<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 JULY 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 August 9, 1999, there were 13,278,724 shares outstanding of the
Registrant's Common Stock (par value $0.001 per share).
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TABLE OF CONTENTS
<TABLE>
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Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet
July 3, 1999 (Unaudited) and January 2, 1999 3
Consolidated Statement of Operations (Unaudited)
Three and Six Months Ended July 3, 1999 and June 27, 1998 4
Consolidated Statement of Cash Flows (Unaudited)
Six Months Ended July 3, 1999 and June 27, 1998 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
</TABLE>
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>
July 3, January 2,
1999 1999
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 13,881 $ 11,255
Accounts receivable (less allowance
for doubtful accounts of $211 and
$159, respectively) 1,892 1,762
Inventories 37,925 28,464
Prepaid expenses and other current assets 1,452 1,956
Deferred income taxes 3,663 812
-------- --------
Total current assets 58,813 44,249
-------- --------
Property and equipment, net 138,481 97,878
Intangible assets, net 109,354 55,827
Deposits and other assets 1,299 886
-------- --------
$307,947 $198,840
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 37,372 $ 29,022
Accrued liabilities 20,126 12,432
Notes payable 3,400 3,150
Current portion of obligations in capital leases 552
-------- --------
Total current liabilities 61,450 44,604
Long-term debt 85,979
Obligations in capital leases 1,031
Deferred income taxes 2,021 1,958
Other liabilities 2,674 1,334
-------- --------
153,155 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; 13,266,502 and
13,077,884 shares issued and outstanding 13 13
Additional paid-in capital 144,126 140,778
Retained earnings 10,340 10,262
Accumulated other comprehensive income (loss) 313 (109)
-------- --------
Total stockholders' equity 154,792 150,944
-------- --------
$307,947 $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 and Comprehensive Income
(In thousands, except per-share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Sales $135,337 $98,663 $257,846 $190,266
Cost of goods sold and occupancy costs 93,150 67,877 178,006 130,824
-------- ------- -------- --------
Gross profit 42,187 30,786 79,840 59,442
Operating expenses:
Direct store expenses 29,712 21,948 56,819 42,249
Selling, general and administrative expenses 4,888 3,856 9,269 7,627
Pre-opening expenses 937 432 1,600 981
Non-recurring expenses 393 10,894 393
-------- ------- -------- --------
Income from operations 6,650 4,157 1,258 8,192
Interest expense (income), net 551 (140) 641 (524)
-------- ------- -------- --------
Income before income taxes 6,099 4,297 617 8,716
Income tax expense 2,723 1,693 258 3,408
-------- ------- -------- --------
Net income before cumulative effect of change 3,376 2,604 359 5,308
in accounting principle
Cumulative effect of change in accounting principle,
net of tax 281
-------- ------- -------- --------
Net income 3,376 2,604 78 5,308
-------- ------- -------- --------
Other comprehensive income:
Foreign currency translation adjustment, net 257 8 424 30
-------- ------- -------- --------
Comprehensive income $ 3,633 $ 2,612 $ 502 $ 5,338
======== ======= ======== ========
Basic net income per common share $0.26 $0.20 $0.01 $0.41
======== ======= ======== ========
Diluted net income per common share $0.25 $0.19 $0.01 $0.39
======== ======= ======== ========
Average common shares outstanding 13,184 12,997 13,138 12,954
Dilutive effect of stock options 393 491 371 486
-------- ------- -------- --------
Average common shares outstanding assuming dilution 13,577 13,488 13,509 13,440
======== ======= ======== ========
</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>
Six Months Ended
July 3, June 27,
1999 1998
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 78 $ 5,308
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 8,567 5,985
Non-recurring expenses 10,794
Loss (gain) on disposal of property and equipment 14 (106)
Deferred tax provision (benefit) (1,462) 426
Change in assets and liabilities (net of acquisitions):
Inventories (4,066) (1,149)
Receivables and other assets 604 (1,017)
Accounts payable 8,342 (494)
Accrued liabilities 1,730 1,526
-------- --------
Net cash provided by operating activities 24,601 10,479
-------- --------
Cash Flows From Investing Activities
Capital expenditures (30,799) (27,138)
Payment for purchase of acquired
entities, net of cash acquired (64,995) (9,585)
-------- --------
Net cash used by investing activities (95,794) (36,723)
-------- --------
Cash Flows From Financing Activities
Net borrowings under line-of-credit agreement 75,500
Repayments on short-term debt (3,150) (705)
Proceeds from issuance of common stock 1,255 1,128
-------- --------
Net cash provided by financing activities 73,605 423
-------- --------
Effect of exchange rate changes on cash 214 30
-------- --------
Net increase (decrease) in cash and cash equivalents 2,626 (25,791)
Cash and cash equivalents at beginning of period 11,255 46,686
-------- --------
Cash and cash equivalents at end of period $ 13,881 $ 20,895
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 633 $ 6
======== ========
Cash paid for income taxes $ 1,240 $ 2,575
======== ========
Supplemental schedule of noncash investing and
financing activities:
Short-term note receivable for sale of property $ 365
========
Non-cash adjustment to purchase price for Nature's
acquisition $ 2,090
========
</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 July 3, 1999, the consolidated
statement of operations for the three and six months ended July 3, 1999 and
June 27, 1998, as well as the consolidated statement of cash flows for the
six months 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
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 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.
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
$32.1 million was allocated to goodwill, which is being amortized on a
straight-line basis over 40 years.
4. Earnings Per Share
The Company reports 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 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
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($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.
6. Subsequent Events
Subsequent to July 3, 1999, the Company signed an agreement to acquire all
of the outstanding stock of Henry's Marketplace, Inc. ("Henry's"), which
operates 11 natural food markets in the metropolitan San Diego area, in a
stock-for-stock exchange valued at approximately $46.0 million. The number
of shares issued by the Company will be based on the average price of the
Company's common stock in the 10 trading days preceding closing, subject to
a pricing collar between $26 and $32 per share. The Federal Trade
Commission has cleared the acquisition. The completion of the acquisition,
which is scheduled to close on September 1, 1999, is subject to certain
conditions to closing, and is intended to qualify as a pooling of interests
for financial accounting purposes. Accordingly, following the completion
of the transaction, the Company's consolidated financial statements for
1999, 1998, 1997, and 1996 will be restated to include Henry's financial
results for the respective periods, adjusted to conform with the Company's
accounting policies and presentation.
7
<PAGE>
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 78 stores in 20 states
and Canada. In the second quarter of 1999, the Company acquired ten operating
natural foods stores, opened one new store, closed two stores and relocated
three stores. The Company has also entered into a stock purchase agreement for
the acquisition of 11 operating natural foods stores, with the proposed
acquisition scheduled to close September 1, 1999. The Company's ability to
implement its growth strategy depends to a significant degree upon its ability
to open, relocate 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
second quarter of 1999, the Company opened one new store in Hinsdale, Illinois,
relocated three stores in Ft. Collins, Colorado, Salt Lake City, Utah and
Portland, Oregon, and closed two "Farm to Market" stores in Buffalo Grove,
Illinois and Tempe, Arizona (see "Notes to Consolidated Financial Statements"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Non-Recurring Expenses"). During the second quarter of 1999, the
Company also acquired seven operating natural foods stores in metropolitan
Portland, Oregon (of which one was subsequently relocated during the second
quarter), and three operating natural foods stores in Norwalk and Hartford,
Connecticut; and Melbourne, Florida. The Company plans to open five new stores
and acquire 11 stores (as described below) during the remainder of 1999.
