<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 3, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________________
TO _______________________
Commission file number 0-21577
WILD OATS MARKETS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1100630
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
3375 MITCHELL LANE
BOULDER, COLORADO 80301-2244
(Address of principal executive offices, including zip code)
(303) 440-5220
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
As of May 5, 1999, there were 13,185,190 shares outstanding of the Registrant's
Common Stock (par value $0.001 per share).
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TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet
April 3, 1999 (Unaudited) and January 2, 1999 3
Consolidated Statement of Operations (Unaudited)
Three Months Ended April 3, 1999 and March 28, 1998 4
Consolidated Statement of Cash Flows (Unaudited)
Three Months Ended April 3, 1999 and March 28, 1998 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 14
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WILD OATS MARKETS, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
APRIL 3, JANUARY 2,
1999 1999
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 9,066 $ 11,255
Accounts receivable (less allowance
for doubtful accounts of $155 and
$159, respectively) 1,662 1,762
Inventories 30,834 28,464
Prepaid expenses and other current assets 1,159 1,956
Deferred income taxes 1,539 812
-------- --------
Total current assets 44,260 44,249
-------- --------
Property and equipment, net 97,585 97,878
Intangible assets, net 71,618 55,827
Deposits and other assets 1,261 886
-------- --------
$214,724 $198,840
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 27,275 $ 29,022
Accrued liabilities 13,223 12,432
Notes payable 3,150
-------- --------
Total current liabilities 40,498 44,604
Long-term debt 22,300
Deferred income taxes 2,016 1,958
Other liabilities 1,649 1,334
-------- --------
66,463 47,896
-------- --------
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; 13,103,675 and
13,077,884 shares issued and outstanding 13 13
Additional paid-in capital 141,228 140,778
Retained earnings 6,964 10,262
Accumulated other comprehensive income (loss) 56 (109)
-------- --------
Total stockholders' equity 148,261 150,944
-------- --------
$214,724 $198,840
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
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WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
APRIL 3, MARCH 28
1999 1998
<S> <C> <C>
Sales $122,508 $91,603
Cost of goods sold and occupancy costs 84,858 63,124
-------- -------
Gross profit 37,650 28,479
Operating expenses:
Direct store expenses 27,107 20,228
Selling, general and administrative expenses 4,378 3,633
Pre-opening expenses 663 548
Non-recurring expenses 10,894
-------- -------
Income (loss) from operations (5,392) 4,070
Interest expense (income), net 90 (349)
-------- -------
Income (loss) before income taxes (5,482) 4,419
Income tax expense (benefit) (2,465) 1,715
-------- -------
Net income (loss) before cumulative effect of
change in accounting principle (3,017) 2,704
-------- -------
Cumulative effect of change in accounting
principle, net of tax 281
-------- -------
Net income (loss) (3,298) 2,704
-------- -------
Other comprehensive income:
Foreign currency translation adjustment, net 165 22
-------- -------
Comprehensive income (loss) $ (3,133) $ 2,726
======== =======
Basic net income (loss) per common share $(0.25) $0.21
======== =======
Diluted net income (loss) per common share $(0.25) $0.20
======== =======
Average common shares outstanding 13,091 12,770
Dilutive effect of stock options 544
-------- -------
Average common shares outstanding assuming dilution 13,091 13,314
======== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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WILD OATS MARKETS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 3, MARCH 28,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (3,298) $ 2,704
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation and amortization 4,047 2,771
Non-recurring expenses 10,794
Loss (gain) on disposal of property and equipment 14 (5)
Deferred tax provision (benefit) (800) 34
Change in assets and liabilities:
Inventories (1,298) (856)
Receivables and other assets 652 (88)
Accounts payable (1,759) 348
Accrued liabilities (820) 2,032
-------- --------
Net cash provided by operating activities 7,532 6,940
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (10,802) (12,132)
Payment for purchase of acquired
entities, net of cash acquired (18,467) (2,122)
Proceeds from sales of equipment 108
-------- --------
Net cash used by investing activities (29,269) (14,146)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line-of-credit agreement 22,300
Repayment of short-term debt (3,150) (2)
Proceeds from issuance of common stock 450 867
-------- --------
Net cash provided by financing activities 19,600 865
-------- --------
Effect of exchange rate changes on cash (52) 22
-------- --------
Net decrease in cash and cash equivalents (2,189) (6,319)
Cash and cash equivalents at beginning of period 11,255 46,686
-------- --------
Cash and cash equivalents at end of period $ 9,066 $ 40,367
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 158 $ 3
======== ========
Cash paid for income taxes $ 157 $ 513
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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WILD OATS MARKETS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACCOUNTING POLICIES
The consolidated balance sheet as of April 3, 1999, the consolidated
statement of operations for the three months ended April 3, 1999 and March
28, 1998, as well as the consolidated statement of cash flows for the three
months ended April 3, 1999 and March 28, 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
consolidated financial statements be read in conjunction with financial
statements and notes thereto included in the Company's 1998 Annual Report
to Stockholders. The results of operations for interim periods presented
are not necessarily indicative of the operating results for the full year.
2. NEW ACCOUNTING PRONOUNCEMENTS
In 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 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, 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 its financial statement
presentation due to the Company's limited use of such instruments.
3. BUSINESS COMBINATIONS
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.
4. EARNINGS PER SHARE
Earnings per share are calculated in accordance with the provisions of FAS
No. 128, Earnings Per Share. FAS No. 128 requires the Company to report
both basic earnings per share, which is based on the weighted-average
number of common shares outstanding, and diluted earnings per share, which
is based on the weighted-average number of common shares outstanding and
all dilutive potential common shares outstanding, except where the effect
of their inclusion would be antidilutive (i.e., in a loss period).
5. NON-RECURRING EXPENSES
During the three months ended April 3, 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 with respect to 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).
