ----- -----
Income from operations 5.0 3.9 4.6 3.7
Interest income, net 0.1 0.2 0.1
----- ----- ----- -----
Income before income taxes 5.1 3.9 4.8 3.8
Income tax expense 2.0 1.6 1.9 1.6
----- ----- ----- -----
Net income 3.1% 2.3% 2.9% 2.2%
===== ===== ===== =====
</TABLE>
STORE OPENINGS, CLOSINGS, REMODELS, RELOCATIONS AND ACQUISITIONS. During the
third quarter of 1998, the Company opened two new stores in Miami Beach, Florida
and Santa Monica, California. During the nine months ended September 26, 1998,
the Company opened five stores and acquired six stores, one each in Columbus,
Ohio (which was subsequently relocated), Nashville, Tennessee, New York, New
York, Victoria, British Columbia, Santa Barbara, California and Little Rock,
Arkansas, and sold two stores in Colorado. The Company closed two stores in
anticipation of relocations to new sites. The Company plans to open as many as
three additional new stores and relocate two stores during the remainder of
1998. The Company anticipates that it also may acquire one or more operating
natural foods grocery stores during the remainder of 1998. The Company's
results of operations have been and will continue to be affected by, among other
things, the number, timing and mix of store openings, acquisitions or closings.
New stores build their sales volumes and refine their merchandise selection
gradually and, as a result, generally have lower gross margins and higher
operating expenses as a percentage of sales than more mature stores. The
Company anticipates that the new stores opened in 1998 will experience operating
losses for the first six to 12 months of operation, in accordance with historic
trends. Further, acquired stores, while generally profitable as of acquisition
date, generate lower gross margins and store contribution margins than the
Company average, due to their substantially lower volume purchase discounts.
Over time, typically six months, as the Company sells through the acquired
inventories and implements its volume purchase discounts, the Company expects
that the gross margin and store contribution margin of the acquired stores will
approach the Company average. The Company anticipates that a high concentration
of acquired stores will have a temporary negative impact on the Company's
consolidated gross margin and store contribution margin.
The Company is actively upgrading, remodeling or relocating some of its older
stores. Remodels and relocations typically cause short-term disruption in sales
volume and related increases in certain expenses as a percentage of sales, such
as payroll. Remodels on average take between 90 and 120 days to complete. The
Company cannot predict whether sales disruptions and the related impact on
earnings may be greater in time or volume than projected in certain remodeled or
relocated stores. The Company will continue to evaluate the profitability of
all of its stores on an ongoing basis and may, from time to time, make decisions
regarding closures, disposals, relocations or remodels in accordance with such
evaluations. As part of this strategy, during the first nine months of 1998,
the Company sold two stores in Colorado, consolidated its stores in Fort
Collins, Colorado by closing one store located there, relocated one store in
Columbus, Ohio, and closed one store in Denver, Colorado in anticipation of a
relocation in the fourth quarter of 1998.
Subsequent to the third quarter of 1998, the Company introduced its Internet
shopping website, "shop.wildoats.com". The Company incurred and will continue
to incur selling, general and administrative costs for the purchase of the
software, advertising and personnel to operate the website. The Company
anticipates that the website will experience small operating losses or break
even on expenses for the first 12 months of operation until consumer awareness,
acceptance and use of the website grow.
SALES. Sales for the three months ended September 26, 1998 increased 21% to
$96.8 million from $80.0 million for the same period in 1997. Sales for the
nine months ended September 26, 1998 increased 27% to $287.1 million from $226.4
million for the same period in 1997. The increases were primarily due to the
opening of five new stores and the acquisition of six stores, and the relocation
of one store in the first nine months of 1998, and the inclusion of four new
stores opened, one relocated store, and nine stores acquired in 1997.
Comparable store sales increased 4% for the third quarter of 1998 and 4% for the
first nine months of 1998, based on both new and acquired stores that have been
operating longer than 12 months. The Company expects its comparable store sales
increases to be 5% to 6% in the fourth quarter of 1998. Sales in the third
quarter were slightly lower than originally projected because of unexpected
construction delays in the opening of two of the Company's stores. See "Risk
Factors--Fluctuations in Financial Results".
GROSS PROFIT. Gross profit for the three months ended September 26, 1998
increased 22% to $30.1 million from $24.7 million for the same period in 1997.
Gross profit for the nine months ended September 26, 1998 increased 28% to $89.6
million from $69.9
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million for the same period in 1997. The increases in gross profit are primarily
attributable to the increase in the number of stores operated by the Company.
Gross profit as a percentage of sales for the three months ended September 26,
1998 increased to 31.1% from 30.9% for the same period in 1997. Gross profit as
a percentage of sales for the nine months ended September 26, 1998 increased to
31.2% from 30.9% for the same period in 1997. The increases are primarily
attributable to the maturation of the Company's store base, the Company's volume
purchase discounts, and enhanced inventory management.
