UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report: February 28, 2000
WILD OATS MARKETS, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-21577 84-1100630
(State or other jurisdiction of Commission File Number (I.R.S. Employer
incorporation or organization) Identification Number)
3375 Mitchell Lane
Boulder, Colorado 80301
(Address of principal executive offices, including zip code)
(303) 440-5220
(Registrant's telephone number, including area code)
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TABLE OF CONTENTS
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Item 5. Other Events. 3
Item 7. Financial Statements and Exhibits. 42
SIGNATURES 43
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ITEM 5. OTHER EVENTS
On December 15, 1999, Wild Oats Markets, Inc. (the "Company") acquired all of
the outstanding capital stock of Sun Harvest Farms, Inc. ("Sun Harvest") and all
of the partnership interests in an affiliated entity from Sun Harvest's
shareholders in exchange for 888,903 shares of the Company's $0.001 par value
common stock. Sun Harvest operated nine natural foods stores and the affiliate
operated four small vitamin stores in San Antonio, Austin, and other Texas
communities. The transaction was accounted for as a pooling of interests, and
accordingly, the Management's Discussion and Analysis of Supplemental Combined
Financial Condition and Results of Operations and the Company's supplemental
combined financial statements for all periods presented include the operations
of Sun Harvest for the respective years, adjusted to conform with the Company's
accounting policies and presentation.
The following supplemental combined financial statements are filed as a part of
this report:
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Management's Discussion and Analysis of Supplemental Combined Financial
Condition and Results of Operations 4
Financial Statements
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Audited supplemental combined financial statements of Wild Oats Markets, Inc.
Report of Independent Accountants by PricewaterhouseCoopers LLP 13
Independent Auditors' Report by KPMG LLP 14
Report of Independent Auditors by Ernst & Young LLP 15
Supplemental Combined Statement of Operations
for the Three Years Ended January 2, 1999 16
Supplemental Combined Balance Sheet as of
January 2, 1999 and December 27, 1997 17
Supplemental Combined Statement of Changes in Stockholders' Equity
(Deficit) for the Three Years Ended January 2, 1999 18
Supplemental Combined Statement of Cash Flows
for the Three Years Ended January 2, 1999 19
Notes to the Supplemental Combined Financial Statements 20
Unaudited supplemental combined financial statements of Wild Oats Markets, Inc.
Supplemental Combined Statement of Operations for the Nine-Month
Periods Ended October 2, 1999 and September 26, 1998 36
Supplemental Combined Balance Sheet as of October 2, 1999 37
Supplemental Combined Statement of Cash Flows for the Nine-Month
Periods Ended October 2, 1999 and September 26, 1998 38
Notes to the Supplemental Combined Financial Statements (Unaudited) 39
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF SUPPLEMENTAL COMBINED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the supplemental combined
financial condition and results of operations have been derived from our filings
on Form 10-K for fiscal years ended 1998, 1997 and 1996, our filing on Form 8-K
dated September 27, 1999, as amended on February 28, 2000 (which includes our
historical consolidated financial statements that supercede the historical
consolidated financial statements in our Annual Report on Form 10-K and reflects
the pooling of interests transaction with Henry's Marketplace, Inc. which
occurred on September 27, 1999), and our filings on Form 10-Q for the nine
months ended September 26, 1998 and October 2, 1999. Our historical financial
information has been revised to reflect the stock-for-stock transaction with the
shareholders of Sun Harvest Farms, Inc. which occurred on December 15, 1999.
This transaction has been accounted for as a pooling of interests and,
accordingly, the accounts and operations of Sun Harvest have been included in
the discussion of supplemental combined financial condition and results of
operations for all periods presented below. As such, this data does not
represent our historical financial position or operations.
The Company declared a 3-for-2 stock split for all stockholders of record
as of November 17, 1999, effective December 1, 1999. All shares and per-share
prices presented herein have been retroactively restated to reflect this stock
split.
The information set forth below should be read in conjunction with our
complete Supplemental Combined Financial Statements, included herein. References
in this report on Form 8-K to "Wild Oats," "the Company," "we," "us," and "our"
each refer to Wild Oats Markets, Inc.
OVERVIEW
STORE OPENINGS, CLOSINGS, REMODELS, RELOCATIONS AND ACQUISITIONS. In 1999,
and to date in 2000, we opened 11 new stores in Phoenix, Arizona, San Diego (two
sites), California, Evanston and Hinsdale, Illinois, St. Louis, Missouri, Reno,
Nevada, Madison, New Jersey, Albuquerque, New Mexico, Tulsa, Oklahoma and
Nashville, Tennessee, and relocated six stores in Phoenix, Arizona, Ft. Collins,
Colorado, West Hartford, Connecticut, Portland, Oregon, Memphis, Tennessee, and
Salt Lake City, Utah. During the same period, we acquired 17 operating natural
foods stores, including seven Nature's Fresh Northwest stores in metropolitan
Portland, Oregon (of which one was subsequently relocated during the second
quarter of 1999), four in metropolitan Boston, Massachusetts, three in Tucson,
Arizona, two in Norwalk and Hartford, Connecticut (of which one was subsequently
relocated during the first quarter of 2000), and one in Melbourne, Florida. We
also consummated two stock-for-stock transactions, accounted for as poolings of
interests, which included 24 stores in our historic store base, including 11
Henry's Marketplace stores in metropolitan San Diego, California (one of which
was opened in 1999 and is included in the number of new stores opened discussed
herein) and nine Sun Harvest and four vitamin stores in San Antonio, Austin and
other Texas communities. We plan to open, acquire or relocate as many as 18
stores in the remainder of 2000. We are actively looking for other acquisition
opportunities and may complete additional acquisitions in 2000. We will continue
to evaluate the profitability of all of our 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 a result of such ongoing
evaluations, we temporarily closed our Dallas store for remodeling and reopening
under the "Sun Harvest" tradename during the first quarter of 2000. During 1999,
we closed two Farm to Market stores in Tempe, Arizona and Buffalo Grove,
Illinois and, to date in 2000, we closed two of our smaller stores. During the
first half of 2000, we plan to remodel as many as 25 of our existing, older
stores to remerchandise and incorporate new features.
ACQUISITIONS. In 1999, and to date in 2000, we opened 11 new stores and
acquired 17 stores, including:
o Nature's Fresh Northwest which owned seven operating natural foods
stores and one site in development in metropolitan Portland, Oregon.
Nature's had sales of approximately $58.3 million in 1998.
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The purchase price was approximately $40.0 million in cash and
assumption by us of a $17.0 million promissory note payable to the
seller. This 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.
o Four natural foods supermarkets operating under the name "Wild
Harvest," located in the greater Boston, Massachusetts area, in
exchange for $12.5 million in cash. The transaction was accounted for
using the purchase method and the excess of cost over the fair value of
the assets acquired of $782,000 was allocated to goodwill, which is
being amortized on a straight-line basis over 40 years.
We also consummated two stock-for-stock transactions accounted for as
poolings of interests, which added 20 natural foods grocery stores and four
small vitamin stores to our historic store base, with the following entities:
o Henry's Marketplace, Inc., which owned 11 operating natural foods
stores and one site in development in metropolitan San Diego,
California. Henry's had sales of approximately $81.0 million in 1998.
The merger consideration was 2,100,290 shares of our common stock. This
transaction was accounted for as a pooling of interests.
o Sun Harvest Farms, Inc., which owned nine operating natural food stores
in San Antonio, Austin and other Texas communities and, through an
affiliated entity also included in such transactions, four vitamin
stores. Sun Harvest had sales of approximately $50.8 million in 1998.
The merger consideration was 888,903 shares of our common stock. The
transaction was accounted for as a pooling of interests.
Our results of operations have been and will continue to be affected by,
among other things, the number, timing and mix of store openings, acquisitions,
relocations 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. We anticipate that the new stores opened in 1999 and to date in 2000
will experience operating losses for the first six to 12 months of operation, in
accordance with historical trends. Further, acquired stores, while generally
profitable as of the acquisition date, generate lower gross margins and store
contribution margins than our company average due to their substantially lower
volume purchasing discounts. Over time, typically six months, as we sell through
the acquired inventories and are able to realize our volume purchase discounts,
we expect that the gross margin and store contribution margin of the acquired
stores will approach our company average. We anticipate that our current high
concentration of acquired stores, including the Nature's, Henry's and Sun
Harvest stores, will have a temporary negative impact on our consolidated
results of operations.
We are actively upgrading, remodeling or relocating some of our 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. We
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.
STORE FORMAT AND CLUSTERING STRATEGY. We operate two store formats:
supermarket and urban. The supermarket format is generally 15,000 to 35,000
gross square feet, and typically generates higher sales and store contribution
than the urban format stores, which are generally 8,000 to 15,000 gross square
feet. Our profitability has been and will continue to be affected by the mix of
supermarket and urban format stores opened, acquired or relocated and whether
stores are being opened in markets where we have an existing presence. We expect
to focus primarily on opening, acquiring or relocating supermarket format stores
in the future but will consider additional urban stores when appropriate
opportunities arise. In addition, we pursue a strategy of clustering stores in
each of our markets to increase overall sales, reduce operating costs and
increase customer awareness. In the past, when we have opened a store in a
market where we have an existing presence, our sales and operating results have
declined at certain of our existing stores in that market. However, over time,
we believe the affected stores generally will achieve store contribution margins
comparable to prior levels on the lower base of sales. We intend to continue to
pursue our
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store clustering strategy and expect 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 our comparable store
sales results, including, among others:
o the opening of stores by us or by our competitors in markets where we
have existing stores
o the relative proportion of new or relocated stores to mature stores
o store remodels
o the timing of promotional events
o our ability to execute our operating plans effectively
o changes in consumer preferences for natural foods products
o general economic conditions.