6. SUBSEQUENT EVENTS
Subsequent to April 3, 1999, the Company acquired the operations of three
existing natural foods markets in Westport and Hartford, Connecticut, and
Melbourne, Florida, in exchange for $6.5 million in cash. The acquisition
was accounted for using
6
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the purchase method, and the excess of cost over the fair value of the
assets acquired of $6.1 million was allocated to goodwill, which is being
amortized on a straight-line basis over 40 years.
Also subsequent to April 3, 1999, the Company signed an agreement to
acquire from General Nutrition, Incorporated ("GNI") all of the outstanding
stock of Nature's Fresh Northwest, Inc. ("Nature's Fresh") in exchange for
$40.0 million in cash. Included in the liabilities of the acquired company
is a $17.0 million note payable to GNI. Nature's Fresh currently operates
six natural foods markets in the Portland, Oregon metropolitan area with
two new stores and a relocation in development. The completion of the
acquisition, which is scheduled to close on May 29, 1999, is subject to
certain conditions to closing, including receipt of clearance for the
acquisition from the Federal Trade Commission. The acquisition will be
accounted for using the purchase method, and the excess of cost over the
fair value of the assets acquired of approximately $30.0 million to $35.0
million will be allocated to goodwill and amortized on a straight-line
basis over 40 years.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains forward-looking statements within the context of Section
21E of the Securities Exchange Act of 1934, as amended. Each and every forward-
looking statement involves a number of risks and uncertainties, including the
Risk Factors specifically delineated and described in the Company's 1998 Annual
Report to Stockholders and those Risk Factors that have been specifically
expanded or modified below. The actual results that the Company achieves may
differ materially from any forward-looking statements due to such risks and
uncertainties. Words such as "believes", "anticipates", "expects", "intends",
and similar expressions are intended to identify forward-looking statements, but
are not the exclusive means of identifying such statements. The Company
undertakes no obligation to update any forward-looking statements in order to
reflect events or circumstances that may arise after the date of this report.
Certain of the Risk Factors are hereby restated, modified and expanded in
accordance with the following section references that correlate to the
corresponding sections of the Company's 1998 Annual Report to Stockholders:
UNCERTAIN ABILITY TO EXECUTE GROWTH STRATEGY
The Company's business has grown considerably in size and geographic scope,
increasing from 14 stores in 1994 to its current size of 71 stores in 19 states
and Canada. In the first quarter of 1999, the Company acquired three operating
natural foods stores, opened one new store, and relocated two stores. The
Company's ability to implement its growth strategy depends to a significant
degree upon its ability to open or acquire stores in existing and new markets
and to integrate and operate those stores profitably. While the Company plans to
expand primarily through the opening of new stores, it will continue to pursue
acquisitions of natural foods retailers where attractive opportunities exist.
The Company's growth strategy is dependent upon a number of factors, including
its ability to:
. access adequate capital resources;
. expand into regions where it has no operating experience;
. identify markets that meet its site selection criteria;
. locate suitable store sites and negotiate acceptable lease terms;
. locate acquisition targets and negotiate acceptable acquisition
terms;
. hire, train and integrate management and store employees;
. recruit, train and retain regional pre-opening and support teams;
. complete construction of new stores on time and on budget; and
. expand its distribution and other operating systems.
In addition, the Company pursues a strategy of clustering stores in each of its
markets to increase overall sales, achieve operating efficiencies and further
penetrate markets. In the past, when the Company has opened a store in a market
where it had an existing presence, the Company has experienced a decline in the
sales and operating results at certain of its existing stores in these markets.
The opening of competing stores may have a similar adverse effect on the
Company's results of operations. The Company intends to continue to pursue its
store clustering strategy and expects the sales and operating results trends for
other stores in an expanded market to continue to experience temporary declines
related to the clustering of stores. Further, acquisitions involve a number of
additional risks, such as short-term negative effects on the Company's reported
operating results, diversion of management's attention, unanticipated problems
or legal liabilities, and the integration of potentially dissimilar operations,
some or all of which could have a material adverse effect on the Company's
business, results of operations and financial condition. There can be no
assurance that the Company will achieve its planned expansion in existing
markets, enter new markets, or operate or integrate its existing, newly-opened
or newly-acquired stores profitably. If the Company fails to do so, the
Company's business, results of operations and financial condition will be
materially and adversely affected. In addition, the Company's ability to execute
its growth strategy is partially dependent upon the demographic trends and
market conditions in the natural foods industry. Any change in those trends and
conditions could adversely affect the Company's future growth rate.
FLUCTUATIONS IN FINANCIAL RESULTS
The Company's results of operations may fluctuate significantly from period-to-
period as the result of a variety of factors, including:
. the number, timing, mix and cost of store openings, acquisitions,
relocations, or closings;
. the ratio of stores opened to stores acquired;
. the opening of stores by the Company or its competitors in markets
where the Company has existing stores;
. comparable store sales results;
. the ratio of urban format to supermarket format stores; and
. seasonality in sales volume and sales mix in certain geographic
regions.
The Company incurs significant pre-opening expenses, and new stores typically
experience an initial period of operating losses. As a result, the opening of a
significant number of stores in a single period will have an adverse effect on
the Company's results of operations. Conversely, delays in opening of planned
new stores may result in revenue shortfalls and may adversely affect results of
operations. The opening of competing stores may have a similar adverse effect on
results of operations. Further, the integration of a significant number of
acquired stores may have an adverse effect on the Company's results of
operations due to duplication of expenses and a higher cost structure in the
acquired stores, financing costs, and goodwill arising from the acquisition. Due
to the foregoing factors, the Company believes that period-to-period comparisons
of its operating results are not necessarily meaningful and that such
comparisons cannot be relied upon as indicators of future financial performance.
8
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IMPACT OF THE YEAR 2000 ISSUE
The Company continually evaluates its management information systems and has
made modifications and upgrades where the Company has believed it to be
necessary to comply with Year 2000 concerns. Although the Company believes that
its internal Year 2000 compliance will be adequate and does not anticipate any
disruption in its operations as a result of its information systems not being
Year 2000 compliant, there can be no assurance that such a disruption will not
occur.