DIRECT STORE EXPENSES. Direct store expenses for the three months ended
September 26, 1998 increased 12% to $20.8 million from $18.6 million for the
same period in 1997. Direct store expenses for the nine months ended September
26, 1998 increased 21% to $63.1 million from $52.3 million for the same period
in 1997. The increases in direct store expenses are attributable to the
increase in the number of stores operated by the Company. Direct store expenses
as a percentage of sales for the three months ended September 26, 1998 decreased
to 21.5% from 23.2% for the same period in 1997. Direct store expenses as a
percentage of sales for the nine months ended September 26, 1998 decreased to
22.0% from 23.1% for the same period in 1997. The decreases are due to the
matured performance of the new stores opened in 1997, as well as improved
control of direct store expenses, particularly payroll and benefits costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended September 26, 1998 increased
27% to $3.6 million from $2.9 million for the same period in 1997. Selling,
general and administrative expenses for the nine months ended September 26, 1998
increased 26% to $11.3 million from $8.9 million for the same period in 1997.
Selling, general and administrative expenses as a percentage of sales for the
three months ended September 26, 1998 increased to 3.8% from 3.6% for the same
period in 1997. The increase is the result of additional central and regional
support staff and infrastructure that the Company has added to support its
increased number of stores. Selling, general and administrative expenses as a
percentage of sales for the nine months ended September 26, 1998 remained
relatively constant at 3.9% versus 4.0% for the same period in 1997. Selling,
general and administrative expenses have been running higher than expected in
the first nine months of 1998 due to additional personnel costs in the
information technology, marketing and purchasing departments needed to support
the Company's growth plans, as well as additional costs to distribute the
Company's marketing materials, such as its specials flyers, to its customers.
The Company anticipates that the higher levels of selling, general and
administrative expenses will continue through 1998. In addition, the Company
moved its corporate office subsequent to the third quarter of 1998 to a larger
facility to accommodate an increased support staff for its larger base of
stores. There will be additional selling, general and administrative expenses
for rent and utilities on the new facility, and the costs of relocating the
information systems currently used by the Company.
PRE-OPENING EXPENSES. Pre-opening expenses for the three months ended
September 26, 1998 increased 449% to $802,000 from $146,000 for the same period
in 1997. Pre-opening expenses as a percentage of sales for the three months
ended September 26, 1998 increased to 0.8% from 0.2% for the same period in
1997. The increases are primarily due to the delayed opening of one store,
resulting in additional pre-opening costs in the form of rental payments, as
well as the opening of two new stores in the third quarter of 1998 as compared
to one new store in the same period in 1997. Pre-opening costs for the nine
months ended September 26, 1998 increased 442% to $1.8 million from $329,000 for
the same period in 1997. For the nine months ended September 26, 1998, pre-
opening costs as a percentage of sales increased to 0.6% from 0.1% due to the
opening of five new stores and the relocation of one store in the first nine
months of 1998 as compared to the opening of two new stores in the same period
in 1997.
NON-RECURRING EXPENSES. In conjunction with the Company's pooling-of-interests
transactions during the nine months ended September 26, 1998, the Company
recorded a non-recurring charge of $393,000. The charge is attributable to
severance costs, lease termination costs, and asset write-downs.
NET INTEREST INCOME. Net interest income for the three months ended September
26, 1998 was $76,000 as compared to net interest expense of $16,000 for the same
period in 1997. Net interest income for the nine months ended September 26,
1998 increased 179% to $600,000 from $215,000 for the same period in 1997. Net
interest income as a percentage of sales for the three months ended September
26, 1998 increased to 0.1% from net interest expense for the same period in
1997. Net interest income as a percentage of sales for the nine months ended
September 26, 1998 increased to 0.2% from 0.1% for the same period in 1997. The
change is attributable to the investment of the net proceeds from the Company's
public offerings in December 1997 and October 1996 and to lower levels of
indebtedness incurred to fund new store openings and acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital have been cash flow from operations,
trade payables, bank indebtedness, and the sale of equity securities. Primary
uses of cash have been the financing of new store development, new store
openings, acquisitions and purchases of real property.
Net cash provided by operating activities was $25.9 million during the nine
months ended September 26, 1998 as compared to $14.6 million during the same
period in 1997. Cash provided by operating activities increased during this
period primarily due to increases in net income before depreciation and
amortization expense and increases in accounts payable and accrued liabilities.
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. The Company
also realized gains from the sale by the Company of certain rights in real
property in the third quarter of 1998.
Net cash used by investing activities was $49.0 million during the nine months
ended September 26, 1998 as compared to $26.2 million during the same period in
1997. The increase is due to the opening of five new stores, the acquisition of
six stores, the relocation of one store, the purchase of certain parcels of real
property, and several store remodels in the first nine months of 1998 as
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well as the construction costs incurred for six new stores and relocations now
under construction which are expected to open in the remainder of 1998 or early
1999, as compared to two new stores and nine acquired stores in the first nine
months of 1997.
Net cash provided by financing activities was $656,000 during the nine months
ended September 26, 1998 as compared to $1.4 million during the same period in
1997. The change reflects reduced long-term debt and decreased issuance of
common stock upon the exercise of employee stock options during the first nine
months of 1998.