Past increases in comparable store sales may not be indicative of future
performance.
Our comparable store sales results have been negatively affected in the
past by planned cannibalization, which is the loss of sales at an existing store
when we open a new store nearby, resulting from the implementation of our store
clustering strategy. We expect that comparable sales increases will continue to
be negatively affected in 2000 by planned cannibalization due to the opening of
new or relocated stores in several of our existing markets, including, among
others, Phoenix, Arizona, San Diego, California, Kansas City and St. Louis,
Missouri, Las Vegas, Nevada, Albuquerque, New Mexico, Portland, Oregon, 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, marketing, and certain other costs incurred prior to a store's
opening. Pre-opening expenses have averaged approximately $250,000 to $350,000
per store historically, 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 98-5, Accounting for Costs of Start-Up Activities.
Statement of Position 98-5 requires that pre-opening costs be expensed as
incurred. Statement of Position 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. We adopted Statement of
Position 98-5 in fiscal 1999 and recorded approximately $281,000 as a cumulative
effect of a change in accounting principle, net of taxes, during 1999.
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RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain selected
income statement data expressed as a percentage of sales:
<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS ENDED
----------------------------- ----------------------------
1996 1997 1998 SEPT. 26, 1998 OCT. 2, 1999
------- ------- ------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold and occupancy costs 69.6 69.8 69.6 69.5 69.4
------- ------- ------- ------- -------
Gross margin 30.4 30.2 30.4 30.5 30.6
Direct store expenses 23.2 22.4 21.3 21.4 21.4
Selling, general and administrative expenses 4.1 3.7 3.8 3.9 3.9
Pre-opening expenses 0.6 0.3 0.6 0.5 0.4
Non-recurring expenses 2.4 -- 0.1 0.1 2.2
------- ------- ------- ------- -------
Income from operations 0.1 3.8 4.6 4.6 2.7
Interest expense, net 0.5 0.1 -- -- 0.5
------- ------- ------- ------- -------
Income (loss) before income taxes (0.4) 3.7 4.6 4.6 2.2
Income tax expense (benefit) (0.1) 1.3 1.5 1.4 0.6
------- ------- ------- ------- -------
Net income (loss) before cumulative effect
of change in accounting principle (0.3) 2.4 3.1 3.2 1.6
Cumulative effect of change in accounting
principle, net of taxes -- -- -- -- 0.1
------- ------- ------- ------- -------
Net income (loss) (0.3)% 2.4% 3.1% 3.2% 1.5%
======= ======= ======= ======= =======
</TABLE>
NINE MONTHS ENDED OCTOBER 2, 1999 AND SEPTEMBER 26, 1998
SALES. Sales for the nine months ended October 2, 1999 increased 34.5% to
$519.4 million from $385.9 million for the same period in 1998. The increase is
primarily due to the opening of six new stores, the acquisition of 13 stores,
and the relocation of five stores in the first nine months of 1999, as well as
the inclusion of nine stores opened, two stores relocated, and seven stores
acquired during 1998. Comparable store sales increased 7% for the nine months
ended October 2, 1999, based on both new and acquired stores that have been
operating longer than 12 months.
GROSS PROFIT. Gross profit for the nine months ended October 2, 1999
increased 35.3% to $159.1 million from $117.6 million for the same period in
1998. The increase in gross profit is primarily attributable to the increase in
the number of stores that we operate. Gross profit as a percentage of sales for
the nine months ended October 2, 1999 remained relatively constant at 30.6% as
compared to 30.5% for the same period in 1998.
DIRECT STORE EXPENSES. Direct store expenses for the nine months ended
October 2, 1999 increased 34.3% to $111.0 million from $82.7 million for the
same period in 1998. The increase in direct store expenses is attributable to
the increase in the number of stores that we operate. Direct store expenses as a
percentage of sales for the nine months ended October 2, 1999 remained constant
at 21.4% as compared to the same period in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the nine months ended October 2, 1999 increased
37.2% to $20.4 million from $14.8 million for the same period in 1998. The
increase is the result of additional central and regional support staff and
infrastructure that we added to support our increased number of stores. Selling,
general and administrative expenses as a percentage of sales for the nine months
ended October 2, 1999 remained constant at 3.9% for the same period in 1998.
PRE-OPENING EXPENSES. Pre-opening expenses for the nine months ended
October 2, 1999 increased 19.1% to $2.3 million from $1.9 million for the same
period in 1998. The increase is attributable to the opening of six new stores
and five relocated stores during the first nine months of 1999, as compared to
the opening of five new stores and one relocated store during the same period in
1998. Additionally, in accordance with Statement of Position 98-
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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 nine months ended October 2, 1999 remained
relatively constant at 0.4% as compared to 0.5% for the same period in 1998.
NON-RECURRING EXPENSES. Non-recurring expenses of approximately $11.5
million were incurred during the first nine months of 1999. $10.9 million was
incurred in the first quarter of 1999 resulting from certain decisions by our
management regarding our operations and selected store closures. The first
decision was a change in our strategic direction with respect to our two Farm to
Market stores located in Buffalo Grove, Illinois, and Tempe, Arizona which
resulted in a non-recurring expense of $4.5 million. The second decision
involved the reallocation of corporate resources to service new and existing
stores, rather than closed sites which resulted in a non-recurring expense of
$6.4 million. Components of the non-recurring expenses consist primarily of
non-cancelable lease obligations through the year 2000 in the amount of $1.2
million and of abandonment of fixed and intangible assets in the amount of $9.7
million. The remaining $600,000 related to professional fees for pooled
transactions incurred in the third quarter of 1999.
NET INTEREST EXPENSE (INCOME). Net interest expense for the nine months
ended October 2, 1999 was $2.7 million as compared to net interest income of
$55,000 for the same period in 1998. The change is attributable to increased
borrowing from our revolving line of credit to fund new store openings and
acquisition of 13 stores in the first nine months of 1999, and to lower levels
of invested cash in the first nine months of 1999.
FISCAL 1998 COMPARED TO FISCAL 1997
Fiscal 1998 contained 53 weeks of operations as compared to 52 weeks in
fiscal 1997.
SALES. Sales for the fiscal year ended January 2, 1999 increased 22.8% to
$530.7 million from $432.0 million in 1997. The increase was primarily due to
the acquisition of seven stores, the opening of nine new stores and the
relocation of two stores, as well as the inclusion of a full year of sales for
the five new stores opened, two stores relocated, and nine stores acquired in
1997. Comparable store sales increased 4% for 1998, as compared to 5% for 1997.
GROSS PROFIT. Gross profit for the fiscal year ended January 2, 1999
increased 23.7% to $161.3 million from $130.3 million in 1997. The increase in
gross profit is primarily attributable to the acquisition of seven stores and
the opening of nine new stores. As a percentage of sales, gross profit increased
to 30.4% from 30.2% in 1997 due to the maturation of our store base, our
increasing volume purchase discounts and enhanced inventory management.
DIRECT STORE EXPENSES. Direct store expenses for the fiscal year ended
January 2, 1999 increased 17.2% to $113.1 million from $96.4 million in 1997.
The increase in direct store expenses is attributable to the increase in the
number of stores that we operate. As a percentage of sales, direct store
expenses decreased to 21.3% from 22.4% in 1997 due to the matured performance of
the new stores opened in 1997, as well as improved control of direct store
expenses, particularly payroll and benefits costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the fiscal year ended January 2, 1999 increased
22.7% to $20.0 million from $16.3 million in 1997. The increase is primarily
attributable to the acquisition of seven stores and the opening of nine new
stores during 1998. As a percentage of sales, selling, general and
administrative expenses increased to 3.8% from 3.7% in 1997 as a result of
additional personnel costs in the information technology, marketing and
purchasing departments needed to support our growth plans, as well as additional
costs to distribute our marketing materials, such as special flyers, to our
customers. In addition, we moved our corporate office during the fourth quarter
of 1998 to a larger facility to accommodate an increased support staff for our
larger base of stores. There were additional selling, general and administrative
expenses for rent and utilities on the new facility, as well as costs of
relocating the information systems that we use.
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PRE-OPENING EXPENSES. Pre-opening expenses for the fiscal year ended
January 2, 1999 increased 200.1% to $3.4 million from $1.1 million in 1997. The
increase in pre-opening expenses is attributable to the increase in the number
of stores opened or relocated. As a percentage of sales, pre-opening expenses
increased to 0.6% from 0.3% due to the delayed opening of two stores resulting
in additional pre-opening costs primarily in the form of rental payments, as
well as the opening of nine new stores in 1998 as compared to five new stores in
1997.
NON-RECURRING EXPENSES. Non-recurring expenses for the fiscal year ended
January 2, 1999 were $393,000. There were no non-recurring expenses in fiscal
1997. The change is attributed to employee severance costs, inventory and fixed
asset write-downs, and lease cancellation costs associated with two immaterial
pooling-of-interests transactions during 1998.
INTEREST INCOME, NET. Net interest expense for the fiscal year ended
January 2, 1999 decreased 95.4% to $28,000 from $622,000 in 1997. The decrease
is attributable to the investment of the net proceeds from our public equity
offering in December 1997 and to lower levels of indebtedness incurred to fund
new store openings and acquisitions.
FISCAL 1997 COMPARED TO FISCAL 1996
SALES. Sales for the fiscal year ended December 27, 1997 increased 44.1% to
$432.0 million from $299.6 million in 1996. The increase was primarily due to
the acquisition of nine stores, the opening of five new stores, and the
relocation of two stores, as well as the inclusion of a full year of sales for
the nine new stores opened and thirteen stores acquired in 1996. Comparable
store sales increased 5% for 1997, as compared to 7% for 1996.
