UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report: September 27, 1999
WILD OATS MARKETS, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-21577 84-1100630
(State or other jurisdiction of Commission Files Number (I.R.S. Employer
incorporation or organization) Identification Number)
3375 Mitchell Lane
Boulder, Colorado 80301
(Address of principal executive offices, including zip code)
(303) 440-5220
(Registrant's telephone number, including area code)
<PAGE>
TABLE OF CONTENTS
Page
Item 5. Other Events. 1
Item 7. Financial Statements and Exhibits. 1
SIGNATURES 2
i
<PAGE>
Item 5. Other Events
On September 27, 1999, Wild Oats Markets, Inc. (the "Company") acquired all of
the outstanding capital stock of Henry's Marketplace, Inc. ("Henry's") from its
shareholders in exchange for 1,400,193 shares of the Company's $0.001 par value
common stock. Henry's operates 11 natural foods markets in the San Diego,
California metropolitan area, with one site in development. The transaction was
accounted for as a pooling of interests, and accordingly, the Company's
supplemental combined financial statements for all periods presented include the
operations of Henry's for the respective years, adjusted to conform with the
Company's accounting policies and presentation.
The following supplemental combined financial statements are filed as a part of
this report:
Item Page
Audited supplemental combined financial statements of Wild Oats
Markets, Inc.
Report of PricewaterhouseCoopers LLP, Independent Accountants 3
Independent Auditors' Report of KPMG LLP 4
Supplemental Combined Statement of Operations for the Three Years
Ended January 2, 1999 5
Supplemental Combined Balance Sheet as of January 2, 1999 and
December 27, 1997 6
Supplemental Combined Statement of Changes in Stockholders'
Equity (Deficit) for the Three Years Ended January 2, 1999 7
Supplemental Combined Statement of Cash Flows for the Three Years
Ended January 2, 1999 8
Notes to the Supplemental Combined Financial Statements 9-20
Unaudited supplemental combined interim financial statements of Wild
Oats Markets, Inc.
Supplemental Combined Statement of Operations for
the Six-Month Periods Ended July 3, 1999 and June 27, 1998 21
Supplemental Combined Balance Sheet as of July 3, 1999 22
Supplemental Combined Statement of Cash Flows for
the Six-Month Periods Ended July 3, 1999 and June 27, 1998 23
Notes to Unaudited Supplemental Combined Interim Financial
Statements 24-26
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
Not applicable.
(b) Pro Forma Financial Information
Not applicable.
(c) Exhibits
The following exhibits to this Form 8-K are filed pursuant to the
requirements of Item 601 of Regulation S-K:
Exhibit Number Description of Document
2.1 Stock Purchase Agreement between Henry's Marketplace, Inc.,
the selling shareholders and Registrant dated July 27, 1999
2.2 Letter Agreement amending Stock Purchase Agreement
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule - December 27, 1997
27.2 Financial Data Schedule - January 2, 1999
27.3 Financial Data Schedule - July 3, 1999
<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, on the 29th day of September, 1999.
Wild Oats Markets, Inc.
By /s/ Mary Beth Lewis
Mary Beth Lewis
Executive Officer and Chief Financial Officer
(Principal Financial and Accounting Officer)
2
<PAGE>
Report of Independent Accountants
To the Board of Directors and Stockholders of Wild Oats Markets, Inc.
In our opinion, based upon our audits and the report of other auditors, the
accompanying supplemental combined balance sheets and the related supplemental
combined statements of operations, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Wild
Oats Markets, Inc. and its subsidiaries at January 2, 1999 and December 27,
1997, and the results of their operations and their cash flows for each of the
three years in the period ended January 2, 1999, 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 did not audit the
financial statements of Henry's Marketplace, Inc., which statements reflect
total assets of $10,930,032 at December 27, 1998, and total revenues of
$81,025,852 for the fifty-two weeks ended December 27, 1998. Those statements
were audited by other auditors whose report thereon has been furnished to us,
and our opinion expressed herein, insofar as it relates to the amounts included
for Henry's Marketplace, Inc. as of and for the fifty-two weeks ended December
27, 1998, is based solely on the report of the other auditors. 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 and the report of other auditors provide a reasonable basis for the
opinion expressed above.
As described in Note 2, on September 27, 1999, the Company merged with Henry's
Marketplace, Inc. in a transaction accounted for as a pooling of interests. The
accompanying supplemental combined financial statements give retroactive effect
to the merger of the Company with Henry's Marketplace, Inc. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of the Company after
financial statements covering the date of consummation of the business
combination are issued.
PricewaterhouseCoopers LLP
Denver, Colorado
January 29, 1999,
except as to the pooling of interests
with Henry's Marketplace, Inc., which
is as of September 27, 1999
3
<PAGE>
Independent Auditors' Report
The Board of Directors
Henry's Marketplace, Inc.
We have audited the balance sheet of Henry's Marketplace, Inc. as of December
27, 1998, and the related statements of earnings, stockholders' equity and cash
flows for the fifty-two weeks ended December 27, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Henry's Marketplace, Inc. as of
December 27, 1998, and the results of its operations and its cash flows for the
fifty-two weeks ended December 27, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
San Diego, California
February 5, 1999
4
<PAGE>
<TABLE><CAPTION>
SUPPLEMENTAL COMBINED STATEMENT OF OPERATIONS
(In thousands, except per-share amounts)
For the Fiscal Year Ended January 2, December 27, December 28,
1999 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $479,883 $383,853 $253,606
Cost of goods sold and occupancy costs 333,944 268,059 175,698
-------- -------- --------
Gross profit 145,939 115,794 77,908
Operating expenses:
Direct store expenses 99,534 85,280 58,928
Selling, general and administrative expenses 19,630 14,083 10,558
Pre-opening expenses 3,277 1,149 1,863
Non-recurring expenses 393 -- 7,035
-------- -------- --------
Income (loss) from operations 23,105 15,282 (476)
Interest income 975 309 95
Interest expense (780) (687) (1,327)
-------- -------- ---------
Income (loss) before income taxes 23,300 14,904 (1,708)
Income tax expense (benefit) 7,793 5,457 (156)
-------- -------- ---------
Net income (loss) $ 15,507 $ 9,447 $ (1,552)
Other comprehensive income:
Foreign currency translation adjustment, net 22 (46) (85)
-------- -------- ---------
Comprehensive income (loss) $ 15,529 $ 9,401 $ (1,637)
======== ======== =========
Pro forma net income (loss) (Note 16) $ 14,011 $ 8,823 $ (2,248)
Accretion of redeemable preferred stock 2,396
-------- -------- ---------
Pro forma net income (loss)
allocable to common stock $ 14,011 $ 8,823 $ (4,644)
======== ======== =========
Basic Net Income (Loss) per share $ 1.08 $ 0.79 $ (0.61)
-------- -------- ---------
Diluted Net Income (Loss) per share $ 1.05 $ 0.76 $ (0.61)
-------- -------- ---------
Pro Forma Basic Net Income (Loss)
per share $ 0.98 $ 0.74 $ (0.72)
-------- -------- ---------
Pro Forma Diluted Net Income (Loss)
per share $ 0.95 $ 0.71 $ (0.72)
-------- -------- ---------
Weighted average common shares
outstanding:
Basic 14,367 11,968 6,478
Assuming dilution 14,793 12,357 6,478
</TABLE>
The accompanying notes are an integral part of these supplemental combined
financial statements.
5
<PAGE>
<TABLE><CAPTION>
SUPPLEMENTAL COMBINED BALANCE SHEET
(In thousands, except share amounts)
January 2, December 27,
1999 1997
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 11,348 $ 46,784
Inventories, net 31,867 24,623
Accounts receivable (net of allowance
for doubtful accounts of $159 and $214, respectively) 2,155 1,026
Income tax receivable 317
Prepaid expenses and other current assets 2,298 1,096
Deferred income taxes 812 1,447
-------- --------
Total current assets 48,480 75,293
Property and equipment, net 103,990 63,291
Intangible assets, net 56,018 44,712
Deposits and other assets 1,282 1,255
-------- --------
$209,770 $184,551
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,952 $ 25,356
Accrued liabilities 13,570 13,018
Notes payable 3,150 --
Current portion of long-term obligations 1,384 1,385
-------- --------
Total current liabilities 50,056 39,759
Long-term debt 2,675 4,157
Deferred income taxes 1,958 2,187
Other long-term obligations 1,582 1,064
-------- --------
56,271 47,167
-------- --------
Commitments and contingencies (Notes 10 and 11)
Stockholders' equity:
Preferred stock; $0.001 par value; 5,000,000 shares authorized;
no shares issued and outstanding
Common stock; $0.001 par
value; 20,000,000 shares authorized; 14,478,077 and
14,146,164 issued and outstanding, respectively 14 14
Additional paid-in capital 142,446 138,483
Retained earnings (accumulated deficit) 11,148 (982)
Accumulated other comprehensive income (109) (131)
-------- ---------
Total stockholders' equity 153,499 137,384
-------- --------
$209,770 $184,551
======== ========
</TABLE>
The accompanying notes are an integral part of these supplemental combined
financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share and per-share amounts)
Retained Accumulated Total
Common Stock Treasury Stock Additional Earnings Other Stockholders'
------------- --------------- Paid-in (Accumulated Comprehensive Equity
Shares Amount Shares Amount Capital Deficit) Income (Deficit)
------ ------ ------ ------ ---------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 30, 1995 5,485,154 $5 602,387 $(5,349) $ 3,320 $ (3,185) $ (5,209)
Equity transactions of pooled companies 1,215 (1,643) (428)
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 (1,552) (1,552)
Foreign currency translation
adjustment $ (85) (85)
---------- --- -------- ------- --------- -------- ------- -------
Balance at December 28, 1996 11,713,464 11 - - 88,136 (8,776) (85) 79,286
Equity transactions of pooled
companies (1,653) (1,653)
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 9,447 9,447
Foreign currency translation
adjustment (46) (46)
---------- --- -------- ------- -------- -------- ------- -------
Balance at December 27, 1997 14,146,164 14 - - 138,483 (982) (131) 137,384
Pooling-of-interests transactions 133,363 60 188 248
Equity transactions of pooled
companies (3,565) (3,565)
Issuance of common stock
($14.45 to $30.50 per share) 46,564 1,096 1,096
Common stock options exercised
($4.70 to $24.00 per share) 151,986 2,807 2,807
Net income 15,507 15,507
Foreign currency translation
adjustment 22 22
---------- --- -------- ------- -------- -------- ------- ------
Balance at January 2, 1999 14,478,077 $14 - $ - $142,446 $ 11,148 $ (109) $153,499
========== === ======== ======= ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these supplemental combined
financial statements.
7
<PAGE>
<TABLE><CAPTION>
SUPPLEMENTAL COMBINED STATEMENT OF CASH FLOWS
(In thousands)
Fiscal Year Ended January 2, December 27, December 28,
1999 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $15,507 $ 9,447 $(1,552)
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 15,047 10,656 7,754
Loss (gain) on disposal of property and equipment and
settlement of property-related obligations (580) (1,060) 110
Deferred tax provision (benefit) 406 1,737 (863)
Deferred severance 476
Change in assets and liabilities:
Inventories (5,635) (3,697) (5,008)
Receivables and other assets (2,271) (593) (777)
Accounts payable 6,627 4,527 3,181
Accrued liabilities 2,046 1,045 5,284
-------- ------- -------
Net cash provided by operating activities 31,147 22,538 13,875
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (55,197) (26,482) (17,193)
Payment for purchase of acquired
entities, net of cash acquired (10,481) (14,003) (14,043)
Proceeds from sale of property and equipment 2,894 566
------- ------- -------
Net cash used by investing activities (62,784) (39,919) (31,236)
------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on line of credit (12,486)
Payments on long-term debt (2,239) (2,996) (3,285)
Principal payments under capitalized leases (60) (88)
Proceeds from notes payable and long-term debt 376 1,661 3,455
Proceeds from issuance of redeemable preferred stock, net 16,068
Proceeds from issuance of common stock, net 2,003 49,705 31,700
Distribution to stockholders (3,565) (1,653) (1,643)
Purchase of treasury stock (42)
Bank overdraft (436) (89)
------- ------- -------
Net cash provided (used) by financing activities (3,861) 46,568 33,679
------- ------- -------
Effect of exchange rates on cash 62 (46) (85)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (35,436) 29,141 16,233
Cash and cash equivalents at beginning of year 46,784 17,643 1,410
------- ------- -------
Cash and cash equivalents at end of year $11,348 $46,784 $17,643
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $648 $619 $1,349
========== ========= =======
Cash paid for income taxes $6,326 $2,469 $1,027
========== ========= =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Short-term note payable issued for business acquisition $3,150
Common stock issued in relation to prior year business acquisition $488 $269
========== =======
Preferred stock, common stock and options issued and total debt
and liabilities incurred and assumed in acquisitions $3,400 $35,500
========= =======
Conversion of preferred stock into common stock $43,100
=======
Accretion of preferred stock $2,400
=======
</TABLE>
In addition, the Company issued 133,363 shares as consideration for
pooling-of-interests transactions in 1998.
The accompanying notes are an integral part of these supplemental combined
financial statements.
8
<PAGE>
NOTES TO THE SUPPLEMENTAL COMBINED 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.
Basis of Presentation
Certain amounts in the prior years' financial statements have been reclassified
to conform to the current year presentation.
Principles of Consolidation
The Company's supplemental combined financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Alfalfa's Canada, Inc. and Wild
Oats Markets Canada, Inc. All significant intercompany accounts and transactions
have been eliminated. As more fully described in Note 2, on September 27, 1999,
Henry's Marketplace, Inc. ("Henry's") was merged with and into the Company in a
transaction accounted for as a pooling of interests. The accompanying
supplemental combined financial statements have been restated to include the
accounts of Henry's for all periods presented.
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. Fiscal year 1998 was
a 53-week period, and fiscal years 1997 and 1996 were 52-week periods. Henry's
fiscal year ends on the Sunday nearest December 31. Fiscal years 1998, 1997 and
1996 for Henry's were 52-week periods. The effect of consolidation of these
fiscal periods with the fiscal periods of the Company for all periods presented
is not considered material.
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 $2.1 million and $40.2 million at January 2, 1999 and December 27,
1997, 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 using
straight-line or accelerated methods 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 30 to 40 years, and are shown net of accumulated
amortization of $4.4 million and $2.8 million at January 2, 1999 and December
27, 1997, 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 January 2, 1999.
Pre-Opening Expenses
Pre-opening expenses are included in other current assets and consist primarily
of labor costs, rent, utilities, supplies, and other expenses incurred in
connection with the opening of a new store. Through fiscal 1998, pre-opening
expenses were deferred until the store's opening date, at which time such costs
were expensed in full. Beginning in fiscal 1999, pre-opening expenses will be
recognized as incurred.
Advertising
Advertising is expensed as incurred. Advertising expense was $5.8 million,
$6.1 million, and $4.5 million for 1998, 1997 and 1996, 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.
9
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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 supplemental combined
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 assets and liabilities at
the exchange rate as of the balance sheet date. Income and expense accounts are
translated at average exchange rates for the year. Adjustments resulting from
the translation are reflected as a separate component of stockholders' equity.
Pro Forma Income Taxes
In fiscal 1999, the Company merged with Henry's in a pooling of interests
transaction (see Note 2), which included entities that were previously not
taxable and, accordingly, any income tax liabilities for the periods prior to
the merger are the responsibility of the previous owner. For purposes of these
supplemental combined financial statements, federal and state income taxes have
been provided as a pro forma adjustment as if the acquired entity had filed C
Corporation tax returns for all periods presented (see Note 16).
Earnings Per Share
Basic earnings per share is based on the weighted-average number of common
shares outstanding, and diluted earnings per share 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) and is calculated using net income and pro
forma net income (net income after giving effect to the pro forma tax adjustment
discussed above). A reconciliation of the basic and diluted per-share
computations is as follows (in thousands, except per-share data):
Jan. 2, Dec. 27, Dec. 28,
Fiscal Year Ended 1999 1997 1996
- ------------------ --------- --------- --------
Basic earnings (loss) per
common share computation:
Net income (loss) allocable
to common stock $15,507 $ 9,447 $(3,948)
Pro forma net income (loss) allocable to
common stock 14,011 $ 8,823 (4,644)
Weighted average common shares issued 14,367 11,968 6,478
------- ------- -------
Earnings (loss) per common share $ 1.08 $ 0.79 $ (0.61)
======= ======= =======
Pro forma earnings (loss)
per common share $ 0.98 $ 0.74 $ (0.72)
======= ======= =======
Diluted earnings (loss) per
common share computation:
Net income (loss) allocable
to common stock $15,507 $ 9,447 $(3,948)
Pro forma net income (loss) allocable to
common stock $14,011 $ 8,823 $(4,644)
Weighted average common shares issued 14,367 11,968 6,478
Incremental shares from assumed
conversions:
Stock options 426 389
------- ------ ------
Total dilutive average
common shares issued 14,793 12,357 6,478
------- ------ ------
Diluted earnings (loss) per
common share $ 1.05 $ 0.76 $(0.61)
======= ======= =======
Pro forma diluted earnings (loss)
per common share $ 0.95 $ 0.71 $(0.72)
========= ========= ======
Due to the Company's net loss allocable to common stock in 1996, 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 6,733,000.
New Accounting Pronouncements
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("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
10
<PAGE>
decisions and allocating internal resources. The Company adopted FAS No. 131 in
1998. The adoption of FAS No. 131 did not affect results of operations,
financial position, or the disclosure of segment information as the Company has
one reportable segment, retail sales.
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 requires that pre-opening costs 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 will
record approximately $284,000 as a cumulative effect of a change in accounting
principle, net of taxes, during the first quarter of fiscal 1999.
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 presentations.
2. Business Combinations
1999
On September 27, 1999, the Company issued approximately 1.4 million shares of
common stock in exchange for all of the outstanding stock of Henry's in a
transaction accounted for as a pooling of interests. Accordingly, the financial
position, results of operations and cash flows of Henry's have been combined
with those of the Company in these supplemental combined financial statements.
Certain reclassifications have been made to the prior financial statements of
Henry's to conform with the Company financial presentation and policies. There
were no intercompany transactions between the Company and Henry's for all
periods presented.
Results of Pooled Company Prior to Merger
Separate results of operations for the Company and Henry's operations for the
periods prior to the merger are as follows (in thousands):
Jan. 2, Dec. 27, Dec. 28,
Fiscal Year Ended 1999 1997 1996
- ------------------ -------- -------- --------
Sales:
Wild Oats $398,857 $311,077 $192,493
Henry's 81,026 72,776 61,113
-------- -------- --------
Combined $479,883 $383,853 $253,606
======== ========= ========
Net Income:
Wild Oats $ 11,648 $ 7,036 $ (4,483)
Henry's 3,859 2,411 2,931
-------- -------- --------
Combined $ 15,507 $ 9,447 $ (1,552)
-------- -------- --------
Other Changes in Stockholders' Equity:
Wild Oats $ 4,173 $ 50,304 $ 86,475
Henry's (3,565) (1,653) (428)
--------- -------- --------
Combined $ 608 $ 48,651 $ 86,047
-------- -------- --------
1998
In January, May, June and December 1998, in four separate transactions, the
Company acquired the assets and assumed certain liabilities of five operating
natural foods supermarkets in Nashville, Tennessee, New York, New York, Santa
Barbara, California, Victoria, British Columbia, Canada, and Boulder, Colorado.
11
<PAGE>
The purchase price for these acquisitions aggregated $10.6 million in cash and a
note payable of $3.1 million that was repaid in full on January 5, 1999 (see
Note 5). The acquisitions were accounted for using the purchase method, and the
excess of cost over the fair value of the assets acquired of $12.0 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):
Current assets ($127 of cash) $1,304
Equipment 1,397
Other assets 25
Liabilities (1,022)
Goodwill 12,014
--------
$13,718
Also during 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. These
acquisitions were accounted for as poolings of interests, and accordingly, the
Company's consolidated financial statements for 1998 include the operations of
the stores for the entire year, adjusted to conform with the Company's
accounting policies and presentation. The Company's financial statements prior
to 1998 were not restated to include the results of these pooling transactions
as the effect is immaterial. Non-recurring, acquisition-related expenses of
$393,000 were recorded in conjunction with the poolings.
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):
Current assets ($27 of cash) $3,304
Equipment 3,782
Other assets 23
Liabilities (2,460)
Goodwill 10,338
--------
$14,987
1996
In July 1996, the Company acquired all of the outstanding common and preferred
stock of Alfalfa's, Inc. 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):
Current assets ($3,591 of cash) $8,507
Equipment 12,030
Other assets 523
Liabilities (9,738)
Goodwill 29,899
--------
$41,221
12
<PAGE>
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 (after
giving effect to the pro forma tax adjustment -- see Notes 2 and 16)(in
thousands):
Jan. 2, Dec. 27, Dec. 28,
Fiscal Year Ended 1999 1997 1996
- ----------------- -------- --------- ------
Sales $497,717 $403,319 $303,431
Pro forma net income (loss) 14,369 9,341 (1,442)
Pro forma net income (loss)
allocable to common stock 14,369 9,341 (3,838)
Pro forma basic earnings (loss)
per share $1.00 $0.78 $ (0.59)
Pro forma diluted earnings (loss)
per share $0.97 $0.76 $ (0.59)
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.
3. Property and Equipment
Property and equipment consist of the following (in thousands):
Jan. 2, Dec. 27,
Fiscal Year Ended 1999 1997
- ----------------- -------- --------
Machinery and equipment $65,140 $ 44,208
Leasehold improvements 43,986 23,358
Land and building 10,992 685
Construction in progress 17,609 14,983
-------- --------
137,727 83,234
Less accumulated depreciation
and amortization (33,737) (19,943)
-------- --------
$103,990 $ 63,291
======== ========
The amounts shown above include $310,000 of machinery and equipment which are
accounted for as capitalized leases and which have accumulated amortization of
$258,000 at December 27, 1997. There were no fixed assets accounted for as
capitalized leases as of January 2, 1999.
4. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Jan. 2, Dec. 27,
Fiscal Year Ended 1999 1997
- ----------------- -------- -------
Accrued wages and employee costs $8,264 $6,934
Accrued sales and property taxes 2,567 2,030
Deferred charges and other accruals 2,739 4,054
-------- --------
$13,570 $13,018
======== ========
13
<PAGE>
5. Notes Payable and Long-Term Debt
Long-term debt outstanding consists of the following (in thousands):
Jan. 2, Dec. 27,
1999 1997
------- --------
Notes payable to corporations and individuals:
Due January 5, 1999, bearing no interest,
secured by inventory and fixed assets $3,150
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
Notes payable to bank and lending institutions
payable in monthly installments ranging from
$632 to $10,992, including interest ranging from
8.0% to 14.55% per annum at January 2, 1999,
due dates ranging from June 1, 1998 through
January 29, 2003, secured by equipment 3,668 4,456
Unsecured notes payable in monthly installments
ranging from $3,805 to $14,311, including interest
ranging from 6.0% to 14.75% per annum at January 2,
1999, due dates ranging from December 18,1999
through July 18, 2001 311 524
Note payable to a related party, unsecured,
interest of 10.0% at January 2, 1999, payable
in monthly installments of $1,366, including
interest through October 1, 2005 80 87
------ ------
7,209 5,542
Less current portion (4,534) 1,385
------ ------
$2,675 $4,157
====== ======
The maturities of long-term debt are as follows:
Fiscal year ending
1999 $4,534
2000 1,457
2001 859
2002 245
2003 95
Thereafter 19
------
Total $7,209
======
In 1998, the Company, through Henry's, entered into a financing agreement with a
commercial bank that permits Henry's to borrow through 2003 up to $200,000 at an
interest rate of 9.5%. As of January 2, 1999, there were no borrowings
outstanding under this facility.
The Company has a $40.0 million revolving line of credit. 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 January
2, 1999, there were no borrowings outstanding under this facility. In March
1999, the Company increased its revolving line of credit to an $80.0 million
commitment with a three-year term and bearing interest at the Company's option,
at the prime rate or LIBOR plus 0.65%.
6. Income Taxes
Income (loss) before income taxes consists of the following (in thousands):
Jan. 2, Dec. 27, Dec. 28,
Fiscal Year Ended 1999 1997 1996
- ----------------- --------- --------- ------
Domestic $22,506 $14,002 $(1,777)
Foreign 794 902 69
--------- --------- -------
$23,300 $14,904 $(1,708)
========= ========= ========
14
<PAGE>
Income tax expense (benefit) consists of the following (in thousands):
Jan. 2, Dec. 27, Dec. 28,
Fiscal Year Ended 1999 1997 1996
- ----------------- --------- --------- ------
Current: Federal $5,685 $3,009 $ 526
State and foreign 1,702 711 181
--------- -------- -------
7,387 3,720 707
--------- --------- -------
Deferred: Federal 430 1,728 (705)
State and foreign (24) 9 (158)
--------- --------- -------
406 1,737 (863)
--------- --------- -------
$7,793 $5,457 $(156)
========= ========= =======
The differences between the U.S. federal statutory income tax rate and the
Company's effective tax rate are as follows:
Jan. 2, Dec. 27, Dec. 28,
Fiscal Year Ended 1999 1997 1996
- ----------------- ------- -------- -------
Statutory tax rate 35.0% 34.0% (34.0%)
State income taxes, net of federal
income tax benefit 4.6 4.6 (3.8)
Tax effect of non-deductible goodwill 1.8 6.7 14.3
Untaxed earnings (Note 16) (6.6) (4.4) 8.8
Other, net (1.4) (4.3) 5.6
------- -------- -------
Effective tax rate 33.4% 36.6% (9.1%)
======= ======== =========
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):
Jan. 2, Dec. 27,
Fiscal Year Ended 1999 1997
- ----------------- ------- -------
Deferred tax assets
Inventory related $237 $326
Vacation accrual 724 574
Other accruals 352 502
Other 3 408
------- --------
Total deferred tax assets 1,316 1,810
------- --------
Deferred tax liabilities
Property related (2,462) (2,550)
------- ---------
Total deferred tax liabilities (2,462) (2,550)
------- ---------
Net deferred tax liability $(1,146) $(740)
======= =========
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.
These state net operating loss carryforwards were fully utilized during 1998.
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.
15
<PAGE>
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 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 January 2, 1999, there were approximately $43,000
of payroll deductions to be applied to purchase stock on June 30, 1999; as of
December 27, 1997, there were approximately $126,000 of payroll deductions which
purchased 8,607 shares of common stock on December 31, 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. In May 1998, an additional
825,000 shares of common stock were reserved for issuance under the Incentive
Plan, pursuant to stockholder vote and approval.
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.
16
<PAGE>
Warrants
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 January 2, 1999. The
warrant expires on November 14, 1999.
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
(after giving effect to the pro forma tax adjustment -- see Notes 2 and 16):
1998 1997 1996
-------- ------ -------
Pro forma net income (loss)
allocable to common stock
As reported $14,011 $8,823 $(4,644)
Pro forma $12,219 $7,837 $(5,239)
Pro forma basic earnings (loss)
per share
As reported $0.98 $0.74 $(0.72)
Pro forma $0.85 $0.65 $(0.81)
Pro forma diluted earnings (loss)
per share
As reported $0.95 $0.71 $(0.72)
Pro forma $0.83 $0.63 $(0.81)
The fair value of the employees' purchase rights was estimated using the
Black-Scholes model with the following weighted-average assumptions:
1998 1997 1996
--------- --------- ------
Estimated dividends None None None
Expected volatility 46% 51% 51%
Risk-free interest rate 4.5% 5.5% 5.6%
Expected life (years) 0.5 0.5 0.7
Weighted-average fair value per share $6.99 $5.53 $4.92
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:
1998 1997 1996
----------- ----------- -------
Estimated dividends None None None
Expected volatility 46% 49% 51%
Risk-free interest rate 4.5%-4.7% 5.8% 5.6%-7.1%
Expected life (years) 7 7 7
A summary of the status of the Company's Incentive Plan as of the 1998, 1997 and
1996 fiscal year ends and changes during the years ending on those dates is
presented below:
Weighted
Number Average
of Exercise
Shares Price
Outstanding as of
December 30, 1995 470,539 $7.97
Granted 704,029 $10.07
Forfeited (64,311) $9.79
Exercised (76,380) $3.90
-----------
Outstanding as of
December 28, 1996 1,033,877 $9.42
Granted 295,479 $16.36
Forfeited (150,934) $10.68
Exercised (243,577) $7.06
-----------
Outstanding as of
December 27, 1997 934,845 $11.93
Granted 231,074 $26.86
Forfeited (67,697) $16.66
Exercised (151,986) $9.04
-----------
Outstanding as of
January 2, 1999 946,236 $15.73
===========
17
<PAGE>
At January 2, 1999, options exercisable for 954,995 shares were available for
future grant under the Incentive Plan. At December 27, 1997 and December 28,
1996, options exercisable for 350,242 and 411,269 shares with weighted average
exercise prices of $10.82 and $7.38, respectively, were exercisable. The
weighted-average grant-date per-share fair values of options granted during
1998, 1997 and 1996 were $26.23, $16.36 and $11.27, respectively.
The following table summarizes information about incentive and nonqualified
stock options outstanding and exercisable at January 2, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-
Range of Number Remaining Average
Exercise Outstanding Contractual Exercise Number Weighted Average
Prices Life Price Exercisable Exercise Price
- ------------- ---------- ------------ --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.65-6.58 75,897 4.9 years $5.24 75,314 $5.23
$7.81-12.67 509,254 7.3 $11.12 263,780 $11.09
$16.67-22.67 95,311 8.6 $18.80 38,632 $18.53
$24.00-26.33 179,149 9.3 $24.70 18,562 $24.04
$26.50-36.00 86,625 9.5 $30.11 2,235 $28.94
---------- -----------
946,236 7.8 $15.73 398,523 $11.41
========== ===========
</TABLE>
10. Litigation
Alfalfa's Canada, Inc., a Canadian subsidiary of the Company, 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. 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. The Company cannot estimate the amount of damages, if any, at this
time.
The Company also 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 numerous 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 $16.1 million, $12.8 million and $9.0 million
during 1998, 1997 and 1996, respectively.
18
<PAGE>
Future minimum lease payments under noncancelable operating leases as of January
2, 1999 are summarized as follows (in thousands):
Fiscal year ending
1999 $20,271
2000 22,485
2001 21,625
2002 21,359
2003 20,875
Thereafter 168,672
--------
Total minimum lease payments $275,287
========
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 1998, 1997 and 1996, the Company paid
contingent rentals of $766,000, $570,000 and $424,000, respectively.
12. Non-Recurring Expenses
During 1998, a $393,000 non-recurring charge was recorded in conjunction with
two pooling-of-interests transactions (see Note 2). The non-recurring charge
consisted of $201,000 of employee severance costs, $162,000 of inventory and
fixed asset write-downs, and $30,000 of lease cancellation costs. As of January
2, 1999, the remaining accrued liabilities related to the non-recurring charge
totaled $22,000.
During 1996, the Company's Board of Directors made the following decisions
related 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 totaled 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. Benefit Plans
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 ($10,000 in 1998) and have the amount of such reduction contributed to the
401(k) Plan. The 401(k) Plan provides for additional matching contributions to
the 401(k) Plan by the Company in an amount determined by the Company prior to
the end of each plan year. Total Company contributions during 1998, 1997 and
1996 were approximately $408,000, $256,000 and $95,000, 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.
The Company, through Henry's, also sponsored a 401(k) plan covering Henry's
employees with at least 12 months of service. Contributions are discretionary.
Henry's contributed $106,000 and $72,000 to this 401(k) plan for fiscal 1998 and
1997, respectively. Henry's had no 401(k) plan prior to fiscal 1997.
19
<PAGE>
14. Stockholder Rights Plan
The Company has adopted a stockholder rights plan having both "flip-in" and
"flip-over" provisions. Stockholders of record as of May 22, 1998 received the
right ("Right") to purchase a fractional share of preferred stock at a purchase
price of $145 for each share of common stock held. In addition, until the Rights
become exercisable as described below and in certain limited circumstances
thereafter, the Company will issue one Right for each share of common stock
issued after May 22, 1998. For the "flip-in provision," the Rights would become
exercisable only if a person or group acquires beneficial ownership of 15% (the
"Threshold Percentage") or more of the outstanding common stock. Holdings of
certain existing affiliates of the Company are excluded from the Threshold
Percentage. In that event, all holders of Rights other than the person or group
who acquired the Threshold Percentage would be entitled to purchase shares of
common stock at a substantial discount to the then-current market price. This
right to purchase common stock at a discount would be triggered as of a
specified number of days following the passing of the Threshold Percentage. For
the "flip-over" provision, if the Company was acquired in a merger or other
business combination or transaction, the holders of such Rights would be
entitled to purchase shares of the acquirer's common stock at a substantial
discount.
15. Related Party Transaction
Elizabeth C. Cook and Michael C. Gilliland, executive officers and directors of
the Company, are trustees of Wild Oats Community Foundation ("Foundation"), a
non-profit organization. In 1998, the Foundation opened Wild Oats Wellness
Centers in Boulder, Colorado and Albuquerque, New Mexico in space subleased from
the Company. The Foundation pays to the Company the same rent as paid by the
Company for the space. There are no material transactions between the Company
and the Foundation.
Additionally, the Company had outstanding notes payable to directors and
stockholders of Henry's totaling approximately $80,000 and $477,000 at January
2, 1999 and December 27, 1997, respectively (see Note 5).
16. Pro Forma Net Income (Loss)
The pro forma net income (loss) and pro forma net income (loss) per share
reflects the tax adjustment for the fiscal 1999 merger with Henry's in a pooling
of interests transaction (see Note 2), which included entities that were
previously not taxable, as if Henry's had filed C Corporation tax returns for
all periods presented. The effect is as follows:
Fiscal Fiscal Fiscal
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------
Net income (loss) before pro forma
adjustments, per the supplemental
combined statements of operations $15,507 $9,447 $(1,552)
Pro forma provision
for income taxes 1,496 624 696
- -----------------------------------------------------------------
Pro forma net income (loss) $14,011 $8,823 $(2,248)
- -----------------------------------------------------------------
17. Subsequent Events (Unaudited)
On February 1, 1999, the Company acquired the operations of three existing
natural foods supermarkets in Tucson, Arizona. The purchase price for this
acquisition aggregated $18.4 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 $16.8 million was allocated to goodwill, which is being
amortized on a straight-line basis over 40 years.
20
<PAGE>
<TABLE><CAPTION>
WILD OATS MARKETS, INC.
SUPPLEMENTAL COMBINED STATEMENT OF OPERATIONS
(In thousands)
For the Six-Month Period Ended July 3, June 27,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Sales $305,334 $230,308
Cost of goods sold and occupancy costs 212,168 159,999
-------- --------
Gross profit 93,166 70,309
Operating expenses:
Direct store expenses 64,601 48,291
Selling, general and administrative expenses 12,193 9,971
Pre-opening expenses 1,600 981
Non-recurring expenses 10,894 393
-------- --------
Income from operations 3,878 10,673
Interest expense (income) 832 (259)
-------- --------
Income before income taxes 3,046 10,932
Income tax expense 298 3,448
-------- --------
Net income before cumulative effect of change in accounting principle 2,748 7,484
Cumulative effect of change in accounting principle, net of taxes 281
------- --------
Net income $ 2,467 $ 7,484
======== ========
Other comprehensive income:
Foreign currency translation adjustment, net 424 30
-------- --------
Comprehensive income $ 2,891 $ 7,514
======== ========
Pro forma net income (Note 4) $ 1,539 $ 6,641
======== ========
Basic Net Income (Loss) per common share:
Continuing Operations $ 0.19 $ 0.52
Cumulative effect of change in
accounting principle (0.02) -
-------- --------
Net Income $ 0.17 $ 0.52
-------- --------
Diluted Net Income (Loss) per common share:
Continuing Operations $ 0.18 $ 0.50
Cumulative effect of change in
accounting principle (0.02) -
-------- --------
Net Income $ 0.16 $ 0.50
-------- --------
Pro Forma Basic Net Income (Loss) per common share:
Continuing Operations $ 0.13 $ 0.46
Cumulative effect of change in
accounting principle (0.02) -
-------- --------
Net Income $ 0.11 $ 0.46
-------- --------
Pro Forma Diluted Net Income (Loss) per common share:
Continuing Operations $ 0.12 $ 0.45
Cumulative effect of change in
accounting principle (0.02) -
-------- --------
Net Income $ 0.10 $ 0.45
-------- --------
Weighted average common shares outstanding:
Basic 14,538 14,354
Assuming dilution 14,909 14,840
</TABLE>
The accompanying notes are an integral part of these supplemental combined
financial statements (unaudited).
21
<PAGE>
<TABLE>
<CAPTION>
WILD OATS MARKETS, INC.
SUPPLEMENTAL COMBINED BALANCE SHEET
(In thousands, except share amounts)
July 3,
1999
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
<S> <C>
Cash and cash equivalents $ 14,844
Inventories, net 41,410
Accounts receivable (net of allowance for doubtful accounts of $211) 2,404
Prepaid expenses and other current assets 1,906
Deferred income taxes 3,663
--------
Total current assets 64,227
Property and equipment, net 145,321
Intangible assets, net 109,535
Deposits and other assets 1,661
--------
$320,744
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $41,594
Accrued liabilities 21,587
Notes payable 3,400
Current portion of long-term debt 1,972
--------
Total current liabilities 68,553
Long-term debt 88,326
Obligations in capital leases 1,031
Deferred income taxes 2,021
Other long-term obligations 2,957
--------
162,888
Stockholders' equity:
Preferred stock; $0.001 par value; 5,000,000
shares authorized; no shares
issued and outstanding
Common stock; $0.001 par value; 20,000,000
shares authorized; 14,666,695
issued and outstanding 14
Additional paid-in capital 145,794
Retained earnings 11,735
Accumulated other comprehensive income 313
--------
157,856
--------
Total stockholders' equity $320,744
========
</TABLE>
The accompanying notes are an integral part of these supplemental combined
financial statements (unaudited).
22
<PAGE>
<TABLE>
<CAPTION>
WILD OATS MARKETS, INC.
SUPPLEMENTAL COMBINED STATEMENT OF CASH FLOWS
(In thousands)
For the Six-Month Period Ended July 3, June 27,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 2,467 $ 7,484
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 9,292 6,778
Loss (gain) on disposal of property and equipment 14 (106)
Non-recurring expenses 10,794
Deferred tax provision (benefit) (1,462) 426
Change in assets and liabilities:
Inventories (4,147) (1,296)
Receivables and other assets 365 (998)
Accounts payable 9,633 32
Accrued liabilities 2,330 1,554
-------- -------
Net cash provided by operating activities 29,286 13,874
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (32,200) (27,334)
Payment for purchase of acquired entities, net of cash acquired (64,995) (9,585)
-------- -------
Net cash used by investing activities (97,195) (36,919)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line-of-credit agreement 75,500
Payments on notes payable and long-term debt (3,866) (1,380)
Distribution to stockholders (1,880) (1,795)
Proceeds from notes payable and long-term borrowing 423
Proceeds from issuance of common stock, net 1,255 1,128
Bank overdraft (241) (677)
-------- -------
Net cash provided (used) by financing activities 71,191 (2,724)
-------- -------
Effect of exchange rate on cash 214 30
-------- -------
Net increase in cash and cash equivalents 3,496 (25,739)
Cash and cash equivalents at beginning of year 11,348 46,784
-------- -------
Cash and cash equivalents at end of period $ 14,844 $21,045
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 814 $ 253
======== =======
Cash paid for income tax $ 1,280 $ 2,595
======== =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Non-cash adjustment to purchase price for Nature's acquisition $ 2,090
========
Short-term note receivable for sale of property $ 365
=======
</TABLE>
The accompanying notes are an integral part of these supplemental combined
financial statements (unaudited).
23
<PAGE>
WILD OATS MARKETS, INC.
NOTES TO THE SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS (UNAUDITED)
1. Accounting Policies
The supplemental combined balance sheet as of July 3, 1999, and the supplemental
combined statement of operations, the supplemental combined statement of changes
in stockholders' equity, and the supplemental combined statement of cash flows
for the six-month periods ended July 3, 1999 and June 27, 1998, 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 supplemental combined
financial statements be read in conjunction with the supplemental combined
financial statements and notes thereto as of January 2, 1999 and for the three
fiscal years then ended included in this Form 8-K. The results of operations for
interim periods presented are not necessarily indicative of the operating
results for the full year.
As more fully described in Note 3, on September 27, 1999, Henry's Marketplace,
Inc. ("Henry's") was merged with and into the Company in a transaction accounted
for as a pooling of interests. The accompanying unaudited supplemental combined
financial statements have been restated to include the accounts of Henry's for
all periods presented.
2. New Accounting Pronouncements
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 adopted SOP 98-1 in fiscal 1999 with no 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 adopted SOP 98-5 in fiscal 1999 and recorded
approximately $281,000 as a cumulative effect of a change in accounting
principle, net of taxes, during the first quarter of 1999. The impact on basic
and diluted earnings per share of this adoption was $(0.02) for the six months
ended July 3, 1999. The Company expects SOP 98-5 to have no material effect on
its ongoing results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. FAS No. 133, as amended is effective for
fiscal years beginning after June 15, 2000, and 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 its financial statement presentation due to the Company's
limited use of such instruments.
3. Business Combinations
On April 30, 1999, the Company acquired the operations of three existing natural
foods supermarkets in Norwalk and Hartford, Connecticut and Melbourne, Florida.
The purchase price for this acquisition aggregated $6.5 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 and liabilities assumed of $6.1
million was allocated to goodwill, which is being amortized on a straight-line
basis over 40 years.
24
<PAGE>
On May 29, 1999, the Company acquired all of the outstanding stock of Nature's
Fresh Northwest, Inc. ("Nature's"), a Delaware corporation that owned seven
operating nature foods stores, with one new store and one relocation in
development in metropolitan Portland, Oregon. The purchase price for this
acquisition aggregated $40.0 million in cash, including the assumption by the
Company of a $17.0 million promissory note owed by Nature's to General
Nutrition, Incorporated, its parent corporation. The acquisition was accounted
for using the purchase method, and the excess of cost over the fair value of the
assets acquired and liabilities assumed of $33.5 million was allocated to
goodwill, which is being amortized on a straight-line basis over 40 years.
On September 27, 1999, the Company issued approximately 1.4 million shares of
its common stock in exchange for all of the outstanding stock of Henry's in a
transaction accounted for as a pooling of interests. Accordingly, the financial
position, results of operations and cash flows of Henry's have been combined
with those of the Company in these supplemental combined financial statements.
Certain reclassifications have been made to the prior financial statements of
Henry's to conform with the Company financial presentation and policies. There
were no intercompany transactions between the Company and Henry's for all
periods presented.
Results of Pooled Company Prior to Merger
Separate results of operations for the Company and Henry's operations for the
periods prior to the merger are as follows (in thousands):
July 3, June 27,
For the Six-Month Period Ended 1999 1998
- ------------------------------ --------- ------
Sales:
Wild Oats $257,846 $190,266
Henry's 47,488 40,042
--------- -------
Combined $305,334 $230,308
========= ========
Net Income:
Wild Oats $ 78 $ 5,308
Henry's 2,389 2,176
--------- --------
Combined $ 2,467 $ 7,484
========= ========
Other Changes in Stockholders' Equity:
Wild Oats $ 3,770 $ 3,008
Henry's (1,880) (1,795)
--------- --------
Combined $ 1,890 $ 1,213
========= ========
4. Pro Forma Net Income
The pro forma net income (loss) and pro forma net income (loss) per share
reflects the tax adjustment for the fiscal 1999 merger with Henry's in a pooling
of interests transaction (see Note 3), which included entities that were
previously not taxable, as if Henry's had filed C Corporation tax returns for
all periods presented. The effect is as follows:
For the Six-Month Period Ended
July 3, June 27,
(In thousands) 1999 1996
- -----------------------------------------------------------------
Net income before pro forma
adjustments, per the supplemental
combined statements of operations $2,467 $7,484
Pro forma provision
for income taxes 928 843
- -----------------------------------------------------------------
Pro forma net income $1,539 $6,641
- -----------------------------------------------------------------
5. Pro Forma Earnings Per Share
The Company reports both pro forma basic earnings per share, which is based on
the weighted-average number of common shares outstanding, and pro forma 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) and is calculated using pro forma net income (net income after giving
effect to the pro forma tax adjustment) (see Note 4).
25
<PAGE>
6. Non-Recurring Expenses
During the first quarter of 1999, the Company's management made certain
decisions relating to the Company's operations and selected store closures,
which resulted in approximately $10.9 million of non-recurring expenses being
recorded. These decisions included (1) a change in the Company's strategic
direction, resulting in the closure in the second quarter of 1999 of its two
"Farm to Market" stores located in Buffalo Grove, Illinois, and Tempe, Arizona
($4.5 million), and (2) a decision by the Company's management to allocate
corporate resources to servicing new and existing stores, rather than closed
sites ($6.4 million). Components of the non-recurring charge consist primarily
of non-cancelable lease obligations through the year 2000 ($1.2 million) and
abandonment of fixed and intangible assets ($9.7 million). At July 3, 1999, the
remaining accrued liabilities related to the non-recurring charge totaled
approximately $785,000.