Further, the Company is actively looking for other acquisition opportunities and
may complete additional acquisitions in the remainder of 1999 and 2000.
Subsequent to July 3, 1999, the Company signed an agreement to acquire all of
the outstanding stock of Henry's Marketplace, Inc. ("Henry's"), which operates
11 natural food markets in the metropolitan San Diego area, in a stock-for-stock
exchange valued at approximately $46.0 million. The number of shares issued by
the Company will be based on the average price of the Company's common stock in
the 10 trading days preceding closing, subject to a pricing collar between $26
and $32 per share. The Federal Trade Commission has cleared the acquisition.
The completion of the acquisition, which is scheduled to close on September 1,
1999, is subject to certain conditions to closing, and is intended to qualify as
a pooling of interests for financial accounting purposes.
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 the seven-
store Nature's acquisition concluded in the second quarter of 1999, and the
eleven-store Henry's acquisition contemplated to be completed in the third
quarter of 1999, 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 closed two stores in Tempe,
Arizona, and Buffalo Grove, Illinois, and relocated three stores in Ft. Collins,
Colorado, Salt Lake City, Utah and Portland, Oregon during the second quarter
and expects to relocate additional stores in the year 2000.
Store Format and Clustering Strategy. The Company operates two store formats:
supermarket and urban. The supermarket format is generally 15,000 to 35,000
square feet, and typically generates higher sales and store contribution than
the 5,000 to 15,000 square foot urban format stores. The Company's results of
operations have been and will continue to be affected by the mix of supermarket
and urban format stores opened or acquired and whether stores are being opened
in markets where the Company has an existing presence. The Company expects to
focus primarily on opening or acquiring supermarket format stores in the future
but will consider additional urban stores when appropriate opportunities exist.
In addition, the Company pursues a strategy of clustering stores in each of its
markets to increase overall sales, achieve operating efficiencies and further
penetrate markets. The Company believes this strategy has resulted in increased
overall sales in each of its markets. In the past, when the Company has opened
a store in a market where it had an existing presence, the Company has
experienced a decline in the sales and operating results at certain of its
existing stores in that market. However, over time, the Company believes the
affected stores generally will achieve store contribution margins comparable to
prior levels on the lower base of sales. The Company intends to continue to
pursue its store clustering strategy and
9
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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 clustering 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, Denver, Colorado,
Hartford, Connecticut, Las Vegas, Nevada, Albuquerque, New Mexico, Nashville,
Tennessee 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 Six Months Ended
July 3, June 27, July 3, June 27,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold and occupancy costs 68.8 68.9 69.0 68.8
----- ----- ----- -----
Gross margin 31.2 31.1 31.0 31.2
Direct store expenses 22.0 22.1 22.0 22.2
Selling, general and administrative expenses 3.6 4.0 3.6 4.0
Pre-opening expenses 0.7 0.6 0.6 0.5
Non-recurring expenses 4.3 0.2
----- ----- ----- -----
Income from operations 4.9 4.4 0.5 4.3
Interest expense (income), net 0.4 (0.4) 0.2 (0.3)
----- ----- ----- -----
Income before income taxes 4.5 4.8 0.3 4.6
Income tax expense 2.0 1.9 0.1 1.8
----- ----- ----- -----
Net income before cumulative effect
of change in accounting principle 2.5 2.9 0.2 2.8
Cumulative effect of change in accounting 0.1
principle, net of taxes
----- ----- ----- -----
Net income 2.5% 2.9% 0.1% 2.8%
===== ===== ===== =====
</TABLE>
Sales. Sales for the three months ended July 3, 1999 increased 37.2% to $135.3
million from $98.7 million for the same period in 1998. Sales for the six
months ended July 3, 1999 increased 35.5% to $257.8 million from $190.3 million
for the same period in 1998. The increase is primarily due to the opening of
two new stores, the acquisition of 13 stores, and the relocation of five stores
in the first six 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 second 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 5% for the third quarter of 1999. See "Risk Factors-
Fluctuations in Financial Results".
Gross Profit. Gross profit for the three months ended July 3, 1999 increased
37.0% to $42.2 million from $30.8 million for the same period in 1998. Gross
profit for the six months ended July 3, 1999 increased 34.3% to $79.8 million
from $59.4 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 July
3, 1999 remained relatively constant at 31.2% as compared to 31.1% for the same
period in 1998. Gross profit as a percentage of sales for the six months ended
July 3, 1999 decreased to 31.0% from 31.2% in the same period in 1998. The
decrease is primarily attributable to year-end reward discount coupons issued in
early
10
<PAGE>
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
margin performance in the Company's two "Farm to Market" stores, which were
closed in the second quarter of 1999 (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 July 3,
1999 increased 35.4% to $29.7 million from $21.9 million for the same period in
1998. Direct store expenses for the six months ended July 3, 1999 increased
34.5% to $56.8 million from $42.2 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 July 3, 1999 decreased to 22.0% from 22.1% for
the same period in 1998. Similarly, direct store expenses as a percentage of
sales for the six months ended July 3, 1999 decreased to 22.0% from 22.2% for
the same period in 1998. The decreases are primarily attributable to the
matured performance of the new stores opened in 1998, as well as improved
control of direct store expenses, particularly payroll and benefits costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended July 3, 1999 increased 26.8%
to $4.9 million from $3.9 million for the same period in 1998. Selling, general
and administrative expenses for the six months ended July 3, 1999 increased
21.5% to $9.3 million from $7.6 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 and six months ended July 3, 1999 decreased to 3.6% from 4.0% for
the same periods in 1998. The decreases are the result of greater leverage of
overhead expenses over higher sales volumes.
Pre-Opening Expenses. Pre-opening expenses for the three months ended July 3,
1999 increased 116.9% to $937,000 from $432,000 for the same period in 1998.
Pre-opening expenses for the six months ended July 3, 1999 increased 63.1% to
$1.6 million from $981,000 for the same period in 1998. The increase is
attributable to the opening of two new stores and five relocated stores during
the first six months of 1999, as compared to the opening of three new stores and
one relocated store 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 July 3, 1999
increased to 0.7% from 0.6% for the same period in 1998. Similarly, pre-opening
expenses as a percentage of sales for the six months ended July 3, 1999
increased to 0.6% from 0.5% for the same period in 1998. The increases are
primarily due to a higher number of new and relocated stores during the first
six months of 1999.
Non-Recurring Expenses. There were no non-recurring expenses during the three
months ended July 3, 1999, as compared to $393,000 for the same period in 1998.
Non-recurring expenses of approximately $10.9 million were incurred during the
first quarter of 1999, resulting from certain decisions by the Company's
management regarding the Company's operations and selected store closures.
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
July 3, 1999 was $551,000 as compared to net interest income of $140,000 for the
same period in 1998. Net interest expense for the six months ended July 3, 1999
was $641,000 as compared to net interest income of $524,000 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 acquisition of 13 stores
in the first six months of 1999, and to lower levels of invested cash in the
first six months 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 $24.6 million during the six
months ended July 3, 1999 as compared to $10.5 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 non-recurring expenses. 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 $95.8 million during the six months
ended July 3, 1999 as compared to $36.7 million during the same period in 1998.