GROSS PROFIT. Gross profit for the fiscal year ended December 27, 1997
increased 43.0% to $130.3 million from $91.1 million in 1996. The increase in
gross profit on a dollar basis is primarily attributable to the acquisition of
nine stores and the opening of five new stores. As a percentage of sales, gross
profit decreased to 30.2% from 30.4% in the same period in 1996 due to
aggressive pricing programs on advertised items instituted in 1997 and a related
increase in the number of lower-margin items offered for sale in our stores, and
the effect of acquiring nine stores in the first six months of 1997.
DIRECT STORE EXPENSES. Direct store expenses for the fiscal year ended
December 27, 1997 increased 38.8% to $96.4 million from $69.5 million in 1996.
The increase in direct store expenses is attributable to the increase in the
number of stores that we operate. As a percentage of sales, direct store
expenses decreased to 22.4% from 23.2% in the same period in 1996 due to the
matured performance of the new stores opened in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the fiscal year ended December 27, 1997 increased
31.9% to $16.3 million from $12.4 million in 1996. The increase is primarily
attributable to the acquisition of nine stores and the opening of five new
stores during 1997. As a percentage of sales, selling, general and
administrative expenses decreased to 3.7% from 4.1% in 1996 as a result of
completing the consolidation of the overhead structure of Alfalfa's Inc. begun
in July 1996 (when we acquired ten Alfalfa's natural foods retail stores,
including three Capers Whole Foods Market stores in Vancouver, British
Columbia).
PRE-OPENING EXPENSES. Pre-opening expenses for the fiscal year ended
December 27, 1997 decreased 38.3% to $1.1 million from $1.9 million in 1996. The
decrease in pre-opening expenses is attributable to the decrease in the number
of new stores opened, with only five new stores opened in 1997, as compared to
nine in 1996. As a percentage of sales, pre-opening expenses decreased to 0.3%
from 0.6% for the same period in 1996 due to the decrease in the number of new
stores opened in 1997.
NON-RECURRING EXPENSES. During 1996, we performed a thorough analysis of
our operations subsequent to the acquisition of Alfalfa's and made certain
decisions relating to our operations which resulted in a $7.0 million
non-recurring charge being recorded, of which $5.7 million were non-cash
write-offs. The charge is attributable to (i) closing our store in Lawrence,
Kansas, resulting in approximately $800,000 in lease-cancellation costs and
asset write-offs, as well as closing a regional bakery and kitchen, resulting in
approximately $200,000 in asset write-offs and lease adjustment costs; (ii)
moving out of our existing corporate headquarters and relocating to the former
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Alfalfa's corporate headquarters, resulting in approximately $700,000 in
lease-cancellation costs, relocation costs and asset write-offs; and (iii)
consolidating certain information systems, resulting in approximately $300,000
in asset write-offs. In addition, after operating the combined companies,
management closed the Alfalfa's Seattle, Washington store, resulting in
approximately $4.5 million of severance costs, lease-cancellation costs and
asset write-offs, and a restaurant in a Capers store, resulting in approximately
$500,000 of severance costs, lease-cancellation costs and asset write-offs. At
the time of the Alfalfa's acquisition, we had planned to retain the Seattle
store and Vancouver restaurant operation.
INTEREST EXPENSE, NET. Net interest expense for the fiscal year ended
December 27, 1997 decreased 57.7% to $622,000 from $1.5 million in 1996. The
decrease is attributable to the investment of the proceeds from our public stock
offerings in October 1996 and December 1997 and to lower levels of indebtedness
incurred to fund store openings and acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Our 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 $39.4 million during the nine
months ended October 2, 1999 as compared to $32.2 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. Net cash provided by operating activities
was $32.1 million during 1998 and $23.6 million during 1997. Cash provided by
operating activities increased during this period primarily as a result of an
increase in net income before depreciation and amortization expense and
increases in accounts payable and accrued liabilities. Net cash provided by
operating activities was $23.6 million during 1997 and $15.2 million during
1996. Cash provided by operating activities increased during this period
primarily as a result of an increase in net income before depreciation and
amortization expense. We have not required significant external financing to
support inventory requirements at our existing and new stores because we have
been able to rely on vendor financing for most of the inventory costs, and we
anticipate that vendor financing will continue to be available for new store
openings.
Net cash used by investing activities was $98.4 million during the nine
months ended October 2, 1999 as compared to $50.5 million during the same period
in 1998. The increase is due to the opening of six new stores, the acquisition
of 13 stores, the relocation of five stores and several store remodels in the
first nine months of 1999, as well as the construction costs incurred for two
new or relocated stores which opened in the last three months of 1999, as
compared to five new stores, one relocated store and six acquired stores in the
first nine months of 1998 and the construction costs incurred for new stores in
development which opened during the remainder of 1998. Net cash used by
investing activities was $63.5 million during 1998 and $40.9 million during
1997. The increase is due to the acquisition of seven stores and the opening of
nine new stores during 1998, the purchase of real property and the construction
costs incurred for six new or relocated stores in development which opened
during the first six months of 1999. Net cash used by investing activities was
$40.9 million during 1997 and $31.4 million during 1996 due to the acquisition
of nine stores and the opening of five new stores during 1997, the purchase of
real property and the construction costs incurred for six new stores in
development which opened during the first nine months of 1998.
Net cash provided by financing activities was $68.6 million during the nine
months ended October 2, 1999 as compared to $3.6 million net cash used during
the same period in 1998. The increase reflects increased borrowing under our
revolving line of credit, as well as repayment of a $3.2 million note payable.
Net cash used by financing activities was $4.0 million during 1998, net cash
provided by financing activities was $46.4 million during 1997, and $32.5
million during 1996. The fluctuation was primarily due to net proceeds of $46.5
million from the sale of 2.1 million shares of our common stock pursuant to a
public equity offering in December 1997, net proceeds of $31.4 million from the
sale of 2.1 million shares of our common stock during its initial public
offering in October 1996 and net proceeds of $16.5 million from the July 1996
sale of Series E convertible preferred stock, the proceeds of which were used to
fund a portion of the purchase price of Alfalfa's, Inc.
10
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The Company has a $40.0 million revolving line of credit. The facility has
a seven-year term and bears interest, at the Company's option, at the prime rate
or LIBOR plus 1.25%. The line of credit agreement includes certain financial and
other covenants, as well as restrictions on payments of dividends. As of January
2, 1999, there were no borrowings outstanding under this facility. In March
1999, the Company increased its revolving line of credit to an $80.0 million
commitment with a three-year term and bearing interest at the Company's option,
at the prime rate or LIBOR plus 0.65%. In July 1999, the Company increased its
revolving line of credit to $120.0 million. The facility has two separate lines
of credit, one in the amount of $90.0 million with a three-year term expiring in
2002 and the other in the amount of $30.0 million with a one-year term, expiring
in May 2000. Both bear interest, at our option, at the prime rate or LIBOR plus
1.15%. The line of credit agreement includes certain financial and other
covenants, as well as restrictions on payments of dividends.
We spent approximately $64 million during 1999, and anticipate that we will
spend approximately $60 to $65 million during 2000 for new store construction,
equipment, leasehold improvement, purchases of leasehold interests, relocations,
remodels and maintenance capital expenditures, exclusive of acquisitions. Our
average capital expenditures to open a leased store, including leasehold
improvements, equipment and fixtures, have ranged from approximately $2.0 to
$3.0 million over the past 24 months, excluding inventory costs and initial
operating losses. Delays in opening new stores may result in increased capital
expenditures, increased pre-opening costs and lower sales.
In the second quarter of 1999, we opened two stores on owned property and
acquired a third operating store together with the underlying property and an
adjoining parcel of real property as part of the acquisition of the outstanding
stock of Nature's Fresh Northwest. Acquisition of real property and construction
of stores requires substantially greater cash outlays than the remodeling of
existing leased buildings (i.e., $3.5 to $9.0 million as compared to $2.0 to
$3.0 million). We also own an office building in San Antonio, Texas included in
the Sun Harvest transaction. We have sold the three stores in sale-leaseback
transactions and are currently marketing the remaining parcels of real property.
The sales generated approximately $16.6 million cash for the Company.
The cost of initial inventory for a new store has historically been
approximately $500,000 - $600,000; however, we obtain vendor financing for most
of this cost. Pre-opening costs currently are approximately $250,000 to $350,000
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 us, 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.
We believe that cash generated from operations and funds available under our
revolving line of credit will be sufficient to satisfy our cash requirements,
exclusive of additional acquisitions, through 2000.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Report on Form 8-K contains "forward-looking statements," within the
meaning of the Private Securities Litigation Reform Act of 1995, that involve
known and unknown risks. Such forward-looking statements include statements as
to the Company's plans to acquire or open additional stores, the anticipated
performance of new or acquired stores, the impact of competition and other
statements containing words such as "believes," "anticipates," "estimates,"
"expects," "may," "intends" and words of similar import or statements of
management's opinion. These forward-looking statements and assumptions involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, market performance or achievements of the Company to differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements. Important factors that could cause
such differences include, but are not limited to, changes in economic or
business conditions in general or affecting the natural foods industry in
particular, changes in product supply, changes in the competitive environment in
which the Company operates, competition for and the availability of sites for
new stores and potential acquisition candidates, changes in the Company's
management information needs, changes in customer needs and expectations and
governmental actions. The Company undertakes no obligation to update any
forward-looking statements in order to reflect events or circumstances that may
arise after the date of this Current Report.