If failures of software systems occur within the operations of the Company's
vendors, distributors or financial centers, the failure could affect the
Company's business, financial condition and results of operations. Such failures
could result in the inability to obtain products for the Company's stores and
the inability to process credit card or electronically processed food stamp
payments from customers.
Although the Company has taken significant steps to address possible Year 2000
problems, there can be no assurance that failure of the Company's primary
vendors, distributors or financial centers to timely attain Year 2000 compliance
will not materially adversely affect the Company's results of operations and
financial condition. Year 2000 compliance problems in other areas such as
failures by telephone, mail, data transfer or other utility or general service
providers or government or private entities could also have a material adverse
effect on the Company. The Company is currently formulating contingency plans in
the event these third-party systems are not Year 2000 compliant and anticipates
having such plans completed by the end of the third quarter of 1999.
BACKGROUND
STORE OPENINGS, CLOSINGS, REMODELS, RELOCATIONS AND ACQUISITIONS. During the
first quarter of 1999, the Company opened one new store in Evanston, Illinois,
and relocated two stores in Tempe, Arizona, and Memphis, Tennessee. The Company
also acquired three operating natural foods stores in Tucson, Arizona, during
the quarter. The Company plans to open seven, acquire up to 11 (inclusive of
those described below), and relocate three additional stores, as well as close
two stores, during the remainder of 1999.
Subsequent to the end of the first quarter of 1999, the Company acquired three
operating natural foods markets in Connecticut and Florida. The Company also
entered into a stock purchase agreement for the acquisition of all of the
outstanding stock of Nature's Fresh Northwest, Inc., a wholly-owned subsidiary
of General Nutrition, Incorporated, that owns six operating natural foods stores
in the Portland, Oregon metropolitan area and also has two new stores and a
relocation in development. The completion of the acquisition, which is currently
scheduled to close on May 29, 1999, is subject to certain conditions to closing,
including receipt of clearance for the acquisition from the Federal Trade
Commission. The Company anticipates that it also may acquire other operating
natural foods grocery stores during the remainder of 1999.
The Company's results of operations have been and will continue to be affected
by, among other things, the number, timing and mix of store openings,
acquisitions or closings. New stores build their sales volumes and refine their
merchandise selection gradually and, as a result, generally have lower gross
margins and higher operating expenses as a percentage of sales than more mature
stores. The Company anticipates that the new stores opened in 1999 will
experience operating losses for the first six to 12 months of operation, in
accordance with historic trends. Further, acquired stores, while generally
profitable as of the acquisition date, generate lower gross margins and store
contribution margins than the Company average, due to their substantially lower
volume purchasing discounts. Over time, typically six months, as the Company
sells through the acquired inventories and implements its volume purchase
discounts, the Company expects that the gross margin and store contribution
margin of the acquired stores will approach the Company average. The Company
anticipates that a high concentration of acquired stores, such as contemplated
by the Nature's Fresh Northwest acquisition, will have a temporary negative
impact on the Company's consolidated results of operations.
The Company is actively upgrading, remodeling or relocating some of its older
stores. Remodels and relocations typically cause short-term disruption in sales
volume and related increases in certain expenses as a percentage of sales, such
as payroll. Remodels on average take between 90 and 120 days to complete. The
Company cannot predict whether sales disruptions and the related impact on
earnings may be greater in time or volume than projected in certain remodeled or
relocated stores. The Company will continue to evaluate the profitability of all
of its stores on an ongoing basis and may, from time to time, make decisions
regarding closures, disposals, relocations or remodels in accordance with such
evaluations. As part of this strategy, the Company relocated two stores in
Tempe, Arizona, and Memphis, Tennessee, during the first quarter and expects to
relocate three additional stores during the remainder of 1999. Further, during
the first quarter of 1999, the Company made a strategic decision to close its
two "Farm to Market" stores, as well as abandon the assets in certain vacant
sites, resulting in a $10.9 million non-recurring charge in the quarter (see
"Notes to Consolidated Financial Statements").
In the fourth quarter of 1998, the Company introduced its Internet shopping
website, "shop.wildoats.com". The Company incurred and will continue to incur
selling, general and administrative costs for the purchase of the software,
advertising and personnel to operate the website. The Company anticipates that
the website will experience small operating losses for at least the first 12
months of operation until consumer awareness, acceptance and use of the website
grow.
STORE FORMAT AND CLUSTERING STRATEGY. The Company operates two store formats:
supermarket and urban. The supermarket format is generally 15,000 to 35,000
square feet, and typically generates higher sales and store contribution than
the 5,000 to 15,000 square foot urban format stores. The Company's results of
operations have been and will continue to be affected by the mix of supermarket
and urban format stores opened or acquired and whether stores are being opened
in markets where the Company has an existing presence. The Company expects to
focus primarily on opening or acquiring supermarket format stores in the future
but will consider additional urban stores when appropriate opportunities exist.
In addition, the Company pursues a strategy of clustering stores in each of its
markets to increase overall sales, achieve operating efficiencies and further
penetrate markets. The Company believes this strategy has resulted in increased
overall sales in each of its markets. In the past, when the Company has opened a
store in a market where it had an existing presence, the Company has experienced
a decline in the sales and operating results at certain of its existing stores
in that
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market. However, over time, the Company believes the affected stores generally
will achieve store contribution margins comparable to prior levels on the lower
base of sales. The Company intends to continue to pursue its store clustering
strategy and expects the sales and operating results trends for other stores in
an expanded market to continue to experience temporary declines related to the
clustering of stores.