The increase is due to the opening of two new stores, the acquisition of 13
stores, the relocation of five stores, and several store remodels in the first
six months of 1999, as well as the construction costs incurred for five new or
relocated stores now under construction which are expected to open in the
remainder of 1999, as compared to three new stores, one relocated store and six
acquired stores in the first six 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 $73.6 million during the six
months ended July 3, 1999 as compared to $423,000 during the same period in
1998. The increase reflects increased borrowing under the Company's revolving
line of credit, as well as the repayment of a $3.2 million note payable.
11
<PAGE>
Subsequent to the end of the second quarter, the Company expanded its $80.0
million revolving line of credit to $120.0 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 August
9, 1999, there were $80.0 million in borrowings outstanding under this facility.
The Company spent approximately $30.8 million during the first six months of
1999 and anticipates that it will spend approximately $20 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'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 three parcels of real property on which it has constructed or
relocated certain stores. The Company opened two stores on owned property in
the second quarter of 1999, and acquired a third operating store and the
underlying property in the second quarter as part of the acquisition of the
outstanding stock of Nature's Fresh Northwest, Inc. 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 two of the parcels of 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 Company has determined that all major point-of-sale systems at the
metropolitan Portland, Oregon Nature's stores purchased in the second quarter of
1999 are Year 2000 compliant, and that all such systems in the 11 San Diego,
California Henry's stores expected to be acquired on September 1, 1999 are Year
2000 compliant. The Company's 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, and is
currently testing its upgrades. 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.
12
<PAGE>
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.
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.
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
At the Company's Annual Meeting of Stockholders, held on May 5, 1999, the
Company's stockholders elected the following directors for a three-year term:
Elizabeth C. Cook, David Ferguson and James McElwee. The directors were elected
by the following number of votes:
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
Elizabeth C. Cook 9,700,175 21,569
David Ferguson 9,701,290 20,454
James McElwee 9,700,203 21,541
</TABLE>
The remaining directors whose terms continue after the meeting date are John
Shields, Brian Devine, Morris Siegel, Michael C. Gilliland and David M.
Chamberlain. Also at such meeting,, PriceWaterhouseCoopers LLP was ratified as
the Company's independent accountants for the fiscal year ending January 1,
2000, by a vote of 9,693,698 for, 8,740 against and 19,306 abstained. There were
no broker non-votes.
Item 5. Other Information
Not applicable.
13
<PAGE>
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 (2)
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.(3)
10.1** Employment Agreement dated June, 14, 1999 between Mary
Beth Lewis and the Registrant.
10.2+ Employment Agreement dated June 1, 1999 between James Lee
and the Registrant.
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 Quarterly Report on Form 10-Q
for the quarter ended April 3, 1999 (File Number 0-21577).
(3) Incorporated by reference to the Registrant's Registration Statement on
Form 8-A dated May 21, 1998.
(b) Reports on Form 8-K.
The Company filed two reports on Form 8-K during the three-month period
ended July 3, 1999. The first report, dated May 28, 1999, reported the
acquisition of the outstanding stock of Nature's Fresh Northwest, Inc,. a
Delaware corporation that owned seven operating natural food stores, with
one new store and one relocation in development. An amendment to such
report on Form 8-K-A was filed on August 16, 1999, to incorporate certain
financial statements of Nature's Fresh Northwest, Inc.
The second report on Form 8-K, dated August 2, 1999, reported the execution
of a stock purchase agreement between the Company, Henry's Marketplace,
Inc. ("Henry's") and the stockholders of Henry's Marketplace, Inc.,
pursuant to which the Company proposed to acquire all of the outstanding
stock of Henry's, which owns and operates 11 natural foods grocery stores
in the metropolitan San Diego, California area. The transaction referenced
in the Form 8-K is contemplated to close on September 1, 1999.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boulder, County of
Boulder, State of Colorado, on the 17th day of August 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
<PAGE>
EXHIBIT 10.1
[LOGO OF WILD OATS APPEARS HERE]
June 14, 1999
Ms. Mary Beth Lewis
C/o Wild Oats Markets
3375 Mitchell Lane
Boulder, CO 80301
Re: EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is entered into as of the 1st
day of June, 1999, by and between Wild Oats Markets, Inc. (the "Corporation"), a
Delaware corporation and Mary Beth Lewis (the "Executive"). The Corporation
desires to employ Executive, and Executive desires to be an Executive Officer of
the Corporation, pursuant to the terms and conditions set forth herein. In
consideration of the foregoing and the promises and covenants set forth below,
the parties agree as follows:
1. Employment. The Corporation hereby employs Executive as Chief Financial
----------
Officer and Vice President Finance, and Executive agrees to be employed in such
position during the term of this Agreement. Executive shall devote her full
time and efforts to perform her duties faithfully and diligently and, to the
best of her ability, to advance the interests of the Corporation.
2. Compensation. (a) The Corporation shall pay Executive a base salary of
------------
$150,000.00 per year, with such increases as may be approved by the Compensation
Committee of Corporation's Board of Directors, payable in accordance with the
Corporation's practices in effect from time to time.
(b) In addition, Executive shall be provided with 100% Corporation-paid
medical and dental insurance; four weeks paid vacation per year; and other
benefits that are comparable to the benefits offered to other executive officers
of the Corporation in general, including stock option grants as approved by the
Compensation Committee of the Corporation's Board of Directors. The Corporation
also shall reimburse Executive for all out-of-pocket expenses reasonably
incurred and paid by her in the performance of her duties pursuant to this
Agreement. Such reimbursement shall be in accordance with the Corporation's
policies, and Executive shall furnish to the Corporation the documentation
required to support the deductibility of such expenses for federal income tax
purposes. All payments made under this Agreement are subject to all deductions
required by law.
(c) Executive also shall be entitled to participate in an annual bonus
plan wherein Executive shall receive a bonus of up to fifty percent (50%) of her
base salary based upon
<PAGE>
Ms. Mary Beth Lewis
Page 2
exceeding the internally budgeted EBIT (earnings before interest and taxes) for
the corresponding fiscal year achieved by the Corporation. Budgeted annual EBIT
shall be determined based on the annual operating plan submitted to and approved
by the Corporation's Board of Directors. The bonus payment, if any, shall be
made reasonably promptly after audited financial statements are available to the
Corporation and may be paid in either cash or stock options, or a combination of
both, as mutually agreed upon between Executive and the Compensation Committee.
3. Term.
----
a. The term of this Agreement (the "Term") shall commence on the date
hereinabove mentioned and shall terminate on May 30, 2000; provided, however,
that the Corporation may extend this Agreement for additional successive one (1)
year terms upon approval by the Compensation Committee of the Board of
Directors. Notwithstanding the foregoing, however, if the Executive's
employment is terminated as the result of a Change in Control (as defined in
Section 3(b)(v)) during the Term of this Agreement, this Agreement shall
continue in effect for a period of twenty-four (24) months after the last day of
the month in which such Change in Control occurred.