11
<PAGE>
Year 2000 readiness statement
Information technologies. We recognize the need to ensure that our
operations will not be adversely affected by Year 2000 software or hardware
failures through the first half of Year 2000. We have determined that all
components of our major software and hardware systems at our corporate
headquarters are Year 2000 compliant. All but seven of our stores contain major
point-of-sale systems, such as cash registers and scanners, that are also Year
2000 compliant, including those recently acquired through the Nature's and
Henry's acquisitions. Total replacement and installation cost to date has been
approximately $5.0 million. This cost may increase if we acquire additional
stores with noncompliant point-of-sale systems. We will continue to make
investments in our software systems and applications to ensure that they are
Year 2000 compliant. The financial impact of these investments to us is not
anticipated to be material in any single year.
Vendors, suppliers and service providers. We have received confirmation
from a majority of our major suppliers, service providers, and financial
institutions that they are Year 2000 compliant. Many of our product vendors are
smaller businesses that have not considered the impact of Year 2000
noncompliance and therefore 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 our stores could
become unavailable, resulting in decreases in operating revenues, although in
many circumstances alternative local vendors' products may be available. One of
our largest distributors 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, we cannot evaluate the magnitude of the impact that a
failure by that distributor to successfully install compliant systems could have
on our operations. A failure in the distributor's warehouse facilities could
affect our ability to stock product in certain of our stores, resulting in lower
sales revenues in those stores. None of our stores' operations were adversely
affected by disruptions on January 1, 2000, in utilities.
There were no major failures in the operating systems of our financial
institutions as of January 1, 2000. If our financial institutions are not Year
2000 compliant, a failure in their operating system could result in our
temporary inability to access necessary cash resources required for operations;
we expect that normal store operations, however, will generate sufficient
revenues to cover daily operating needs. Our credit card processor has confirmed
to us that it has adapted its systems to accept credit cards issued with
expiration dates of 2000 and beyond and has also completed implementation of all
phases of its compliance program in accordance with guidelines of the Federal
Financial Institutions Examination Council.
Mechanical systems. There was little impact on store operations due to Year
2000 noncompliance in mechanical systems as of January 1, 2000. We do 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 one store.
The estimates and conclusions regarding Year 2000 impact contained above
are forward-looking statements based on our best estimates of future events.
Actual results may differ due to certain risks and uncertainties that we cannot,
at this time, predict.
12
<PAGE>
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Wild Oats Markets, Inc.
In our opinion, based upon our audits and the reports of other auditors, the
accompanying supplemental combined balance sheet and the related supplemental
combined statements of operations, changes in stockholders' equity (deficit) and
cash flows present fairly, in all material respects, the financial position of
Wild Oats Markets, Inc. and its subsidiaries at January 2, 1999 and December 27,
1997, and the results of their operations and their cash flows for each of the
three years in the period ended January 2, 1999, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Sun Harvest Farms, Inc., which statements reflect total
assets of $6,850,288 and $5,189,373 at December 29, 1998, and December 30, 1997,
respectively, and total revenues of $50,841,400, $48,120,937, and $45,961,223
for the fifty-two weeks ended December 29, 1998, and December 30, 1997, and the
fifty-three weeks ended December 31, 1996, respectively. Those statements were
audited by other auditors whose report thereon has been furnished to us, and our
opinion expressed herein, insofar as it relates to the amounts included for Sun
Harvest Farms, Inc. as of and for the fifty-two weeks ended December 29, 1998,
and December 30, 1997, and for the fifty-three weeks ended December 31, 1996, is
based solely on the report of the other auditors. Additionally, we did not audit
the financial statements of Henry's Marketplace, Inc., which statements reflect
total assets of $10,930,032 at December 27, 1998, and total revenues of
$81,025,852 for the fifty-weeks ended December 27, 1998. Those statements were
audited by other auditors whose report thereon has been furnished to us, and our
opinion expressed herein, insofar as it relates to the amounts included for
Henry's Marketplace, Inc. as of and for the fifty-two weeks ended December 27,
1998, is based solely on the report of the other auditors. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the reports of other auditors provide a reasonable basis for the
opinion expressed above.
As described in Note 2, on September 27, 1999, the Company merged with Henry's
Marketplace, Inc. in a transaction accounted for as a pooling of interests. On
December 15, 1999, the Company consummated a stock-for-stock transaction with
the shareholders of Sun Harvest Farms, Inc. and its affiliate in a transaction
accounted for as a pooling of interests. The accompanying supplemental combined
financial statements give retroactive effect to the transaction with Sun Harvest
Farms, Inc. Generally accepted accounting principles proscribe giving effect to
a consummated business combination accounted for by the pooling of interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation of the
transaction with the shareholders of Sun Harvest Farms, Inc. and its affiliates;
however, they will become the historical consolidated financial statements of
the Company after financial statements covering the date of consummation of that
business combination are issued.
PricewaterhouseCoopers LLP
Denver, Colorado
January 29, 1999,
except as to the pooling of interests with Henry's Marketplace, Inc., which
is as of September 27, 1999, and except as to the pooling of interests with
Sun Harvest Farms, Inc, which is as of December 15, 1999
13
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Henry's Marketplace, Inc.
We have audited the balance sheet of Henry's Marketplace, Inc. as of December
27, 1998, and the related statements of earnings, stockholders' equity and cash
flows for the fifty-two weeks ended December 27, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Henry's Marketplace, Inc. as of
December 27, 1998, and the results of its operations and its cash flows for the
fifty-two weeks ended December 27, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
San Diego, California
February 5, 1999
14
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Sun Harvest Farms, Inc.
We have audited the accompanying balance sheets of Sun Harvest Farms, Inc. (the
Company) as of September 28, 1999, December 29, 1998, and December 30, 1997, and
the related statements of income, shareholder's equity (deficit), and cash flows
for the nine-month period ended September 28, 1999 and the fiscal years ended
December 29, 1998, December 30, 1997, and December 31, 1996, not separately
presented herein. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sun Harvest Farms, Inc. as of
September 28, 1999, December 29, 1998, and December 30, 1997, and the results of
its operations and its cash flows for the nine-month period ended September 28,
1999 and the fiscal years ended December 29, 1998, December 30, 1997, and
December 31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
November 17, 1999
15
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
January 2, December 27, December 28,
For the Fiscal Year Ended 1999 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 530,726 $ 431,974 $ 299,567
Costs of goods sold and occupancy costs 369,475 301,644 208,454
--------- --------- ---------
Gross Profit 161,251 130,330 91,113
Operating Expenses:
Direct store expenses 113,094 96,448 69,485
Selling, general and administrative expenses 20,026 16,314 12,361
Pre-opening expenses 3,449 1,149 1,863
Non-recurring expenses 393 -- 7,035
--------- --------- ---------
Income from operations 24,289 16,419 369
Interest income 975 309 95
Interest expense (1,003) (931) (1,566)
--------- --------- ---------
Income (loss) before income taxes 24,261 15,797 (1,102)
Income tax expense (benefit) 7,822 5,501 (120)
--------- --------- ---------
Net income (loss) 16,439 10,296 (982)
Other comprehensive income:
Foreign currency translation adjustment, net 22 (46) (85)
--------- --------- ---------
Comprehensive income (loss) $ 16,461 $ 10,250 $ (1,067)
========= ========= =========
Pro forma net income (loss) allocable to common stock $ 14,343 $ 9,389 $ (904)
========= ========= =========
Basic net income (loss) per share $ 0.73 $ 0.55 $ (0.32)
--------- --------- ---------
Diluted net income (loss) per share $ 0.71 $ 0.53 $ (0.32)
--------- --------- ---------
Pro forma basic net income (loss) per share $ 0.64 $ 0.50 $ (0.31)
--------- --------- ---------
Pro forma diluted net income (loss) per share $ 0.62 $ 0.48 $ (0.31)
--------- --------- ---------
Weighted average common shares outstanding:
Basic 22,440 18,841 10,606
Assuming dilution 23,079 19,425 10,606
</TABLE>
The accompanying notes are an integral part of these supplemental combined
financial statements.