COMPARABLE STORE SALES RESULTS. Sales of a store are deemed to be comparable
commencing in the thirteenth full month of operations for new, relocated and
acquired stores. A variety of factors affect the Company's comparable store
sales results, including, among others, the relative proportion of new or
relocated stores to mature stores, the opening of stores by the Company or its
competitors in markets where the Company has existing stores, the timing of
promotional events, the Company's ability to execute its operating strategy
effectively, changes in consumer preferences for natural foods and general
economic conditions. Past increases in comparable store sales may not be
indicative of future performance.
The Company's comparable store sales results have been negatively affected in
the past by planned cannibalization (the loss of sales at an existing store when
the Company opens a new store nearby) resulting from the implementation of the
Company's store cluster strategy. The Company expects that comparable sales
increases will continue to be negatively affected by planned cannibalization
throughout 1999 due to the planned opening of new or relocated stores in several
of the Company's existing markets including Phoenix, Arizona, Las Vegas, Nevada,
Albuquerque, New Mexico and Salt Lake City, Utah. There can be no assurance that
comparable store sales for any particular period will not decrease in the
future.
PRE-OPENING EXPENSES. Pre-opening expenses include labor, rent, utilities,
supplies and certain other costs incurred prior to a store's opening. Through
1998, pre-opening costs were deferred during the pre-opening period and expensed
in full when the store opened. Pre-opening expenses have averaged approximately
$250,000 to $350,000 per store over the past 18 months, although the amount per
store may vary depending on the store format and whether the store is the first
to be opened in a market, or is part of a cluster of stores in that market.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, Accounting for 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 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.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected
income statement data expressed as a percentage of sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 3, MARCH 28,
1999 1998
<S> <C> <C>
Sales 100.0% 100.0%
Cost of goods sold and occupancy costs 69.3 68.9
----- -----
Gross margin 30.7 31.1
Direct store expenses 22.1 22.1
Selling, general and administrative expenses 3.6 4.0
Pre-opening expenses 0.5 0.6
Non-recurring expenses 8.9
----- -----
Income (loss) from operations (4.4) 4.4
Interest expense (income), net 0.1 (0.4)
----- -----
Income (loss) before income taxes (4.5) 4.8
Income tax expense (benefit) (2.0) 1.9
----- -----
Net income (loss) before cumulative effect
of change in accounting principle (2.5) 2.9
Cumulative effect of change in accounting
principle, net of taxes 0.2
----- -----
Net income (loss) (2.7)% 2.9%
===== =====
</TABLE>
SALES. Sales for the three months ended April 3, 1999 increased 33.7% to $122.5
million from $91.6 million for the same period in 1998. The increase is
primarily due to the opening of one new store, the acquisition of three stores,
and the relocation of two stores in the first three months of 1999, as well as
the inclusion of eight stores opened and seven stores acquired during 1998.
Comparable store sales increased 8% for the first quarter of 1999, based on both
new and acquired stores that have been operating longer than 12 months. The
Company expects its comparable store sales increases to be 6% to 8% through the
remainder of 1999. See "Fluctuations in Financial Results".
GROSS PROFIT. Gross profit for the three months ended April 3, 1999 increased
32.2% to $37.7 million from $28.5 million for the same period in 1998. The
increase in gross profit is primarily attributable to the increase in the number
of stores operated by the Company. Gross profit as a percentage of sales for the
three months ended April 3, 1999 decreased to 30.7% from 31.1% for the same
period in 1998. The decrease is primarily attributable to year-end reward
discount coupons issued in early fiscal 1999 in conjunction with the Company's
Wild Shopper Card frequent shopper program (which was discontinued in the first
quarter of 1999) and to lower gross
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margin performance in the Company's two "Farm to Market" stores (see "Notes to
Consolidated Financial Statements" and "Store Openings, Closings, Remodels,
Relocations and Acquisitions").
DIRECT STORE EXPENSES. Direct store expenses for the three months ended April
3, 1999 increased 34.0% to $27.1 million from $20.2 million for the same period
in 1998. The increase in direct store expenses is attributable to the increase
in the number of stores operated by the Company. Direct store expenses as a
percentage of sales for the three months ended April 3, 1999 remained the same
as the percentage for the same period in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended April 3, 1999 increased 20.5%
to $4.4 million from $3.6 million for the same period in 1998. The increase is
the result of additional central and regional support staff and infrastructure
that the Company has added to support its increased number of stores. Selling,
general and administrative expenses as a percentage of sales for the three
months ended April 3, 1999 decreased to 3.6% from 4.0% for the same period in
1998. The decrease is the result of greater leverage of overhead expenses over
higher sales volumes.
PRE-OPENING EXPENSES. Pre-opening expenses for the three months ended April 3,
1999 increased 21.0% to $663,000 from $548,000 for the same period in 1998. The
increase is attributable to the opening of one new store and two relocated
stores during the first quarter of 1999, as compared to the opening of two new
stores during the same period in 1998. Additionally, in accordance with SOP 98-
5, pre-opening expenses are recognized as incurred during fiscal 1999. Prior to
fiscal 1999, pre-opening expenses were deferred until a store's opening date, at
which time such costs were expensed in full. Pre-opening expenses as a
percentage of sales for the three months ended April 3, 1999 decreased to 0.5%
from 0.6% for the same period in 1998. The decrease is primarily due to the
greater leverage of pre-opening expenses over higher sales volumes.
NON-RECURRING EXPENSES. During the three months ended April 3, 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 in the three months ended April 3, 1999.
These decisions included (1) a change in the Company's strategic direction with
respect to 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).
NET INTEREST EXPENSE (INCOME). Net interest expense for the three months ended
April 3, 1999 was $90,000 as compared to net interest income of $349,000 for the
same period in 1998. The change is attributable to increased borrowing from the
Company's revolving line of credit to fund new store openings and the
acquisition of three stores in the first quarter of 1999, and to lower levels of
invested cash in the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital have been cash flow from operations,
trade payables, bank indebtedness, and the sale of equity securities. Primary
uses of cash have been the financing of new store development, new store
openings, acquisitions and purchases of real property.