The Company has a revolving line of credit of $40.0 million. The facility has a
seven-year term and bears interest, at the Company's option, at the prime rate
or LIBOR plus 1.25%. The line of credit agreement includes certain financial
and other covenants, as well as restrictions on payments of dividends. As of
November 4, 1998, there were no borrowings outstanding under this facility.
The Company spent approximately $12.6 million during the third quarter of 1998
for new store development, remodels and maintenance capital expenditures,
exclusive of any acquisitions. The Company anticipates that it will spend
approximately $45.0 million during 1998 for real property purchases, new store
development, remodels and maintenance capital expenditures, exclusive of any
acquisitions. Three new store openings and two store relocations are planned
for the remainder of 1998. The Company's average capital expenditures to open a
store, including leasehold improvements, equipment and fixtures, have ranged
from approximately $1.0 million to $3.0 million over the past 24 months,
excluding inventory costs and initial operating losses. The Company expects to
increase the average size of its new stores and increase the number of its new
store openings over time, and is using a greater proportion of new and custom
equipment in its stores. Therefore, the Company anticipates that its average
capital expenditures per store will increase over time by approximately
$500,000.
The Company has purchased, or entered into contracts to purchase, real property
or ground leases on which it intends to construct new stores or relocate certain
existing stores. The Company constructed one new store that opened in March
1998, has constructed one store planned to open in the fourth quarter of 1998,
is constructing a third store planned to open in the first quarter of 1999, and
plans to commence remodeling of one additional new store in early 1999.
Construction of stores requires substantially greater cash outlays than the
remodeling of existing buildings (i.e., $3.5 to $7.0 million as compared to $1.0
to $3.0 million). The Company intends to sell certain of the acquired real
properties in one or more sale-leaseback transactions in order to recover the
cash expended for the purchase of the underlying real property and the building
construction costs. If the Company is not successful in locating and
negotiating acceptable transactions with one or more parties for the sale and
leaseback of certain 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. Delays
in opening new stores also may result in reductions in forecasted sales revenues
from projected levels and increases in pre-opening costs for any given reporting
period.
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 currently are approximately $250,000 to
$300,000 per store and are expensed when the new store opens. Beginning in 1999
pre-opening costs will be expensed as incurred. The amounts and timing of such
pre-opening costs will depend upon the availability of new store sites and other
factors, including the location of the store and whether it is in a new or
existing market for the Company, the size of the store, and the required build-
out at the site. Costs to acquire future stores, if any, are impossible to
predict and could vary materially from the cost to open new stores. There can be
no assurance that actual capital expenditures will not exceed anticipated
levels. The Company believes that the net proceeds of its public stock offering
in December 1997, together with cash generated from operations and funds
available under the revolving line will be sufficient to satisfy its cash
requirements, exclusive of acquisitions, through 1998 and 1999.
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, with the exception of the Company's
current headquarters voicemail system, all of its major software and hardware
systems at its corporate headquarters are Year 2000 compliant. The cost for a
Year 2000-compliant voicemail system is not material. The Company has
substantially completed installing point-of-sale hardware (cash registers and
scanners) in its stores that are Year 2000 compliant. Total replacement and
installation cost to date has been approximately $1 million, with the cost to
complete the installation in 1999 estimated at an additional $300,000. The
existing point-of-sale hardware was and is being replaced to accommodate a
merchandise management system that is Year 2000 compliant and that was
previously acquired by the Company for its greater item movement, tracking,
pricing and reporting capabilities.
The Company also is in the process of verifying whether its major suppliers,
service providers, and financial institutions are Year 2000 compliant. Many of
the Company's product vendors are smaller businesses that have not considered
the impact of Year 2000 noncompliance and so are taking no steps to ensure
compliance. To the extent that product vendors' manufacturing or distribution
systems fail as a result of Year 2000 noncompliance, certain products carried by
the Company's stores could become unavailable, resulting in decreases in
operating revenues, although in many circumstances, alternative local vendors'
products may be available. The Company's stores' operations could be materially
adversely affected if utilities are disrupted. At this time the Company has not
developed any contingency plans to address product or utility disruptions. One
of the Company's larger distributors has disclosed that certain of its warehouse
facilities' systems are not Year 2000 compliant, but that it will be purchasing
compliant systems in 1998 and 1999. The Company cannot currently evaluate the
magnitude of the impact that a failure by the distributor to install compliant
systems could have on the Company's operations. A failure in the distributor's
warehouse facilities could affect the Company's ability to stock product in
certain of its stores, resulting in lower sales revenues in those stores. If
the Company's financial institutions are not Year 2000 compliant, a failure in
their operating system could result in a temporary inability by the Company to
access necessary cash resources required for operations; however, normal store
operations will generate sufficient revenues to cover daily operating needs.
The Company has commenced review of the various individual mechanical systems,
such
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as HVAC, refrigeration and security systems, in its stores to determine whether
any Year 2000 compliance issues exist as to these systems. The Company will
contact the suppliers of certain store systems where Year 2000 compliance may be
an issue to obtain confirmation of compliance or instructions for reprogramming
in the event of a compliance problem. The Company does not anticipate that any
major store systems will require replacement because of Year 2000 compliance
concerns or that noncompliance of any mechanical systems will have any material
effect on store operations. The proportion of perishable goods that could be
impacted by a failure in refrigerated systems is small on a total dollar basis
to the gross inventory of any store. The Company will continue to make certain
investments in its software systems and applications to ensure that they are
Year 2000 compliant. The financial impact to the Company is not anticipated to
be material in any single year.