16
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
January 2, December 27,
1999 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,389 $ 46,822
Inventories, net 36,206 28,082
Accounts receivable (net of allowance
for doubtful accounts of $159 and $214, respectively) 2,257 1,141
Income tax receivable 317
Prepaid expenses and other current assets 2,552 1,404
Deferred income taxes 812 1,447
--------- ---------
Total current assets 53,216 79,213
Property and equipment, net 106,804 65,572
Intangible assets, net 56,018 44,712
Deposits and other assets 1,282 1,255
--------- ---------
$ 217,320 $ 190,752
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 35,991 $ 28,397
Accrued liabilities 14,386 13,822
Notes payable 6,736 3,043
Current portion of long-term debt 1,384 1,385
--------- ---------
Total current liabilities 58,497 46,647
Long-term debt 2,675 4,157
Deferred income taxes 1,958 2,187
Other long-term obligations 1,582 1,064
--------- ---------
64,712 54,055
--------- ---------
Commitments and contingencies (Notes 10 and 11)
Stockholders' equity:
Preferred stock; $0.001 par value; 5,000,000 shares authorized;
no shares issued and outstanding
Common stock; $0.001 par value; 60,000,000 shares authorized;
22,606,019 and 22,108,149 issued and outstanding, respectively 23 22
Additional paid-in capital 143,074 138,812
Retained earnings (accumulated deficit) 9,620 (2,006)
Accumulated other comprehensive income (loss) (109) (131)
--------- ---------
Total stockholders' equity 152,608 136,697
--------- ---------
$ 217,320 $ 190,752
========= =========
The accompanying notes are an integral part of these supplemental combined
financial statements.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AND PER-SHARE AMOUNTS)
Retained Accumulated Total
Common Stock Treasury Stock Additional Earnings Other Stockholders'
-------------------- ------------------- Paid In (Accumulated Comprehensive Equity
Share Amount Share Amount Capital Deficit) Income (Loss) (Deficit)
---------- -------- --------- -------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 30, 1995 9,116,634 $ 9 903,581 $ (5,349) $ 3,654 $ (4,331) $ (6,017)
Equity transactions of
pooled companies 1,215 (2,374) (1,159)
Issuance of common stock
($7.42 per share) 1,762,698 1 13,086 13,087
Initial public offering of
common stock ($11.11 per
share), net of issuance costs 3,150,000 3 31,399 31,402
Accretion of redeemable
preferred stock (2,396) (2,396)
Conversion of redeemable
convertible preferred
stock into shares of
common stock 5,226,320 5 43,097 43,102
Issuance of stock options 1,109 1,109
Common stock options
exercised ($3.13 to
$7.60 per share) 114,570 298 298
Repurchase of common stock 7,542 (42) (42)
Retirement of treasury stock (911,123) (911,123) 5,391 (5,391)
Net loss (982) (982)
Foreign currency
translation adjustment
(85) (85)
---------- -------- --------- -------- --------- ---------- -------- ----------
Balance at December 28, 1996 18,459,099 18 -- -- 88,467 (10,083) (85) 78,317
Equity transactions of
pooled companies (2,219) (2,219)
Issuance of common stock
($7.11 to $9.45 per share) 152,346 1,117 1,117
Public offering of common
stock ($14.99 per share),
net of issuance costs 3,125,313 3 46,535 46,538
Common stock options
and warrants exercised
($1.77 to $8.45 per share) 371,391 1 2,693 2,694
Net income 10,296 10,296
Foreign currency
translation adjustment
(46) (46)
---------- -------- --------- -------- --------- ---------- -------- ----------
Balance at December 27, 1997 22,108,149 22 -- -- 138,812 (2,006) (131) 136,697
Pooling-of-interests
transactions 200,045 60 188 248
Equity transactions of
pooled companies 300 (5,001) (4,701)
Issuance of common stock
($9.63 to $20.33 per share) 69,846 1,096 1,096
Common stock options
exercised ($3.13 to
$16.00 per share) 227,979 1 2,806 2,807
Net income 16,439 16,439
Foreign currency
translation adjustment
22 22
---------- -------- --------- -------- --------- ---------- -------- ----------
Balance at January 2, 1999 22,606,019 $ 23 -- $ -- $ 143,074 $ 9,620 $ (109) $ 152,608
========== ======== ========= ======== ========= ========== ======== ==========
The accompanying notes are an integral part of these supplemental combined financial statements.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTAL COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
Fiscal Year Ended January 2, 1999 December 27, 1997 December 28, 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 16,439 $ 10,296 $ (982)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Write-off of assets in non-recurring expenses 5,746
Depreciation and amortization 15,525 11,118 8,210
Loss (gain) on disposal of property and equipment and
settlement of property-related obligations (829) (1,060) 108
Deferred tax provision (benefit) 406 1,737 (863)
Deferred severance 476
Change in assets and liabilities:
Inventories (6,504) (4,024) (5,366)
Receivables and other assets (2,215) (533) (749)
Accounts payable 7,202 4,499 3,853
Accrued liabilities 2,046 1,045 5,284
-------- -------- --------
Net cash provided by operating activities 32,070 23,554 15,241
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (56,448) (27,459) (17,329)
Payment for purchase of acquired entities,
net of cash acquired (10,481) (14,003) (14,043)
Proceeds from sale of property and equipment 3,408 566
-------- -------- --------
Net cash used by investing activities (63,521) (40,896) (31,372)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on line of credit (12,486)
Payments on long-term debt (3,041) (3,510) (3,745)
Principal payments under capitalized leases (60) (88)
Proceeds from notes payable and long-term debt 1,720 2,497 3,455
Proceeds from issuance of redeemable preferred stock, net 16,068
Proceeds from issuance of common stock, net 2,003 49,705 31,700
Contributions received from stockholders 300
Distribution to stockholders (5,026) (2,244) (2,399)
Purchase of treasury stock (42)
-------- -------- --------
Net cash provided (used) by financing activities (4,044) 46,388 32,463
-------- -------- --------
Effect of exchange rates on cash 62 (46) (85)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (35,433) 29,000 16,247
Cash and cash equivalents at beginning of year 46,822 17,822 1,575
-------- -------- --------
Cash and cash equivalents at end of year $ 11,389 $ 46,822 $ 17,822
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 897 $ 891 $ 1,618
======== ======== ========
Cash paid for income taxes $ 6,370 $ 2,505 $ 1,039
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Short-term note payable issued for business acquisition $ 3,150
========
Common stock issued in relation to prior year business
acquisition $ 488 $ 269
======== ========
Preferred stock, common stock and options issued
and total debt and liabilities incurred
and assumed in acquisitions $ 3,400 $ 35,500
======== ========
Conversion of preferred stock into common stock $ 43,100
========
Accretion of preferred stock $ 2,400
========
</TABLE>
In addition, the Company issued 200,045 shares as consideration for pooling of
interests transactions in 1998. The accompanying notes are an integral part of
these supplemental combined financial statements.
19
<PAGE>
NOTES TO THE SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Wild Oats Markets, Inc. ("Wild Oats" or the "Company"), headquartered in
Boulder, Colorado, owns and operates natural foods supermarkets in the United
States and Canada. The Company also operates bakeries, commissary kitchens, and
warehouses that supply the retail stores. The Company's operations are
concentrated in one market segment--grocery stores--and are geographically
concentrated in the western and central United States. Management considers a
downturn in this market segment and geographic location to be unlikely.
BASIS OF PRESENTATION
Certain amounts in the prior years' financial statements have been reclassified
to conform to the current year presentation.
PRINCIPLES OF CONSOLIDATION
The Company's supplemental combined financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. As more fully described in Note
2, on September 27, 1999, the Company completed a stock-for-stock transaction,
accounted for as a pooling of interests, with the shareholders of Henry's
Marketplace, Inc. ("Henry's"). On December 15, 1999, the Company completed a
stock-for-stock transaction, accounted for as a pooling of interests, with the
shareholders of Sun Harvest Farms, Inc. and its affiliate (together "Sun
Harvest"). The accompanying supplemental combined financial statements have been
restated to include the accounts of Henry's and Sun Harvest for all periods
presented.
FISCAL YEAR
The Company reports its financial results on a 52- or 53-week fiscal year ending
on the Saturday closest to December 31. Each fiscal quarter consists of a
13-week period, with one 14-week period in a 53-week year. Fiscal year 1998 was
a 53-week period, and fiscal years 1997 and 1996 were 52-week periods. Sun
Harvest's fiscal year ends on the last Tuesday in December. Fiscal years 1998
and 1997 were 52-week periods and fiscal 1996 was a 53-week period for Sun
Harvest. The effect of consolidation of these fiscal periods with the fiscal
periods of the Company for all periods presented is not considered material.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Such cash equivalents
aggregated $2.1 million and $40.2 million at January 2, 1999 and December 27,
1997, respectively.
INVENTORIES
Inventories consisting of products held for sale are stated at the lower of cost
(first-in, first-out) or market, as determined by the retail inventory method.
DEPRECIATION AND AMORTIZATION
Property and equipment are recorded at cost. Depreciation is computed using
straight-line or accelerated methods over the estimated useful lives of the
respective assets (three to seven years). Leasehold improvements are amortized
on a straight-line basis over the shorter of the useful life of the asset or the
lease term. Maintenance and repairs are expensed as incurred, and improvements
are capitalized.
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill, which is amortized using the
straight-line method over 30 to 40 years, and are shown net of accumulated
amortization of $4.4 million and $2.8 million at January 2, 1999 and December
27, 1997, respectively. The carrying value of goodwill is assessed for
recoverability by management based on an analysis of undiscounted expected
future cash flows from the related acquired entities. The Company believes that
there has been no impairment thereof as of January 2, 1999.
20
<PAGE>
PRE-OPENING EXPENSES
Pre-opening expenses are included in other current assets and consist primarily
of labor costs, rent, utilities, supplies, and other expenses incurred in
connection with the opening of a new store. Through fiscal 1998, pre-opening
expenses were deferred until the store's opening date, at which time such costs
were expensed in full. Beginning in fiscal 1999, pre-opening expenses will be
recognized as incurred.
ADVERTISING
Advertising is expensed as incurred. Advertising expense was $6.8 million, $7.0
million, and $5.5 million for 1998, 1997 and 1996, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash and
cash equivalents, short-term trade receivables and payables and long-term debt,
approximate their fair values.
USE OF ESTIMATES
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the supplemental combined
financial statements and accompanying notes. Actual results could differ from
those estimates.
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company's Canadian subsidiary is the Canadian
dollar. Translation into U.S. dollars is performed for assets and liabilities at
the exchange rate as of the balance sheet date. Income and expense accounts are
translated at average exchange rates for the year. Adjustments resulting from
the translation are reflected as a separate component of stockholders' equity.
PRO FORMA INCOME TAXES
In fiscal 1999, the Company consummated stock-for-stock transactions with the
shareholders of Henry's and with the shareholders of Sun Harvest in pooling of
interests transactions (see Note 2), which included entities that were
previously not taxable and, accordingly, any income tax liabilities for the
periods prior to the transaction are the responsibility of the previous owner.
For purposes of these supplemental combined financial statements, federal and
state income taxes have been provided as a pro forma adjustment as if the
acquired entities had filed C Corporation tax returns for all periods presented
(see Note 16).