26
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made as of July 27,
1999 by and among WILD OATS MARKETS, INC., a Delaware corporation with its
principal office at 3375 Mitchell Lane, Boulder, CO 80301 (the "Buyer"), the
parties set forth on Schedule 1.1(A) (referred to collectively as the "Seller"),
and Henry's Marketplace, Inc., a California corporation ("the Corporation").
RECITALS
A. Seller owns all of the outstanding equity interests (the "Shares")
of the Corporation.
B. Buyer desires to purchase the Shares from Seller on the terms and
conditions set forth below.
AGREEMENT
NOW, THEREFORE, in consideration of their mutual covenants, promises
and obligations contained in this Agreement, the parties hereto agree as
follows:
1. PURCHASE OF SHARES AND CONSIDERATION
1.1 Definitions. The following terms shall have the following meanings
in this Agreement:
"Closing Balance Sheet" - the balance sheet of the Corporation prepared within
15 days prior to the Closing by the Corporation's accountants, updated at
Closing to the extent possible and reflecting the Corporation's financial status
as of the date of Closing. The Closing Balance Sheet, when finalized, shall be
attached hereto as Exhibit A. The Closing Balance Sheet shall be prepared in
accordance with generally accepted accounting principles applied consistently
with the Corporation's 1998 audited financial statements by the Corporation's
independent auditors, and submitted to Buyer for review and comment not less
than 5 days prior to closing. The Closing Balance Sheet shall reflect all
liabilities of the Corporation required to be set forth therein, including
estimated percentage rent, estimated profit sharing and accrued salaries to the
date of Closing.
"Code" - the Internal Revenue Code of 1986, as amended, or any successor
statute.
"Corporation" - the Corporation and its predecessors in interest.
"Contemplated Transactions" - all of the transactions contemplated by this
Agreement, including:
(a) the sale of the stock by Seller to Buyer;
(b) the performance by Buyer, Seller and the Corporation of their
respective covenants and obligations under this Agreement.
"Encumbrance" - any charge, claim, community property interest, condition,
equitable interest, lien, option, pledge, security interest, right of first
refusal, or restriction of any kind, including any restriction on use, voting,
transfer, receipt of income, or exercise of any other attribute of ownership.
"ERISA" - the Employee Retirement Income Security Act of 1974 or any successor
law, and regulations and rules issued pursuant to that Act or any successor law.
"Facilities" - any real property, leaseholds, or other interests currently owned
or operated by the Corporation and any buildings, plants, structures, fixtures
or equipment (including motor vehicles) currently owned by the Corporation.
"Financial Statements" - the audited balance sheet and accompanying statements
of income, changes in shareholder equity and cash flow for the Corporation dated
December 27, 1998, and the unaudited balance sheet and accompanying statements
of income, changes in shareholder equity and cash flow dated March 31, 1999.
"HSR Act" means the Hart-Scott Rodino Antitrust Improvements Act of 1976, as
amended.
"Knowledge" - the actual knowledge of the Corporation's officers, directors and
the general managers of its Stores.
"Legal Requirement" - any federal, state, local, municipal, foreign,
international, multinational, or other administrative order, constitution, law,
ordinance, principle of common law, regulation, statute, or treaty.
<PAGE>
"Order" - any award, decision, injunction, judgment, order, ruling, subpoena, or
verdict entered, issued, made, or rendered by any court, administrative agency,
or other governmental body or by any arbitrator.
"Ordinary Course of Business" - an action taken by a person will be deemed
to have been taken in the "Ordinary Course of Business" only if:
(a) such action is consistent with the past practices of such person
and is taken in the ordinary course of the normal day-to-day
operations of such person; and
(b) such action is similar in nature and magnitude to actions
customarily taken, without any authorization by the board of
directors (or by any person or group of persons exercising similar
authority), Seller or any governmental authority in the ordinary
course of the normal day-to-day operations of other persons that
are in the same line of business of such person.
Ordinary Course of Business shall not include execution of loan agreements in
excess of $10,000, the closure of stores comprising any part of the
Corporation's operations, or the execution of new lease obligations.
"Principals" - each of Stan Boney, Scott Boney, Craig Engstrand, Shon Boney,
Kevin Easler and Scott Wing.
"Proceeding" - any action, arbitration, audit, hearing, investigation,
litigation, or suit (whether civil, criminal, administrative, investigative, or
informal) commenced, brought, conducted, or heard by or before, or otherwise
involving, any governmental body or arbitrator, including, but not limited to,
OSHA, EEOC, SEC.
"Stores" - the Corporation's current operating grocery stores, proposed sites
and relocations, offices, kitchens, bakeries, warehouse or commissary operations
as listed on Schedule 1.1(B) attached hereto.
"Tax" - any tax (including any income tax, franchise, capital stock, capital
gains tax, value-added tax, sales tax, property tax, gift tax, or estate tax,
and any federal, state or local payroll or withholding taxes, FICA, FUTA or
SUTA), levy, assessment, tariff, duty (including any customs duty), deficiency,
or other fee, and any related charge or amount (including any fine, penalty,
interest, or addition to tax), imposed, assessed, or collected by or under the
authority of any governmental body or payable pursuant to any tax-sharing
agreement or any other Contract relating to the sharing or payment of any such
tax, levy, assessment, tariff, duty, deficiency, or fee.
"Tax Return" - any return (including any information return), report, statement,
schedule, notice, form, or other document or information filed with or submitted
to, or required to be filed with or submitted to, any governmental body in
connection with the determination, assessment, collection, or payment of any Tax
or in connection with the administration, implementation, or enforcement of or
compliance with any legal requirement relating to any Tax, including any
amendment thereof..
1.2 Purchase of Shares. Subject to the terms and conditions set forth
below, Seller hereby agree to sell, assign, transfer and convey to Buyer, and
Buyer agrees to buy from Seller, the Shares, effective as of the beginning of
business on the Closing Date.
1.3 Purchase Price. (a) The purchase price for the Shares (the
"Purchase Price") is $46 million payable in restricted shares of the $.001 par
value common stock of Buyer (the "Buyer Stock"), adjusted as provided below. The
number of shares of Buyer Stock comprising the Purchase Price shall be
determined based on the average closing price of shares of the Buyer's common
stock on the Nasdaq National Market on the 10 business days immediately prior to
Closing; provided, however, that if the closing price of the Buyer's common
stock is less than $26 per share, the price shall be deemed to be $26 per share
and if the price of the Buyer Stock is greater than $32 per share, the price
shall be deemed to be $32 per share.
2
<PAGE>
(b) At Closing, Buyer shall instruct its transfer agent to deliver to
California Bank and Trust, as escrow agent ("Escrow Agent"), Buyer Stock equal
to 10% of the Purchase Price, adjusted as set forth below (the "Escrowed
Stock"), to be held and disbursed pursuant to the terms and provisions of the
Escrow Agreement attached hereto as Exhibit B (the "Escrow Agreement"). Each
Seller shall contribute to the Escrowed Stock 10% of such Seller's share of the
Buyers Stock.
(c) In addition to the foregoing escrow, in order to preserve the
pooling treatment for the Contemplated Transaction, Seller agrees that all Buyer
Stock to be received by all affiliates of the Corporation (defined as officers,
directors or 5% or more holders of the Shares) shall be deposited (less the
amounts escrowed pursuant to (b) above) in escrow with Lorenz, Alhadeff, Cannon
& Rose, LLP, Seller's counsel, upon issuance of the Buyer Stock, until such time
as 30 days of combined post-merger earnings of the Corporation and Buyer's other
operations are released.
(d) At Closing, Buyer shall instruct its transfer agent to issue in the
name of Seller the Adjusted Purchase Price (as defined below) in Buyer Stock.
The Buyer Stock shall be deposited in accordance with 1.3(b) and(c) above, with
the remainder distributed to the non affiliate Sellers in accordance with
Seller's instructions. Seller shall pay all sales, use or similar taxes, to the
extent such transaction is taxable, arising from the sale of the Shares
hereunder.
1.4 Adjustment to Purchase Price.
(a) On the night before the Closing Date, Seller and Buyer shall
supervise a physical inventory, to be taken by an outside inventory service, in
the Stores of all food products and non-food merchandise sold in the operation
of the Stores and of a quality that is usable and salable, currently sold in the
Stores and not damaged, out of code or obsolete (the "Inventory"). The charge of
the inventory service shall be split equally between Seller and Buyer. The
parties shall prepare a summary of the Inventory and calculate, based on the
cost factors historically used by the Corporation, the aggregate value of the
Inventory as of the Closing.
(b) The Closing Balance Sheet shall be adjusted at Closing to reflect,
among other things, the actual Inventory values at the Stores and the
distribution of earnings prior to Closing to Seller in accordance with the
Ordinary Course of Business of the Corporation. Based on the Closing Balance
Sheet, the Purchase Price shall be increased if (i) the amount by which total
assets exceed total liabilities, as shown in the Closing Balance Sheet, is
greater than (ii) the amount by which the total assets exceed total liabilities
as shown on the December 27, 1998 balance sheet. The Purchase Price shall be
decreased if (i) the amount by which total assets exceeds total liabilities, as
shown on the Closing Balance Sheet, is less than (ii) the amount by which total
assets exceed total liabilities as shown on the December 27, 1998 balance sheet
(c) In addition to the foregoing adjustments, if any, the Purchase
Price shall be reduced by (i) attorneys' fees incurred by Sellers in connection
with the Contemplated Transactions, (ii) transfer fees owed to the landlords of
the Stores for the processing of necessary consents to assignment, (iii)
Seller's share of the (A) HSR fees, (B) the inventory service fees, (C) the
Escrow Agent fees and (D) the auditor fees under 1.6(f) below.
(d) Any modifications to Purchase Price based on the foregoing shall be
referred to as "Closing Adjustments" and the adjusted Purchase Price shall be
referred to as the "Adjusted Purchase Price". Upon completion of the
calculations set forth above, the parties shall execute a Settlement Sheet in
the form attached as Exhibit C, documenting the Closing Adjustments made.
Settlement of the Closing Adjustments shall not be deemed a modification or
waiver of any other indemnification obligations under this Agreement. In the
event of a disagreement between the parties relating to the Closing Adjustments
which the parties are unable to resolve, either party may elect to have the
dispute resolved by an accounting firm of nationally recognized standing, to be
mutually selected by the parties, or if no agreement is reached, by the
accountants for Buyer and Seller. The resolution reached by the accounting firm
or firms shall be final and binding. The fees of the accounting firm mutually
selected shall be shared equally by the parties, and the fees of the accountants
for Buyer and Seller shall each be borne by the respective party.
1.5 Restrictions on Stock. The certificates representing the Buyer
Stock tendered to Seller as the Purchase Price shall be endorsed with a legend
substantially in the following form, together with any other legends required by
applicable state securities laws:
3
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND ARE "RESTRICTED
SECURITIES" AS DEFINED IN RULE 144 PROMULGATED UNDER THE ACT. THE
SECURITIES MAY NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE DISTRIBUTED
EXCEPT (i) IN CONJUNCTION WITH AN EFFECTIVE REGISTRATION STATEMENT FOR
THE SHARES UNDER THE ACT, (ii) IN COMPLIANCE WITH RULE 144, OR (iii)
PURSUANT TO AN OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT
SUCH REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS TO SAID SALE, OFFER
OR DISTRIBUTION.
1.6 Registration Rights. (a) Buyer shall use its reasonable best
efforts, on or before September 24, 1999, to file with the U.S. Securities and
Exchange Commission ("SEC"), a Form S-3 or other appropriate form of
registration statement, covering the resale of the Buyer Stock received by
Seller. Buyer agrees to use all reasonable efforts to cause such registration
statement to become effective on or prior to November 15, 1999. During the
period that the registration statement is effective, Buyer shall make all public
filings required in the normal course of its business and necessary to maintain
the effectiveness of the registration statement for the lesser of the period in
which Seller sells all of the Buyer Stock or a period of one year following the
Closing contemplated herein; provided that Seller agrees that Buyer may, from
time to time, inform Seller that Seller may not sell Buyer Stock until further
notice if circumstances exist which have not been disclosed publicly and the
omission of which, in the reasonable opinion of Buyer, would require an
amendment to the S-3 pursuant to the undertakings in Part II thereof. . Seller
agrees that upon receipt of such notice and until otherwise informed by Buyer,
Seller shall not sell the Buyer Stock Buyer shall pay the costs to prepare and
file the registration statement, including the registration fee due to the SEC
and all legal and accounting expenses of Buyer, together with the cost of
compliance with the securities or blue sky laws of the State of California.
Seller shall pay all other costs of sale of the Buyer Stock, including any
underwriting fees, commissions on sale or stock transfer taxes resulting from
the sale of the Buyer Stock. In the event that a registration statement for the
resale of the Shares is not approved by the SEC, Seller shall receive the
piggyback registration rights set forth in (c) below, subject to the rights of
parties holding senior registration rights under the terms of a Registration
Rights Agreement dated as of July 12, 1996 (the "Registration Rights
Agreement"). Seller further acknowledges that the piggy back registration rights
granted under (c) below are subordinate to the rights granted under the
Registration Rights Agreement.
(b) Buyer agrees that it will (i) prepare and file with the SEC any
amendments or supplements to the Form S-3 resale registration statement or
prospectus which may be necessary to keep such registration statement effective
and to comply with the provisions of the Securities Act with respect to the
resale of the Buyer Stock covered by such registration statement for a period of
twelve months from the effective date of the registration statement; (ii)
prepare and promptly file with the SEC and promptly notify Seller of the filing
of such amendment or supplement to such registration statement or prospectus as
may be necessary to correct any statement therein or omission therefrom if, at
any time when a prospectus relating to the Buyer Stock is required to be
delivered under the Securities Act, any event with respect to Buyer shall have
occurred as a result of which any prospectus would include an untrue statement
of material fact or omit to state any material fact necessary to make the
statements therein not misleading; (iii) if Seller is required to deliver a
prospectus, prepare promptly such amendment or amendments to such registration
statement and such prospectus or prospectuses as may be necessary to permit
compliance with the requirements of Section 10(a)(3) of the Securities Act; (iv)
advise Seller promptly after Buyer shall receive notice or obtain knowledge of
the issuance of any stop order by the SEC suspending the effectiveness of any
such registration statement or amendment thereto or of the initiation or
threatening of any proceedings for that purpose, and promptly use all reasonable
efforts to prevent the issuance of any stop order or to obtain its withdrawal if
such stop order should be issued; (v) use all reasonable efforts to qualify the
Buyer Stock for sale under the securities or "blue sky" laws of such states
within the United States as Seller may reasonably designate, except that Buyer
shall not be required in connection therewith or as a condition thereto to
qualify to do business in any such state or to take any action which would
subject it to general service of process in any such jurisdiction where it is
not then so subject; and (vi) furnish to Seller, as soon as available, copies of
any such registration statement and each preliminary and final prospectus, or
supplement or amendment required to be prepared with respect thereto, all in
such quantities as they may from time to time reasonably request.
4
<PAGE>
(c) If Buyer is unable to register the resale of the Buyer Stock in
accordance with subparagraph (a) above, at any time for a period of one year
following the Closing (but without obligation to do so) if Buyer proposes to
register any of its common stock under the Securities Act of 1933 in connection
with the public offering of such securities solely for cash (other than a
registration effected solely to implement an employee benefit plan or a
transaction to which Rule 145 of the Securities Act is applicable or a
registration using any form that does not permit secondary sales of securities),
Buyer will give written notice to Seller of its intention to do so and, upon
written request of Seller delivered to Buyer within 15 days after receipt of
notice, Buyer will use its best efforts at its own expense (but excluding any
underwriting commissions and stock transfer taxes accruing to any Buyer Stock
registered by Seller) to cause to be registered under the Securities Act the
shares of Buyer's Stock specified by Seller, subject to (ii) the right of other
holders of restricted stock to include their stock in any such registration
prior to the inclusion of the Buyer Stock, including but not limited to rights
of parties acquiring shares of Buyer's common stock under any agreement that
Buyer will register the resale thereof or under certain superior registration
rights granted to other holders of restricted stock pursuant to the Registration
Rights Agreement, (ii) Seller's acceptance of the terms of any underwriting
agreement entered into or proposed to be entered into between Buyer and any
underwriter of such offering, and (iii) if the sole or managing underwriter of
such offering determines that the aggregate number of shares of Buyer's Stock
which have been requested by Seller to be included in the registration should be
limited to a lesser number or not included due to market conditions or the
necessity of including in such underwriting or registration shares to be sold
for the account of Buyer or the holders of superior registration rights under
the Registration Rights Agreement, then Seller may only sell the lesser portion,
if any. Buyer or any underwriter shall have no obligation to pro rate the amount
of Buyer Stock that Seller may register in any such offering with any shares for
which registration is requested under the Registration Agreement, in the event
that the number of shares includable in such offering are limited. If a
limitation is imposed on the number of Buyer Stock shares includable by Seller
in any such offering, Buyer shall give Seller prompt written notice thereof.
(e) This transaction is intended to be accounted for as a pooling of
interest by Buyer in accordance with the requirements of Opinion No. 16
"Business Combinations" of the Accounting Principles Board of the American
Institute of Certified Public Accountants, as amended and/or interpreted by the
rules and regulations of the SEC and applicable pronouncements by the Financial
Accounting Standards Board, the Emerging Issues Task Force and the American
Institute of Certified Public Accountants (collectively, with the rules and
regulations of the SEC, the "Pooling Requirements"). Each Seller who is an
affiliate of the Corporation acknowledges that notwithstanding the approval of a
resale registration statement by the SEC, each "affiliate" Seller shall not sell
any of the Buyer Stock until 30 days of combined post-merger earnings of the
operations of the Corporation and Buyer's other operations have been publicly
announced by Buyer as part of Buyer's normal quarterly earnings release, and
that any premature sale of Buyer Stock prior to such announcement may result in
the disallowance of the pooling treatment by Buyer and is expressly prohibited
hereunder. For financial accounting purposes, it is intended that the Merger
shall be accounted for as a "pooling-of-interest." Buyer shall be under no
obligation to announce combined earnings except pursuant to its regularly
scheduled quarterly earnings announcements.
(f) In furtherance of the preparation and filing of the Form S-3 as
quickly as possible after Closing, Seller and the Corporation agree to cooperate
with Buyer and its independent auditors to prepare audited financials of the
Corporation and its predecessors in interest for fiscal years 1996 and 1997.
Seller shall bear one-half of the cost of such audit (which cost shall be
deducted from Purchase Price at Closing).
1.7 Closing. The closing on the Contemplated Transactions (the
"Closing") provided for in this Agreement will take place on September 1, 1999
or at such other time and place as the parties may agree.
2. REPRESENTATIONS AND WARRANTIES OF PRINCIPALS, SELLER
AND THE CORPORATION
The Principals and the Corporation, for the benefit of Buyer and the
Buyer Indemnified Parties (as hereinafter defined), hereby jointly and severally
represent and warrant as follows (and such representations and warranties of the
Principals shall survive the Closing and delivery of the Shares hereunder for
the period provided in Article VII below):
2.1 Organization and Enforceability; Articles of Incorporation and
Bylaws.
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(a) The Corporation is a corporation duly incorporated and validly
existing under, and by virtue of, the laws of the State of California and is in
good standing under such laws.
(b) The Corporation has delivered to Buyer true and correct copies of
the Corporation's Articles of Incorporation and Bylaws and stock records and has
made available minutes and other records of meetings of the stockholders and
board of directors of the Corporation and its predecessors in interest. There
has not been any violation of any of the provisions of the Corporation's
Articles of Incorporation or Bylaws or any resolution adopted by the
Corporation's shareholders or directors, and no event has occurred (with or
without notice or lapse of time) which may constitute or result in a violation.
The books and records of the Corporation are accurate and complete in all
material respects.
2.2 Authorization. (a) This Agreement is a valid and binding obligation
of Principals and the Corporation , enforceable in accordance with its terms.
Upon execution of the documents to be delivered at Closing, such documents will
constitute the valid and binding obligations of Principals and the Corporation ,
enforceable in accordance with their terms. All action of the Corporation's
officers and directors necessary to consummate the transactions contemplated in
this Agreement and the Exhibits hereto has been taken. Neither the Principals
nor the Corporation have filed or had filed against them any bankruptcy petition
or similar filing, nor has either of them made a general assignment for the
benefit of creditors. No consent or authorization of any third party or
governmental authority, except as listed on Schedule 2.2A attached hereto, is
required to complete the purchase of the Shares contemplated hereunder or the
assignment of the assets of the Corporation pursuant to a change in control in
the equity ownership of the Corporation.
(b) Except as set forth in Schedule 2.2B, neither the execution and
delivery of this Agreement nor the consummation or performance of any of the
Contemplated Transactions will, directly or indirectly (with or without notice
or lapse of time):
(i) contravene, conflict with, or result in a
violation of, or give any governmental body or other person the
right to challenge any of the Contemplated Transactions or to
exercise any remedy or obtain any relief under, any Legal
Requirement or any Order to which the Principals, the Corporation
or , to the Corporation's knowledge, any of the assets owned or
used by the Corporation in its operations, may be subject;
(ii) contravene, conflict with, or result in a
violation of any of the terms or requirements of, or give any
governmental body the right to revoke, withdraw, suspend, cancel,
terminate, or modify, any governmental authorization that is held
by the Corporation or that otherwise relates to the business of, or
any of the assets owned or used by, the Corporation;
(iii) cause Buyer or the Corporation to become
subject to, or to become liable for the payment of, any municipal
or California state tax; arising from the transfer of shares.
(iv) to the Knowledge of the Principals and the
Corporation contravene, conflict with, or result in a violation or
breach of any provision of, or give any person the right to declare
a default or exercise any remedy under the contracts, leases and
other commitments described on Schedule 2.16 (the "Contracts"), or
to accelerate the maturity or performance of, or to cancel,
terminate, or modify, any Contract that is material to the
operation of the business of the Corporation; or
(v) result in the imposition or creation of any lien
or encumbrance upon or with respect to any of the assets owned or
used by the Corporation in its operations.
2.3 Capitalization. (a) The authorized capital stock of the Corporation
is 1,000,000 shares, consisting of 1,000,000 shares of common stock, $.01 par
value, each with rights, preferences and privileges as set forth in the
Corporation's Articles of Incorporation and Bylaws. In connection with the
transactions contemplated by this Agreement, immediately prior to the Closing
there will be 499,444 issued and 499,444 outstanding Shares held as set forth on
Schedule 2.3. All of the Shares are fully paid and nonassessable.