The estimates and conclusions regarding Year 2000 impact contained above are
forward-looking statements based on the Company's best estimates of future
events. Actual results may differ due to certain risks and uncertainties.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("FAS") No. 130, Reporting Comprehensive Income.
FAS No. 130 establishes standards for the reporting and presentation of
comprehensive income and its components in a full set of general-purpose
financial statements. FAS No. 130 requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements. The Company adopted FAS No. 130 in 1998.
Also in 1997, the FASB issued FAS No. 131, Disclosure about Segments of an
Enterprise and Related Information. FAS No. 131 revises the current
requirements for reporting business segments by redefining such segments
according to management's disaggregation of the business for purposes of making
operating decisions and allocating internal resources. The Company will adopt
FAS No. 131 effective January 2, 1999; however, the Company does not expect FAS
No. 131 to materially affect financial statement presentation.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1, which is effective
for transactions in fiscal years beginning after December 15, 1998, provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. The Company will adopt SOP 98-1 for the 1999 fiscal year, but
does not expect such adoption to have a material effect on its reported
financial results.
In April 1998, the AICPA issued SOP 98-5, Accounting for the Costs of Start-Up
Activities. SOP 98-5 provides guidance on how entities should account for
start-up costs, such as pre-opening costs, pre-operating costs, organization
costs and start-up costs. SOP 98-5 requires that the costs of start-up
activities be expensed as incurred. SOP 98-5 is effective for fiscal years
beginning after December 15, 1998, and the initial application should be
reported as a cumulative effect of a change in accounting principle. The
Company will adopt SOP 98-5 in fiscal 1999 and does not expect adoption to have
a material effect on the Company's results of operations.
In June 1998, the FASB issued FAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. FAS No. 133, which is effective for fiscal years
beginning after June 15, 1999, requires all derivatives to be recognized in the
balance sheet as either assets or liabilities and measured at fair value. In
addition, all hedging relationships must be reassessed and documented pursuant
to the provisions of FAS No. 133. The Company will adopt FAS No. 133 for the
2000 fiscal year, but does not expect such adoption to materially affect
financial statement presentation.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Alfalfa's Canada, Inc., the Company's Canadian subsidiary, is a defendant in a
suit brought in the Supreme Court of British Columbia, by one of its
distributors, Waysafer Wholefoods Limited and one of its principals, seeking
monetary damages for breach of contract and injunctive relief to enforce a
buying agreement for the three Canadian stores entered into by a predecessor of
Alfalfa's Canada, Inc. Under the buying agreement, the stores must buy products
carried by the plaintiff if such are offered at the current advertised price of
its competitors. The suit was filed in September 1996. In June 1998, the
Company filed a Motion for Dismissal on the grounds that the contract in dispute
constituted a restraint of trade. The Motion was subsequently denied. 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 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
Number DESCRIPTION OF DOCUMENT
------ -----------------------
3(i).1.(a) Amended and Restated Certificate of Incorporation of Registrant.*
3(i).1.(b) Certificate of Correction to Amended and Restated Certificate of
Incorporation of the Registrant.*
3(ii).1 Amended and Restated By-Laws of Registrant.*
4.1 Reference is made to Exhibits 3(i).1 through 3(ii).1.*
4.2 Rights Agreement dated as of May 22, 1998 between Registrant and
Norwest Bank Minnesota N.A.**
10.1 Employment Agreement dated March 2, 1998 between Registrant and
John Weber.
27.1 Financial Data Schedule.
* Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 27, 1997 (File Number 0-21577).
** Incorporated by reference to the Company's Registration Statement on Form 8-
A dated May 21, 1998.
(b) Reports on Form 8-K.
The Company did not file a Form 8-K during the three-month period ended
September 26, 1998.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boulder, County of
Boulder, State of Colorado, on the 11th day of November 1998.
WILD OATS MARKETS, INC.
By /s/ Mary Beth Lewis
--------------------
Mary Beth Lewis
Executive Officer, Vice President of
Finance, Treasurer and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
14
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Exhibit 10.1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of March 2, 1998 between Wild Oats Markets,
Inc., a Delaware corporation (the "Company") and John Weber ("Executive").
For good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties agree as follows:
ARTICLE 1. EMPLOYMENT
1.1 Employment. The Company agrees to employ Executive, and Executive
----------
hereby accepts employment with the Company, upon the terms and conditions set
forth in this Agreement for the period beginning on the date hereof and
terminating as provided in Section 1.4 (the "Employment Period").
1.2 Positions and Duties.
--------------------
(a) During the Employment Period, Executive shall serve as Vice President
of Marketing and Purchasing of the Company at its Headquarters in Boulder,
Colorado, under the supervision and direction of the Company's Chief Executive
Officer, President and Board of Directors (the "Board").