Net cash provided by operating activities was $7.5 million during the three
months ended April 3, 1999 as compared to $6.9 million during the same period in
1998. Cash provided by operating activities increased during this period
primarily due to increases in net income before depreciation and amortization
expense and loss on disposal of property and equipment. The Company has not
required significant external financing to support inventory requirements at its
existing and new stores because it has been able to rely on vendor financing for
most of the inventory costs, and anticipates that vendor financing will continue
to be available for new store openings.
Net cash used by investing activities was $29.3 million during the three months
ended April 3, 1999 as compared to $14.1 million during the same period in 1998.
The increase is due to the opening of one new store, the acquisition of three
stores, the relocation of two stores, and several store remodels in the first
three months of 1999, as well as the construction costs incurred for 10 new or
relocated stores now under construction which are expected to open in the
remainder of 1999, as compared to two new stores and one acquired store in the
first three months of 1998 and the construction costs incurred for new stores in
development which opened during the remainder of 1998.
Net cash provided by financing activities was $19.6 million during the three
months ended April 3, 1999 as compared to $865,000 during the same period in
1998. The change reflects increased borrowing from the Company's revolving line
of credit and decreased issuance of common stock upon the exercise of employee
stock options during the first three months of 1999, as well as the repayment of
a $3.2 million note payable.
The Company has a revolving line of credit of $80.0 million. The facility has a
three-year term and bears interest, at the Company's option, at the prime rate
or LIBOR plus 0.65%. The line of credit agreement includes certain financial and
other covenants, as well as restrictions on payments of dividends. As of May 12,
1999, there were $29.6 million in borrowings outstanding under this facility.
The Company spent approximately $10.8 million during the first quarter of 1999
and anticipates that it will spend approximately $27.5 million during the
remainder of 1999 for new store construction, purchases of real property and
leasehold interests, development, remodels and maintenance capital expenditures,
exclusive of acquisitions. The Company expects to spend approximately $65.2
million to acquire the operations of existing natural foods or specialty markets
inclusive of the costs of the acquisitions already completed or expected to be
completed during the second quarter of 1999. The Company has entered into a
stock purchase agreement to acquire from General Nutrition, Incorporated the
outstanding stock of Nature's Fresh Northwest, Inc., a corporation with six
11
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operating natural foods stores and two stores and one relocation under
development. The purchase price is $40.0 million in cash plus the assumption of
liabilities including a $17.0 million note payable due to the seller. The
acquisition is scheduled to close May 29, 1999, subject to certain conditions to
closing.
The Company's average capital expenditures to open a leased store, including
leasehold improvements, equipment and fixtures, have ranged from approximately
$2.0 million to $3.0 million over the past 24 months, excluding inventory costs
and initial operating losses. The Company expects to increase the average size
of its new stores and increase the number of its new store openings over time,
and is using a greater proportion of new and custom equipment in its stores.
Therefore, the Company anticipates that its average capital expenditures per
store will increase over time by approximately $500,000.
The Company owns two parcels of real property on which it is constructing
new stores or relocating certain existing stores. The Company has constructed
one store planned to open in the second quarter of 1999, and commenced
remodeling of one additional new store scheduled to open in mid-1999.
Construction of stores requires substantially greater cash outlays than the
remodeling of existing buildings (i.e., $3.5 to $9.0 million as compared to $2.0
to $3.0 million). The Company has entered into agreements to sell the real
properties in sale-leaseback transactions. If the Company is not successful in
completing the transactions for the sale and leaseback of the properties
currently owned by the Company, this may result in unplanned, long-term uses of
the Company's cash that otherwise would be available to fund operations.
Additionally, unexpected permitting and construction delays could result in
greater or longer-term cash outlays. Delays in opening new stores also may
result in reductions in forecasted sales revenues from projected levels and
increases in pre-opening costs for any given reporting period.
The cost of initial inventory for a new store has historically been
approximately $500,000; however, the Company relies on vendor financing for most
of this cost. Pre-opening costs currently are approximately $250,000 to $300,000
per store and are expensed as incurred. The amounts and timing of such pre-
opening costs will depend upon the availability of new store sites and other
factors, including the location of the store and whether it is in a new or
existing market for the Company, the size of the store, and the required build-
out at the site. Costs to acquire future stores, if any, are impossible to
predict and could vary materially from the cost to open new stores. There can be
no assurance that actual capital expenditures will not exceed anticipated
levels. The Company believes that cash generated from operations and funds
available under the revolving line of credit will be sufficient to satisfy its
cash requirements, exclusive of additional acquisitions, through 1999.
YEAR 2000 READINESS STATEMENT
INFORMATION TECHNOLOGIES. As the Year 2000 approaches, the Company recognizes
the need to ensure its operations will not be adversely impacted by Year 2000
software or hardware failures. The Company has determined that all of its major
software and hardware systems at its corporate headquarters are Year 2000
compliant. The Company has substantially completed installing Year 2000
compliant point-of-sale hardware (cash registers and scanners) in its stores. In
1995, the Company began installing new point-of-sale systems to enable its
stores to have scanning capabilities. The Company has not accelerated the
installation schedule for this equipment in response to Year 2000 compliance
issues. All equipment installed since 1995 is Year 2000 compliant. Total
replacement and installation cost to date has been approximately $5.0 million,
with the cost to complete the installation in 1999 in the Company's existing
noncompliant stores estimated at an additional $500,000. This cost may increase
if the Company acquires additional stores with noncompliant point-of-sale
systems. The existing point-of-sale hardware was and is being replaced to
accommodate a merchandise management system that is Year 2000 compliant and that
was previously acquired by the Company for its greater item movement, tracking,
pricing and reporting capabilities. The Company will continue to make certain
investments in its software systems and applications to ensure that they are
Year 2000 compliant. The financial impact of these investments to the Company is
not anticipated to be material in any single year.