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(b) No other stocks, trust receipts or other securities of the
Corporation are issued or outstanding, and there are no outstanding warrants,
options scrip, contracts, calls, preemptive rights or other rights or
obligations that might in any circumstance require the issuance by the
Corporation of further stock or other securities except as set forth on Schedule
2.3. None of the outstanding options were issued in contemplation of the
Contemplated Transactions nor have the vesting of such options been accelerated
beyond the schedule provided for in the options or the Corporation's stock
option program. No proceedings for the issuance of stock or other securities of
the Corporation are pending or threatened. No shares of the Corporation's common
stock are held as treasury shares.
2.4 Subsidiaries; Licenses. (a) The Corporation does not own or
control, directly or indirectly, any other corporation, association or business
entity, and since 1994 has not operated or conducted business under any trade
names, assumed names or other names, other than "Henry's Marketplace", "Boney's
Marketplace", and derivations thereof and as set forth on Schedule 2.4 hereto..
The Corporation is not a partner, member, joint venturer or shareholder of
another entity other than as set forth on Schedule 2.4.
(b) The Corporation is the licensor of certain rights set forth in the
Tradename License Agreements ("TLA") set forth on Schedule 2.4.
(i) The Corporation has no ongoing obligations to provide
goods or services except as set forth in the TLA and the TLA have not
been amended except as indicated on Schedule 2.4.
(ii) All royalties payable from the licensees under the TLA
have been paid in accordance with the TLA, and there are no offsets or
excuses to the payment of future royalties in accordance with the terms
of TLA. There are no monetary obligations owed by the Corporation to
any licensee.
2.5 Corporate Power. The Corporation has all requisite corporate power
and authority to own, operate and lease its properties and other assets and to
carry on its business as now conducted in the places where such properties or
other assets are now owned or leased or business is conducted, and to perform
its obligations under the Contracts which are material to the business of the
Corporation. The Corporation is not qualified to do business in any other
jurisdiction.
2.6 Title to Assets. (a) Set forth in Schedule 2.6A is a complete and
accurate list as of July 19, 1999 of all material: (i) fixtures, equipment and
personal property; (ii) leasehold improvements; and (iii) intangible assets,
including software and trade names; owned or leased by the Corporation, used in
the operation of the Stores, or for which the Corporation is obligated
(collectively the "Assets").
(b) Set forth in Schedule 2.6B is a complete and accurate list of all
leaseholds or other interests in real property owed by the Corporation or for
which the Corporation is obligated. The Corporation owns no fee title to real
property. The Corporation has delivered or made available to Buyer copies of the
leases and other instruments (as recorded) by which the Corporation acquired
such interests in real property, and copies of all title insurance reports,
opinions, abstracts, and surveys in the possession of the Corporation and
relating to such interest in real property.
(c) The Corporation owns (with good and marketable title, subject only
to the matters permitted by the following sentence) all the properties and
Assets (whether real, personal, or mixed and whether tangible or intangible)
located in the Stores or reflected as owned in the books and records of the
Corporation, including all of the properties and Assets reflected on Schedule
2.6 and in the Corporation's March 31, 1999 Balance Sheet, except (i) as
otherwise disclosed on Schedule 2.6C, which includes a list as of July ___, 1999
of (i) Assets held under capitalized or operating leases, (ii) loaned equipment,
and (iii) personal property sold since the date of the Balance Sheet in the
Ordinary Course of Business, and all of the properties and Assets purchased or
otherwise acquired by the Corporation since the date of the Balance Sheet
(except for personal property acquired and sold since the date of the Balance
Sheet in the Ordinary Course of Business and consistent with past practice).
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(d) Except as set forth on Schedule 2.6D hereof, all properties and
Assets reflected in the Balance Sheet are free and clear of all Encumbrances and
are not, to the Knowledge of the Corporation, in the case of interests in real
property, subject to any rights of way, building use restrictions, exceptions,
variances, reservations, or limitations of any nature except, with respect to
all such properties and Assets, (i) liens for current taxes not yet due, and
(ii) with respect to real property, (A) zoning laws and other land use
restrictions, none of which materially detract from the use of the property
subject thereto or materially impairs the operations of the Corporation, and (B)
other such use restrictions set forth in the real estate leases that do not
materially impair the present or anticipated use of the property subject
thereto.
(e) Except as set forth on Schedule 2.6E, the buildings, structures,
and equipment of the Corporation are structurally sound, are in good operating
condition and repair, ordinary wear and tear excepted, and are adequate for the
uses to which they are being put, and none of such buildings, structures, or
equipment is in need of maintenance or repairs except for ordinary, routine
maintenance and repairs that are not material in nature or cost. There are no
items of deferred maintenance required to be performed on any buildings,
structures, equipment or leasehold improvements except as set forth on Schedule
2.6E. Schedule 2.6E also sets forth the approximate cost of all deferred
maintenance items referenced in such schedule. The building, structures, and
equipment of the Corporation are sufficient for the continued conduct of the
Corporation's business after the Closing in substantially the same manner as
conducted prior to the Closing.
2.7 Inventory. All inventory of the Corporation, whether or not
reflected in the Balance Sheet consists of a quality and quantity usable and
salable in the Ordinary Course of Business, except for obsolete items and items
of below-standard quality, which in the aggregate comprise less than 1% of the
current aggregate inventory value and all of which have been written off or
written down to net realizable value in the Balance Sheet or on the accounting
records of the Corporation as of the Closing Date, as the case may be. The
inventory reflected on the Balance Sheet is reflected at cost, based on actual
inventory in the Stores determined by periodic physical counts in accordance
with normal industry practices. The quantities of each item of inventory
(whether raw materials, work-in-process, or finished goods) are not excessive,
but are reasonable in the present circumstances of the Corporation. No liens or
encumbrances exist on any of the inventory except as set forth on Schedule 2.7.
2.8 Financial Statements and Records. (a) Seller has delivered to
Buyer: (i) unaudited balance sheets and income statements of the Corporation as
of December 27 in each of the years 1995, 1996 and 1997, and the notes thereto,
and the related unaudited statements of income, changes in stockholders' equity,
and cash flow for each of the fiscal years then ended, (ii) audited financial
statements of the Corporation for the period ended December 27, 1998 and (iii)
an unaudited balance sheet at March 31, 1999 (the "interim balance sheet") and
the related unaudited statements of income, changes in stockholders' equity, and
cash flow for the one and three months then ended, including in each case the
notes thereto. The financial statements and notes fairly present in all material
respects the financial condition and the results of operations, changes in
stockholders' equity, and cash flow of the Corporation as of the respective
dates of and for the periods referred to in such financial statements, and as to
the Financial Statements referred to in (ii) and (iii), all are substantially in
accordance with GAAP, subject, in the case of interim financial statements, to
normal recurring year-end adjustments (the effect of which will not,
individually or in the aggregate, be materially adverse) and the absence of
notes (that, if presented, would not differ materially from those included in
the balance sheet); the financial statements referred to in Schedule 2.8 reflect
the consistent application of accounting principles throughout the periods
involved, except as disclosed in the notes to such financial statements. No
financial statements of any person other than the Corporation are required by
GAAP to be included in the consolidated financial statements of the Corporation.
(b) The books of account, minute books, and stock record books of the
Corporation, and other records of the Corporation, all of which have been made
available to Buyer, are complete and correct in all material aspects, subject to
ordinary and customary record keeping practices and procedures, and have been
maintained in accordance with sound business practices. The minute books of the
Corporation contain accurate and complete records of all meetings held of, and
corporate action taken by, the stockholders, the Board of Directors, and
committees of the Board of Directors of the Corporation, and no meeting of any
such stockholders, Board of Directors, or committee has been held for which
minutes have not been prepared and are not contained in such minute books. At
the Closing, all of those books and records will be in the possession of the
Corporation.
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2.9 Proprietary Assets. Except as set forth on Schedule 2.9, there are
no trademarks or names, service marks, licensed software or other proprietary
assets owned by or licensed to the Corporation. The Corporation has taken the
steps set forth on Schedule 2.9 to protect the proprietary nature, value or
confidentiality of the items identified on Schedule 2.9. To the best of Seller's
knowledge, the Corporation is not infringing on any trade name or mark, service
mark, license or other proprietary asset of any third party, and the Corporation
has not received any notice of infringement.
2.10 Accounts Receivable. All accounts receivable of the Corporation
that are reflected on the Financial Statements or on the accounting records of
the Corporation as of the Closing Date (collectively, the "Accounts Receivable")
represent or will represent valid obligations arising from sales actually made
or services actually performed in the ordinary course of business. Unless paid
prior to the Closing Date, the Accounts Receivable are or will be as of the
Closing Date current and collectible net of the respective reserves shown on the
Financial Statements or on the accounting records of the Corporation as of the
Closing Date (which reserves are adequate and calculated consistent with past
practice and, in the case of the reserve as of the Closing Date, will not
represent a greater percentage of the Accounts Receivable as of the Closing Date
than the reserve reflected in the interim balance sheet represented of the
Accounts Receivable reflected therein and will not represent a material adverse
change in the composition of such Accounts Receivable in terms of aging).
Subject to such reserves, each of the Accounts Receivable either have been or
will be collected in full, without any set-off, within ninety days after the day
on which it first becomes due and payable, except for accounts receivable
arising from the Demo Department or Buying Division, which are in the aggregate
uncollectible to the extent of 25%. There is no contest, claim, or right of
set-off, other than returns in the ordinary course of business, under any
material Contract with any obligor of an Accounts Receivable relating to the
amount or validity of such Accounts Receivable. Schedule 2.10 contains a
complete and accurate list of all Accounts Receivable as of July 19, 1999, which
list sets forth the aging of such Accounts Receivable.
2.11 Liabilities. (a) Except as set forth on Schedule 2.11, the
Corporation has no material liabilities except (i) those liabilities reflected
or reserved as such on the Financial Statements, (ii) current liabilities to the
extent reflected in the Corporation's Financial Statements and incurred in the
Ordinary Course of Business since the date of the Corporation's most recent
Financial Statements, (iii) the obligations under the Contracts described below,
(iv) the bank loans, other debts or financing arrangements, described on
Schedule 2.11 hereto to which the Corporation is a party, or under which the
Corporation's assets have been pledged as security, and (v) those liabilities
taken into account in making the Closing Adjustments.
(b) As of Closing, all of the Corporation's liabilities shall be as set
forth on the Closing Balance Sheet.
(c) The Closing Balance Sheet shall reflect all liabilities that may
accrue from the operations of the Corporation including but not limited to
percentage rent obligations, profit sharing or bonuses and deferred maintenance
obligations.
2.12 Material Adverse Events. Except as set forth on Schedule 2.12,
there have been no material adverse events or changes since the March 31, 1999
Financial Statements in the financial condition, assets, liabilities, properties
or business of the Corporation, including in the amount, nature or salability of
the Inventory of the Stores, or in the Corporation's title to any of its assets
or properties, or any material transaction except in the ordinary course of
business, except as disclosed on the attached schedules. Since the date of the
Financial Statements, the Corporation has not (a) issued or sold any stock,
notes, or other corporate securities or options to purchase securities or
entered into an agreement for any such sale, (b) incurred any damage or
destruction whether covered by insurance or not and materially affecting its
properties, (c) incurred any material indebtedness, obligation or liability
(absolute or contingent), other than current liabilities in the ordinary course
of business, (d) suffered any material adverse change in relationship with any
key supplier, officers, key employees, independent contractors, customers or
contract parties, (e) sold, assigned or transferred any trademarks, trade names,
copyrights, licenses, franchises or other intangible assets or sold, leased,
transferred, released or abandoned any of its tangible or intangible assets,
other than those listed on Schedule 2.12 or in the ordinary course of business,
(f) mortgaged, pledged or suffered any liens, encumbrances or charges against
its assets or properties, except as listed on Schedules 2.6E and 2.11 hereto,
(g) waived any rights of a material value or canceled any debts or claims owed,
(h) amended or terminated contract, lease or other agreement that may
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individually or in the aggregate materially effect the Corporation's business,
(i) made any change in the compensation paid to employees, other than increases
based on merit and in the ordinary course, (j) adopted any resolution or taken
any other action with respect to dissolution, winding up or liquidation of the
Corporation, no such resolution has been proposed, and there is no proceeding or
other action pending or to the knowledge of the Seller, threatened, proposed or
contemplated by any court, agency or group of the Corporation's or Seller'
creditors, or (k) to the best of Seller' knowledge, suffered any other event or
condition materially adversely affecting the Corporation, its properties,
assets, operations or business.
2.13 Taxes. (a) The Corporation has filed (with respect to periods
ending on or after January 1, 1994, on a timely basis) all Tax Returns that it
was required to file. All such Tax Returns were true, correct, and complete in
all material respects. The Corporation is not currently the beneficiary of any
extension of time within which to file any Tax Return. The Corporation has paid
all Taxes owed by it (whether or not shown on a Tax Return), except such Taxes,
if any, (i) listed in Schedule 2.13, (ii) being contested in good faith, and
(iii) as to which adequate reserves (determined in accordance with GAAP) have
been set forth on the face of the interim balance sheet and will be set forth on
the face of the Closing Balance Sheet. No claim has ever been made by an
authority in a jurisdiction where the Corporation does not file Tax Returns that
the Corporation is or may be subject to taxation by that jurisdiction. None of
the Corporation's property or assets are subject to Encumbrances that arose in
connection with any failure (or alleged failure) to pay any Tax.
(b) Schedule 2.13 lists all federal, state, local, or foreign income
Tax Returns filed with respect to the Corporation for taxable periods ending on
or after January 1, 1994 that have been audited, and indicates those Tax Returns
that currently are the subject of audit. Seller has delivered [or made
available] to Buyer true, correct, and complete copies of all [federal, state,
local, or foreign income] Tax Returns, examination reports, and statements of
deficiencies filed, assessed against, or agreed to by the Corporation with
respect to taxable periods ending on or after January 1, 1994. Except as
described in Schedule 2.13, the Corporation has not waived any statute of
limitations in respect of Taxes or agreed to any extension of time with respect
to a Tax assessment or deficiency.
(c) Neither Seller nor any director or officer (or employee responsible
for Tax matters) of the Corporation expects any authority to assess any
additional Tax for any period for which Tax Returns have been filed. There is no
dispute or claim concerning any Tax liability of the Corporation either (i)
claimed or raised by any authority in writing or (ii) as to which Seller or any
director or officer (or employee responsible for Tax matters) of the Corporation
has knowledge based upon personal contact with any agent of such authority. The
Corporation has not filed a consent under section 341(f) of the Code concerning
collapsible corporations. The Corporation has not been a United States real
property holding corporation within the meaning of section 897(c)(2) of the Code
during the applicable period specified in section 897(c)(1)(A)(ii) of the Code.
(d) The Corporation is not currently nor has it been a party to any Tax
allocation or sharing agreement. The Corporation (i) has not been a member of an
affiliated group filing a consolidated federal income Tax Return and (ii) does
not have any liability for the Taxes of any person other that the Corporation
under Treasury Regulation section 1.1502-6 (or any similar provision of state,
local, or foreign law), as a transferee or successor, by contract, or otherwise.
(e) The Corporation has withheld, filed Tax Returns with respect to,
and paid to the proper authority all Taxes required to have been withheld,
filed, or paid in connection with amounts paid or owing to any employee,
independent contractor, creditor, stockholder, or other third party, including,
without limitation, any FICA, FUTA, SUTA, or similar state or local Tax. The
Corporation is current on all such remittances as of the date of Closing, and
has established reserves for any withholding not yet due to be remitted but
collected on payroll paid to employees.
(f) The unpaid Taxes of the Corporation (i) did not, as of the date of
the interim balance sheet, exceed the reserve for Tax liability (rather than any
reserve for deferred Taxes established to reflect timing differences between
book and Tax income) set forth on the face of the interim balance sheet and (ii)
do not exceed that reserve as adjusted for the passage of time through the
Closing Date in accordance with the past custom and practice of the Corporation
in filing Tax Returns.
(g) The Corporation has been a validly electing S corporation within
the meaning of sections 1361 and 1362 of the Code at all times since Deceember
31, 1997 and the Corporation will be an S corporation up to and including the
day before the Closing Date.
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2.14 Employee Benefit Plans. (a) The Corporation is not a party to and
does not maintain or contribute to any pension, profit sharing or other employee
benefit plans, as defined in section 3(3) of the ERISA, except as listed on
Schedule 2.14. Except as set forth on Schedule 2.14 each plan listed on Schedule
2.14 is in compliance in all material respects, and has been in compliance in
all material respects, with all applicable requirements of law including the
provisions of ERISA and the IRC, and no liability has been incurred by the
Corporation with respect to any such plan which, singly or in the aggregate, may
have a material adverse effect on the Corporation's business, financial
condition, results of operation or prospects. Except as listed on Schedule 2.14
the Corporation does not maintain or contribute to any form of plan or agreement
with any of its employees, officers, directors, agents or representatives
providing for present or future employee benefits or deferred compensation of
any nature whatsoever, or stock options, stock purchases, unemployment
compensation plan, vacation pay, severance pay, bonus or benefit agreement,
insurance or hospitalization program or other fringe benefit arrangement,
whether pursuant to contract, arrangement, custom or informal understanding,
whether or not such plan, arrangement or agreement an "employee benefit plan"
(as defined in section 3(3) of ERISA). The Corporation is not a party to any
employment agreement not terminable on thirty (30) days' or less written notice,
without further liability.
(b) The Corporation will make all contributions to employee benefit
plans (including profit-sharing plans) listed on Schedule 2.14 for all periods
ending prior to the Closing (including periods from the first day of the current
plan year to the Closing) in accordance with its normal business practices. All
unpaid but accrued contributions shall be reflected on the Closing Balance
Sheet. Neither the Corporation nor any of its directors, officers, employees or
any other "fiduciary", as that term is defined in section 3(21) of ERISA of
section 4975 of the IRC, has committed any breach of fiduciary responsibility
imposed by ERISA or any other applicable law with respect to any employee
benefit plan listed on Schedule 2.14 which would subject the Corporation or
Buyer or any of their respective directors, officers or employees to liability
under ERISA or any applicable law. None of the assets of any employee benefit
plan are invested in any employer security (as defined in ERISA Section
407(d)(1) or employer real property (as defined in ERISA Section 407(d)(2)).
(c) Neither the Corporation nor any member of the Controlled Group has
ever maintained, contributed to, or been obligated to contribute to any plan
that is subject to Title IV of ERISA or the minimum funding requirements of IRC
section 412. Neither the Corporation nor any member of the Controlled Group has
ever contributed to, been obligated to contribute to, or incurred any liability
(whether primary or secondary) to a multiemployer plan (as such term is defined
in ERISA Section 3(37)). "Controlled Group" shall mean a controlled or
affiliated group within the meaning of IRC sections 414(b), (c), (m), or (o) of
which the Corporation (or a predecessor of the Corporation, including any entity
that merged into the Corporation) is or has ever been a member.
(d) The Corporation does not maintain or contribute to any plan that
provides retiree medical or retiree life insurance benefits to any person and is
not contractually or otherwise obligated (whether or not in writing) to provide
any person with life insurance or medical benefits upon retirement or
termination of employment, other than as required by the provisions of ERISA
sections 601 through 608 and Code section 4980B ("COBRA"). The Corporation has
no liability for post retirement welfare benefits, except for COBRA continuation
coverage.
(e) No payment made pursuant to the Corporation's compensation
arrangements and no payments resulting from the consummation of the Contemplated
Transactions Agreement will constitute an excess parachute payment as defined in
Code section 280G.
(f) None of the transactions contemplated by this Agreement is a
"prohibited transaction", as such term is defined in ERISA section 406 of ERISA
or in IRC section 4975.
(g) There are no actions, suits or claims (other than routine claims
for benefits) pending or threatened involving any employee benefit plans or the
assets of such plans, and no facts exist that could give rise to any such
actions, suits or claims. Except as set forth in Schedule 2.14, there have been
no acts or omission by the Corporation that have given rise to or may give rise
to penalties, Taxes or related charges under sections 502(c), 502(i) or 4071 of
ERISA or chapter 43 of the IRC for which the Corporation may be liable.
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(h) Except as set forth in Schedule 2.14, all group health plans of the
Corporation (and any predecessor of the Corporation including any entity that
merged into the Corporation) (including any plans of current and former
affiliates of the Corporation that must be taken into account under section
162(i) of the IRC or section 601 of ERISA) have been operated in compliance with
the group health plan continuation coverage requirements of section 4980B of the
IRC and section 601 of ERISA.
(i) The Corporation has no obligations for benefits for retirees (other
than pensions) with respect to both retired and active employees of the
Corporation.
(j) Except as set forth in Schedule 2.14, the consummation of the
Contemplated Transactions will not result in the payment, vesting, or
acceleration of any benefit.
2.15 Compliance with Laws. (a) Except as set forth in Schedule
2.15 and where noncompliance has been corrected, as indicated on Schedule 2.15:
(i) the Corporation is, and at all times since January 1, 1998
has been, in compliance in all material respects with each Legal
Requirement that is or was applicable to it or to the conduct or
operation of its business or the ownership or use of any of its assets;
(ii) no event has occurred or circumstance exists that (with
or without notice or lapse of time) (A) may constitute or result in a
violation or failure of the Corporation to comply in all material
respects with, any Legal Requirement, or (B) may give rise to any
obligation on the part of the Corporation to undertake, or to bear all
or any portion of the cost of, any remedial action of any nature; and
(iii) the Corporation has not received, at any time since
January 1, 1998, any notice or other written communication from any
governmental body or any other person regarding (A) any actual,
alleged, possible, or potential violation of, or failure to comply
with, any Legal Requirement, or (B) any actual, alleged, possible, or
potential obligation on the part of the Corporation to undertake, or to
bear all or any portion of the cost of, any remedial action of any
nature.