21
<PAGE>
EARNINGS PER SHARE
Basic earnings per share is based on the weighted-average number of common
shares outstanding, and diluted earnings per share is based on the
weighted-average number of common shares outstanding and all dilutive potential
common shares outstanding, except where the effect of their inclusion would be
antidilutive (i.e., in a loss period) and is calculated using net income and pro
forma net income (net income after giving effect to the pro forma tax adjustment
discussed above). A reconciliation of the basic and diluted per-share
computations is as follows (in thousands, except per-share data):
<TABLE>
<CAPTION>
Jan. 2, Dec. 27, Dec. 28,
Fiscal Year Ended 1999 1997 1996
- --------------------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Basic earnings (loss) per common share computation:
Net income (loss) $ 16,439 $ 10,296 $ (982)
Accretion of redeemable preferred stock -- -- (2,396)
-------- -------- --------
Net income (loss) allocable to common stock $ 16,439 $ 10,296 $ (3,378)
======== ======== ========
Pro forma net income (loss)(Note 16) $ 14,619 $ 9,389 $ (904)
Accretion of redeemable preferred stock -- -- (2,396)
-------- -------- --------
Pro forma net income (loss) allocable to common stock $ 14,619 $ 9,389 $ (3,378)
======== ======== ========
Weighted average common shares issued 22,440 18,841 10,606
-------- -------- --------
Earnings (loss) per common share $ 0.73 $ 0.55 $ (0.32)
======== ======== ========
Pro forma earnings (loss)
per common share $ 0.65 $ 0.50 $ (0.31)
======== ======== ========
Diluted earnings (loss) per common share computation:
Net income (loss) allocable
to common stock $ 16,439 $ 10,296 $ (3,378)
Pro forma net income (loss) allocable to
common stock $ 14,619 $ 9,389 $ (3,300)
Weighted average common shares issued 22,440 18,841 10,606
Incremental shares from assumed
conversions:
Stock options 639 584 --
-------- -------- --------
Total dilutive average
common shares issued 23,079 19,425 10,606
======== ======== ========
Diluted earnings (loss) per
common share $ 0.71 $ 0.53 $ (0.32)
======== ======== ========
Pro forma diluted earnings (loss)
per common share $ 0.63 $ 0.48 $ (0.31)
======== ======== ========
</TABLE>
Due to the Company's net loss allocable to common stock in 1996, diluted loss
per share is the same as basic. In 1996, dilutive securities not included in the
calculation consisted of stock options and warrants convertible into 1,542,267
shares of common stock. Weighted average shares outstanding related thereto
would have been 10,099,500.
NEW ACCOUNTING PRONOUNCEMENTS
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("FAS") No. 131, Disclosure about Segments of an
Enterprise and Related Information. FAS No. 131 revises the current requirements
for reporting business segments by redefining such segments according to
management's disaggregation of the business for purposes of making operating
decisions and allocating internal resources. The Company adopted
22
<PAGE>
FAS No. 131 in 1998. The adoption of FAS No. 131 did not affect results of
operations, financial position, or the disclosure of segment information as the
Company has one reportable segment, retail sales.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1, which is effective
for transactions in fiscal years beginning after December 15, 1998, provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. The Company will adopt SOP 98-1 for the 1999 fiscal year, but
does not expect such adoption to have a material effect on its reported
financial results.
In April 1998, the AICPA issued SOP 98-5, Accounting for the Costs of Start-Up
Activities. SOP 98-5 requires that pre-opening costs be expensed as incurred.
SOP 98-5 is effective for fiscal years beginning after December 15, 1998, and
the initial application should be reported as a cumulative effect of a change in
accounting principle. The Company will adopt SOP 98-5 in fiscal 1999 and will
record approximately $284,000 as a cumulative effect of a change in accounting
principle, net of taxes, during the first quarter of fiscal 1999.
In June 1998, the FASB issued FAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. FAS No. 133, which is effective for fiscal quarters
beginning after June 15, 2000, 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 all
fiscal quarters beginning after June 15, 2000, but does not expect such adoption
to materially affect financial statement presentations.
2. BUSINESS COMBINATIONS
1999
On December 15, 1999, the Company issued approximately 889,000 shares of common
stock in exchange for all of the outstanding stock of Sun Harvest in a
transaction accounted for as a pooling of interests. Accordingly, the financial
position, results of operations and cash flows of Sun Harvest have been combined
with those of the Company in these supplemental combined financial statements.
Certain reclassifications have been made to the prior financial statements of
Sun Harvest to conform with the Company's financial presentation and policies.
There were no intercompany transactions between the Company and Sun Harvest for
all periods presented.
On September 27, 1999, the Company issued approximately 2.1 million shares of
common stock in exchange for all of the outstanding stock of Henry's
Marketplace, Inc. in a transaction accounted for as a pooling of interests.
Accordingly, the financial position, results of operations and cash flows of
Henry's Marketplace, Inc. have been combined with those of the Company in these
supplemental combined financial statements. Certain reclassifications have been
made to the prior financial statements of Henry's Marketplace, Inc. to conform
with the Company's financial presentation and policies. There were no
intercompany transactions between the Company and Henry's Marketplace, Inc. for
all periods presented.
23
<PAGE>
RESULTS OF POOLED COMPANY PRIOR TO TRANSACTION Separate results of operations
for the Company, Henry's, and Sun Harvest's (including the affiliated entity)
operations for the periods prior to the transaction are as follows (in
thousands):
Jan. 2, Dec. 27, Dec. 28,
Fiscal Year Ended 1999 1997 1996
- -------------------------------------- --------- --------- ---------
Sales:
Wild Oats $ 398,857 $ 311,077 $ 192,493
Henry's 81,026 72,776 61,113
Sun Harvest 50,843 48,121 45,961
--------- --------- ---------
Combined $ 530,726 $ 431,974 $ 299,567
========= ========= =========
Net Income:
Wild Oats $ 11,648 $ 7,036 $ (4,483)
Henry's 3,859 2,411 2,931
Sun Harvest 932 849 570
--------- --------- ---------
Combined $ 16,439 $ 10,296 $ (982)
--------- --------- ---------
Other Changes in Stockholders' Equity:
Wild Oats $ 4,173 $ 50,304 $ 86,475
Henry's (3,565) (1,653) (428)
Sun Harvest (1,136) (567) (731)
--------- --------- ---------
Combined $ (528) $ 48,084 $ 85,316
--------- --------- ---------
1998
In January, May, June and December 1998, in four separate transactions, the
Company acquired the assets and assumed certain liabilities of five operating
natural foods supermarkets in Nashville, Tennessee, New York, New York, Santa
Barbara, California, Victoria, British Columbia, Canada, and Boulder, Colorado.
The purchase price for these acquisitions aggregated $10.6 million in cash and a
note payable of $3.1 million that was repaid in full on January 5, 1999 (see
Note 5). The acquisitions were accounted for using the purchase method, and the
excess of cost over the fair value of the assets acquired of $12.0 million was
allocated to goodwill, which is being amortized on a straight-line basis over 40
years.
The fair values of the acquired assets and liabilities of these acquisitions are
as follows (in thousands):
Current assets ($127 of cash) $ 1,304
Equipment 1,397
Other assets 25
Liabilities (1,022)
Goodwill 12,014
---------
$ 13,718
=========
Also during 1998, the Company issued 200,045 shares of the Company's common
stock in exchange for all of the common stock of two companies operating natural
foods grocery stores in Columbus, Ohio and Little Rock, Arkansas. These
acquisitions were accounted for as poolings of interests, and accordingly, the
Company's consolidated financial statements for 1998 include the operations of
the stores for the entire year, adjusted to conform with the Company's
accounting policies and presentation. The Company's financial statements prior
to 1998 were not restated to include the results of these pooling transactions
as the effect is immaterial. Non-recurring, acquisition-related expenses of
$393,000 were recorded in conjunction with the poolings.
24
<PAGE>
1997
In February, March and June 1997, in four separate transactions, the Company
acquired the assets and assumed certain liabilities of nine operating natural
foods supermarkets: two in south Florida, two in Eugene, Oregon, two in Memphis,
Tennessee, and three in Phoenix and Scottsdale, Arizona. The purchase price for
these acquisitions aggregated $15.0 million and consisted of $14.0 million in
cash and 137,690 shares of the Company's common stock valued at approximately
$979,000. The acquisitions were accounted for using the purchase method, and the
excess of cost over the fair value of the assets acquired of $10.3 million was
allocated to goodwill, which is being amortized on a straight-line basis over 40
years.
The fair values of the acquired assets and liabilities of these acquisitions are
as follows (in thousands):
Current assets ($27 of cash) $ 3,304
Equipment 3,782
Other assets 23
Liabilities (2,460)
Goodwill 10,338
---------
$ 14,987
=========
1996
In July 1996, the Company acquired all of the outstanding common and preferred
stock of Alfalfa's, Inc. for $39.1 million, consisting of $16.2 million of cash,
issuance of 1,762,698 shares of common stock and options to acquire 279,228
shares of common stock valued at $14.2 million, issuance of 612,504 shares of
redeemable convertible Series D preferred stock valued at $7.7 million and $1.0
million of acquisition-related costs. The acquisition was accounted for using
the purchase method, and the excess of cost over the fair value of the assets
acquired of $27.8 million was allocated to goodwill, which is being amortized on
a straight-line basis over 40 years.
In May 1996, the Company acquired substantially all of the combined assets of
three related natural foods retail stores in Salt Lake City, Utah, in exchange
for total consideration of $2.2 million consisting of $500,000 in cash and $1.7
million in promissory notes. The acquisition was accounted for using the
purchase method, and the excess of cost over the fair value of the assets
acquired of $2.1 million was allocated to goodwill, which is being amortized on
a straight-line basis over 40 years.