VENDORS, SUPPLIERS AND SERVICE PROVIDERS. The Company also is in the process of
verifying whether its major suppliers, service providers, and financial
institutions are Year 2000 compliant. Many of the Company's product vendors are
smaller businesses that have not considered the impact of Year 2000
noncompliance and so are taking no steps to ensure compliance. To the extent
that product vendors' manufacturing or distribution systems fail as a result of
Year 2000 noncompliance, certain products carried by the Company's stores could
become unavailable, resulting in decreases in operating revenues, although in
many circumstances, alternative local vendors' products may be available. The
Company is currently requesting Year 2000 compliance statements from its major
vendors to determine whether such vendors' distribution of product may be
interrupted as a result of Year 2000 compliance problems. The Company will,
based on the responses received, formulate an alternative action plan to ensure
minimal impact on the available supply of products in its stores. One of the
Company's largest distributors recently provided information to its customers
concerning its own Year 2000 compliance. Currently this distributor has upgraded
or replaced the majority of its technology infrastructure and devices that had
embedded computer chips with compliant systems and devices. Successful testing
has been done on all of the systems and devices, and the distributor believes
that its current schedule of being Year 2000 compliant by July 1999 will be
successfully met. At this time, the Company cannot evaluate the magnitude of the
impact that a failure by the distributor to successfully install compliant
systems could have on the Company's operations. A failure in the distributor's
warehouse facilities could affect the Company's ability to stock product in
certain of its stores, resulting in lower sales revenues in those stores. The
Company's stores' operations could be materially adversely affected if utilities
are disrupted. At this time the Company is in the process of developing
contingency plans to address product or utility disruptions.
If the Company's financial institutions are not Year 2000 compliant, a failure
in their operating system could result in a temporary inability by the Company
to access necessary cash resources required for operations; however, normal
store operations will generate sufficient revenues to cover daily operating
needs. The Company's credit card processor has confirmed to the Company that it
has adapted its systems to accept credit cards issued with expiration dates of
2000 and beyond and has also completed implementation of the phases of its
compliance program in accordance with guidelines of the Federal Financial
Institutions Examination Council.
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MECHANICAL SYSTEMS. The Company has commenced review of the various individual
mechanical systems, such as HVAC, refrigeration and security systems, in its
stores to determine whether any Year 2000 compliance issues exist as to these
systems. The Company has contacted the suppliers of certain store systems with
embedded chips where Year 2000 compliance may be an issue to obtain confirmation
of compliance or instructions for reprogramming in the event of a compliance
problem. Responses received to date to a questionnaire sent to service providers
of mechanical systems indicate there will be little impact on store operations
due to Year 2000 noncompliance in mechanical systems. The Company does not
anticipate that any major store mechanical systems will require replacement
because of Year 2000 compliance concerns or that noncompliance of any mechanical
systems will have any material effect on store operations. The dollar value of
perishable goods that could be affected by a failure in refrigerated systems is
small in comparison to the total inventory of any store.
The estimates and conclusions regarding Year 2000 impact contained above are
forward-looking statements based on the Company's best estimates of future
events. Actual results may differ due to certain risks and uncertainties that
the Company cannot, at this time, predict.
NEW ACCOUNTING PRONOUNCEMENTS
See disclosures in Note 2 of the "Notes to Consolidated Financial Statements".
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
13
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Alfalfa's Canada, Inc., the Company's Canadian subsidiary, is a defendant in a
suit brought in the Supreme Court of British Columbia, by one of its
distributors, Waysafer Wholefoods Limited and one of its principals, seeking
monetary damages for breach of contract and injunctive relief to enforce a
buying agreement for the three Canadian stores entered into by a predecessor of
Alfalfa's Canada, Inc. The suit was filed in September 1996. The Company does
not believe its potential exposure in connection with the suit to be material.
There are no other material pending legal proceedings to which the Company or
its subsidiaries are a party. From time to time, the Company is involved in
lawsuits that the Company considers to be in the normal course of its business.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
3(i).1.(a)** Amended and Restated Certificate of
Incorporation of Registrant.(1)
3(i).1.(b)** Certificate of Correction to Amended and
Restated Certificate of Incorporation of the
Registrant.(1)
3(i).1.(c)+ Certificate of Designations of Series A Junior
Participating Preferred Stock of Registrant
3(ii).1** Amended and Restated By-Laws of Registrant.(1)
4.1** Reference is made to Exhibits 3(i).1 through
3(ii).1.(1)
4.2** Rights Agreement dated as of May 22, 1998
between Registrant and Norwest Bank Minnesota
N.A.(2)
10.1** Revolving Loan Agreement dated as of March 2,
1999 among Wild Oats Markets, Inc., the Lenders
Named Herein and Wells Fargo Bank, National
Association, as Administrative Agent.(3)
27.1+ Financial Data Schedule.
________________________________
** Previously filed.
+ Included herewith.
(1) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 28, 1996 (File Number 0-21577).
(2) Incorporated by reference to the Registrant's Registration Statement on
Form 8-A dated May 21, 1998.
(3) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended January 2, 1999 (File Number 0-21577).
(b) Reports on Form 8-K.
The Company did not file a Form 8-K during the three-month period ended
April 3, 1999.
14
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boulder, County of
Boulder, State of Colorado, on the 12th day of May 1999.
WILD OATS MARKETS, INC.
By /s/ Mary Beth Lewis
----------------------
Mary Beth Lewis
Executive Officer, Vice President of
Finance, Treasurer and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
15
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EXHIBIT 3(i).1.(c)
CERTIFICATE OF DESIGNATIONS
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
WILD OATS MARKETS, INC.