(b) Executive shall carry out the customary functions of his position as
determined by the Company, and perform such tasks and responsibilities as
requested by the CEO, president or Board.
(c) Executive shall devote his best efforts and full business time and
attention (except for permitted vacation periods and periods of illness or other
incapacity as provided for herein) to the business and affairs of the Company
and its subsidiaries. Executive shall perform his duties and responsibilities
to the best of his abilities in a diligent, trustworthy, businesslike and
efficient manner.
1.3 Salary, Bonus, Options and Benefits.
-----------------------------------
(a) During the Employment Period, Executive's base salary (the "Base
Salary") shall initially be $125,000.00 per annum, which salary shall be payable
in regular installments in accordance with the Company's general payroll
practices as in place from time to time. Any adjustment in Executive's
compensation shall be determined by the Compensation Committee of the Board (the
"Compensation Committee") in its sole discretion.
(b) Executive also shall be entitled to participate in an annual bonus plan
under which Executive shall receive a bonus of up to 50% of his base salary
based upon achieving performance objectives to be mutually agreed upon by
Executive and the President or the Board. The bonus payment, if any, shall be
paid within 90 days after the end of the first 12 months of the Executive's
employment with the Company.
(c) During the Employment Period, Executive shall be entitled to
participate in all of the Company's employee benefit programs for which senior
executive employees of the Company are generally eligible as in effect from time
to time. Executive shall be entitled to four weeks of paid vacation per year in
accordance with the Company's policies. Any payments of benefits payable to
Executive hereunder in respect of any calendar year during which Executive is
employed by the Company for less than the entire such year shall, unless
otherwise provided in the applicable plan or arrangement or required by
applicable law, be prorated in accordance with the number of days in such
calendar year during which Executive is employed.
(d) All payments of compensation hereunder shall be subject to federal,
state and other withholding taxes as required by applicable law and the
Company's general payroll policies as in effect from time to time.
(e) Executive shall be entitled to reimbursement for moving costs of up to
$25,000 for actual expenses incurred by Executive in moving from his current
residence to Colorado, along with up to not more than 6 months of actual housing
costs for temporary housing. The amount of monthly housing costs shall
<PAGE>
be approved in advance by the Vice President of Human Resources. The Company
will also reimburse the Executive for the actual costs of travel once each month
to California, for a period equal to the shorter of six months or the date upon
which the Executive's family relocates to Colorado.
(f) The Executive shall be granted stock options pursuant to the Company's
1996 Equity Incentive Plan for 5,000 shares of the Company's common stock. The
options shall vest over a five year period and shall expire 10 years after the
date of grant, unless earlier terminated under the terms of such options. The
options shall be subject to approval by the Board and if so approved shall be
granted on the last day of the first fiscal quarter of 1998. The exercise price
shall be equal to the closing price of the Company's common stock on the NASDAQ
National Market system on the date of grant. After one year, assuming the
Executive achieves the performance objectives set by the President or the Board,
as determined by the Board or the President, the Executive will be eligible for
an additional grant of options exercisable for up to 2,500 shares of the
Company's common stock.. The options shall be subject to the terms and
conditions set forth in the Stock Option agreement to be provided to the
Executive at the time of grant, and the terms of the 1996 Equity Incentive Plan.
1.4 Term. (a) The Employment Period shall commence on the date hereof
----
and end on the first anniversary hereof (the "Initial Employment Period"),
subject to earlier termination (1) by reason of Executive's death or disability
(as defined below), (2) for Cause (as defined herein), (3) without Cause, or (4)
by written resignation of the Executive.
(b) If the Employment Period is terminated by reason of Executive's
termination without Cause, Executive shall be entitled to receive his then
effective Base Salary for the remainder of the term of his initial Employment
Period, plus an additional twelve months. Such amounts shall be payable in equal
biweekly installments over a period of 12 months plus the number of months
remaining in his initial Employment Period from the date of termination of
employment. Notwithstanding anything to the contrary herein, in the event of
renewal of the Executive's term of employment after the initial 12 months of
employment hereunder, this provision shall not apply, and Executive shall not be
entitled to any severance payments for a termination without Cause after such 12
month period.
(c) Except as expressly set forth in this Section 1.4, all
compensation and other benefits shall cease to accrue upon termination of
employment.
1.5 Renewal Options. The Employment Period shall automatically renew for
---------------
successive one (1) year terms unless terminated by Company or Executive upon
ninety (90) days written notice prior to such renewal period, or terminated by
the Company at any time during any term with or without Cause.