The fair values of the acquired assets and liabilities of these acquisitions are
as follows (in thousands):
Current assets ($3,591 of cash) $ 8,507
Equipment 12,030
Other assets 523
Liabilities (9,738)
Goodwill 29,899
---------
$ 41,221
=========
The following unaudited pro forma combined results of operations of the Company
and the acquired businesses discussed above have been prepared as if the
transactions occurred as of the beginning of the respective periods (after
giving effect to the pro forma tax adjustment -- see Notes 2 and 16) (in
thousands):
Jan. 2, Dec. 27, Dec. 28,
Fiscal Year Ended 1999 1997 1996
- --------------------------------- --------- ---------- ---------
Sales $ 548,560 $ 451,440 $ 349,392
Pro forma net income (loss) 14,977 9,907 (98)
Pro forma net income (loss)
allocable to common stock 14,977 9,907 (2,494)
Pro forma basic earnings (loss)
per share $ .67 $ .53 $ (.24)
Pro forma diluted earnings (loss)
per share $ .65 $ .51 $ (.24)
The unaudited pro forma results above are not necessarily representative of the
actual results that would have occurred or may occur in the future, if the
transactions had been in effect on the dates indicated. The pre-transaction
historical results of the acquired businesses discussed above are not reflected
in the Company's historical financial statements.
25
<PAGE>
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
Jan. 2, Dec. 27,
Fiscal Year Ended 1999 1997
- ------------------------------ ---------- ----------
Machinery and equipment $ 70,309 $ 48,369
Leasehold improvements 45,369 25,146
Land and building 11,492 1,245
Construction in progress 17,609 14,983
---------- ----------
144,779 89,743
Less accumulated depreciation
and amortization (37,975) (24,171)
---------- ----------
$ 106,804 $ 65,572
========== ==========
The amounts shown above include $310,000 of machinery and equipment which are
accounted for as capitalized leases and which have accumulated amortization of
$258,000 at December 27, 1997. There were no fixed assets accounted for as
capitalized leases as of January 2, 1999.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
Jan. 2, Dec. 27,
Fiscal Year Ended 1999 1997
- ----------------------------------- ---------- ----------
Accrued wages and employee costs $ 8,752 $ 7,242
Accrued sales and property taxes 2,778 2,152
Deferred charges and other accruals 2,856 4,428
---------- ----------
$ 14,386 $ 13,822
========== ==========
26
<PAGE>
<TABLE>
<CAPTION>
5. NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt outstanding consists of the following (in thousands):
Jan. 2, Dec. 27,
1999 1997
--------- ----------
<S> <C> <C>
Notes payable to corporations and individuals:
Due January 5, 1999, bearing no interest, secured by
inventory and fixed assets $ 3,150
Due in monthly installments of $4,635 (including interest)
through April 2017, bearing interest at 10%, secured by fixed
assets, penalty for early repayment $ 475
Notes payable to bank and lending institutions payable in monthly
installments ranging from $632 to $10,992, including interest
ranging from 8.0% to 14.55% per annum at January 2, 1999,
due dates ranging from June 1, 1998 through January 29, 2003,
secured by equipment 3,668 4,456
Unsecured notes payable in monthly installments ranging from
$3,805 to $14,311, including interest ranging from 6.0% to 14.75%
per annum at January 2, 1999, due dates ranging from December
18, 1999 through July 18, 2001 311 524
Note payable to a related party, unsecured, interest of 10.0% at
January 2, 1999, payable in monthly installments of $1,366,
including interest through October 1, 2005 80 87
Note payable to bank ($2,675,000) in monthly principal and interest
installments of $40,000 at a financial institution's prime (8.25%
at September 28, 1999) beginning February 5, 1995 through
January 5, 2000; all remaining unpaid principal and interest is
due and payable on January 5, 2000; payable on demand at the bank's
discretion; collateralized by inventory, equipment, and furniture
and fixtures, and personally guaranteed by the shareholders 1,538 1,780
Note payable to bank ($350,000) in monthly principal installments
of $8,350 plus interest at a financial institution's prime
(8.25% at September 28, 1999) floating, beginning November 6, 1995
through May 6, 2000 with the outstanding principal and interest
balance due on June 6, 2000; collateralized by property, assignment
of life insurance proceeds, and assignments of common stock -- 177
Note payable to bank ($500,000) in monthly principal installments
of $10,440 plus interest at a financial institution's prime
(8.25% at September 28, 1999) floating, beginning February 5, 1997
through January 28, 2002 with the outstanding principal and interest
balance due on January 28, 2002; payable on demand at the bank's
discretion; collateralized by property, assignment of life
insurance proceeds, and assignments of common stock 388 451
Note payable to bank ($200,000) in monthly principal installments
of $4,200 plus interest at a financial institution's prime
(8.25% at September 28, 1999) floating, beginning June 16, 1997
through January 28, 2002 with the outstanding principal and interest
balance due on January 28, 2002; payable on demand at the bank's
discretion; collateralized by property, assignment of life insurance
proceeds, and assignments of common stock 37 184
Note payable to bank ($1,000,000) in monthly principal installments
of $16,344 plus interest at prime (8.25% at September 28, 1999)
+ .5% floating, beginning May 15, 1998 through April 15, 2003 with
the outstanding principal and interest balance due on April 15, 2003;
payable on demand at the bank's discretion; collateralized
by real property 952 --
Note payable to bank ($200,000) in monthly interest-only installments
at prime (8.52% at September 28, 1999) + 1% floating, beginning
December 20, 1998 through May 20, 1999 with the entire principal
balance due on May 20, 1999; payable on demand at the bank's discretion;
collateralized by property, assignment of life insurance proceeds, and
assignments of common stock 200 --
Note payable ($136,047) in twelve monthly principal installments of
$11,337; collateralized by inventory due on August 15, 1998 -- 79
Note payable ($144,198) in twelve monthly principal installments of
$12,017; collateralized by inventory due on November 8, 1999 120 --
Mortgage payable to lending institution payable in monthly installments
of $3,899, including interest, secured by real estate 226 247
Unsecured note payable to a related party on demand 125 125
--------- ----------
10,795 8,585
Less current portion (8,120) (4,428)
--------- ----------
$ 2,675 $ 4,157
========= ==========
</TABLE>
27
<PAGE>
The maturities of notes payable and long-term debt (exclusive of debt that
contains a payable on demand clause which are classified as current on the
balance sheet) are as follows (in thousands):
Fiscal year ending (in thousands)
1999 $ 5,562
2000 2,983
2001 1,052
2002 656
2003 523
Thereafter 19
-----------
Total $ 10,795
===========
In 1998, the Company, through Henry's, entered into a financing agreement with a
commercial bank that permits Henry's to borrow through 2003 up to $200,000 at an
interest rate of 9.5%. As of January 2, 1999, there were no borrowings
outstanding under this facility.
The Company has a $40.0 million revolving line of credit. The facility has a
seven-year term and bears interest, at the Company's option, at the prime rate
or LIBOR plus 1.25%. The line of credit agreement includes certain financial and
other covenants, as well as restrictions on payments of dividends. As of January
2, 1999, there were no borrowings outstanding under this facility. In March
1999, the Company increased its revolving line of credit to an $80.0 million
commitment with a three-year term and bearing interest at the Company's option,
at the prime rate or LIBOR plus 0.65%.
6. INCOME TAXES
Income (loss) before income taxes consists of the following (in thousands):
Jan. 2, Dec. 27, Dec. 28,
Fiscal Year Ended 1999 1997 1996
- ----------------------------- -------- -------- --------
Domestic $ 23,404 $ 14,895 $ (1,171)
Foreign 856 902 69
-------- -------- --------
$ 24,260 $ 15,797 $ (1,102)
======== ======== ========
Income tax expense (benefit) consists of the following (in thousands):
Jan. 2, Dec. 27, Dec. 28,
Fiscal Year Ended 1999 1997 1996
- ----------------------------- -------- -------- --------
Current: Federal $ 5,685 $ 3,009 $ 526
State and foreign 1,731 755 217
-------- -------- --------
7,416 3,764 743
-------- -------- --------
Deferred: Federal 430 1,728 (705)
State and foreign (24) 9 (158)
-------- -------- --------
406 1,737 (863)
-------- -------- --------
$ 7,822 $ 5,501 $ (120)
======== ======== ========
28
<PAGE>
The differences between the U.S. federal statutory income tax rate and the
Company's effective tax rate are as follows:
Jan. 2, Dec. 27, Dec. 28,
Fiscal Year Ended 1999 1997 1996
- ----------------------------- -------- -------- --------
Statutory tax rate 35.0% 34.0% (34.0%)
State income taxes, net of federal
income tax benefit 3.6 1.5 (1.3)
Tax effect of non-deductible goodwill 1.2 1.7 63.8
Untaxed earnings related to Henry's (5.7) (2.8) (41.2)
Untaxed earnings related to Sun Harvest (1.4) (1.9) (18.7)
Other, net (0.5) 2.3 20.5
-------- -------- --------
Effective tax rate 32.2% 34.8% (10.9)%
======== ======== ========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows (in
thousands):
Jan. 2, Dec. 27,
Fiscal Year Ended 1999 1997
- ----------------------------- -------- --------
Deferred tax assets
Inventory related $ 237 $ 326
Vacation accrual 724 574
Other accruals 352 502
Other 3 408
-------- --------
Total deferred tax assets 1,316 1,810
-------- --------
Deferred tax liabilities
Property related (2,462) (2,550)
-------- --------
Total deferred tax liabilities (2,462) (2,550)
-------- --------
Net deferred tax liability $ (1,146) $ (740)
======== ========
During 1997, the Company fully utilized U.S. net operating loss carryforwards of
approximately $1.9 million. Additionally, during 1997, the Company utilized
state net operating loss carryforwards of approximately $4.1 million and, as of
December 27, 1997, had state net operating loss carryforwards of approximately
$137,000.
These state net operating loss carryforwards were fully utilized during 1998.
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Upon the closing of the Company's initial public offering on October 22, 1996,
the Company's Series A, B, C, D and E redeemable convertible preferred stock
shares were converted into an aggregate of 5,226,320 shares of the Company's
common stock.