Pursuant to Section 151 of the Delaware General Corporation Law, the
undersigned authorized officer of Wild Oats Markets, Inc., certifies that the
Board of Directors of Wild Oats Markets, Inc., adopted the following resolution
at a meeting duly called and held on May 4, 1998:
"BE IT RESOLVED, that pursuant to the authority expressly granted by
the provisions of the Amended and Restated Certificate of Incorporation of the
Corporation, the Board of Directors hereby creates and authorizes the issuance
of a series of preferred stock, par value $.001 per share of the Corporation,
and hereby fixes the designation and amount thereof and the voting powers,
preferences and relative, participating, optional and other special rights of
the shares of such series, and the qualifications, limitations or restrictions
thereof are as follows:
Section 1. Designation and Amount. The shares of such series (the
----------------------
"Series A Stock") shall be designated as "Series A Junior Participating
Preferred Stock" and the number of shares constituting such series shall be
20,000.
Section 2. Dividends and Distributions.
---------------------------
(A) Subject to the prior and superior rights of the holders of any
series of Preferred Stock ranking prior and superior to the Series A Stock with
respect to dividends, the holders of Series A Stock shall be entitled to
receive, when, as and if declared by the Board of Directors out of funds legally
available for such purpose, quarterly dividends payable in cash on the first day
of March, June, September, and December in each year (each such date being
referred to herein as a "Quarterly Dividend Payment Date"), commencing on the
first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $1.00 or (b) the product of the
Adjustment Number (defined below) multiplied by the aggregate per share amount
of all cash dividends, and the Adjustment Number multiplied by the aggregate per
share amount (payable in kind) of all non-cash dividends or other distributions
other than a dividend payable in shares of common stock or a subdivision of the
outstanding shares of common stock (by reclassification or otherwise), declared
on the common stock, par value $.001 per share, of the Corporation (the "Common
Stock") since the immediately preceding Quarterly Dividend Payment Date, or,
with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A Stock. As used herein,
the "Adjustment Number" shall initially be 100, but if the Corporation at any
time after May 4, 1998 (the "Declaration Date") (i) declares any dividend on
Common Stock payable in
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shares of Common Stock, (ii) subdivides the outstanding Common Stock, or (iii)
combines the outstanding Common Stock into a smaller number of shares, then in
each such case the Adjustment Number immediately after such event shall equal
the Adjustment Number immediately before such event multiplied by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately before such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Stock as provided in paragraph (A) above immediately after it declares
a dividend or distribution on the Common Stock (other than a dividend payable in
shares of Common Stock); provided that, if the total dividends declared on the
Common Stock during the period between any Quarterly Dividend Payment Date and
the next subsequent Quarterly Dividend Payment Date is less than $.01 per share,
a dividend equal $1.00 per share on the Series A Stock, minus an amount per
share equal to the dividends already paid on the Series A Stock during such
period, shall nevertheless be payable on such subsequent Quarterly Dividend
Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Stock from the Quarterly Dividend Payment Date next preceding
the date of issue of such shares, unless the date of issue of such shares is
prior to the record date for the first Quarterly Dividend Payment Date, in which
case dividends on such shares shall begin to accrue from the date of issue of
such shares, or unless the date of issue is a Quarterly Dividend Payment Date or
is a date after the record date for a quarterly dividend and before such
Quarterly Dividend Payment Date, in either of which events such dividends shall
begin to accrue and be cumulative from such Quarterly Dividend Payment Date.
Accrued but unpaid dividends shall not bear interest. Dividends paid on the
Series A Stock in an amount less than the total amount of such dividends at the
time accrued and payable on such shares shall be allocated pro rata on a share-
by-share basis among all such shares at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of shares of
Series A Stock entitled to receive payment of a dividend or distribution
declared thereon, which record date shall be no more than 30 days prior to the
date fixed for the payment thereof.
Section 3. Voting Rights. The holders of the Series A Stock shall
-------------
have the following voting rights:
(A) Each share of Series A Stock shall entitle the holder thereof to a
number of votes equal to the Adjustment Number on each matter submitted to a
vote of the stockholders of the Corporation.
(B) Except as otherwise provided herein or by law, the holders of
Series A Stock and the holders of shares of Common Stock shall vote together as
one class on all matters submitted to a vote of stockholders of the Corporation.
(C) If at the time of any annual meeting of stockholders for the
election of directors a default in preference dividends on the shares of the
Series A Stock shall exist, the number of directors constituting the Board of
Directors shall be increased by two, and the holders of Series A
2
<PAGE>
Stock (whether or not the holders of the Series A Stock would be entitled to
vote for the election of Directors if such default in preference dividends did
not exist), shall have the right at such meeting, voting together as a single
class, to the exclusion of the holders of Common Stock, to elect two directors
of the Company to fill such newly created directorships. Such right shall
continue until there are no dividends in arrears upon the Series A Stock. Each
director elected by the holders of shares of Series A Stock (herein called a
"Preferred Director") shall continue to serve as such director for the full term
for which he shall have been elected, notwithstanding that prior to the end of
such term a default in preference dividends shall cease to exist. Any Preferred
Director may be removed by, and shall not be removed except by, the vote of the
holders of record of the outstanding shares of Series A Stock, voting together
as a single class, at a meeting of the stockholders, or of the holders of shares
of Series A Stock, called for that purpose. So long as a default in any
preference dividends on the Series A Stock shall exist, (i) any vacancy in the
office of a Preferred Director may be filled (except as provided in the
following clause (ii)) by an instrument in writing signed by the remaining
Preferred Director and filed with the corporation and (ii) in the case of the
removal of any Preferred Director, the vacancy may be filled by the vote of the
holders of the outstanding shares of Series A Stock, voting together as a single
class, at the same meeting at which such removal shall be voted. Each director
appointed as aforesaid by the remaining Preferred Director shall be deemed, for
all purposes hereof, to be a Preferred Director. Whenever the term of office of
the Preferred Directors shall end and a default in preference dividends shall no
longer exist, the number of Directors constituting the Board of Directors of the
Corporation shall be reduced by two. For the purposes hereof, a "default in
preference dividends on the Series A Stock" shall be deemed to have occurred
whenever the amount of accrued dividends upon the Series A Stock shall be
equivalent to six full quarter-yearly dividends or more, and, having so occurred
such default shall be deemed to exist thereafter until, but only until, all
accrued dividends on all shares of Series A Stock shall have been paid, or
declared and set aside for payment, to the end of the last preceding quarterly
dividend.