1.6 Confidential Information; Company Property. Executive acknowledges
------------------------------------------
that the information, observations and data obtained by him while employed by
the Company and its subsidiaries concerning the business or affairs of the
Company, its subsidiaries and any predecessor to the business of the Company
that are not generally available to the public other than as a result of breach
of this Agreement by Executive ("Confidential Information") are the property of
the Company and its subsidiaries. Executive agrees that he shall not disclose
to any unauthorized person or use for his own account any Confidential
Information without the prior written consent of the Company unless, and in such
case only to the extent that, such matters become generally known to and
available for use by the public other than as a result of Executive's acts or
omissions to act. Notwithstanding the foregoing, in the event Executive becomes
legally compelled to disclose Confidential Information pursuant to judicial or
administrative subpoena or process or other legal obligation, Executive may make
such disclosure only to the extent required, in the opinion of counsel for
Executive, to comply with such subpoena, process or other obligation. Executive
shall, as promptly as possible and in any event prior to the making of such
disclosure, notify the Company of any such subpoena, process or obligation and
shall cooperate with the Company in seeking a protective order or other means of
protecting the confidentiality of the Company Information. Executive shall
deliver to the Company at the termination of the Employment Period, or at any
time the Company may reasonably request, all memoranda, notes, plans, records,
reports, computer tapes and software and other documents and data (and copies
thereof) containing, relating to, or derived from the Confidential Information
or the business of the Company or its subsidiaries which he may then possess or
have under his control. Executive agrees that he will not retain after the
termination of the
2
<PAGE>
Employment Period any copies of any Confidential Information including, without
limitation, any software, documents or other materials originating with and/or
belonging to the Company or any Subsidiary of the Company.
1.7 Non-Compete; Non-Solicitation.
-----------------------------
(a) Executive acknowledges that in the course of his employment with the
Company he will become familiar with the Company's trade secrets and with other
confidential information concerning the Company and its predecessors and that
his services have been and will be of special, unique and extraordinary value to
the Company. Executive agrees that, during the period in which Executive is
receiving compensation hereunder and for a period of three (3) years following
termination of Executive's employment with the Company for any reason (the "Non-
Compete Period"), he shall not directly or indirectly own, manage, control,
participate in, consult with, render services for, or in any manner engage in
any supermarket, food store or retailer of health and beauty aids with retail
locations located within a ten (10) mile radius of any store operated (defined
herein as current stores or stores for which leases have been signed as of the
date of termination) by the Company or its subsidiaries as of the date of
termination of Executive's employment with the Company. Nothing herein shall
prohibit Executive from being a passive owner of not more than 1% of the
outstanding stock of another corporation, so long as Executive has no active
participation in the management or the business of such corporation.
(b) During the Non-Compete Period, Executive shall not directly or
indirectly (1) induce or attempt to induce any employee of the Company or any
Subsidiary of the Company to leave the employ of the Company or such Subsidiary,
or in any way interfere with the relationship between the Company or any such
Subsidiary and any employee thereof; (2) induce or attempt to induce any
customer, supplier, licensee or other business relationship of the Company or
any Subsidiary of the Company to cease doing business with the Company or such
Subsidiary, or in any way interfere with the relationship between any such
customer, supplier, licensee or business relation and the Company or any such
Subsidiary; or (3) make an oral or written disparaging statement, comment or
remark about the Company or any of its Subsidiaries to any employee, customer,
supplier, licensee or other business relationship of the Company or any of its
Subsidiaries or to or for the intended use of any member of the press.
(c) Such Non-Compete Period shall terminate immediately at such time as the
Company and its Subsidiaries no longer operate supermarkets or food stores.
1.8 Employment-At-Will. It is understood and agreed that this Agreement
------------------
constitutes employment-at-will and that notwithstanding (i) any general or
specific policies (whether written or oral) of the Company relating to the
employment or termination of its employees, (ii) any statements made to
Executive, whether made orally or contained in any document, pertaining to
Employee's relationship with the Company, or (iii) assignment of Cause by the
Company, the Company reserves the right to terminate the employment of Executive
by the Company in which event Executive's sole remedy shall be to receive
certain payments and other benefits upon the terms and subject to the conditions
provided for herein.
1.9 Resignations upon Termination. Upon termination of the Executive,
-----------------------------
Executive shall be deemed to have resigned from all offices and directorships,
if any, then held with the Company or any of its Subsidiaries or other
affiliates.
ARTICLE 2. REPRESENTATIONS
AND WARRANTIES
2.1 Representations and Warranties of Executive. Executive represents and
-------------------------------------------
warrants to the Company that:
(a) this Agreement constitutes the legal, valid and binding obligation of
Executive, enforceable in accordance with the terms, and the execution, delivery
and performance of this Agreement by Executive does not and will not conflict
with, violate or cause a breach of or default under any agreement, contract or
instrument, order, judgment or decree to which Executive is a party or by which
he is bound, and
3
<PAGE>
(b) Executive is not a party to or bound by any employment agreement or
non-compete agreement with any other person or entity.
2.2 Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to Executive that:
(a) the execution, delivery and performance of this Agreement by the
Company does not and will not conflict with, breach, violate or cause a default
under any contract, agreement, instrument, order, judgment or decree to which
Company is a party or by which it is bound, and
(b) upon the execution and delivery of this Agreement by Executive, this
Agreement shall be the valid and binding obligation of the Company enforceable
in accordance with its terms.