(b) Schedule 2.15 contains a complete and accurate list of each
governmental authorization that is held by the Corporation or that otherwise
relates to the business of, or to any of the Assets owned or used by, the
Corporation. Each governmental authorization listed or required to be listed in
Schedule 2.15 is valid and in full force and effect. Except as set forth in
Schedule 2.15:
(i) the Corporation is, and at all times since January 1, 1998
has been, in full compliance or such noncompliance has been corrected
with all of the terms and requirements of each governmental
authorization identified or required to be identified in Schedule 2.15;
(ii) no circumstance exists that may (with or without notice
or lapse of time) (A) constitute or result directly or indirectly in a
violation of or a failure to comply with any term or requirement of any
governmental authorization listed or required to be listed in Schedule
2.15 or (B) result directly or indirectly in the revocation,
withdrawal, suspension, cancellation, or termination of, or any
modification to, any governmental authorization listed or required to
be listed in Schedule 2.15;
(iii) the Corporation has not received, at any time since
January 1, 1998, any notice or other written communication from any
governmental body or any other person regarding (A) any actual,
alleged, possible, or potential violation of or failure to comply with
any term or requirement of any governmental authorization, or (B) any
actual, proposed, possible, or potential revocation, withdrawal,
suspension, cancellation, termination of, or modification to any
governmental authorization; and
(iv) all applications required to have been filed and all fees
required to be paid for the renewal of the governmental authorizations
listed or required to be listed in Schedule 2.15 have been duly filed
on a timely basis with the appropriate governmental bodies, and all
other filings required to have been made with respect to such
governmental authorizations have been duly made on a timely basis with
the appropriate governmental bodies.
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The governmental authorizations listed in Schedule 2.15 collectively constitute
all of the governmental authorizations necessary to permit the Corporation to
lawfully conduct and operate its business and to permit the Corporation to own
and use its Assets in the manner in which it currently owns and uses such
Assets.
2.16 Contracts, Leases and Commitments. (a) Schedule 2.16 and other
Schedules attached hereto contain a complete and accurate list, and the
Corporation has delivered to Buyer true and complete copies all written
contracts and provided detailed summaries of oral (as such are known to the
Corporation) agreements, of:
(i) each Contract that involves performance of services or
delivery of goods or materials by or to the Corporation of an amount or
value in excess of $2,500; unless such Contract is cancelable by the
Corporation with not more than 90 days notice and the amount or value
of the services to be performed or of the goods or materials to be
delivered by or to the Corporation within such 90 day period would not
exceed $2,500;
(ii) each Contract that was not entered into in the Ordinary
Course of Business or that involves expenditures or receipts of the
Corporation in excess of $2,500;
(iii) each lease, rental or occupancy agreement, license,
installment and conditional sale agreement, and other Contract
affecting the ownership of, leasing of, title to, use of, or any
leasehold or other interest in, any real or personal property (except
personal property leases and installment and conditional sales
agreements having a value per item or aggregate payments of less than
$2,500 and with terms of less than one year);
(iv) each licensing agreement or other Contract (except for
commonly available software programs with a value of less than $2,500)
with respect to patents, trademarks, copyrights, or other intellectual
property, including agreements with current or former employees,
consultants, or contractors regarding the appropriation or the
nondisclosure of any of the Intellectual Property Assets;
(v) each joint venture, partnership, and other Contract to or
with any labor union or other employee representative of a group of
employees;
(vi) each Contract containing covenants that in any way
purport to restrict the business activity of the Corporation, the
parties with whom it contracts or limit the freedom of the Corporation
to engage in any line of business or to compete with any person or that
purport to grant an option to any person to acquire any of the Assets
of the Corporation or Shares of the Corporation;
(vii) each Contract providing for payments to or by any person
based on sales, purchases, or profits, other than direct payments for
goods;
(viii) each power of attorney that is currently effective and
outstanding;
(ix) each Contract entered into other than in the Ordinary
Course of Business that contains or provides for an express undertaking
by the Corporation to be responsible for consequential damages;
(x)each Contract for capital expenditures in excess of $5,000;
(xi) each written warranty, guaranty, and or other similar
undertaking with respect to contractual performance of any person
extended by the Corporation other than in the Ordinary Course of
Business;
(xii) each amendment, supplement, and modification in respect
of any of the foregoing; and
(xiii) each Contract for the removal of hazardous wastes or
materials, as defined under legal requirements, or for its disposal.
(b) Except as set forth in Schedule 2.16 to the knowledge of the Seller
and the Corporation, no officer, director or employee, of the Corporation is
bound by any Contract that purports to limit the ability of such officer,
director or employee, to (i) engage in or continue any conduct, activity, or
practice relating to the business of the Corporation, or (ii) assign to the
Corporation or to any other Person any rights to any invention, improvement, or
discovery.
(c) Except as set forth in Schedule 2.16, each Contract is in full
force and effect and is valid and enforceable in accordance with its terms.
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(d) Except as set forth in Schedule 2.16:
(i) the Corporation is, and at all times since January 1, 1998
has been, in full compliance with all material applicable terms and
requirements of each Contract under which the Corporation has or had
any obligation or liability or by which the Corporation or any of the
assets owned or used by the Corporation is or was bound;
(ii) to the best of the Corporation's knowledge each other
person that has or had any obligation or liability under any applicable
Contract under which the Corporation has or had any rights is, and at
all times since January 1, 1998 has been, in full compliance with all
material applicable terms and requirements of such Contract;
(iii) no event has occurred or circumstance exists since
January 1, 1998 that (with or without notice or lapse of time) may
contravene, conflict with, or result in a material violation or breach
of any contract by the Corporation or other person, or give the
Corporation or other person the right to declare a default or exercise
any remedy under, or to accelerate the maturity or performance of, or
to cancel, terminate, or modify, any Contract; and
(iv) the Corporation has not given to or received from any
other person, at any time any notice or other communication (whether
oral or written) regarding any actual, alleged, possible, or potential
violation or breach of, or default under, any Contract by the
Corporation where such breach was not subsequently cured or proceedings
commenced.
(e) There are no renegotiations of, attempts to renegotiate, or
outstanding rights to renegotiate any material amounts paid or payable to the
Corporation under current or completed Contracts with any Person and, no such
Person has made written demand to the Corporation for such renegotiation.
(f) The Contracts have been entered into in the Ordinary Course of
Business and have been entered into without the commission of any act alone or
in concert with any other Person, or any consideration having been paid or
promised, that is or would be in violation of any Legal Requirement by the
Corporation.
2.17 Insurance. (a) The Corporation has delivered to Buyer: (i) true
and complete copies of all policies of insurance, including policies for workers
compensation insurance, to which the Corporation is a party or under which the
Corporation is or has been covered at any time within the three years preceding
the date of this Agreement; and (ii) true and complete copies of all pending
applications for policies of insurance.
(b) Schedule 2.17 describes: (i) any self-insurance arrangement by or
affecting the Corporation, including any reserves established thereunder; (ii)
any contract or arrangement, other than a policy of insurance, for the transfer
or sharing of any risk by the Corporation; and (iii) all obligations of the
Corporation to third parties with respect to insurance (including such
obligations under leases and service agreements) and identifies the policy under
which such coverage is provided.
(c) The Corporation has delivered to Buyer for the current policy year
and each of the two preceding policy years:
(i) a summary of the loss experience under each policy;
(ii) a statement describing each claim under an insurance
policy for an amount in excess of $25,000, which sets forth:
(A) the name of the claimant;
(B) a description of the policy by insurer, type
of insurance, and period of coverage; and
(C) the amount and a brief description of the claim;
(iii) a statement describing the loss experience for all
claims that were self-insured including the number and aggregate cost
of such claims, or for claims where insurance coverage was denied.
(d) Except as set forth on Schedule 2.17:
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(i) all policies to which the Corporation is a party or that
provide coverage to the Corporation:
(A) are valid, outstanding, and enforceable;
(B) taken together, in the Corporation's reasonable
business judgment are believed to provide adequate insurance
coverage for the Assets and the operations of the Corporation
for all risks normally insured against by a person carrying on
the same business or businesses as the Corporation and for all
risks to which the Corporation is normally exposed ;
(C) are sufficient for compliance with all Legal
Requirements and Contracts to which the Corporation is a party
or by which it is bound;
(D) will continue in full force and effect following
the consummation of the Contemplated Transactions until
terminated in accordance with their terms; and
(E) except for the Corporation's worker's
compensation insurance, do not provide for any retrospective
premium adjustment or other experience-based liability on the
part of the Corporation.
(ii) The Corporation has not, since the March 31, 1999 Balance
Sheet, received (A) any refusal of coverage or any notice that a
defense will be afforded with reservation of rights, or (B) any notice
of cancellation or any other indication that any insurance policy is no
longer in full force or effect or will not be renewed or that the
issuer of any current or past policy is not willing or able to perform
its obligations thereunder.
(iii) The Corporation has paid all premiums when due, and has
otherwise performed all of its respective obligations, under each
policy to which any Corporation is a party or that provides coverage to
the Corporation or director thereof.
(iv) The Corporation has given notice to each current or past
insurer of all claims that may be insured thereby to the extent that
such claims are known to the Corporation.
2.18 Bank Relationships. Schedule 2.18 contains a complete list, as of
the date of this Agreement, of all bank accounts, depositories of funds, lines
of credit, securities and certificates of deposit owned by the Corporation. This
list will be updated at Closing. Schedule 2.18 contains the (a) name of all
banks or institutions, (b) the number of each account, (c) the names of all
persons authorized to draw or sign checks or drafts on each account, (d) the
names of all persons authorized to borrow funds for the Corporation.
2.19 Litigation. (a) Except as set forth in Schedule 2.19 and as
disclosed in Schedule 2.17, there is no pending or, to the Knowledge of the
Principals or the Corporation, threatened proceeding that: (i) has been or may
be commenced by or against the Corporation or that otherwise relates to or may
affect the business of, or any of the Assets owned or used by, the Corporation;
(ii) arises from an alleged breach by the Corporation or Seller of any Contract;
(iii) challenges, or that may have the effect of preventing, delaying, making
illegal, or otherwise interfering with, the proposed sale of the Shares or (iv)
arises from the conduct of Seller, the Principals, the Corporation or any
employees of the Corporation. To the Knowledge of the Corporation, (A) no such
proceeding has been threatened, and (B) no event has occurred or circumstance
exists that may give rise to or serve as a basis for the commencement of any
such proceeding.
(b) The Corporation has delivered to Buyer copies of all pleadings,
correspondence, and other documents relating to each proceeding listed in
Schedule 2.19. If decisions adverse to the Corporation are rendered in all of
the proceedings, the proceedings listed in Schedule 2.19 will not have a
material adverse effect on the business, operations, assets, condition, or
prospects of the Corporation.
(c) Except as set forth in Schedule 2.19: (i) there is no Order to
which the Corporation, or any of the assets or Stores owned or used by the
Corporation, is subject; and (ii) to the knowledge of the Corporation or the
Seller, no officer, director, agent, or employee of the Corporation is subject
to any Order that prohibits such officer, director, agent, or employee from
engaging in or continuing any conduct, activity, or practice relating to the
business of the Corporation.
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(d) Except as set forth in Schedule 2.19: (i) the Corporation is, and
at all times, has been, in full compliance with all of the terms and
requirements of each Order to which it, or any of the Assets or Stores owned or
used by it, is or has been subject; (ii) no event has occurred or circumstance
exists that may constitute or result in (with or without notice or lapse of
time) a violation of or failure to comply with any term or requirement of any
Order to which the Corporation, or any of the Assets owned or used by the
Corporation, is subject; and (iii) neither the Seller nor the Corporation has
received any notice or other written communication from any governmental body or
any other person regarding any actual, alleged, possible, or potential violation
of, or failure to comply with, any term or requirement of any Order to which the
Corporation, or any of the Assets owned or used by the Corporation, is or has
been subject.
2.20 Employees and Labor Matters. (a) Schedule 2.20 accurately sets
forth (i) the name of all employees of the Corporation as of July 15, 1999, (ii)
such employees' titles, (iii) the current compensation of each employee as of
the date of the Schedule and any other commissions, wages, fees or other
payments to which each such employee is entitled and has received in fiscal
1999. There are no bonuses accrued for the benefit of or owed to employees
except as reflected on the Financial Statements. Schedule 2.20 also sets forth
the name, if any, of each employee or relation thereof entitled to receive any
severance, bonus or pension payments, COBRA or other benefits arising from the
employee's former employment.
(b) The employment of each employee of the Corporation is terminable at
will, and there are no existing employment, bargaining or labor agreements with
any employee. There are no current organizing efforts of the Corporation's
employees by any labor union except as disclosed on Schedule 2.20, nor are there
any unfair labor practice charges pending or threatened against the Corporation
except as set forth on Schedule 2.20.
(c) Prior to the Closing Date, the Corporation shall not increase any
employee's compensation except for normal yearly adjustments pursuant to an
annual performance review.
(d) No event has occurred or circumstance exists that could provide the
basis at any Store for any work stoppage or other labor dispute. There is no
lock-out of any employees by the Corporation, and no such action is contemplated
by the Corporation. The Corporation has complied in all material respects with
all legal requirements relating to employment, equal employment opportunity,
classification of exempt and non-exempt status, nondiscrimination, immigration,
wages, including overtime wages, hours, benefits, collective bargaining, the
payment of social security and similar taxes, occupational safety and health,
and plant closing and all other legal requirements, the failure to comply with
which may result in liability to or adverse impact on the Corporation or its
operations. The Corporation is not liable for the payment of any compensation,
damages, taxes, fines, penalties, or other amounts, however designated, for
failure to comply with any of the foregoing Legal Requirements.
(e) The Corporation is not a party to any collective bargaining or
other labor Contract. Since January 1, 1998, there has not been, there is not
presently pending or existing, and there is not threatened, (i) any strike,
slowdown, picketing, work stoppage, or employee grievance process, (ii) any
Proceeding against or affecting the Corporation relating to the alleged
violation of any Legal Requirement pertaining to labor relations or employment
matters, including any charge or complaint filed by an employee or union with
the National Labor Relations Board, the Equal Employment Opportunity Commission,
or any comparable governmental body, organizational activity, or other labor or
employment dispute against or affecting the Corporation or Stores, or (iii) any
application for certification of a collective bargaining agent, except as set
forth on Schedule 2.20.
2.21 Environmental Matters. (a) For the purposes of Section 2.21: (i)
"Environmental Claim" means any claim, action, cause of action, investigation or
written notice by any person or entity alleging potential liability (including,
without limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries, or penalties) arising out of, based on or resulting from (A)
the presence, or release into the environment, of any Material of Environmental
Concern at any location, whether or not owned or operated by the person making
the representation, or (B) circumstances forming the basis of any violation, or
alleged violation, of any Environmental Law; and (ii) "Environmental Laws" means
all federal, state, local and foreign laws and regulations relating to pollution
or protection of human health or the environment (including, without limitation,
ambient air, surface water, ground water, land surface or subsurface strata),
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including, without limitation, laws and regulations relating to emissions.
discharges, releases or threatened releases of Materials of Environmental
Concern, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Materials of
Environmental Concern; and (iii) "Materials of Environmental Concern" means
chemicals, pollutants, contaminants, wastes, toxic substances, asbestos,
petroleum and petroleum products.
(b) The Corporation is in compliance in all material respect with all
applicable Environmental Laws, which compliance includes, but is not limited to
the possession by Corporation of all permits and other governmental
authorizations required under applicable Environmental Laws, and compliance with
the terms and conditions thereof. Except as set forth in Schedule 2.21,
Corporation has not received any written communication, from a governmental
authority that alleges that Corporation is not in such full compliance and, to
the best of Corporation's knowledge, there are no circumstances that may prevent
or interfere with such full compliance in the future. All permits and other
governmental authorizations currently held by Corporation pursuant to the
Environmental Laws are identified in Schedule 2.21.
(c) Except as set forth in Schedule 2.21, there is no Environmental
Claim pending or, to the best of Corporation's or Seller's knowledge, threatened
against the Corporation or, to the best of the Corporation's or Seller's
knowledge, against any person or entity whose liability for any Environmental
Claim the Corporation has or may have retained or assumed either contractually
or by operation of law.
(d) Except as set forth in Schedule 2.21, to the best of the
Corporation's or Seller's knowledge, there are no past or present actions,
activities, circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge, presence or disposal of any
Material of Environmental Concern, that would form the basis of any
Environmental Claim against the Corporation or against any person or entity
contractually or by operation of law.
(e) Without in any way limiting the generality of the foregoing, (i)
all on-site and off-site locations where the Corporation has stored, disposed of
or, to the Corporation's Knowledge, arranged for the disposal of, Materials of
Environmental Concern are identified in Schedule 2.21, (ii) all underground
storage tanks (whether or not in use by the Corporation), and the capacity and
contents of such tanks, located on property owned or leased by Corporation are
identified in Schedule 2.21, (iii) except as set forth in Schedule 2.21, there
is no asbestos contained in or forming part of any building, building component,
structure or office space owned or leased by the Corporation, and (iv) except as
set forth in Schedule 2.21, no polychlorinated biphenyls (PCBs) are used or
stored at any property owned or leased by the Corporation.
(f) Notwithstanding anything contained herein to the contrary, the
Corporation's and Seller's indemnification obligations pursuant to this Section
shall be deemed to include any and all losses sustained by, imposed on, incurred
by, or accrued against Buyer, the Corporation, their affiliates, and their
respective stockholders, directors, officers, employees, agents,
representatives, successors and assigns, as a result of any representations or
warranties being in any way untrue or misleading when made or as of the Closing
Date.
(g) The business of the Corporation as currently being conducted does
not violate, in any material respect, any applicable law or regulation relating
to pollution, the environment, human safety and health, transportation or the
production, storage, labeling or disposition of Materials of Environmental
Concern. The Corporation has not (and to the Corporation's or Seller's Knowledge
no other person has) placed, held, located, stored, buried, dumped, disposed,
spilled or released any Materials of Environmental Concern on, beneath or about
any of the properties used, owned or leased by the Corporation. The Corporation
has not received any written notice from any governmental agency or private or
public entity advising it that it is responsible for or potentially responsible
for corrective action or investigation or response costs with respect to a
release, a threatened released or clean up of Materials of Environmental Concern
and has no reason to believe that such notice may be forthcoming.
2.22 No Brokers. Neither Seller nor the Corporation is obligated for
the payment of fees or expenses of any broker or finder in connection with the
origin, negotiation or execution of this Agreement or in connection with any
transaction contemplated hereby.
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2.23 Y2K Compliance. "Year 2000 Compliant" shall mean that an Asset
shall not cease to operate, function properly, or properly process information
because of an inability to recognize the date "1/1/00" as January 1, 2000, or to
process information such as credit card information bearing the date "1/1/00".
The Corporation has made a survey of its Assets to determine Year 2000
Compliance of the Assets, in accordance with the plan set forth on Schedule
2.23. To the best of its knowledge, all Assets are Y2K Compliant except as
listed on Schedule 2.24 hereto. The Corporation's status report is attached as
Schedule 2.23.
2.24 Seller Representations. Each Seller, for the benefit of Buyer and
the Buyer Indemnified Parties, hereby represents and warrants as follows (and
such representations and warranties of Seller shall survive the closing and
delivery of the Shares hereunder for the period provided in Article VII below):
(a) Investment Representations: (i) Seller is acquiring the
Buyer Stock for investment solely for Seller's own account and not with
a view to, or for resale in connection with, any distribution thereof
in violation of the Securities Act of 1933. Seller further understands
that the Buyer Stock has not been registered under the Securities Act
of 1933, as amended, by reason of a specific exemption from the
registration provisions thereof which depends upon, among other things,
the bona fide nature of the investment intent as expressed herein.
(ii) Seller understands (A) that the Buyer Stock is restricted
stock under the federal securities laws and has not been registered
under the Securities Act by reason of its issuance in a transaction
exempt from the registration and prospectus delivery requirements of
the Securities Act pursuant to Section 4(2) and/or Regulation D
promulgated under Section 3(b) thereof, (B) that unless Buyer is
successful in registering the resale of the Buyer Stock pursuant to
Section 1.5 above, the Buyer Stock may be required to be held by Seller
for at least one year and may not be sold except under an applicable
exemption from registration, and (C) that Seller must therefore bear
the economic risk of such investment for such period, unless a
subsequent disposition thereof is registered under the Securities Act
and registered or qualified under applicable state securities laws, or
is exempt from such registration and qualification.
(b) Authorization. This Agreement is a valid and binding
obligation of Seller, enforceable in accordance with its terms. Upon execution
of the documents to be delivered at Closing, such documents will constitute the
valid and binding obligations of Seller , enforceable in accordance with their
terms. All action of Seller necessary to consummate the transactions
contemplated in this Agreement and the Exhibits hereto has been taken. Seller
has not filed or had filed against them any bankruptcy petition or similar
filing, nor has Seller made a general assignment for the benefit of creditors.
No consent or authorization of any third party or governmental authority, except
as listed on Schedule 2.2A attached hereto, is required to complete the purchase
of the Shares contemplated hereunder.
(c) Liens and Encumbrances. No lien or encumbrance exists on
any of the Shares, and no legend reflecting any lien or encumbrance has been
placed on any of the certificates reflecting the Shares, other than restrictions
under applicable securities laws.
(d) Receipt of Information. Seller has been provided with a
copy of Buyer's 1998 Annual Report on Form 10-K, related to Buyer's operations,
financial condition and other matters, Buyer's first quarter 1999 quarterly
report on Form 10-Q, Buyer's report on 8-K for the period ended May 29, 1999 and
all other information required to be provided by Rule 502(b) of Regulation D
under the Securities Act of 1933. Seller acknowledges that Seller has been given
such information as Seller has reasonably requested in order to evaluate the
merits and risks of the prospective investment in Buyer's Stock contemplated
herein, and has had an opportunity to ask questions and receive answers from
Buyer.
(e) Compliance with Reg D. Seller will, prior to Closing,
execute such investment representation letters as may be reasonably required by
Buyer in order to conclude an offering under Regulation D. Seller acknowledges
that to the extent that Seller is not an "accredited investor" as such term is
defined by Regulation D promulgated under the Act, Seller may be required by
Buyer to be represented by a "purchaser representative", who shall be an
accredited investor, to assist Seller in evaluating an investment in the Buyer
Stock prior to Closing.
(f) Compliance with Securities Act. Seller warrants that the
transfer of the Shares will be made in accordance with the Securities Act and
all regulations promulgated thereunder and all applicable state securities laws.
Seller will make all filings and pay all fees required to effect the transfer of
the Shares.
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(g) HSR Compliance. No Seller will, upon completion of the
Contemplated Transactions, receive together with such Seller's spouse, minor
children or such Seller's interest in any trust, partnership, corporation or
other entity in which such Seller holds any beneficial interests, Buyer Stock
worth $15 million or more. The calculation of the value of the Buyer Stock held
by each Seller shall be made in accordance with the HSR Act.