(D) Except as set forth herein, holders of Series A Stock shall have no
special voting rights and their consent shall not be required (except to the
extent they are entitled to vote with holders of Common Stock as set forth
herein) for taking any corporate action.
Section 4. Certain Restrictions.
--------------------
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Stock outstanding have been paid in full,
the Corporation shall not
(i) declare or pay dividends on, make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Stock;
(ii) declare or pay dividends or make any other distributions on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Stock, except
dividends paid ratably on the Series A Stock and all such parity stock on
3
<PAGE>
which dividends are payable or in arrears in proportion to the total amounts to
which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Stock, provided that
the Corporation may at any time redeem, purchase or otherwise acquire shares of
any such parity stock in exchange for shares of any stock of the Corporation
ranking junior (either as to dividends or upon dissolution, liquidation or
winding up) to the Series A Stock;
(iv) purchase or otherwise acquire for consideration any shares
of Series A Stock except in accordance with a purchase offer made in writing or
by publication (as determined by the Board of Directors) to all holders of such
shares upon such terms as the Board of Directors shall determine in good faith
will result in fair and equitable treatment among the respective series or
classes.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this Section 4,
purchase or otherwise acquire such shares at such time and in such manner.
Section 5. Re-acquired Shares. Any shares of Series A Stock purchased
------------------
or otherwise acquired by the Corporation in any manner shall be retired and
canceled promptly after such acquisition. All such shares shall upon their
cancellation become authorized but unissued shares of Preferred Stock and may be
reissued as part of a new series of Preferred Stock to be created by resolution
or resolutions of the Board of Directors, subject to the conditions and
restrictions on issuance set forth herein.
Section 6. Liquidation, Dissolution or Winding Up.
--------------------------------------
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Stock unless, prior thereto, the
holders of Series A Stock have received, for each such share, a number of
dollars equal to the Adjustment Number, plus an amount equal to accrued and
unpaid dividends and distributions thereon, whether or not declared, to the date
of such payment (the "Series A Liquidation Preference"). Following the payment
of the full amount of the Series A Liquidation Preference, no additional
distributions shall be made to the holders of Series A Stock unless, prior
thereto, the holders of Common Stock shall have received an amount per share
(the "Common Adjustment") equal to the quotient obtained by dividing (i) the
Series A Liquidation Preference by (ii) the Adjustment Number. Following the
payment of the full amount of the Series A Liquidation Preference and the Common
Adjustment in respect of all outstanding shares of Series A Stock and Common
Stock, respectively, holders of Series A Stock and holders of Common Stock shall
receive their ratable and proportionate share of the remaining assets to be
distributed to them in the ratio of
4
<PAGE>
the Adjustment Number to one with respect to such Preferred Stock and Common
Stock, on a per share basis, respectively.
(B) If there are not sufficient assets available to permit payment in
full of the Series A Liquidation Preference and the liquidation preferences of
all other series of preferred stock, if any, that rank on a parity with the
Series A Stock, then such remaining assets shall be distributed ratably to the
holders of such parity shares in proportion to their respective liquidation
preferences. If thereafter there are not sufficient assets available to permit
payment in full of the Common Adjustment, then such remaining assets shall be
distributed ratably to the holders of Common Stock (subject to the rights of any
Preferred Stock other than the Series A Stock).
Section 7. Consolidation, Merger, etc. If the Corporation enters into
--------------------------
any consolidation, merger, combination or other transaction in which the shares
of Common Stock are exchanged for or changed into other stock or securities,
cash and/or any other property, then in each such case the Series A Stock shall
at the same time be similarly exchanged or changed in an amount per share equal
to the Adjustment Number multiplied by the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the case may
be, into which or for which each share of Common Stock is changed or exchanged.
Section 8. No Redemption. The Series A Stock shall not be redeemable.
-------------
Section 9. Ranking. The Series A Stock shall rank junior to all other
-------
series of the Corporation's Preferred Stock as to the payment of dividends and
the distribution of assets, unless the terms of any such series provide
otherwise.
Section 10. Amendment. Whenever any Series A Stock is outstanding,
---------
the Certificate of Incorporation of the Corporation shall not be amended in any
manner that would materially adversely affect the powers, preferences or special
rights of the Series A Stock without the affirmative vote of the holders of a
majority of the outstanding shares of Series A Stock, voting separately as a
class.
Section 11. Fractional Shares. Series A Stock may be issued in
-----------------
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series A Stock.
WILD OATS MARKETS, INC.
By: /s/ Freya R. Brier
-----------------------------------------------
Name: Freya R. Brier
Title: General Counsel (Authorized Officer)
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF APRIL 3, 1999 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE THREE MONTHS ENDED APRIL 3, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> APR-03-1999
<CASH> 9,066
<SECURITIES> 0
<RECEIVABLES> 1,817
<ALLOWANCES> 155
<INVENTORY> 30,834
<CURRENT-ASSETS> 44,260
<PP&E> 126,614
<DEPRECIATION> 29,029
<TOTAL-ASSETS> 214,724
<CURRENT-LIABILITIES> 40,498
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 148,248
<TOTAL-LIABILITY-AND-EQUITY> 214,724
<SALES> 122,508
<TOTAL-REVENUES> 122,508
<CGS> 84,858
<TOTAL-COSTS> 84,858
<OTHER-EXPENSES> 43,015
<LOSS-PROVISION> 27
<INTEREST-EXPENSE> 90
<INCOME-PRETAX> (5,482)
<INCOME-TAX> (2,465)
<INCOME-CONTINUING> (3,017)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 281
<NET-INCOME> (3,298)
<EPS-PRIMARY> (0.25)
<EPS-DILUTED> (0.25)
</TABLE>