b. The Term may be terminated at any time upon the occurrence of any of
the following events:
i). The death or permanent disability of Executive;
ii). Executive's voluntary resignation;
iii). Executive's discharge for cause;
iv). Upon the thirtieth (30th) day following written notice of
termination other than for cause (the "Termination Without Cause
Notice") from the Corporation to Executive; or
v). On Executive's election for Good Reason upon a Change in
Control. For purposes of this Agreement, a Change in Control shall be
deemed to occur if:
1. any Person (as defined below) becomes the Beneficial Owner
(as defined below), directly or indirectly, of securities of
the Corporation representing a majority or more of the
combined voting power of the Corporation's then outstanding
securities. For purposes of this Agreement, (A) the term
"Person" is used as such term is used in Section 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"); provided, however, that unless this
Agreement provides to the contrary, the term shall not
include Elizabeth C. Cook, Michael C. Gilliland, Chase
Venture Capital Associates or their affiliates, the
Corporation, any trustee or other fiduciary holding
securities under an employee benefit plan of the
Corporation, or any corporation owned, directly or
indirectly, by the stockholders of the Corporation in
substantially the same proportions as their ownership of
stock of the Corporation, and (B) the term "Beneficial
Owner" shall have the meaning given to such term in Rule
13d-3 under the Exchange Act;
2. during any period of two consecutive years following the
execution of this Agreement, individuals who at the
beginning of such period
<PAGE>
Ms. Mary Beth Lewis
Page 3
constitute the Board, and any new director (other than a
director designated by a person who has entered into an
agreement with the Corporation to effect a transaction
described in Sections 3(b)(v), (1) or (3)) whose election by
the Board or nomination for election by the Corporation's
stockholders was approved by a vote of at least a majority
of the directors then still in office who either were
directors at the beginning of such period or whose election
or nomination for election was previously so approved
(hereinafter referred to as "Continuing Directors"), cease
for any reason to constitute at least a majority thereof;
3. the stockholders of the Corporation consummate a plan of
complete liquidation of the Corporation or an agreement for
the sale or disposition by the Corporation to an unrelated
third party or parties of all or substantially all of the
Corporation's assets.
c. Executive shall be considered permanently disabled if Executive is
absent from employment or unable to render services hereunder on a full-time
basis by reason of physical or mental illness or disability for three (3) months
or more in the aggregate in any consecutive twelve month period during the Term.
d. As used in Paragraph 3(b)(ii), "voluntary resignation" means Executive
has resigned for any reason other than at the express written request, whether
or not for cause, of the Board.
e. As used in Paragraph 3(b)(iii), "cause" shall mean only that (i)
Executive has refused to perform or discharge her material objections or duties
hereunder for thirty (30) days after notice from the Board, or (ii) Executive
has engaged in illegal or other wrongful conduct substantially detrimental to
the business or reputation of the Corporation.
4. Compensation upon Termination
a. If this Agreement is terminated pursuant to Paragraphs 3(b)(i) or
3(b)(ii), this Agreement shall terminate immediately or at such later date as
shall be designated by the Board and all of Executive's rights hereunder shall
terminate effective upon such termination.
b. If this Agreement is terminated pursuant to Paragraph 3(b)(iii), this
Agreement shall terminate immediately and all of Executive's rights hereunder
shall terminate effective upon such termination and Executive shall not be
entitled to any further benefits. Except as provided above and as otherwise
specified in any notice of termination, Executive shall not continue after
termination to be an Executive Officer of the Corporation for any purpose and
all rights Executive might thereafter have as an Executive Officer pursuant to
any plan shall cease, except as expressly provided to the contrary in writing
under any such plan.
c. If the Corporation should terminate this Agreement pursuant to
Paragraph 3(b)(iv) by giving a Termination Without Cause Notice:
i). Executive shall cease to be Chief Financial Officer, or to hold
such other office or position Executive then holds in the Corporation or
any subsidiary or affiliate thereof, effective upon the date specified in
the Termination Without Cause Notice (the "Effective Date").
<PAGE>
Ms. Mary Beth Lewis
Page 4
ii). The Corporation shall be obligated and shall continue to pay
Executive a salary at Executive's then annual salary (excluding bonus) for
a period of one (1) year following the Effective Date. Such payments shall
be made in installments payable as provided in Section 2 hereof.
d. If this Agreement should terminate pursuant to Paragraph 3(b)(v):
i). General. If any of the events described in Section 3(b)(v)
constituting a Change in Control shall have occurred, and the Executive
terminates for Good Reason, the Executive shall be entitled to the benefits
provided in Section 4(d)(iii) upon the subsequent termination of her
employment during the term of this Agreement. In the event the Executive's
employment with the Corporation is terminated for any reason and
subsequently a Change in Control occurs, she shall not be entitled to any
benefits hereunder.
ii) Good Reason. The Executive shall be entitled to terminate her
employment for Good Reason. For purposes of this Agreement, "Good Reason"
shall mean, without her express written consent, the occurrence after a
Change in Control of any of the following circumstances:
(A) a significant adverse alteration in the nature or status of
her responsibilities or the conditions of her employment from those in
effect immediately prior to such Change in Control;
(B) the Corporation's reduction of her annual base salary as in
effect on the date hereof or as the same may be increased from time to
time except for proportional across-the-board salary reductions
similarly affecting all management personnel of the Corporation and
all management personnel of any Person in control of the Corporation;
(C) the relocation of the Corporation's offices at which she is
principally employed immediately prior to the Change of Control to a
location more than 25 miles further from the Executive's home than the
previous location;
(D) the Corporation's failure to pay to the Executive any portion
of her current compensation or to pay any portion of an installment of
deferred compensation under any deferred compensation program of the
Corporation within thirty (30) days of the date such compensation is
due;
(E) the Corporation's failure to continue in effect any material
compensation or benefit plan in which the Executive participates or to
arrange for him to receive any perquisites to which she is entitled
immediately prior to the Change in Control, unless an equitable
arrangement (embodied in an ongoing substitute or alternative plan)
has been made with respect to such plan, or the Corporation's failure
to continue the Executive's participation therein (or in such
substitute or alternative plan) on a basis not materially less
favorable, both in terms of the amount of benefits provided and the
level of participation relative to other participants, as existed at
the time of the Change in Control;
(F) the Corporation's failure to continue to provide the
Executive with benefits substantially similar to those enjoyed by him
under any of the Corporation's life insurance, medical, health and
accident, or disability plans in which she was participating at the
time of the Change in Control, the taking of any action by the
Corporation which would directly or indirectly materially reduce
<PAGE>
Ms. Mary Beth Lewis
Page 5
any of such benefits, or the failure by the Corporation to provide him
with the number of paid vacation days to which she was entitled
pursuant to this Agreement.
(G) the Corporation's failure to obtain a satisfactory agreement
from any successor to assume and agree to perform this Agreement, as
contemplated in Section 7.
(H) the continuation or repetition, after written notice of
objection from the Executive, of harassing or denigrating treatment of
him inconsistent with her position with the Corporation.
(I) The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any circumstances
constituting Good Reason hereunder.
iii). Upon a termination for Good Reason under Paragraph 3(b)(v), the
Corporation shall be obligated and shall continue to pay Executive a salary
at Executive's then annual salary (excluding bonus) for a period of two (2)
years following the Effective Date. Such payments shall be made in
installments payable as provided in Section 2 hereof, provided, however,
that Executive may elect a lump sum payment discounted at the applicable
long term federal interest rate.
iv). If the Executive's employment is terminated under Paragraph
3(b)(v), all outstanding stock options held by Executive shall become
immediately and fully vested. Such options must be exercised within 30
days of the Effective Date.
v). The Corporation shall pay to the Executive all legal fees and
expenses reasonably incurred by him, in contesting or disputing any such
termination or in seeking to obtain or enforce any right or benefit
provided by this Agreement.
vi). If by reason of Section 280G of the Internal Revenue Code
("Code") any payment or benefit received or to be received by the Executive
in connection with a Change in Control or the termination of her employment
would not be deductible (in whole or in part) by the Corporation, an
Affiliate or other person making such payment or providing such benefit,
then the severance payments payable under (iii) above shall be reduced
until no portion of the total payments is not deductible by reason of
Section 280G. For purposes of this limitation, (A) no portion of the total
payments, the receipt or enjoyment of which the Executive shall have
effectively waived in writing prior to the date of payment of the Severance
Payments shall be taken into account; (B) no portion of the total payments
shall be taken into account which in the opinion of the Corporation's
counsel does not constitute a "parachute payment" within the meaning of
Code Section 280G(b)(2); (C) the severance payments shall be reduced only
to the extent necessary so that the severance payments in their entirety
constitute reasonable compensation for services actually rendered within
the meaning of Code Section 280G(b)(4), and (D) the value of any noncash
benefit or any deferred payment or benefit included in the Severance
Payments shall be determined by the Corporation's independent auditors in
accordance with the principles of Code Sections 280G(d)(3) and (4). For
purposes of this Section 4(d)(vi), the term "Affiliate" means the
Corporation's successors, any Person whose actions result in a Change in
Control or any corporation affiliated (or which, as a result of the
completion of the transactions causing a Change in Control shall become
affiliated) with the Corporation within the meaning of Code Section 1504.