2.25 Pooling Representations. (a) Neither the Corporation, Seller nor
any affiliates for purposes of the Pooling Requirements has knowingly and
intentionally taken or agreed to take any action, that the Corporation or Seller
knew or knows might reasonably be construed as preventing Buyer from accounting
for the business combination to be effected by the Contemplated Transactions as
a 'pooling-of-interests' in accordance with the Pooling Requirements, as defined
in 1.6(e) above, or prevent the Contemplated Transactions from qualifying as a
"reorganization" within the meaning of Section 368(a) of the Code. The
Corporation has provided and will continue to provide to Buyer's independent
auditors all information requested by such auditors to assess whether the
Contemplated Transactions can be properly accounted for as a
'pooling-of-interests" in accordance with the Pooling Requirements, and have
fully cooperated with such auditors with respect to all reasonable requests made
in connection with such assessment.
(b) Neither Seller nor the Corporation have made nor will they make,
prior to Closing, any distributions of the assets of the Corporation other than
monthly and year end distributions to Seller in the Ordinary Course of Business
in accordance with the Corporation's past practices and policies, nor have there
been nor will there be, prior to Closing, any redemptions or any modifications
not in the Ordinary Course of Business in any Seller's interest in the
Corporation in contemplation of the Contemplated Transactions.
(c) No change in voting structure or ownership of the Corporation will
be made after the date of this Agreement without the prior consent of Buyer.
Other than a rescission of a stock purchase arrangement with Michael and Darlene
Darr in February, 1997, the Corporation has not repurchased any of its capital
stock. The distributions by the Corporation to Seller during the fiscal years
1996, 1997 and 1998 and the period from December 28, 1998 through the Closing
Date, did not exceed the taxable income of the Corporation for those periods.
Other than as set forth on Schedule 2.25, since August of 1997, there has been
no transaction between the Corporation and Seller relating to the transfer or
lease of property, or the transfer of Shares, except for payment of services
rendered and the distributions to Sellers. Except as disclosed on Schedule 2.25,
Sellers have not entered into any business arrangements or transaction with the
Corporation or any of its affiliates in the twelve months preceding the date of
this Agreement. Also, except as described on Schedule 2.25, the Corporation owns
all of the assets used or employed in the business conducted by the Corporation,
and Sellers do not own any of such assets.
3. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller and the Corporation as follows:
3.1 Corporate Organization. Buyer is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
and is qualified to do business and is in good standing in each other
jurisdiction in which the ownership of properties or operations requires it to
be so qualified, except where the failure to so qualify would not have a
material adverse effect on Buyer.
3.2 Authorization; No Conflicts. (a) The consummation of the
transactions contemplated hereby will not conflict with or violate any
provisions of the Buyer's Certificate of Incorporation or Bylaws. Subject to the
contingencies set forth herein, including receipt of approval from Buyer's board
of directors, this Agreement shall be the valid and binding obligation of Buyer,
enforceable in accordance with its terms. Upon receipt of such approval, all
action of Buyer's officers and directors necessary to consummate the
transactions contemplated in this Agreement and the Exhibits hereto shall have
been taken. When issued in accordance with this Agreement, the Buyer Stock
issued to Seller shall be validly issued, fully paid and nonassessable,
authorized, and will, when issued, not be subject to any preemptive rights.
(b) Except as set forth on Schedule 3.2, this Agreement and the
Contemplated Transactions do not:
(i) require the consent, waiver, approval, license or
authorization of any third party, or the filing of any notices or reports, other
than as set forth on Schedule 3.2, or as required by Buyer's accounting
procedures;
(ii) contravene, conflict with or result in a violation of any
Legal Requirements or Order to which Buyer may be subject; or
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(iii) to the knowledge of Buyer contravene, conflict with or
result in a violation or breach of any material contract to which Buyer is a
party.
3.3 Brokers. Buyer is not obligated for the payment of fees or expenses
of any broker or finder in connection with the origin, negotiation or execution
of this Agreement or in connection with any transaction contemplated hereby.
3.4 Investment Representation.Buyer is acquiring the Shares for
investment solely for Buyer's own account and not with a view to, or for resale
in connection with, any distribution thereof. Buyer further understands that the
Shares have not been registered under the Securities Act of 1933, as amended, or
any state securities law by reason of a specific exemption from the registration
provisions thereof which depends upon, among other things, the bona fide nature
of the investment intent as expressed herein. Buyer understands (a) that the
Shares have not been registered under the Securities Act by reason of their
issuance in a transaction exempt from the registration and prospectus delivery
requirements of the Securities Act pursuant to Section 4(2) and/or Regulation D
promulgated under Section 3(b) thereof, and (b) that Buyer must therefore bear
the economic risk of such investment for such period, unless a subsequent
disposition thereof is registered under the Securities Act and registered or
qualified under applicable state securities laws, or is exempt from such
registration and qualification.
3.5 Registration Requirements. Buyer qualifies and meets the conditions
in order to use Form S-3 for the registration under the Act of the Buyer Stock
issued to Seller pursuant to this Agreement, and the registration of the Buyer
Stock meets the transaction requirements for use of Form S-3. Buyer has no
actual knowledge of any events or circumstances currently existing which would
result in the Form S-3 to be filed by Buyer to register the resale of the Buyer
Stock not being declared effective within 60 days after the filing thereof.
3.6 Financial Statements and Records. Buyer has previously furnished to
Seller copies of Buyer's January 2, 1999 audited financial statements and April
3, 1999 quarterly financials statements, together with notes thereto, which
include the balance sheet and statement of income. On or before August 6, 1999,
Buyer will file as an amendment to its report on Form 8-K filed for the period
ended May 29, 1999 audited financial statements for 1998 for Nature's Fresh
Northwest, Inc., an entity acquired by Buyer on may 29, 1999 (all of such
financial statements referred to herein as "Buyer's Financials"). Buyer's
Financials (a) present fairly the financial position and results of operations
of Buyer as of the dates and for the periods indicated, and (b) have been
prepared in accordance with generally accepted accounting principles. Buyer has
no material liabilities, direct or contingent, as of the date of Buyer's
Financials except those shown on the Buyer's Financials (inclusive of those
financials to be filed as an amendment to the 8-K) or incurred in the ordinary
course of business since April 3, 1999.
3.7 Reports Filed with the SEC. Buyer has made all filings required to
be made by Buyer pursuant to the Securities Exchange Act of 1934, and to the
extent required to be disclosed, Buyer has disclosed in its filings under the
Act and the rules and regulations promulgated thereunder (the "34 Act") all
material adverse events or changes since the Buyer's Financials in the financial
condition, assets, liabilities, properties or business of Buyer, or any material
transaction required to be disclosed under the 34 Act as of the date of this
Agreement(other than this Agreement). Buyer's filings with the SEC pursuant to
the 34 Act comply in all material respects with applicable rules and regulations
promulgated by the SEC.
3.8 Capitalization. The authorized capital stock of Buyer is 20,000,000
shares of common stock and 5,000,000 shares of preferred stock, each $.001 par
value, and each with the rights, designations, preferences and privileges as set
forth in Buyer's Certificate of Incorporation and Bylaws. As of the close of
business on July 12, 1999, 13,236,313 shares of Buyer's common stock were issued
and outstanding. As of the close of business on July 12, 1999, options for
1,032,950 shares of Buyer's common stock were granted and outstanding., and
options for 406,518 shares were exercisable on that date.
3.9 Exemption from Registration. Buyer is issuing the Buyer Stock to
Seller in accordance with the exemptions from registration set forth in Rule 506
of Regulation D promulgated under the Securities Act of 1933. Buyer warrants
that the transfer of the Buyer Stock will be made in accordance with the
Securities Act and all regulations promulgated thereunder and all applicable
state securities laws. Buyer will make all filings and pay all fees required to
effect the transfer of the Buyer Stock.
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4. PRECLOSING AND POST-CLOSING COVENANTS, RISK OF LOSS,
TITLE INFORMATION AND TAX MATTERS
4.1 Delivery of Information. Seller will deliver to Buyer all title
documents in Seller's possession pertaining to the Assets listed on the
Schedules hereto, including but not limited to (a) copies of all leases, bills
of sale, service agreements, permits, licenses, orders, security agreements,
financing statements or agreements and other Contracts affecting the Assets, and
(b) evidence of payments due under the Contracts and other agreements and of
taxes and assessments required by the ownership of the Assets or the conduct of
the Corporation's business. Seller and the Corporation shall supply all
additional information reasonably requested by Buyer.
4.2 Status of Title. (a) As a condition precedent to the obligation of
Buyer to purchase the Shares and subject to the other provisions of this
Agreement, (i) Seller shall have good and marketable title to the Shares, free
and clear of all liens and encumbrances, (ii) the Corporation shall be validly
existing and in good standing in the State of California, and (ii) the
Corporation shall have good and marketable title to the Assets, free and clear
of liens and encumbrances, except as disclosed to Buyer, other than sales and
use taxes, ad valorem, personal property and real estate taxes and as disclosed
on the Schedules hereto.
(b) Seller shall deliver to Buyer, at Seller's cost and
expense, the following as evidence of the foregoing and of the Corporation's
good and marketable title to the Assets, all such items to be delivered prior to
the Closing: (1) a lien search under the Uniform Commercial Code under the
Corporation's name and any trade name, D/B/A, business name or assumed name used
by the Corporation now or in the past 5 years in the conduct of its business,
(2) such other lien or title searches as Buyer may reasonably request, and (3) a
good standing certificate for the Corporation issued by the State of California.
In the event that Buyer determines that defects to the Corporation's good
standing or title to the Assets exist, Buyer shall give written notice to Seller
of such defects, and Seller shall have 15 days from the date of such notice to
cure such defects to Buyer's satisfaction (and the Closing shall be delayed to 5
days after the expiration of the cure period). If Seller fail to cure such
defects, Buyer may terminate this Agreement on notice to Seller.
4.3 Operation of Business. Until Closing, Seller and the Corporation
covenant and agree that they shall (a) conduct the operations of the Corporation
in the Ordinary Course of Business, except as approved in writing by Buyer, (b)
use their best efforts to preserve intact the current business organization and
employee base of the Corporation, (c) use their best efforts to maintain
relations and good will with suppliers, landlords, customers and other parties
involved in the conduct of the Corporation's business, (d) maintain all
insurance policies in full force and effect, (e) not amend any articles or
bylaws, or issue or agree to issue additional shares of stock, options or
warrants therefor, (f) not transfer or dispose of any Assets, except in the
ordinary course of business, (g) maintain Inventories in the Stores at their
normal levels, subject to ordinary short-term fluctuations, (h) not incur any
material liabilities encumbering the Assets, and (i) confer with Buyer
concerning operational matters of a material nature.
4.4 Risk of Loss. (a) If between the date of this Agreement and the
Closing, (i) any of the Stores are materially damaged or destroyed by fire or
other casualty, or by vandalism, or (ii) any Store or Asset incurs more than
$50,000 in uninsured damage, then Buyer shall have the right to terminate this
Agreement upon written notice to Seller. Seller shall promptly notify Buyer of
any such occurrence. "Material" damage shall mean that more than 25% of the
Store is damaged or that the Landlord thereof shall have the right to terminate
the lease for the Store.
(b) If between the date of this Agreement and the Closing any of the
Assets are damaged or destroyed and Buyer does not terminate the Agreement under
(a) above, all insurance proceeds for such loss that are payable to Seller shall
be assigned to Buyer prior to Closing, and Seller shall cooperate with Buyer in
the collection of any such amounts.
4.5 Submission for Approval Under HSR Act. (a) As promptly as
practicable after the date of this Agreement, Seller will, and will cause the
Corporation to, at Seller's expense, make all filings required by Legal
Requirements to be made by them in order to consummate the Contemplated
Transactions (including all filings under the HSR Act). Between the date of this
Agreement and the Closing Date, Seller will, and will cause the Corporation, to
(i) cooperate with Buyer with respect to all filings that Buyer elects to make
or is required by Legal Requirements to make in connection with the Contemplated
Transactions, and (ii) cooperate with Buyer in obtaining all consents identified
in Schedule 2.2A (including taking all actions requested by Buyer to cause early
termination of any applicable waiting period under the HSR Act). The parties
shall each bear one half of the filing fees under the HSR Act. Seller's portion
of the fees shall be deducted from the Purchase Price.
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(b) As promptly as practicable after the date of this
Agreement, Buyer will, at Buyer's expense, make all filings required by Legal
Requirements to be made by it in order to consummate the Contemplated
Transactions (including all filings under the HSR Act).
4.6 Lease Amendments and Estoppels. (a) Seller and the Corporation
shall assist Buyer in requesting from each of the Stores' landlords the
following: (i) a consent to the transfer of the Shares, to the extent required
under the terms of the applicable Store lease assignment provisions; (ii) an
Estoppel Certificate, specifying that no defaults exist by the Corporation under
the Store lease, or if defaults have occurred, specifying the nature of such
defaults; and (iii) to the extent set forth in Schedule 4.6, amendments to the
Store leases.
(b) To the extent any landlord requires a transfer fee to approve the
assignment of the Stores' leases through the transfer of the Shares, Seller
shall pay the transfer fee. The transfer fees shall be deducted from the
Purchase Price.
(c) If any estoppel certificate specifies a default by the Corporation
in any obligation under a Store lease, Seller or the Corporation shall
immediately commence to cure the default so that the cure, to the extent
possible, shall be fully completed prior to Closing. If the cure is not
completed prior to Closing, Seller shall, prior to Closing, obtain from the
landlord a waiver of any rights to call the lease in default, pending completion
of the cure within a reasonable period of time thereafter. Buyer shall be
entitled to deduct from the Adjusted Purchase Price the cost to cure any default
resulting from the failure to perform maintenance or repairs as required under
the lease, if such cure is completed after Closing and the estimated cost to
effect such cure exceeds $25,000 in the aggregate with any other estimated costs
to cure.
4.7 Notification. Between the date of this Agreement and the Closing
Date, the Corporation and the Seller will promptly notify Buyer in writing if
the Seller or the Corporation becomes aware of any fact or condition that causes
or constitutes a Breach of any of the Corporation's or the Seller's
representations and warranties as of the date of this Agreement, or if the
Seller or the Corporation becomes aware of the occurrence after the date of this
Agreement of any fact or condition that would (except as expressly contemplated
by this Agreement) cause or constitute a Breach of any such representation or
warranty had such representation or warranty been made as of the time of
occurrence or discovery of such fact or condition. Should any such fact or
condition require any change in the Exhibits if the Exhibits were dated the date
of the occurrence or discovery of any such fact or condition, the Corporation
will promptly deliver to Buyer a supplement to the Exhibits specifying such
change. During the same period, the Corporation will promptly notify Buyer of
the occurrence of any Breach of any covenant of the Corporation or Seller in
this Section 4.7 or of the occurrence of any event that may make the
satisfaction of the conditions in Article 5 impossible or unlikely.
4.8 Certain Tax Matters. (a) Seller and the Corporation will not revoke
the Corporation's election to be taxed as an S corporation within the meaning of
sections 1361 and 1362 of the Code. Seller and the Corporation will not take or
allow any action other than the sale of the Corporation's stock pursuant to this
Agreement that would result in the termination of the Corporation's status as a
validly electing S corporation within the meaning of sections 1361 and 1362 of
the Code.
(b) Within 75 days following the end of the month in which Closing
occurs, Seller shall prepare or cause to be prepared and file or cause to be
filed all Tax Returns for the Corporation for all periods ending on or prior to
the Closing Date which are filed after the Closing Date. Not less than 20 days
prior to filing, Seller shall permit Buyer to review and comment on each such
Tax Return. Seller shall include any income, gain, loss, deduction, or other tax
items for such periods on its Tax Return in a manner consistent with the
Schedule K-1s prepared by Seller for such periods. Seller shall reimburse Buyer
for any Tax of the Corporation with respect to such periods (and with respect
that portion ending on the Closing Date of all periods beginning before and
ending after the Closing Date) owed by the Corporation within 15 days after
payment by Buyer or the Corporation of such Tax to the extent such Tax is not
reflected in the reserve for Tax liability or has not previously been paid
(rather than any reserve for deferred Taxes established to reflect timing
differences between book and Tax income) shown on the face of the Closing
Balance Sheet.
(c) Buyer, the Corporation, and Seller shall cooperate fully, as and to
the extent reasonably requested by the other party, in connection with the
filing of Tax Returns pursuant to this Section 4.8 and any audit or Proceeding
with respect to Taxes. Such cooperation shall include:
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(i) the retention and (upon the other party's reasonable
request) the provision of records and information which are reasonably
relevant to any such audit or Proceeding,
(ii) making employees available on a mutually convenient basis
to provide additional information and explanation of any material
provided hereunder,
(iii) providing data for the preparation of any original or
amended Tax Returns;
(iv) cooperating in any audit and providing reasonable access
to Buyer's Tax personnel;
(v) filing protests or otherwise contesting any audit relating
to Tax Returns filed prior to Closing, including the filing of
petitions for redetermination or prosecuting actions for refund in any
court and pursuing the appeal of any such actions; and
(vi) providing on reasonable prior notice books, records,
documentation or other information relating to any tax return until the
expiration of the applicable statute of limitation (giving effect to
any extension, waiver, or mitigation thereof), providing additional
information and explanation of material provided hereunder, and the use
of Seller's commercially reasonable efforts to obtain any documentation
from a governmental authority or third party that may be necessary or
helpful in connection with the foregoing.
(d) All transfer, documentary, sales, use, stamp, registration, and
other such Taxes and fees (including any penalties and interest) incurred in
connection with this Agreement shall be paid by Seller when due, and the party
required by applicable law will file all necessary Tax Returns and other
documentation with respect to all such transfer, documentary, sales, use, stamp,
registration, and other Taxes and fees (and if required by applicable law, the
other parties will, and will cause their affiliates to, join in the execution of
any such Tax Returns and other documentation). The expense of such filings shall
be paid by the party making such filing.
(e) Buyer shall not dispose of any records of the Taxes paid or payable
by Corporation (including but not limited to returns, reports, books, records,
financial data, and work papers) in the possession of the Corporation at Closing
prior to the seventh anniversary of the Closing Date, unless buyer shall first
have received Seller's consent.
4.9. Pooling of Interest. (a) Each of Buyer, Seller and the Corporation
shall use all reasonable efforts to cause the transaction contemplated by this
Agreement to be accounted for as a pooling of interests under Opinion 16 of the
Accounting Principles Board and applicable SEC rules and regulations, and
neither Buyer, Seller nor the Corporation shall voluntarily take any action that
would cause such accounting treatment not to be obtained.
(b) Prior to Closing no Seller shall purchase, gift or sell any equity
interest in the Corporation, nor make any agreement for the purchase, gift or
sale of any equity interest in the Corporation, with any other Seller.
(c) Prior to Closing, the Corporation shall not transfer any assets or
equity interests in the Corporation to any person or entity, other than in the
Ordinary Course of Business, nor shall the Corporation make any modifications or
adjustments to the equity interests of any Seller in the Corporation. Prior to
Closing the Corporation shall not issue any stock options, rights, calls,
warrants or rights exercisable by any party for any equity interest in the
Corporation.
(d) Seller and the Corporation shall provide such information and
execute such representation letters regarding the operation of the Corporation,
distributions to Seller and the equity interests of Seller as
PriceWaterhouseCoopers shall reasonably request to support an opinion by
PriceWaterhouseCoopers that the Contemplated Transaction may be accounted for as
a pooling of interest by Buyer.
(e) After the Closing, each Seller who is an affiliate of the
Corporation will not sell, exchange, transfer, pledge, dispose or otherwise
reduce his/her risk relative to the Buyer Stock or any part thereof until such
time after the Closing Date as financial results covering as least thirty (30)
days of the combined post-closing operations of Buyer and the Corporation after
the Closing Date have been, within the meaning of Release No. 130, filed by
Buyer with the SEC or published by Buyer in an Annual Report on Form 10-K, a
Quarterly Report on Form 10-Q, a Current Report on Form 8-K, a quarterly
earnings report, a press release or other public issuance which includes
combined sales and income of Buyer and the Corporation.
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4.10 Record Retention. Buyer covenants and agrees that, from and
after Closing, it shall and shall cause the Corporation to:
(a) not destroy or dispose of the books and records of the Corporation
in the Corporation's possession at Closing and, relating to periods prior to the
Closing Date for a period of seven (7) years after the Closing Date without
giving adequate notice to Seller of such pending disposal and offering Seller
the right to copy or take possession of such records; and
(b) give Seller and their counsel, accountants and advisors full access
upon reasonable notice during normal business hours to all such records for any
proper purpose including, without limitation, preparing any tax returns, tax
elections or financial statements, or any judicial, quasi-judicial,
administrative, tax audit or arbitration proceeding.
4.11 Release of Certain Obligations. Buyer will use its reasonable
efforts to obtain the release of any third party guarantor or obligor on any
Lease, loan or other obligation of the Corporation. To the extent Buyer cannot
obtain such release, Buyer shall indemnify the guarantor or obligor at Closing
against any liability, loss, cost or expense incurred by such guarantor or
obligor and arising from the actions of Buyer after the Closing Date.
4.12 Filing of SEC Required Reports. Buyer covenants to use its best
efforts to file, on a timely basis, all reports required to be filed by Buyer
pursuant to the Securities Act or the Securities Exchange Act between the date
of execution of this Agreement and one year following the Closing Date.
4.13 Employee Benefits and Seniority. Buyer covenants that after
Closing Buyer shall offer to the Corporation's employees such health benefits:
(a) as are currently offered by the Corporation to its employees, or (b) such
health benefits as are currently offered by Buyer to its employees, or a mix
thereof, at Buyer's election. Buyer further covenants that for purposes of
determining service commencement dates for eligibility for benefits offered by
Buyer to the Corporation's employees, such employees shall retain the service
commencement dates that such employees have with the Corporation as of Closing.
5. BUYER'S CONDITIONS PRECEDENT
The obligation of Buyer to acquire the Shares at the Closing is subject
to the fulfillment on or prior to the Closing Date of the conditions set forth
in Article 4 above and the following conditions (unless the fulfillment of a
condition has been waived in writing):
5.1 Accuracy of Representations and Warranties; Performance of
Obligations. The representations and warranties made by Seller and the
Corporation in Article 2 hereof shall be true and correct in all material
respects on the Closing Date and Seller and the Corporation shall have executed
and delivered to Buyer Closing Certificates in the form of Exhibit D, updating
and reconfirming such representations and warranties and all conditions to
Seller's obligations have been satisfied, and Seller and the Corporation shall
have performed all obligations and conditions herein required to be performed or
observed by them or it on or prior to the Closing Date, including but not
limited to those contained in Article 4.
5.2 Consents and Waivers. (a) All holders of the Shares shall have
executed this Agreement.
(b) Seller and the Corporation shall have obtained all consents and
approvals of third parties (including HSR approval and approval of all
governmental authorities) set forth on Schedule 5.2 to consummate the
transactions contemplated by this Agreement.