ARTICLE 3. DEFINITIONS
As used in this Agreement, the following terms shall have the definitions
set forth below:
(a) For purposes of the foregoing, "cause" shall mean (1) a material breach
by the Executive of the Executive's obligations of confidentiality or loyalty;
(2) the Executive's willful and repeated failure to comply with the lawful
directives of the President, Chief Executive Officer or Board of Directors of
The Company; (3) negligence or willful misconduct by the Executive in the
performance of the Executive's duties to The Company; (4) the commission by the
Executive of an act (including, but not limited to, a felony or a crime
involving moral turpitude) causing material harm to the standing and reputation
of the Company, as determined in good faith by the Board; (5) misappropriation,
breach of trust or fraudulent conduct by the Executive with respect to the
assets or operations of The Company or any of its subsidiaries; (6) the
continued use by the Executive of alcohol or drugs to an extent that, in the
good faith determination of the President, Chief Executive Officer or Board,
materially interferes with the performance by the Executive of the Executive
employment responsibilities; (7) the repeated threat by the Executive to cause,
or the actual occurrence of, damage to the relations of the Company or any of
its subsidiaries with customers, suppliers, lenders, advisors or employees which
damage is materially adverse to the business or operations of the Company or any
of its subsidiaries; or (8) continued unauthorized absence from work.
Termination without cause shall not include termination by voluntary
resignation, death or disability, and no severance amounts shall be payable upon
the occurrence of any of the foregoing.
(b) "Disability" shall mean Executive's inability to substantially perform
----------
his normal duties hereunder for one month or more during any twelve (12) month
period determined in good faith by the Board.
(c) "Subsidiary" of an entity shall mean any corporation or other business
----------
organization of which the securities have a majority of the normal voting power
in electing the board of directors or similar governing body of such entity are,
at the time of determination, owned by such entity directly or indirectly
through one or more subsidiaries.
ARTICLE 4. GENERAL PROVISIONS
4.1 Enforcement. It is the express intention of the parties that this
-----------
Agreement be enforced to the fullest extent permitted by applicable law in order
to give full effect to the agreements reached herein. Accordingly, if at the
time of enforcement of Sections 1.6 or 1.7 a court holds that the restrictions
stated herein are unreasonable under the circumstances then existing, the
parties hereto agree that the maximum period, scope or geographical area
reasonable under such circumstances shall be substituted for the stated period,
scope or area. Because Executive's services are unique and because Executive
has access to Confidential Information, the parties hereto agree that money
damages would be an inadequate remedy for any breach of this Agreement. In the
event of a breach or threatened breach of this Agreement, the Company, its
subsidiaries and their respective successors or assigns may, in addition to
other rights and remedies existing in their favor, apply to any court of
competent jurisdiction for specific performance and/or injunctive or other
4
<PAGE>
relief in order to enforce, or prevent any violation of, the provisions hereof
(without posting a bond or other security).
4.2 Survival. Sections 1.6 and 1.7 and this Article 4 shall survive and
--------
continue in full force and effect in accordance with their terms notwithstanding
any termination of the Employment Period.
4.3 Notices. All notices or other communications to be given or delivered
-------
under or by reason of the provisions of this Agreement will be in writing and
will be deemed to have been given when delivered personally, one (1) business
day following when sent via a nationally recognized overnight courier, or when
sent via facsimile confirmed in writing to the recipient. Such notices and
other communications will be sent to the addresses indicated below:
To the Company:
Wild Oats Markets, Inc.
1645 Broadway
Boulder, CO 80302
Attention: President
To Executive:
John Weber
----------
----------------------------
----------------------------
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party.
4.4 Severability. Whenever possible, each provision of this Agreement
------------
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or any other jurisdiction, but this Agreement will be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.
4.5 Entire Agreement. This Agreement and those documents expressly
----------------
referred to herein embody the complete agreement and understanding among the
parties and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way.
4.6 Amendments and Waivers. Any provision of this Agreement may be
----------------------
amended or waived only with the prior written consent of the Company and
Executive.
4.7 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the domestic laws of the State of Colorado without giving effect
to any choice of law or conflict of law provision or rule (whether of the State
of Colorado or any other jurisdiction) that would cause the application of the
laws of any jurisdiction other than the State of Colorado.
4.8 Counterparts. This Agreement may be executed by the parties hereto in
------------
separate counterparts, each of which when so executed and delivered shall be an
original, but all such counterparts shall togethis constitute one and the same
instrument.
4.9 Headings. The headings contained in this Agreement are for reference
--------
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement or of any term or provision hereof.
5
<PAGE>
4.10 Conflict. In the event of any conflict between the provisions of
--------
this Agreement and the policies and practices of the Company, the provisions of
this Agreement shall govern.
4.11 Negotiation of Agreement. Each of the parties acknowledge that it
------------------------
has been represented by independent counsel of its choice throughout all
negotiations that have preceded the execution of this Agreement and that it has
executed the same with consent and upon the advice of said independent counsel.
Each party of its counsel cooperated in the drafting and preparation of this
Agreement and the documents referred to herein, and any and all drafts relating
thereto shall be deemed the work product of the parties and may not be construed
against any party by reason of its preparation. Accordingly, any rule of law,
or any legal decision that would require interpretation of any ambiguities in
this Agreement against the party that drafted it, is of no application and is
hereby expressly waived.