<PAGE>
Ms. Mary Beth Lewis
Page 6
(vii) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 4(d) by seeking other employment or
otherwise nor shall the amount of any payment or benefit provided for in this
Section 4(d) be reduced by any compensation earned by the Executive as the
result of employment by another employer or self-employment or by retirement
benefits.
5. Return of Documents and Property. Upon the termination of Executive's
--------------------------------
employment by the Corporation, or at any time upon the request of the
Corporation, Executive (or her heir or personal representative) shall deliver to
the Corporation: (a) all documents and materials containing trade secrets and
other confidential information relating to the Corporation's business and
affairs, and (b) all other documents, materials and other property belonging to
the Corporation or its affiliated companies that are in the possession or under
the control of Executive.
6. Competition, Confidential Information.
-------------------------------------
a. The Corporation and Executive agree that when the term "Confidential
Information" is used in this Section 6, that said term shall refer only to
Confidential Information of the Corporation which is not generally known to
others engaged in similar businesses or activities as the Corporation, or which
was not known by Executive prior to her employment by the Corporation.
b. The Executive and the Corporation recognize that due to the nature of
her engagement hereunder, and the relationship of the Executive to the
Corporation, the Executive will have access to and will acquire, and may assist
in developing confidential and proprietary information which is not generally
known to others engaged in similar business or activities as the Corporation, or
which was not known by Executive prior to her employment by the Corporation
(hereinafter "Confidential Information") relating to the business and operations
of the Corporation, including, without limiting the generality of the foregoing,
information with respect to its present and prospective products, systems,
customers, agents, processes, and sales and marketing methods except that such
Confidential Information shall exclude information already in the public domain
or which enters the public domain through sources other than the Executive. The
Executive acknowledges that such Confidential Information is of central
importance to the business of the Corporation and that disclosure of it to
others or its use by others could cause substantial loss to the Corporation. The
Executive and the Corporation also recognize that an important part of the
Executive's duties will be to develop good will for the Corporation through her
personal contact with customers, agents and others having business relationships
with the Corporation, and that there is a danger that this good will, a
proprietary asset of the Corporation, may follow the Executive if and when her
relationship with the Corporation is terminated. The Executive accordingly
agrees to the following provisions:
i). During the term of this Agreement and for a period of twelve
(12) months thereafter, the Executive will not personally, either on her
own behalf, or on behalf of any other person or entity, except for the
account of and on behalf of the Corporation: (A) solicit employment from
or become an employee of any company which was, at the time of termination
of this Agreement or within six (6) months prior to that date, a competitor
of the Corporation; (B) hire any individual who was, at the time of
termination of this Agreement or within six (6) months prior to that date,
an employee of the Corporation; or
<PAGE>
Ms. Mary Beth Lewis
Page 7
(C) compete with the Corporation in the area of natural foods or grocery
supermarkets anywhere in the United States.
ii). Nothing in this Section 6 shall be construed to prevent the
Executive from owning, as an investment, not more than 1% of a class of
equity securities issued by any competitor of the Corporation and publicly
traded and registered under the federal securities laws.
iii). The Executive will keep confidential any Confidential
Information of the Corporation which is now known to him or which hereafter
may become known to him as a result of her employment or association with
the Corporation and shall not at any time directly or indirectly disclose
any such Confidential Information to any person or entity, or use the same
in any way, other than in connection with the business of the Corporation,
during and after the term of this Agreement. Confidential Information of
the Corporation shall include, but not be limited to, the following: (A)
the business operations or internal structure of the Corporation, (B) the
employees, customers or clients of the Corporation, (C) past, present or
future research done by the Corporation respecting the business or
operations of the Corporation or customers, clients, or potential customers
or clients of the Corporation, (D) the Executive's work performed for any
customer or client of the Corporation, (E) any method or procedure relating
or pertaining to projects developed by the Corporation or contemplated by
the Corporation to be developed, or (F) any other Confidential Information
of the Corporation. Further, upon leaving the employ of the Corporation for
any reason whatsoever, the Executive shall not take with him, without the
prior written consent of the Board of Directors of the Corporation,
anything containing Confidential Information relating to or pertaining to
the Corporation, whether in written, graphic, recorded, or computer-
generated form, or in any other form.
iv). A violation by the Executive of the provisions of this Section
would cause irreparable injury to the Corporation, and there is no adequate
remedy at law for such violation, the Corporation shall have the right, in
addition to any other remedies available to it at law or in equity, to
enjoin the Executive from violating these provisions.
7. Successors; Binding Agreement. The Corporation shall, upon the Executive's
-----------------------------
written request, require that any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Corporation expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Corporation
would be required to perform it if no such succession had taken place. Failure
of any such successor to assume and agree to perform this Agreement within 30
days of such written request upon such successor to assume and agree to perform
this Agreement shall be a breach of this Agreement and shall entitle the
Executive to terminate her employment and receive compensation from the
Corporation in the same amount and on the same terms to which she would be
entitled hereunder if she terminates her employment for Good Reason following a
Change of Control. For purposes of implementing the foregoing, the date which
is 30 days after the Corporation makes a written request upon a successor to
assume and agree to perform this Agreement shall be deemed the Date of
Termination. Where the context requires, "Corporation" shall mean the
Corporation as hereinbefore defined and any successor to its business and/or
assets as aforesaid which assumes and agrees to perform this Agreement by
operation of law, or otherwise.
<PAGE>
Ms. Mary Beth Lewis
Page 8
8. Assignment. Executive's rights and obligations under this Agreement
----------
shall not be assignable by Executive. The Corporation's rights and obligations
under this Agreement shall not be assignable by the Corporation except as
incident to the transfer, by sale, merger, liquidation, or otherwise, of all or
substantially all of the business of the Corporation.
9. Severability. The invalidity or unenforceability of any provision of
------------
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
10. Counterparts. This Agreement may be executed in several counterparts, each
------------
of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
11. Notices. Any notice required or permitted under this Agreement shall be
-------
given in writing and shall be deemed to have been effectively made or given if
personally delivered, or if telegraphed, telexed, cabled, faxed, e-mailed, or
mailed to the other party at its address set forth below in this Section 11, or
at such other address as such party may designate by written notice to the other
party hereto. Any effective notice hereunder shall be deemed given on the date
personally delivered or on the date telegraphed, telexed, cabled faxed, e-
mailed, or deposited in the United States mail (sent by certified mail, return
receipt requested) mailed postage prepaid, as the case may be at the following
addresses:
To Corporation: Wild Oats Markets, Inc.