5.3 Delivery of Assignment. At the Closing each Seller shall have
executed and delivered the Stock Assignment in the form of Exhibit E attached
hereto, and Stock Certificate Assignments for all of the Shares shall be
delivered.
5.4 Removal of Defects. All defects to title or to the valid existence
and good standing of the Corporation of which Buyer shall have provided notice
to Seller or the Corporation have been removed prior to or at Closing except
defects which, in Buyer's reasonable determination, are immaterial in nature and
do not impair the Corporation's ability to conduct business or the value of its
assets.
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5.5 No Adverse Development; Ordinary Course Operations. Prior to
Closing, neither Seller nor the Corporation shall have received any order,
decree or ruling from any court or governmental agency that might prohibit or
have a material adverse effect upon the business of the Corporation or the
purchase of the Shares, nor shall the Corporation have incurred any material
obligations or liabilities not reflected on the Financial Statements, other than
in the Ordinary Course of Business, that impair or reflect upon the operation of
its business or title to the Assets, or suffered any loss or damage to its
operations, Assets, Contracts or any business. The Corporation shall have
conducted its operations in the Ordinary Course of Business.
5.6 Transferability of Contracts. Buyer shall be satisfied that all
material Contracts listed on Schedule 5.6 hereto, and the rights thereunder
shall not be terminated or adversely affected by the sale of the Shares to
Buyer, and that all material licenses, permits, certificates, orders, approvals
and authority listed on Schedule 5.6 will not be terminated or materially
adversely affected by this Agreement or the sale of the Shares, except as
disclosed on Schedule 5.6.
5.7 Estoppel Certificates. On or prior to the Closing Date, Seller's
landlords for the Stores shall have executed Estoppel Certificates as to the
Stores' leases (the "Leases") in form satisfactory to Buyer, including, but not
limited to, that there are no defaults, deferred rents or other amounts not in
the Ordinary Course of Business due by the Corporation.
5.8 Tax Payments. The Corporation and Seller shall have filed all
federal, state and local Tax Returns or other reports required to be filed prior
to the date of Closing, and shall have fully paid all amounts of Taxes due and
owing to any federal, state or local taxing authority prior to Closing,
including any interest or penalties accrued thereon. Seller shall fully
cooperate with Buyer in the preparation and filing of all Tax Returns for
periods prior to Closing. Seller acknowledges that the payment of Taxes by Buyer
for periods prior to Closing, where reserves therefor have not previously been
established, is an indemnifiable obligation of Seller.
5.9 Opinion of Seller's Counsel. Seller shall have provided to Buyer at
Closing an opinion of counsel in satisfactory form to Buyer and to the effect
that (a) the Corporation is a corporation validly existing and in good standing
in the State of California; (b) this Agreement has been duly and validly
executed and delivered by each holder of the Shares and the Corporation and
constitutes a binding obligation of Seller and the Corporation, enforceable in
accordance with its terms; and (c) the Shares are duly and validly issued, fully
paid and nonassessable, and to the best knowledge of counsel free of liens and
encumbrances.
5.10 Noncompetition Agreements; Employment Agreements. (a) Each of Stan
Boney, Scott Boney, Craig Engstrand and Henry Boney and Buyer shall, at Closing,
enter into a Noncompetition and Employment Agreement in the form of Exhibit F-1
hereto, and a Noncompetition Agreement in the form of Exhibit F-2 hereto,
pursuant to which such Sellers shall agree not to compete with Buyer in certain
defined geographic areas.
(b) Each of Shon Boney, Scott Wing and Kevin Easler and Buyer shall, at
Closing, enter into a Noncompetition and Employment Agreement in the form of
Exhibit F-3 hereto, and a Noncompetition Agreement in the form of Exhibit F-4
hereto, pursuant to which such Sellers shall agree not to compete with Buyer in
certain defined geographic areas.
5.11 Approval by Board. On or before July 27, 1999, Buyer's board of
directors shall have approved the execution and delivery of this Agreement and
shall have approved the contemplated transactions.
5.12 Delivery of Closing Documents. Seller shall have executed and
delivered at Closing the various documents and certificates itemized in Article
8 below.
5.13 Satisfaction with Investigation. (a) On the basis of
investigations performed by Buyer of information made available to Buyer to such
date, Buyer shall be satisfied, as of July 27, 1999, as to the business,
financial condition and liabilities of the Corporation, that the Exhibits and
Schedules are true and correct and that the Corporation's and Seller's
representations and warranties are true and correct. If Buyer fails to identify
by July 27, 1999 any item disclosed prior to July 22, 1999 as a defect in due
diligence, Buyer shall not be entitled subsequently to raise such item as a
basis for terminating this Agreement.
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(b) After July 27, 1999, Buyer shall, on the basis of further
investigations conducted by Buyer of previously undisclosed information made
available to Buyer or supplements made to the Schedules and Exhibits attached
hereto after July 27, 1999, be satisfied that such new information or
supplements to the Schedules and Exhibits does not create or evidence a
previously undisclosed material adverse impact on the business, financial
condition, operations or liabilities of the Corporation, or a material
misrepresentation or omission in the Corporation's or Seller's representations
and warranties.
(c) Completion of the investigations described above shall not
constitute a waiver by Buyer of any facts or circumstances affecting the
Corporation's and Seller's representation or warranties in this Agreement or
preclude or stop Buyer from asserting any failure or breach of any such
representations or warranties based upon facts or circumstances that come to
Buyer's attention within the period set forth herein or from pursuing any other
rights or remedy granted to Buyer by this Agreement or law or equity.
(d) For purposes of the foregoing provisions only, a "material adverse
impact" shall be any impact which in the aggregate results in liabilities to or
an impact on the Corporation's financial condition, assets, business or results
of operations of $100,000 or more.
5.14 Compliance with Pooling Covenants. Prior to Closing neither Seller
nor the Corporation shall take any action in violation of the covenants set
forth in Section 4.9 above, nor shall Seller or the Corporation have disclosed
any previously undisclosed facts or circumstances which would, in Buyer's
reasonable determination, disallow treatment of the Contemplated Transaction as
a pooling of interest by Buyer.
6. CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS
The obligation of Seller to sell the Shares at the Closing is subject
to the fulfillment on or prior to the Closing Date of the following conditions
(unless the fulfillment of such condition has been duly waived in writing):
6.1 Accuracy of Representations and Warranties; Performance of
Obligations. The representations and warranties made by the Buyer in Article 3
hereof shall be true and correct on the Closing Date, and the Buyer shall have
performed all obligations and conditions herein required to be performed or
observed by it on or prior to the Closing, and Buyer shall have executed a
closing certificate in form satisfactory to Seller reconfirming such
representations and warranties and performance of conditions.
6.2 Consents and Waivers. Buyer shall have obtained all consents and
approvals of third parties (including governmental authorities) required of
Buyer to consummate the transactions contemplated by this Agreement.
6.3 Buyer Stock. Buyer shall have provided Seller's counsel with (a) a
copy of its blank form instruction letter to its Transfer Agent regarding
issuance of the Buyer Stock, and (b) an opinion of Buyer's inhouse counsel that
(i) when issued the Buyer Stock shall be validly issued and non assessable, and
(ii) Buyers is a corporation validly existing and in good standing in the State
of Delaware.
6.4 Employment Agreements. Buyer and each of Stan Boney, Scott Wing,
Kevin Easler, and Shon Boney shall have entered into an Employment Agreement
with Buyer in substantially the form of Exhibit G hereto.
6.5 Closing Documents. Buyer shall execute and deliver at Closing the
documents itemized in Article 8 below.
7. INDEMNIFICATION; APPOINTMENT OF SELLER REPRESENTATIVE
7.1 Survival of Warranties and Representations. The representations,
warranties and covenants of Seller and the Corporation and the Buyer included in
this Agreement, any Schedule or Exhibit hereto and any other agreement provided
in accordance with this Agreement shall survive the Closing and the purchase of
the Shares hereunder for the periods set forth in Section 7.5.
7.2 Seller and Corporation Indemnity. Seller and the Corporation (prior
to Closing) and Seller (after Closing) shall indemnify, defend and hold harmless
Buyer and its officers, directors, employees, agents and each person, if any,
who controls Buyer (within the meaning of the Securities Act of 1933, as
amended) (the "Seller Indemnified Party") from and against all losses, damages,
liabilities, actions, suits, proceedings, demands, costs and expenses
(including, without limitation, interest, penalties and reasonable attorneys'
fees), and shall pay Buyer or such persons on demand the full amount of any and
all sums that Buyer or such persons may pay or become obligated to pay on
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account of and arising out of or resulting from (a) any breach or failure of any
written representation or warranty of the Principals, Seller or the Corporation
in this Agreement or any Exhibit or Schedule hereto (without giving effect to
any supplement to the Schedules unless specifically agreed to by Buyer), or (b)
any failure of the Principals, the Corporation or Seller to perform or observe,
or to have performed or observed, in full, any covenant, agreement or condition
to be performed or observed by the Principals, the Corporation or Seller under
this Agreement or any other document or agreement executed by the Principals,
the Corporation or Seller in connection with this Agreement.
7.3 Buyer Indemnity. Buyer shall indemnify, defend and hold harmless
Seller from and against all losses, damages, liabilities, actions, suits,
proceedings, demands, costs and expenses (including, without limitation,
interest, penalties and reasonable attorneys' fees), and shall pay Seller on
demand the full amount of any and all sums that Seller may pay or become
obligated to pay on account of and arising out of or resulting from (a) any
breach or failure of any written representation or warranty of Buyer, or (b) any
failure of Buyer to perform or observe, or to have performed or observed, in
full, any covenant, agreement or condition to be performed or observed by Buyer
under this Agreement or any other document or agreement executed by Buyer in
connection with this Agreement.
7.4 Indemnification Procedure. (a)Promptly after receipt by a Seller
Indemnified Party or a Seller (hereinafter collectively referred to as an
"Indemnified Party") of notice from a third party of any complaint or the
commencement of any action, proceeding or claim with respect to which such
Indemnified Party may be entitled to receive payment from the other party
(subject to the limitation on losses in Section 7.5), such Indemnified Party
shall notify Buyer or Seller, whoever is the appropriate indemnifying party
hereunder (the "Indemnifying Party"), of the commencement of such action,
proceeding or claim; provided, however, that the failure to so notify the
Indemnifying Party shall not relieve the Indemnifying Party from liability for
such claim arising otherwise than under this Agreement and such failure to so
notify the Indemnifying Party shall relieve the Indemnifying Party from
liability under this Agreement with respect to such matter only if, and only to
the extent that, such failure to notify the Indemnifying Party results in the
forfeiture by the Indemnifying Party of rights and defenses otherwise available
to the Indemnifying Party with respect to such matter. The Indemnifying Party
shall have the right, upon written notice delivered to the Indemnified Party
within twenty (20) days thereafter, to assume the defense of such matter,
including the employment of counsel reasonably satisfactory to the Indemnified
Party and the payment of the fees and disbursements of such counsel. In the
event, however, that the Indemnifying Party declines or fails to assume the
defense of the matter or to employ counsel reasonably satisfactory to the
Indemnified Party, in either case within such twenty (20) day period, then such
Indemnified Party may employ counsel to represent or defend it in any such
action or proceeding and the Indemnifying Party shall pay the reasonable fees
and disbursements of such counsel as incurred; provided, however, that the
Indemnifying Party shall not be required to pay the fees and disbursements of
more than one counsel for all Indemnified Parties in any jurisdiction in any
single action or proceeding. In any action or proceeding with respect to which
indemnification is being sought hereunder, the Indemnified Party or the
Indemnifying Party, whichever is not assuming the defense of such action, shall
have the right to participate in such matter and to retain its own counsel at
such party's own expense. The Indemnifying Party or the Indemnified Party, as
the case may be, shall at all times use reasonable efforts to keep the
Indemnifying Party or the Indemnified Party, as the case may be, reasonably
apprised of the status of the defense of any action, the defense of which they
are maintaining, and to cooperate in good faith with each other with respect to
the defense of any such action.
(b) No Indemnified Party may settle or compromise any claim or
consent to the entry of any judgment with respect to which indemnification is
being sought hereunder without the prior written consent of the Indemnifying
Party, unless (i) the Indemnifying Party fails to assume and maintain the
defense of such claim pursuant to Section 7.4(a), or (ii) such settlement,
compromise or consent includes an unconditional release of the Indemnifying
Party from all liability arising out of such claim. An Indemnifying Party may
not, without the prior written consent of the Indemnified Party, settle or
compromise any claim or consent to the entry of any judgment with respect to
which indemnification is being sought hereunder unless such settlement,
compromise or consent includes an unconditional release of the Indemnified Party
from all liability arising out of such claim and does not contain any equitable
order, judgment or term which in any manner effects, restrains or interferes
with the business of the Indemnified Party or any of the Indemnified Party's
respective affiliates.
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(c) In the event an Indemnified Party shall claim a right to
payment (or, a credit towards the Buyer or Seller Basket Amount) pursuant to
this Agreement, such Indemnified Party shall send written notice of such claim
to the appropriate Indemnifying Party. Such notice shall specify the basis for
such claim. As promptly as possible after the Indemnified Party has given such
notice, such Indemnified Party and the appropriate Indemnifying Party shall
establish the merits and amount of such claim (by mutual agreement, litigation,
arbitration or otherwise) and, within five business days of the final
determination of the merits and amount of such claim, the Indemnifying Party
shall pay to the Indemnified Party immediately available funds (or, if
applicable, shall provide notice to the Escrow Agent regarding disbursement of
the appropriate portion of the Escrowed Stock) in an amount equal to such claim
as determined hereunder (or shall record an appropriate credit against the Buyer
or Seller Basket Amount).
7.5 Limitation on Indemnity. (a) The obligation of the Indemnitor under
7.2 and 7.3 above or any other provision of this Agreement under any covenant,
warranty, representation or indemnity (the "Indemnity Obligations") shall
terminate at the date that is the later of the following:
(i) with respect to claims specifically based on Seller's or
the Corporation's lack of due authorization and corporate power to consummate
the transactions contemplated by this Agreement, 12 months after the Closing
Date; or
(ii) with respect to claims relating to or arising out of the
Corporation's failure to file any reports or pay any taxes due or arising from
activities of the Seller post-Closing which result in additional taxes due by
the Corporation, 12 months from the date of Closing; or
(iii) with respect to claims other than those specified in
clause (i) or (ii) that are of a nature and of sufficient materiality typically
expected to be encountered in the audit process, on the completion of the first
independent audit of financial statements containing combined operations of
Buyer and the Corporation (the "First Audit"); or
(iv) with respect to all claims other than those referred to
in clause (i), (ii), or (iii) of this Section 7.5(a), the later of (A) 12 months
after the Closing Date (the "First Anniversary"), or (B) the final resolution of
claims or demands pending as of the relevant dates described in clause (i) of
this Section 7.5(a) (such claims referred to as "Pending Claims").
(b) To the extent any Indemnity Obligation arises within the first 210
days following the Closing, Buyer shall make a claim against Buyer Stock held in
escrow for Seller's benefit any amount claimed as an Indemnity Obligation prior
to making any claim against Seller.. Buyer shall provide notice as provided in
the Escrow Agreement for any offset against amounts held in escrow.
(c) Neither party shall have an Indemnity Obligation with respect to
any matter, event or obligation which was taken into account in calculating the
Closing Adjustments, but only up to the amount of the Adjustment. Neither party
shall be liable for Indemnity Obligations except to the extent that the
aggregate amount of the Indemnity Obligations exceed $150,000 (the "Basket
Amount") in the aggregate, and then the Indemnifying Party shall only be liable
for amounts in excess of the Basket Amount. Seller's aggregate liability for all
Indemnity Obligations shall not exceed 10% of the Adjusted Purchase Price.
7.6 Shareholder Representative. (a) By the execution and delivery of
this Agreement, including counterparts hereof, each Seller hereby irrevocably
constitute and appoint Stanley A. Boney and Scott Boney as the true and lawful
agents and attorneys-in-fact (referred to in this Agreement as the
"Representatives") of such Seller with full powers of substitution to act in the
name, place and stead of such Seller with respect to the performance on behalf
of such Seller under the terms and provisions of this Agreement, as the same may
be from time to time amended, and to do or refrain from doing all such further
acts and things, and to execute all such documents, as the Representatives shall
deem necessary or appropriate in connection with any of such documents, as the
Representatives shall deem necessary or appropriate in connection with any of
the transactions contemplated under this Agreement, including without limitation
the power:
(i) to receive, hold and deliver to Buyer any documents on
behalf of such Seller;
(ii) to receive on behalf of such Seller any shares of Buyer
Stock issued to such Seller pursuant to this Agreement;
(iii) to execute and deliver the Escrow Agreement and all
other ancillary agreements, certificates, and documents which the
Representative deems necessary or appropriate in connection with the
consummation of the transactions contemplated by the terms and
provisions of this Agreement;
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(iv) to act for such Seller with respect to all
indemnification matters referred to in this Agreement, including the
right to compromise or settle any such claims on behalf of such Seller;
(v) to amend or waive any provision of this Agreement
(including any condition to closing) in any manner which does not
differentiate among the Sellers.
(vi) to employ and obtain the advice of legal counsel,
accountants and other professional advisors as the Representatives, in
their sole discretion, deems necessary or advisable in the performance
of their duties as Representative and to rely on their advice and
counsel;
(vii) to incur any expenses, to liquidate and withhold assets
received on behalf of Seller prior to their distribution to Seller to
the extent of any amount which the Representatives deems necessary for
payment of or as a reserve against expenses, and to pay such expenses
or to deposit the same in an interest bearing bank account established
for such purpose;
(viii) to receive all notices, communications and deliveries
hereunder on behalf of Seller under this Agreement; and
(ix) to do or refrain from doing any further act or deed on
behalf of Seller which the Representatives deems necessary or
appropriate in his sole discretion relating to the subject matter of
this Agreement as fully and completely as any of the Sellers could do
if personally present and acting and as though any reference to a
Seller or the Seller in this Agreement were a reference to the
Representatives.
(b) The appointment of the Representatives shall be deemed coupled with
an interest and shall be irrevocable, and Buyer and any other person may
conclusively and absolutely rely, without inquiry, upon any action of the
Representatives, or either of them, as the act of the Seller in all matters
referred to in this Agreement. Each Seller hereby ratifies and confirms all that
the Representatives shall do or cause to be done by virtue of their appointment
as Representatives of such Seller. The Representatives shall act for the Seller
on all of the matters set forth in this Agreement in the manner the
Representatives believe to be in the best interest of the Seller, but the
Representatives shall not be responsible to any Seller for any loss or damage
any Seller may suffer by reason of the performance by the Representatives of
their duties under this Agreement, other than loss or damage arising from
willful misconduct in the performance of their duties under this Agreement.
(c) Each Seller hereby expressly acknowledges and agrees that the
Representatives are authorized to act on behalf of such Seller notwithstanding
any dispute or disagreement among the Sellers, and the Buyer shall be entitled
to rely on any and all action taken by the Representatives, or either of them,
under this Agreement without liability to, or obligation to inquire of, any of
the Sellers. If either of the Representatives resigns or ceases to function in
such capacity for any reason whatsoever, then those Sellers who held a majority
of the Shares on the date hereof shall appoint a successor; provided, however,
that if for any reason no successor has been appointed within thirty (30) days,
then any Seller shall have the right to petition a court of competent
jurisdiction for appointment of a successor. Sellers do hereby jointly and
severally agree to indemnify and hold the Representatives harmless from and
against any and all liability loss, cost, damage or expense (including without
limitation attorney's fees) reasonably incurred or suffered as a result of the
performance of their duties under this Agreement except for willful misconduct.
8. CLOSING
8.1 Seller's Closing Documents. At Closing Seller shall execute or
obtain and deliver to Buyer the following:
(a) the Escrow Agreement;
(b) the certificates representing the Shares and
Stock Assignments, with signature guarantees;
(c) the Noncompetition Agreements and Employment
Agreement;
(d) any documentation required by Buyer to effect a
transaction under Regulation D of the Securities Acts;
(e) Sellers' Closing Certificate;
(f) the opinion of counsel referenced in Article V above;
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(g) letters of resignation from each of the Corporation's
officers and directors from his/her position as an officer or director of the
Corporation; and
(h) any other documents, consents or instruments necessary to
effect the transaction contemplated hereunder.
8.2 Buyer's Closing Documents and Delivery of Purchase Price. At
Closing Buyer shall execute and/or deliver to Seller and/or Seller's counsel
and/or the Escrow Agent the following:
(a) the Escrow Agreement;
(b) an irrevocable form of letter to Buyer's transfer
agent authorizing the issuance of the Buyer Stock in
the amount to be determined upon completion of the
Closing Balance Sheet;
(c) Buyer's Closing Certificate;
(d) the Noncompetition Agreements and the Employment
Agreements;
(e) any Amendments to Lease; and
(f) the opinion of Buyer's counsel; and
(g) such other documents as are necessary to effect the
transactions contemplated hereunder.
9. TERMINATION
9.1 Termination Events. This Agreement may be terminated prior to
Closing by Seller or Buyer if there is a material breach by the other of any
covenant, representation or warranty, or if Buyer determines that the timely
satisfaction of any condition to closing is impossible or impracticable, or if
any of either party's conditions to Closing has not been satisfied or waived
prior thereto. In addition, if the Closing has not occurred by September 1, 1999
either party may terminate its obligations hereunder.
9.2 Termination Notice. If either party desires to terminate this
Agreement pursuant to Section 9.1 above, the party shall deliver written notice
to the other, specifying the reasons therefor.
9.3 Effect of Termination. If this Agreement is terminated pursuant to
Section 9.1, all further obligations under this Agreement shall terminate,
provided, however, that the parties shall continue to be bound by all
confidentiality obligations hereunder and under any separate agreement, and no
party shall be relieved of any liability arising from a breach of this
Agreement. In the event of a breach by Seller or the Corporation of their
obligations hereunder, Buyer shall be entitled to all remedies available at law
or in equity, including specific performance. In the event of a breach by Buyer,
Seller shall be entitled to all damages available in law and equity, other than
specific performance.
10. MISCELLANEOUS
10.1 Arbitration, Resolution Of Disputes. (a) Each party commits to
cooperate in good faith and to deal fairly in performing its duties under this
agreement in order to accomplish their mutual objectives and avoid disputes. If
a dispute arises, the parties may, upon the agreement of all parties, resolve
all disputes by the following alternate dispute resolution process: (a) the
parties will seek a fair and prompt negotiated resolution, but if this is not
successful, (b) all disputes shall be resolved by binding arbitration, provided
that during this process, at the request of either party made not later than
seventy-five (75) days after the initial arbitration demand, the parties will
attempt to resolve any dispute by nonbinding mediation (but without delaying the
arbitration hearing date). The parties recognize that negotiation or mediation
may not be appropriate to resolve some disputes and, in such disputes, agree
that either party may proceed with arbitration without negotiating or mediating.