4.12 Parties in Interest;Assignment. This Agreement shall inure to the
------------------------------
benefit of and be binding upon the parties hereto and their respective permitted
successors, assigns, heirs, and/or personal representatives, except that neither
this Agreement nor any interest herein shall be assigned or assignable by
operation of law or otherwise, by Executive without the prior written consent of
the Company, which such consent the Company may grant or withhold in its sole
discretion. The Company may, without the consent of Executive, assign this
Agreement or any interest herein, by operation of law or otherwise, to (i) any
successor to all or substantially all of its stock, assets or business by
dissolution, merger, consolidation, transfer or assets, or otherwise, or (ii)
any direct or indirect Subsidiary, affiliate or division of the Company or of
any such successor referred in (a) hereof. Nothing in this Agreement, expressed
or implied, is intended to confer on any person other than the parties and their
respective successors and permitted assigns any rights or remedies under or by
reason of this Agreement.
4.13 Dispute Resolution Process. The parties hereby agree that, in order
--------------------------
to obtain prompt and expeditious resolution of any disputes under this
Agreement, each claim, dispute or controversy of whatever nature, arising out
of, in connection with, or in relation to the interpretation, performance or
breach of this Agreement (or any other agreement contemplated by or related to
this Agreement or any other agreement between the Company and Executive),
including without limitation, any claim based on contract, tort or statute, or
the arbitrability of any claim hereunder (a "Claim"), shall be settled, at the
request of any part of this Agreement, by final and binding arbitration
conducted in Denver, Colorado. All such Claims shall be settled by one
arbitrator in accordance with the Commercial Arbitration Rules then in effect of
the American Arbitration Association. Such arbitrator shall be provided through
the CFR Institute for Dispute Resolution ("CFR") by mutual agreement of the
parties, provided that, absent such agreement, the arbitrator shall be appointed
by CFR. In eithis event, such arbitrator may not have any pre-existing, direct
or indirect relationship with any party to the dispute. Each party hereto
expressly consents to, and waives any future objection to, such forum and
arbitration rules. Judgment upon any award may be entered by any state or
federal court having jurisdiction thereof. Except as required by law
(including, without limitation, the rules and regulations of the Securities and
Exchange Commission and the Nasdaq Stock Market, if applicable), neither party
nor the arbitrator shall disclose the existence, content, or results of any
arbitration hereunder without the prior written consent of all parties. Except
as provided herein, the Federal Arbitration Act shall govern the interpretation,
enforcement and all proceedings pursuant to this Section.
Adherence to this dispute resolution process shall not limit the right of
the Company or Executive to obtain any provisional remedy, including without
limitation, injunctive or similar relief set forth in Section 4.1 from any court
of competent jurisdiction as may be necessary to protect their respective rights
and interests pending arbitration. Notwithstanding the foregoing sentence, this
dispute resolution procedure is intended to be the exclusive method of resolving
any Claims arising out of or relating to this Agreement.
The arbitration procedures shall follow the substantive law of the State of
Colorado, including the provisions of statutory law dealing with arbitration, as
it may exist at the time of the demand for arbitration, insofar as said
provisions are not in conflict with this Agreement and specifically excepting
therefrom sections of any such statute dealing with discovery and sections
requiring notice of the hearing date by registered or certified mail.
6
<PAGE>
4.14 Full Understanding. Executive represents and agrees that he fully
------------------
understands his right to discuss all aspects of this Agreement with his private
attorney, and that to the extent, if any, that he desired, he availed himself of
such right. Executive further represents that he has carefully read and fully
understands all of the provisions of this Agreement (including the non-compete
provisions of Section 1.7), that he is competent to execute this Agreement, that
his agreement to execute this Agreement has not been obtatined by any duress and
that he freely and voluntarily enters into it, and that he has read this
document in its entirety and fully understands the meaning, intent and
consequences of this document.
IN WITNESS WHISEOF, this Agreement has been signed and sealed the day first
above written.
COMPANY:
WILD OATS MARKETS, INC.
By /s/ James Lee
-------------
EXECUTIVE:
By /s/ John Weber
--------------
John Weber
7
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 26, 1998 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 26, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> DEC-28-1997
<PERIOD-END> SEP-26-1998
<CASH> 24,110
<SECURITIES> 0
<RECEIVABLES> 1,491
<ALLOWANCES> 167
<INVENTORY> 25,125
<CURRENT-ASSETS> 53,323
<PP&E> 112,763
<DEPRECIATION> 24,429
<TOTAL-ASSETS> 194,490
<CURRENT-LIABILITIES> 44,419
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 146,835
<TOTAL-LIABILITY-AND-EQUITY> 194,490
<SALES> 287,062
<TOTAL-REVENUES> 287,062
<CGS> 197,486
<TOTAL-COSTS> 197,486
<OTHER-EXPENSES> 76,365
<LOSS-PROVISION> 143
<INTEREST-EXPENSE> (600)
<INCOME-PRETAX> 13,668
<INCOME-TAX> 5,359
<INCOME-CONTINUING> 8,309
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,309
<EPS-PRIMARY> 0.64
<EPS-DILUTED> 0.62
</TABLE>