Attention: Freya Brier, General Counsel
3375 Mitchell Lane
Boulder, CO 80301
(303) 440-5220
Fax (303) 440-5280
To Executive: Mary Beth Lewis
725 Union Avenue
Boulder, CO 80304
12. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Colorado.
13. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding of
the Executive and the Corporation with respect to its subject matter and
supersedes any and all prior understandings of the parties. This Agreement may
not be amended, modified, or discharged orally, but only by an instrument in
writing signed by both parties.
<PAGE>
Ms. Mary Beth Lewis
Page 9
IN WITNESS WHEREOF, the parties have set their hands and seals as of the
day and year above written.
THE CORPORATION
Wild Oats Markets, Inc.
By /s/ Freya R. Brier
---------------------------------
THE EXECUTIVE
By /s/ Mary Beth Lewis
---------------------------------
Mary Beth Lewis
<PAGE>
EXHIBIT 10.2
[LOGO OF WILD OATS COMMUNITY MARKET APPEARS HERE]
June 1, 1999
Mr. James Lee
C/o Wild Oats Markets
3375 Mitchell Lane
Boulder, CO 80301
Re: EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is entered into effective as
of the 29th day of October, 1998, by and between Wild Oats Markets, Inc. (the
"Corporation"), a Delaware Corporation and James Lee (the "Executive") and is a
renewal of an original employment agreement dated September 1996. The
Corporation desires to employ Executive, and Executive desires to be an
Executive Officer of the Corporation, pursuant to the terms and conditions set
forth herein. In consideration of the foregoing and the promises and covenants
set forth below, the parties agree as follows:
1. Employment. The Corporation hereby employs Executive as President and
----------
Chief Operating Officer (the "COO"), and Executive agrees to be employed in such
position during the term of this Agreement. Executive shall devote his full
time and efforts to perform his duties faithfully and diligently and, to the
best of his ability, to advance the interests of the Corporation.
2. Compensation. (a) The Corporation shall pay Executive a base salary of
------------
$250,000.00 per year, with such increases as may be approved by the Compensation
Committee of Corporation's Board of Directors, payable in accordance with the
Corporation's practices in effect from time to time.
(b) In addition, Executive shall be provided with a car and reimbursement
for all business related automobile expenses; 100% Corporation-paid medical and
dental insurance; four weeks paid vacation per year; and other benefits that are
comparable to the benefits offered to other executive officers of the
Corporation in general, including stock option grants as approved by the
Compensation Committee of the Corporation's Board of Directors. The Corporation
also shall reimburse Executive for all out-of-pocket expenses reasonably
incurred and paid by him in the performance of his duties pursuant to this
Agreement. Such reimbursement shall be in accordance with the Corporation's
policies, and Executive shall furnish to the Corporation the documentation
required to support the deductibility of such expenses for federal income tax
purposes. All payments made under this Agreement are subject to all deductions
required by law.
<PAGE>
Mr. James Lee
Page 2
(c) Executive also shall be entitled to participate in an annual bonus
plan wherein Executive shall receive a bonus of up to fifty percent (50%) of his
base salary based upon exceeding the internally budgeted EBIT (earnings before
interest and taxes) for the corresponding fiscal year achieved by the
Corporation. Budgeted annual EBIT shall be determined based on the annual
operating plan submitted to and approved by the Corporation's Board of
Directors. The bonus payment, if any, shall be made reasonably promptly after
audited financial statements are available to the Corporation and may be paid in
either cash or stock options, or a combination of both, as mutually agreed upon
between Executive and the Compensation Committee.
3. Term.
----
a. The term of this Agreement (the "Term") shall commence on the date
hereinabove mentioned and shall terminate on June 1, 2000; provided, however,
that the Corporation may extend this Agreement for additional successive one (1)
year terms upon approval by the Compensation Committee of the Board of
Directors. Notwithstanding the foregoing, however, if the Executive's employment
is terminated as the result of a Change in Control (as defined in Section
3(b)(v)) during the Term of this Agreement, this Agreement shall continue in
effect for a period of twenty-four (24) months after the last day of the month
in which such Change in Control occurred.
b. The Term may be terminated at any time upon the occurrence of any of
the following events:
i). The death or permanent disability of Executive;
ii). Executive's voluntary resignation;
iii). Executive's discharge for cause;
iv). Upon the thirtieth (30th) day following written notice of
termination other than for cause (the "Termination Without Cause
Notice") from the Corporation to Executive; or
v). On Executive's election for Good Reason upon a Change in
Control. For purposes of this Agreement, a Change in Control shall be
deemed to occur if:
1. any Person (as defined below) becomes the Beneficial Owner
(as defined below), directly or indirectly, of securities of
the Corporation representing a majority or more of the
combined voting power of the Corporation's then outstanding
securities. For purposes of this Agreement, (A) the term
"Person" is used as such term is used in Section 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"); provided, however, that unless this
Agreement provides to the contrary, the term shall not
include Elizabeth C. Cook, Michael C. Gilliland, Chase
Venture Capital Associates or their affiliates, the
Corporation, any trustee or other fiduciary holding
securities under an employee benefit plan of the Corporation,
or any corporation owned, directly or indirectly, by the
stockholders of the Corporation in substantially the same
proportions as their ownership of stock of the Corporation,
and (B) the term "Beneficial Owner" shall have the meaning
given to such term in Rule 13d-3 under the Exchange Act;
<PAGE>
Mr. James Lee
Page 3
2. during any period of two consecutive years following the
execution of this Agreement, individuals who at the beginning
of such period constitute the Board, and any new director
(other than a director designated by a person who has entered
into an agreement with the Corporation to effect a
transaction described in Sections 3(b)(v), (1) or (3)) whose
election by the Board or nomination for election by the
Corporation's stockholders was approved by a vote of at least
a majority of the directors then still in office who either
were directors at the beginning of such period or whose
election or nomination for election was previously so
approved (hereinafter referred to as "Continuing Directors"),
cease for any reason to constitute at least a majority
thereof;
3. the stockholders of the Corporation consummate a plan of
complete liquidation of the Corporation or an agreement for
the sale or disposition by the Corporation to an unrelated
third party or parties of all or substantially all of the
Corporation's assets.
c. Executive shall be considered permanently disabled if Executive is
absent from employment or unable to render services hereunder on a full-time
basis by reason of physical or mental illness or disability for three (3) months
or more in the aggregate in any consecutive twelve month period during the Term.
d. As used in Paragraph 3(b)(ii), "voluntary resignation" means Executive
has resigned for any reason other than at the express written request, whether
or not for cause, of the Board.
e. As used in Paragraph 3(b)(iii), "cause" shall mean only that (i)
Executive has refused to perform or discharge his material objections or duties
hereunder for thirty (30) days after notice from the Board, or (ii) Executive
has engaged in illegal or other wrongful conduct substantially detrimental to
the business or reputation of the Corporation.