The parties confirm that by agreeing to this dispute resolution process, they
intend to give up their right to have any dispute decided in court by a judge or
jury.
(b) Any claim between the parties, including but not limited to those
arising out of or in relation to this Agreement and any claim based on or
arising form an alleged tort, shall be determined by arbitration in San Diego,
California commenced in accordance with the then existing Commercial Arbitration
rules of the American Arbitration Association (AAA); provided that the total
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award by a single arbitrator (as opposed to a majority of the arbitrators) shall
not exceed $250,000, including interest, attorneys' fees and costs. If either
party demands a total award greater than $250,000 there shall be three (3)
neutral arbitrators. If the parties cannot agree on the identity of the
arbitrator(s) within ten (10) days of the arbitration demand, the arbitrator(s)
shall be selected by the administrator of the AAA office in San Diego from its
Large, Complex Case Panel (or have similar professional credentials). Each
arbitrator shall be an attorney with at least fifteen (15) years' experience in
corporate law. All statutes of limitations which would otherwise be applicable
shall apply to any arbitration proceeding hereunder.
(c) The arbitration shall be conducted in accordance with the AAA
Corporate Arbitration Rules with Expedited Procedures, in effect on the date
hereof, as modified by this agreement. There shall be no dispositive motion
practice. As may be shown to be necessary to ensure a fair hearing, the
arbitrator(s) may authorize limited discovery; and may enter pre-hearing orders
regarding (without limitation) scheduling, document exchange witness disclosure
and issues to be heard.
(d) The arbitrator(s) shall take such steps as may be necessary to hold
a private hearing within one hundred twenty (120) days of the initial demand for
arbitration and to conclude the hearing within three (3) days; and the
arbitrator(s)'s written decision shall be made not later than fourteen (14)
calendar days after the hearing. The parties have included these time limits in
order to expedite the proceeding, but they are not jurisdictional, and the
arbitrator(s) may for good cause afford or permit reasonable extensions or
delays, which shall not affect the validity of the award. The written decision
shall contain a brief statement of the claim(s) determined and the award made on
each claim. In making the decision and award, the arbitrator(s) shall apply the
applicable substantive law of the State of California without regard to its
conflict of laws provisions. Absent fraud, collusion, willful misconduct or
mistake of law by an arbitrator, the award shall be final, and judgment may be
entered in any court having jurisdiction thereof. The arbitrator(s) may award
injunctive relief or any other remedy available from a judge, including the
joinder of parties or consolidation of this arbitration with any other involving
common issues of law or fact or which may promote judicial economy, and may
award attorneys' fees and costs to the prevailing party but shall not have the
power to award punitive or exemplary damages. The decision and award of the
arbitrators need not be unanimous; rather, the decision and award of two
arbitrators shall be final.
(e) Pending selection of the arbitrator(s), either party may request
the AAA to appoint unilaterally an arbitrator for the limited purpose of
awarding temporary or preliminary relief. This award may be immediately entered
in any federal or state court having jurisdiction over the parties even though
the decision on the underlying dispute may still be pending. Once appointed, the
arbitrator(s) may, upon request of a party, issue a superseding order to modify
or reverse such temporary or preliminary relief or may confirm such relief
pending a full hearing on the merits of the underlying dispute. Any such initial
or superseding order of temporary or preliminary relief may be immediately
entered in any federal or state court having jurisdiction over the parties even
though the decision on the underlying dispute may remain pending. Such relief
may be granted by the arbitrator(s) only after notice to and opportunity to be
heard by the opposing party unless the party applying for such relief
demonstrates that its purpose would be rendered futile by giving notice.
10.2 Amendments and Waiver. Any amendment to this Agreement shall be in
a writing, which may be executed in one or more counterparts, and shall be
effective if executed by the Buyer and Seller. The rights of Seller or Buyer may
only be waived by the respective party in writing.
10.3 Governing Law. This Agreement shall be governed by and interpreted
under the laws of the State of California applicable to contracts executed in
and to be performed in the State of California. Any actions brought to enforce
this Agreement or any breach hereof or obligation hereunder shall be brought in
the District Court in and for San Diego County, California and the parties agree
to such venue and agree to the jurisdiction of such court.
10.4 Incorporation of Exhibits.All exhibits, schedules and other
documents referenced herein or required to be delivered pursuant to this
Agreement are incorporated into this Agreement by this reference and are
warranted by the party or parties which deliver the same to be accurate and
complete in all material respects.
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10.5 Cooperation. Each party will take all reasonable actions necessary
to comply promptly with all requirements with respect to the consummation of the
transactions contemplated by this Agreement and will promptly cooperate with and
furnish information to the other party in connection with any such requirements
imposed upon either of them in connection with the consummation of the
transactions contemplated by this Agreement. Each party will take all reasonable
actions necessary to obtain (and will cooperate with the other party in
obtaining) any consent, approval, order or authorization of, or any
registration, declaration or filing with, any governmental entity, domestic or
foreign, or other person, required to be obtained or made by such party (or by
the other party) in connection with the taking of any action contemplated by
this Agreement. If, after the date of Closing, in order properly to prepare its
tax returns or other documents or reports required to be filed with governmental
authorities or its financial statements, it is necessary that a party to this
Agreement be furnished with additional information relating to the transaction
or the Corporation and such information is in possession of the other party or
any related party and can reasonably be furnished to the party in need of such
information, then the other party will, promptly upon request, furnish such
information to the party in need of such information. At any time or from time
to time after the Closing Date, each party hereto, execute and deliver any
further instruments or documents and take all such further action as such
requesting party may reasonably request in order to consummate and document the
transactions contemplated hereby.
10.6 Assistance with Audits. Seller agrees, if requested by Buyer at
any time within three years after Closing, to give Buyer and its independent
accountants access to (and to cause access to be given by its independent public
accountants) the work papers of Seller in the possession of Seller pertaining to
the sale of the Shares in connection with the preparation of any financial
statements, internal reports or audits of Buyer, and to assist Buyer and its
independent accountants for a period of three years in understanding such work
papers.
10.7 Confidentiality. For a period of two (2) years from the date of
this Agreement, each party will hold in confidence and take reasonable efforts
to ensure that their respective employees, agents, representatives and
affiliated companies hold in confidence all information of a proprietary or
confidential nature and all documents containing such information which is
disclosed by either party to the other party in connection with the transactions
contemplated by this Agreement, and not disclose, publish, use or permit others
to use the same; provided, however, that the foregoing restriction shall not
apply to any portion of the foregoing which (i) becomes generally available to
the public in any manner or form through no fault of either party, or their
respective employees, agents or representatives, or (ii) is released for
disclosure by one party with the other party's consent, or (iii) when such
disclosure is required by a court or a governmental agency or is otherwise
required by law or is necessary in order to establish rights under this
Agreement or any other agreements referred to herein.
10.8 Public Announcements. Buyer and Seller will jointly agree on the
issuance of press releases or trade releases, and the making of such other
public statements with respect to this Agreement and the transactions
contemplated hereby as may be necessary or appropriate, provided, however, that
if Buyer and Seller cannot agree on the content of such releases, Buyer may make
such announcements as are, in the opinion of its counsel, legally required.
10.9 Captions. The captions in this Agreement are for convenience only
and shall not be considered a part of or affect the constructing or
interpretation of any provision of this Agreement.
10.10 Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall constitute an original copy
hereof, but all of which together shall constitute one agreement. For purposes
of execution of this Agreement, facsimile signatures shall be accepted as
original signatures.
10.11 Parties in Interest. Nothing in this Agreement, whether express
or implied, is intended to confer any rights or remedies under or by reason of
this Agreement on any persons other than the parties to it and their respective
successors and permitted assigns, nor is anything in this Agreement intended to
relieve or discharge the obligation or liability of any third persons to any
party to this Agreement. This Agreement shall be binding on the parties hereto,
their heirs, successors and assigns. This agreement shall not be assignable,
except that Buyer may assign its interest to a wholly owned subsidiary, but such
assignment shall not relieve Buyer from its obligations hereunder.
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10.12 Entire Agreement. This Agreement, together with the related
agreements and Exhibits and Schedules hereto, constitutes the final, exclusive
and complete understanding of the parties with respect to the subject matter
hereof and supersedes any and all prior agreements, understandings and
discussions with respect thereto. No variation or modification of this Agreement
and no waiver of any provision or condition hereof, or granting of any consent
contemplated hereby, shall be valid unless in writing and signed by the party
against whom enforcement of any such variation, modification, waiver or consent
is sought.
10.13 Notices. All notices, requests, demands and other communications
required or permitted under this Agreement and the transactions contemplated
herein shall be in writing and shall be deemed to have been duly given, made and
received on the date when delivered by hand delivery with receipt acknowledged,
or upon the next business day following receipt of telecopy transmission, or
upon the fifth day after deposit in the United States mail, registered or
certified with postage prepaid, return receipt requested, addressed as set forth
below:
If to the Buyer: With a copy (not constituting notice) to:
Wild Oats Markets, Inc. General Counsel
3375 Mitchell Lane Wild Oats Markets, Inc.
Boulder, Colorado 80301 3375 Mitchell Lane
Boulder, CO 80301
If to Seller: With a copy to:
Stanley Boney Scott Wolfe, Esq.
2146 Corte Plata Espuela Latham & Watkins
Alpine, CA 91901 701 B Street, Suite 2100
San Diego, CA 92101-8197
or to such other address as any party may have furnished in writing to the other
parties in the manner provided above.
10.13 Severability. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
10.14 Delays or Omissions. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to either party, upon any breach or
default of the other party under this Agreement, shall impair any such right,
power of remedy, nor shall it be construed to be a waiver of any such breach or
default, or any acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or default be
deemed a waiver of any other breach or default theretofore or thereafter
occurring. It is further agreed that any waiver, permit, consent or approval of
any kind or character of any breach or default under this Agreement, or any
waiver of any provisions or conditions of this Agreement must be in writing and
shall be effective only to the extent specifically set forth in such writing and
that all remedies, either under this Agreement, or by law or otherwise, shall be
cumulative and not alternative.
10.15 Tax Aspects. Both Seller and Buyer intend that the
transactions consummated pursuant to this Agreement be treated as a
tax-free Reorganization within the meaning of ss.368(a) of the Code,
agree to report the transaction consistent therewith and to account for that tax
treatment, and shall not take any contrary provision in any filing, return,
report or statement to the Internal Revenue Service. This Agreement constitutes
a plan of reorganization adopted pursuant to ss.368(a) of the Code.
THE PARTIES HERETO HAVE executed this Agreement as of the day and year
first above written.
SELLER THE CORPORATION:
Henry's Marketplace, Inc.
By /s/
BUYER:
WILD OATS MARKETS, INC.
By /s/
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SPOUSAL CONSENT TO STOCK PURCHASE AGREEMENT
I, _______________________, am the spouse of ______________________,
identified in the foregoing Stock Purchase Agreement as a Seller of Henry's
Marketplace, Inc. I have read the Agreement and know its contents and
provisions. I am aware that my spouse, as a party to the Agreement, has agreed
to sell all of our shares, including my community property interest therein, on
the occurrence of certain events and on the terms and conditions set forth in
the Agreement. I hereby consent to and approve the terms, conditions and
provisions of the Agreement, and I agree that shares identified in the Agreement
as my spouse's shares, including my community property interest therein, shall
be subject to the Agreement. I agree that I will not sell, transfer, convey,
assign, bequeath or otherwise dispose of any interest which I may have in the
shares, except in accordance with the terms of the Agreement. By this consent,
however, I do not waive my rights under California law, vis-a-vis
________________________, to my community property interest in such shares or
the proceeds therefrom.
DATED: _______________________
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SIGNATURE
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NAME
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EXHIBIT A
Attached to the Stock Purchase Agreement
between Wild Oats Markets, Inc., Seller and Henry's
Marketplace, Inc.
CLOSING BALANCE SHEET
<PAGE>
EXHIBIT B
Attached to the Stock Purchase Agreement
between Wild Oats Markets, Inc., Seller and Henry's
Marketplace, Inc.
ESCROW AGREEMENT
<PAGE>
EXHIBIT C
Attached to the Stock Purchase
Agreement between Wild Oats Markets, Inc.,
Seller and Henry's Marketplace, Inc.
SETTLEMENT SHEET
<PAGE>
EXHIBIT D
Attached to the Stock Purchase
Agreement between Wild Oats Markets, Inc.,
Seller and Henry's Marketplace, Inc.
SELLER'S CLOSING CERTIFICATE
<PAGE>
EXHIBIT E
Attached to the Stock Purchase
Agreement between Wild Oats Markets, Inc.,
Seller and Henry's Marketplace, Inc.
STOCK ASSIGNMENT
<PAGE>
SCHEDULE 1.1B
Attached to the Stock Purchase
Agreement between Wild Oats Markets, Inc.,
Seller and Henry's Marketplace, Inc.
THE STORES
HENRY'S MARKETPLACE, INC.
1825 Gillespie Way
Suite 200
El Cajon, California 92020
(619) 258-2900
-----------------
September 1, 1999
Wild Oats Markets, Inc.
3375 Mitchell Lane
Boulder, Colorado 80301
Re: Stock Purchase Agreement dated July 27, 1999
Gentlemen/Ladies:
The following procedures have been agreed to by the parties
regarding the Stock Purchase Agreement (the "Agreement") among Wild Oats
Markets, Inc.("Wild Oats"), Henry's Marketplace, Inc. ("Henry's") and the Seller
(as defined therein).
1. All undistributed amounts of Henry's earnings for 1998 and 1999 through
August 31, 1999 will be calculated and distributed to Seller as soon as
possible.
2. The tax basis balance sheet to be prepared by Lowell Business Services for
the period ended August 31, 1999 (the "August Balance Sheet") will be
converted to GAAP by the Company with KPMG providing assistance when
necessary to Lowell Business Services on or prior to September 23, 1999.
3. On or prior to September 23, 1999 the August Balance Sheet will be provided
to Wild Oats, including the actual inventory balances as determined by
actual inventories of the Stores prepared on August 31 and September 2,
1999. The parties presume that the August Balance Sheet will include
shareholder distributions and payment of any outstanding amounts owed for
the improvements to the Solana Beach store. If such presumption is not
correct, the August Balance Sheet shall include anticipated adjustments for
such items through the Closing Date (and subject to confirmation by Wild
Oats of no further undisclosed liabilities upon completion of their review
of the schedules provided by Henry's). Upon review by Wild Oats prior to
the Closing, this will serve as the Closing Balance Sheet required by the
Agreement (except for the adjustments which are described below).
4. On the nights of August 31, 1999 and September 2, 1999, physical
inventories were taken at all stores. The inventory determined plus the
computation of all accounting, legal and other transaction expenses
described in Section 1.4 (c) of the Agreement through September 1, 1999
(for which final bills will be delivered and final payments will be made at
or within thirty days of the Closing) will constitute the final adjustments
to the Closing Balance Sheet referred to in Section 3 above and for the
purposes of the Agreement. Such final adjustments shall be forth in a
"Settlement Sheet" as described in the Agreement. Wild Oats agrees that any
reasonable additional legal, accounting or bookkeeping costs incurred by
Henry's or the Seller in preparation for the consummation of the
Contemplated Transactions and related to the adjustment of the Closing Date
from September 1 to September 27, 1999, including the costs to convert to
GAAP the August Balance Sheet (but not normal course of business expenses),
shall be borne solely by Wild Oats and shall not reduce the Purchase Price
pursuant to Section 1.4(c) of the Agreement.
5. The third sentence of Section 2.25(c) of the Agreement is amended and
restated to read in its entirety "The distributions by the Corporation to
Seller during the fiscal years 1996, 1997 and 1998 and the period from
December 28, 1998 through the Closing Date, in the aggregate, did not
exceed the taxable income of the Corporation for those periods, in the
aggregate."
<PAGE>
6. The references to "September 1, 1999" in Sections 1.7 and 9.1 of the
Agreement are hereby amended to read "September 27, 1999." At the Closing
on September 27, 1999, calculations of the final share issuances for the
Purchase Price to Henry's shareholders will be determined by the parties.
Wild Oats' Transfer Agent will issue the actual share certificates for
delivery to the shareholders (or the appropriate escrow) in accordance with
the Agreement and the Closing Balance Sheet within two business days of the
Closing.
7. Following the Closing and before October 30, 1999 the Company will deliver
to Wild Oats copies of final federal and state tax returns and a
determination of the final income distributions to shareholders based on
such tax returns dated as of the Closing. The tax returns will be prepared
by KPMG based on the financial statements prepared by Lowell Business
Services for the period December 28, 1998 through September 26, 1999 (the
"Final Period").
8. Wild Oats will review and approve the final tax returns and distributions
and assuming no dispute will make a final 100% earnings distribution for
all undistributed income during the Final Period to shareholders on or
before November 8, 1999. Any dispute regarding the final distribution shall
be resolved as provided in Section 1.4 (d) of the Agreement. Wild Oats will
pay any undisputed amounts prior to November 8, 1999. Any dispute will be
finally resolved prior to December 15, 1999. No other changes or
adjustments to the Closing Balance Sheet will be made after the Closing.
9. Wild Oats hereby waives the conditions precedent to Closing set forth in
Sections 5.2, 5.4, 5.6, 5.7, 5.11 and 5.13(a), and deems all such
conditions to be satisfied.
10. The first sentence of Section 1.6 shall be amended to delete "September 24,
1999" and substitute therefor "September 29, 1999".
11. Wild Oats hereby covenants and agrees that if it does not include 30 days
of combined operations of Henry's and Wild Oats in Wild Oats' normal third
quarter press release, Wild Oats will, within 5 business days after the end
of the 30 day period commencing with the Closing Date, prepare and issue a
public announcement sufficient to satisfy applicable pooling of interest
requirements to announce 30 days of combined results of Henry's and Wild
Oats.
If the foregoing comports with your understanding of our agreement, please
execute in the space below, whereupon this will become a binding amendment to
the Agreement.
Henry's Marketplace, Inc.
By: /s/
Its:
- ---------------------------------
ACCEPTED AND AGREED TO:
/s/ Scott Boney
Scott Boney, Seller Representative
/s/ Stanley Boney
Stanley Boney, Seller Representative
Wild Oats Markets, Inc.
By: /s/
Its: _____________________________
Exhibit 23.1
Independent Auditors' Consent
The Board of Directors
Henry's Marketplace, Inc.:
We consent to the inclusion of our report dated February 5, 1999, with respect
to the balance sheet of Henry's Marketplace, Inc. as of December 27, 1998, and
the related statements of earnings, stockholders' equity, and cash flows for the
fifty-two weeks then ended, which report appears in the Form 8-K of Wild Oats
Markets, Inc. dated September 27, 1999.
KPMG LLP
San Diego, California
September 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
supplemental combined balance sheet as of December 27, 1997 and the supplemental
combined statement of operations for the year ended December 27, 1997 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Dec-27-1997
<PERIOD-START> Dec-29-1996
<PERIOD-END> Dec-27-1997
<CASH> $46,784
<SECURITIES> 0
<RECEIVABLES> 1,240
<ALLOWANCES> 214
<INVENTORY> 24,623
<CURRENT-ASSETS> 75,293
<PP&E> 82,808
<DEPRECIATION> 19,517
<TOTAL-ASSETS> 184,551
<CURRENT-LIABILITIES> 39,759
<BONDS> 4,157
0
0
<COMMON> 14
<OTHER-SE> 137,370
<TOTAL-LIABILITY-AND-EQUITY> 184,551
<SALES> 383,853
<TOTAL-REVENUES> 383,853
<CGS> 268,059
<TOTAL-COSTS> 268,059
<OTHER-EXPENSES> 100,239
<LOSS-PROVISION> 273
<INTEREST-EXPENSE> 378
<INCOME-PRETAX> 14,904
<INCOME-TAX> 5,457
<INCOME-CONTINUING> 9,447
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,447
<EPS-BASIC> 0.79
<EPS-DILUTED> 0.76
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
supplemental combined balance sheet as of January 2, 1999 and the supplemental
combined statement of operations for the year ended January 2, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> Jan-02-1999
<PERIOD-START> Dec-28-1997
<PERIOD-END> Jan-02-1999
<CASH> $11,348
<SECURITIES> 0
<RECEIVABLES> 2,314
<ALLOWANCES> 159
<INVENTORY> 31,867
<CURRENT-ASSETS> 209,770
<PP&E> 137,727
<DEPRECIATION> 33,737
<TOTAL-ASSETS> 209,770
<CURRENT-LIABILITIES> 50,056
<BONDS> 2,675
0
0
<COMMON> 14
<OTHER-SE> 153,485
<TOTAL-LIABILITY-AND-EQUITY> 209,770
<SALES> 479,883
<TOTAL-REVENUES> 479,883
<CGS> 333,944
<TOTAL-COSTS> 333,944
<OTHER-EXPENSES> 122,779
<LOSS-PROVISION> 55
<INTEREST-EXPENSE> (195)
<INCOME-PRETAX> 23,300
<INCOME-TAX> 7,793
<INCOME-CONTINUING> 15,507
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,507
<EPS-BASIC> 1.08
<EPS-DILUTED> 1.05
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
supplemental combined balance sheet as of July 3, 1999 and the supplemental
combined statement of operations for the six months ended July 3, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Jan-01-2000
<PERIOD-START> Jan-03-1999
<PERIOD-END> Jul-03-1999
<CASH> $14,844
<SECURITIES> 0
<RECEIVABLES> 2,615
<ALLOWANCES> 211
<INVENTORY> 41,410
<CURRENT-ASSETS> 64,227
<PP&E> 184,794
<DEPRECIATION> 39,474
<TOTAL-ASSETS> 320,744
<CURRENT-LIABILITIES> 68,553
<BONDS> 89,357
0
0
<COMMON> 14
<OTHER-SE> 157,842
<TOTAL-LIABILITY-AND-EQUITY> 320,744
<SALES> 305,334
<TOTAL-REVENUES> 305,334
<CGS> 212,168
<TOTAL-COSTS> 212,168
<OTHER-EXPENSES> 89,241
<LOSS-PROVISION> 47
<INTEREST-EXPENSE> 832
<INCOME-PRETAX> 3,046
<INCOME-TAX> 298
<INCOME-CONTINUING> 2,748
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 281
<NET-INCOME> 2,467
<EPS-BASIC> 0.17
<EPS-DILUTED> 0.16
</TABLE>