4. Compensation upon Termination
a. If this Agreement is terminated pursuant to Paragraphs 3(b)(i) or
3(b)(ii), this Agreement shall terminate immediately or at such later date as
shall be designated by the Board and all of Executive's rights hereunder shall
terminate effective upon such termination.
b. If this Agreement is terminated pursuant to Paragraph 3(b)(iii), this
Agreement shall terminate immediately and all of Executive's rights hereunder
shall terminate effective upon such termination and Executive shall not be
entitled to any further benefits. Except as provided above and as otherwise
specified in any notice of termination, Executive shall not continue after
termination to be an Executive Officer of the Corporation for any purpose and
all rights Executive might thereafter have as an Executive Officer pursuant to
any plan shall cease, except as expressly provided to the contrary in writing
under any such plan.
c. If the Corporation should terminate this Agreement pursuant to
Paragraph 3(b)(iv) by giving a Termination Without Cause Notice:
i). Executive shall cease to be President and COO, or to hold such
other office or position Executive then holds in the Corporation or any
subsidiary or affiliate
<PAGE>
Mr. James Lee
Page 4
thereof, effective upon the date specified in the Termination Without Cause
Notice (the "Effective Date").
ii). The Corporation shall be obligated and shall continue to pay
Executive a salary at Executive's then annual salary (excluding bonus) for
a period of one (1) year following the Effective Date. Such payments shall
be made in installments payable as provided in Section 2 hereof.
d. If this Agreement should terminate pursuant to Paragraph 3(b)(v):
i). General. If any of the events described in Section 3(b)(v)
constituting a Change in Control shall have occurred, and the Executive
terminates for Good Reason, the Executive shall be entitled to the benefits
provided in Section 4(d)(iii) upon the subsequent termination of his
employment during the term of this Agreement. In the event the Executive's
employment with the Corporation is terminated for any reason and
subsequently a Change in Control occurs, he shall not be entitled to any
benefits hereunder.
ii) Good Reason. The Executive shall be entitled to terminate his
employment for Good Reason. For purposes of this Agreement, "Good Reason"
shall mean, without his express written consent, the occurrence after a
Change in Control of any of the following circumstances:
(A) a significant adverse alteration in the nature or status of
his responsibilities or the conditions of his employment from those in
effect immediately prior to such Change in Control;
(B) the Corporation's reduction of his annual base salary as in
effect on the date hereof or as the same may be increased from time to
time except for proportional across-the-board salary reductions
similarly affecting all management personnel of the Corporation and all
management personnel of any Person in control of the Corporation;
(C) the relocation of the Corporation's offices at which he is
principally employed immediately prior to the Change of Control to a
location more than 25 miles further from the Executive's home than the
previous location;
(D) the Corporation's failure to pay to the Executive any portion
of his current compensation or to pay any portion of an installment of
deferred compensation under any deferred compensation program of the
Corporation within thirty (30) days of the date such compensation is
due;
(E) the Corporation's failure to continue in effect any material
compensation or benefit plan in which the Executive participates or to
arrange for him to receive any perquisites to which he is entitled
immediately prior to the Change in Control, unless an equitable
arrangement (embodied in an ongoing substitute or alternative plan) has
been made with respect to such plan, or the Corporation's failure to
continue the Executive's participation therein (or in such substitute
or alternative plan) on a basis not materially less favorable, both in
terms of the amount of benefits provided and the level of participation
relative to other participants, as existed at the time of the Change in
Control;
(F) the Corporation's failure to continue to provide the
Executive with benefits substantially similar to those enjoyed by him
under any of the Corporation's life insurance, medical, health and
accident, or disability plans in
<PAGE>
Mr. James Lee
Page 5
which he was participating at the time of the Change in Control, the
taking of any action by the Corporation which would directly or
indirectly materially reduce any of such benefits, or the failure by
the Corporation to provide him with the number of paid vacation days to
which he was entitled pursuant to this Agreement.
(G) the Corporation's failure to obtain a satisfactory agreement
from any successor to assume and agree to perform this Agreement, as
contemplated in Section 7.
(H) the continuation or repetition, after written notice of
objection from the Executive, of harassing or denigrating treatment of
him inconsistent with his position with the Corporation.
(I) The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any circumstances
constituting Good Reason hereunder.
iii). Upon a termination for Good Reason under Paragraph 3(b)(v), the
Corporation shall be obligated and shall continue to pay Executive a salary
at Executive's then annual salary (excluding bonus) for a period of two (2)
years following the Effective Date. Such payments shall be made in
installments payable as provided in Section 2 hereof, provided, however,
that Executive may elect a lump sum payment discounted at the applicable
long term federal interest rate.
iv). If the Executive's employment is terminated under Paragraph
3(b)(v), all outstanding stock options held by Executive shall become
immediately and fully vested. Such options must be exercised within 30 days
of the Effective Date.
v). The Corporation shall pay to the Executive all legal fees and
expenses reasonably incurred by him, in contesting or disputing any such
termination or in seeking to obtain or enforce any right or benefit
provided by this Agreement.
vi). If by reason of Section 280G of the Internal Revenue Code
("Code") any payment or benefit received or to be received by the Executive
in connection with a Change in Control or the termination of his employment
would not be deductible (in whole or in part) by the Corporation, an
Affiliate or other person making such payment or providing such benefit,
then the severance payments payable under (iii) above shall be reduced until
no portion of the total payments is not deductible by reason of Section
280G. For purposes of this limitation, (A) no portion of the total payments,
the receipt or enjoyment of which the Executive shall have effectively
waived in writing prior to the date of payment of the Severance Payments
shall be taken into account; (B) no portion of the total payments shall be
taken into account which in the opinion of the Corporation's counsel does
not constitute a "parachute payment" within the meaning of Code Section
280G(b)(2); (C) the severance payments shall be reduced only to the extent
necessary so that the severance payments in their entirety constitute
reasonable compensation for services actually rendered within the meaning of
Code Section 280G(b)(4), and (D) the value of any noncash benefit or any
deferred payment or benefit included in the Severance Payments shall be
determined by the Corporation's independent auditors in accordance with the
principles of Code Sections 280G(d)(3) and (4). For purposes of this Section
4(d)(vi), the term "Affiliate" means the Corporation's successors, any
Person whose actions result in a Change in Control or any corporation
affiliated (or which, as a result of the completion of the transactions
causing a Change in Control shall become affiliated) with the Corporation
within the meaning of Code Section 1504.
<PAGE>
Mr. James Lee
Page 6
(vii) The Executive shall not be required to mitigate the amount of any
payment provided for in this Section 4(d) by seeking other employment or
otherwise nor shall the amount of any payment or benefit provided for in this
Section 4(d) be reduced by any compensation earned by the Executive as the
result of employment by another employer or self-employment or by retirement
benefits.
5. Return of Documents and Property. Upon the termination of Executive's
--------------------------------
employment by the Corporation, or at any time upon the request of the
Corporation, Executive (or his heir or personal representative) shall deliver to
the Corporation: (a) all documents and materials containing trade secrets and
other confidential information relating to the Corporation's business and
affairs, and (b) all other documents, materials and other property belonging to
the Corporation or its affiliated companies that are in the possession or under
the control of Executive.
6. Competition, Confidential Information.
-------------------------------------
a. The Corporation acknowledges that prior to Executive's employment
by the Corporation, the Executive has previously worked in the retail
supermarket business. As a result, Executive possesses knowledge and
information which was acquired through sources other than the Corporation, and
which includes, but is not limited to, knowledge and information regarding
prospective products, products, systems, prospective customers, agents,
processes, and sales and marketing methods which may be identical to or similar
to information regarding the Corporation's present and prospective products,
systems, customers, agents, process, and sales and marketing methods disclosed
to Executive by the Corporation relating to the business and operation of the
Corporation. Accordingly, the Corporation and Executive agree that when the
term "Confidential Information" is used in this Section 6, that said term shall
refer only to Confidential Information of the Corporation which is not generally
known to others engaged in similar businesses or activities as the Corporation,
or which was not known by Executive prior to his employment by the Corporation.
b. The Executive and the Corporation recognize that due to the nature
of his engagement hereunder, and the relationship of the Executive to the
Corporation, the Executive will have access to and will acquire, and may assist
in developing confidential and proprietary information which is not generally
known to others engaged in similar business or activities as the Corporation, or
which was not known by Executive prior to his employment by the Corporation
(hereinafter "Confidential Information") relating to the business and operations
of the Corporation, including, without limiting the generality of the foregoing,
information with respect to its present and prospective products, systems,
customers, agents, processes, and sales and marketing methods except that such
Confidential Information shall exclude information already in the public domain
or which enters the public domain through sources other than the Executive. The
Executive acknowledges that such Confidential Information is of central
importance to the business of the Corporation and that disclosure of it to
others or its use by others could cause substantial loss to the Corporation.
The Executive and the Corporation also recognize that an important part of the
Executive's duties will be to develop good will for the Corporation through his
personal contact with customers, agents and others having business relationships
with the Corporation, and that there is a danger that this good will, a
proprietary asset of the Corporation, may follow the Executive if and when his
relationship with the Corporation is terminated. The Executive accordingly
agrees to the following provisions:
<PAGE>
Mr. James Lee
Page 7
i). During the term of this Agreement and for a period of twelve
(12) months thereafter, the Executive will not personally, either on his own
behalf, or on behalf of any other person or entity, except for the account
of and on behalf of the Corporation: (A) solicit employment from or become
an employee of any company which was, at the time of termination of this
Agreement or within six (6) months prior to that date, a competitor of the
Corporation; (B) hire any individual who was, at the time of termination of
this Agreement or within six (6) months prior to that date, an employee of
the Corporation; or (C) compete with the Corporation in the area of natural
foods or grocery supermarkets anywhere in the United States.
ii). Nothing in this Section 6 shall be construed to prevent the
Executive from owning, as an investment, not more than 1% of a class of
equity securities issued by any competitor of the Corporation and publicly
traded and registered under the federal securities laws.
iii). The Executive will keep confidential any Confidential
Information of the Corporation which is now known to him or which hereafter
may become known to him as a result of his employment or association with
the Corporation and shall not at any time directly or indirectly disclose
any such Confidential Information to any person or entity, or use the same
in any way, other than in connection with the business of the Corporation,
during and after the term of this Agreement. Confidential Information of the
Corporation shall include, but not be limited to, the following: (A) the
business operations or internal structure of the Corporation, (B) the
employees, customers or clients of the Corporation, (C) past, present or
future research done by the Corporation respecting the business or
operations of the Corporation or customers, clients, or potential customers
or clients of the Corporation, (D) the Executive's work performed for any
customer or client of the Corporation, (E) any method or procedure relating
or pertaining to projects developed by the Corporation or contemplated by
the Corporation to be developed, or (F) any other Confidential Information
of the Corporation. Further, upon leaving the employ of the Corporation for
any reason whatsoever, the Executive shall not take with him, without the
prior written consent of the Board of Directors of the Corporation, anything
containing Confidential Information relating to or pertaining to the
Corporation, whether in written, graphic, recorded, or computer-generated
form, or in any other form.
iv). A violation by the Executive of the provisions of this
Section would cause irreparable injury to the Corporation, and there is no
adequate remedy at law for such violation, the Corporation shall have the
right, in addition to any other remedies available to it at law or in
equity, to enjoin the Executive from violating these provisions.
7. Successors; Binding Agreement. The Corporation shall, upon the Executive's
-----------------------------
written request, require that any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Corporation expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Corporation
would be required to perform it if no such succession had taken place. Failure
of any such successor to assume and agree to perform this Agreement within 30
days of such written request upon such successor to assume and agree to perform
this Agreement shall be a breach of this Agreement and shall entitle the
Executive to terminate his employment and receive compensation from the
Corporation in the same amount and on the same terms to which he would be
entitled hereunder if he terminates his employment for Good Reason following a
Change of Control. For purposes of implementing the foregoing, the date
<PAGE>
Mr. James Lee
Page 8
which is 30 days after the Corporation makes a written request upon a successor
to assume and agree to perform this Agreement shall be deemed the Date of
Termination. Where the context requires, "Corporation" shall mean the
Corporation as hereinbefore defined and any successor to its business and/or
assets as aforesaid which assumes and agrees to perform this Agreement by
operation of law, or otherwise.
8. Assignment. Executive's rights and obligations under this Agreement shall
----------
not be assignable by Executive. The Corporation's rights and obligations under
this Agreement shall not be assignable by the Corporation except as incident to
the transfer, by sale, merger, liquidation, or otherwise, of all or
substantially all of the business of the Corporation.
9. Severability. The invalidity or unenforceability of any provision of this
------------
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
10. Counterparts. This Agreement may be executed in several counterparts, each
------------
of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
11. Notices. Any notice required or permitted under this Agreement shall
-------
be given in writing and shall be deemed to have been effectively made or given
if personally delivered, or if telegraphed, telexed, cabled, faxed, e-mailed, or
mailed to the other party at its address set forth below in this Section 11, or
at such other address as such party may designate by written notice to the other
party hereto. Any effective notice hereunder shall be deemed given on the date
personally delivered or on the date telegraphed, telexed, cabled faxed, e-
mailed, or deposited in the United States mail (sent by certified mail, return
receipt requested) mailed postage prepaid, as the case may be at the following
addresses:
To Corporation: Wild Oats Markets, Inc.
Attention: Freya Brier, General Counsel
3375 Mitchell Lane
Boulder, CO 80301
(303) 440-5220
Fax (303) 440-5280
To Executive: Jim Lee
685 East Wiggins
Superior, Colorado 80027
12. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Colorado.
13. AGREEMENT. This Agreement constitutes the entire understanding of
the Executive and the Corporation with respect to its subject matter and
supersedes any and all prior understandings of the parties. This Agreement may
not be amended, modified, or discharged orally, but only by an instrument in
writing signed by both parties.
<PAGE>
Mr. James Lee
Page 9
IN WITNESS WHEREOF, the parties have set their hands and seals as of the
day and year above written.
THE CORPORATION
Wild Oats Markets, Inc.
By /s/ Freya R. Brier
----------------------------
THE EXECUTIVE
By /s/ James Lee
----------------------------
James Lee
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<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 SIX MONTHS ENDED JULY 3, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-START> JAN-03-1999
<PERIOD-END> JUL-03-1999
<CASH> 13,881
<SECURITIES> 0
<RECEIVABLES> 2,103
<ALLOWANCES> 211
<INVENTORY> 37,925
<CURRENT-ASSETS> 58,813
<PP&E> 171,627
<DEPRECIATION> 33,146
<TOTAL-ASSETS> 307,947
<CURRENT-LIABILITIES> 61,450
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 154,779
<TOTAL-LIABILITY-AND-EQUITY> 307,947
<SALES> 257,846
<TOTAL-REVENUES> 257,846
<CGS> 160,163
<TOTAL-COSTS> 160,163
<OTHER-EXPENSES> 96,236
<LOSS-PROVISION> 47
<INTEREST-EXPENSE> 641
<INCOME-PRETAX> 617
<INCOME-TAX> 258
<INCOME-CONTINUING> 359
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 281
<NET-INCOME> 78
<EPS-BASIC> 0.01
<EPS-DILUTED> 0.01
</TABLE>