8. CAPITAL STOCK
The Company declared a 3-for-2 stock split for all stockholders of record as of
December 22, 1997, effective January 7, 1998 (see Note 17).
In December 1997, the Company completed a public offering of its common stock.
The proceeds from the sale of 3,125,313 shares of common stock at $14.99 per
share were approximately $46.5 million, net of the underwriting discount of $2.5
million and stock offering costs of $300,000.
29
<PAGE>
The Company completed an initial public offering of its common stock on October
22, 1996. The proceeds from the sale of 3,150,000 shares of common stock at
$11.11 per share were approximately $31.4 million, net of the underwriting
discount of $2.5 million and stock offering costs of $1.1 million.
9. STOCK PLANS, OPTIONS AND WARRANTS
EMPLOYEE STOCK PURCHASE PLAN
In August 1996, the Company's board of directors approved and adopted the
Employee Stock Purchase Plan ("Purchase Plan") covering an aggregate of 287,307
shares of common stock. The Purchase Plan is intended to qualify as an employee
stock purchase plan within the meaning of Section 423 of the Internal Revenue
Code. Under the Purchase Plan, the board of directors may authorize
participation by eligible employees, including officers, in periodic offerings.
The offering period for any offering will be no more than 27 months. The board
authorized an offering commencing on the initial public offering date of October
22, 1996 and ending June 30, 1997, and sequential six-month offerings
thereafter.
Employees are eligible to participate in the currently authorized offerings if
they have been employed by the Company or an affiliate of the Company
incorporated in the United States for at least six months preceding October 22,
1996. Employees can have up to 15% of their earnings withheld pursuant to the
Purchase Plan (10% under the currently authorized offerings) and applied on
specified purchase dates (currently the last day of each authorized offering) to
the purchase of shares of common stock. The price of common stock purchased
under the Purchase Plan will be equal to 85% of the lower of the fair market
value of the common stock on the commencement date of each offering or the
relevant purchase date. As of January 2, 1999, there were approximately $43,000
of payroll deductions to be applied to purchase stock on June 30, 1999; as of
December 27, 1997, there were approximately $126,000 of payroll deductions which
purchased 12,911 shares of common stock on December 31, 1997.
EMPLOYEE STOCK OWNERSHIP PLAN
In conjunction with the acquisition of Alfalfa's in July 1996, the Company
assumed an employee stock ownership plan ("ESOP") for Alfalfa's employees who
were participants at the time of the acquisition. Following the acquisition, the
Company discontinued contributions to the ESOP. In January 1998, the Company
received a favorable determination letter from the Internal Revenue Service,
authorizing termination of the ESOP and distribution of the ESOP shares. The
112,617 shares of the Company's common stock held in trust as of December 27,
1997, were distributed to the ESOP participants, pursuant to the terms of the
ESOP, in February 1998.
1996 EQUITY INCENTIVE PLAN
The Company's 1996 Equity Incentive Plan (the "Incentive Plan") was adopted by
the board of directors in August 1996 as an amendment and restatement of the
Company's 1993 Stock Option Plan (the "1993 Plan"). The board designated all
shares formerly available for issuance under the 1993 Plan and the 1991 Option
Plan (the "1991 Plan") of Alfalfa's following the July 1996 acquisition of
Alfalfa's to be available for issuance under the Incentive Plan. The board also
amended the 1993 Plan and the 1991 Plan to transfer to the Incentive Plan any
shares of common stock that are subject to an option which expires or otherwise
terminates prior to exercise. At plan adoption, 1,852,721 shares of common stock
were reserved for issuance under the Incentive Plan. In May 1998, an additional
1,237,500 shares of common stock were reserved for issuance under the Incentive
Plan, pursuant to stockholder vote and approval.
The Incentive Plan provides for the grant of incentive stock options to
employees (including officers and employee-directors) and nonqualified stock
options, restricted stock purchase awards and stock bonuses to employees and
directors. The exercise price of options granted under the Incentive Plan is
determined by the board of directors, provided that the exercise price for an
incentive stock option cannot be less than 100% of the fair market value of the
common stock on the grant date and the exercise price for a nonqualified stock
option cannot be less than 85% of the fair market value of the common stock on
the grant date. Outstanding options generally vest ratably over a period of five
years and generally expire ten years from the grant date.
WARRANTS
A five-year warrant to purchase 7,904 shares of the Company's common stock at an
exercise price of $9.47 per share was outstanding at January 2, 1999.
30
<PAGE>
FAIR VALUES
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock plans. Accordingly, no compensation
expense has been recognized for these plans. Had compensation cost for these
plans been determined based on the fair value at the grant dates as prescribed
by FAS No. 123, Accounting for Stock-Based Compensation, the Company's net
income (loss) allocable to common stock and basic and diluted earnings (loss)
per share would have been reduced to the pro forma amounts indicated below
(after giving effect to the pro forma tax adjustment -- see Notes 2 and 16):
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Pro forma net income (loss) allocable to common stock
As reported .......................................................... $ 14,619 $ 9,389 $ (3,300)
Pro forma ............................................................ $ 12,827 $ 8,403 $ (4,051)
Pro forma basic earnings (loss) per share
As reported .......................................................... $ 0.65 $ 0.50 $ (0.31)
Pro forma ............................................................ $ 0.57 $ 0.45 $ (0.38)
Pro forma diluted earnings (loss) per share
As reported .......................................................... $ 0.63 $ 0.48 $ (0.31)
Pro forma ............................................................ $ 0.56 $ 0.43 $ (0.38)
The fair value of the employees' purchase rights was estimated using the
Black-Scholes model with the following weighted-average assumptions:
1998 1997 1996
-------- --------- ---------
Estimated dividends .................................................. None None None
Expected volatility .................................................. 46% 51% 51%
Risk-free interest rate .............................................. 4.5% 5.5% 5.6%
Expected life (years) ................................................ 0.5 0.5 0.7
Weighted-average fair value per share ................................ $ 4.66 $ 3.69 $ 3.28
The fair value of each option grant under the Incentive Plan is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1998 1997 1996
-------- --------- ---------
Estimated dividends .................................................. None None None
Expected volatility .................................................. 46% 49% 51%
Risk-free interest rate .............................................. 4.5%-4.7% 5.8% 5.6%-7.1%
Expected life (years) ................................................ 7 7 7
</TABLE>
31
<PAGE>
A summary of the status of the Company's Incentive Plan as of the 1998, 1997 and
1996 fiscal year ends and changes during the years ending on those dates is
presented below:
Weighted
Number Average
of Exercise
Shares Price
--------- ---------
Outstanding as of December 30, 1995 705,809 $ 5.31
Granted 1,056,044 $ 6.71
Forfeited (96,467) $ 6.53
Exercised (114,570) $ 2.60
---------
Outstanding as of December 28, 1996 1,550,816 $ 6.28
Granted 443,219 $ 10.91
Forfeited (226,401) $ 7.12
Exercised (365,366) $ 4.71
---------
Outstanding as of December 27, 1997 1,402,268 $ 7.95
Granted 346,611 $ 17.91
Forfeited (101,546) $ 11.11
Exercised (227,979) $ 6.03
---------
Outstanding as of January 2, 1999 1,419,354 $ 10.49
=========
The following table summarizes information about incentive and nonqualified
stock options outstanding and exercisable at January 2, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Range of Number Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.77-4.39 113,845 4.9 years $ 3.49 112,971 $ 3.49
$5.21-8.45 763,881 7.3 $ 7.41 395,670 $ 7.39
$11.11-15.11 142,967 8.6 $12.53 57,948 $12.35
$16.00-17.55 268,724 9.3 $16.47 27,843 $16.03
$17.67-24.00 129,937 9.5 $20.07 3,353 $19.29
--------- -------
1,419,354 7.8 $10.49 597,785 $7.61
========= =======
</TABLE>
At January 2, 1999, options exercisable for 1,432,493 shares were available for
future grant under the Incentive Plan. At December 27, 1997 and December 28,
1996, options for 525,363 and 616,904 shares with weighted average exercise
prices of $7.21 and $4.92, respectively, were exercisable. The weighted-average
grant-date per-share fair values of options granted during 1998, 1997 and 1996
were $17.49, $10.91 and $7.51, respectively.
10. LITIGATION
Alfalfa's Canada, Inc., a Canadian subsidiary of the Company, is a defendant in
a suit brought in the Supreme Court of British Columbia, by one of its
distributors, Waysafer Wholefoods Limited and one of its principals, seeking
monetary damages for breach of contract and injunctive relief to enforce a
buying agreement for the three Canadian stores entered into by a predecessor of
Alfalfa's Canada. Under the buying agreement, the stores must buy products
carried by the plaintiff if such are offered at the current advertised price of
its competitors. The suit was filed in September 1996. In June 1998, the Company
filed a Motion for Dismissal on the grounds that the contract in dispute
constituted a restraint of trade. The Motion was subsequently denied. The
Company does not believe its potential exposure in connection with the suit to
be material.
32
<PAGE>
The Company also is named as defendant in various actions and proceedings
arising in the normal course of business. In all of these cases, the Company is
denying the allegations and is vigorously defending against them and, in some
cases, has filed counterclaims. Although the eventual outcome of the various
lawsuits cannot be predicted, it is management's opinion that these lawsuits
will not result in liabilities that would materially affect the Company's
financial position or results of operations.
11. COMMITMENTS
The Company has numerous operating leases related to facilities occupied and
store equipment. These leases generally contain renewal provisions at the option
of the Company. Total rental expense (consisting of minimum rent and contingent
rent) under these leases was $17.1 million, $13.7 million and $9.9 million
during 1998, 1997 and 1996, respectively.
Future minimum lease payments under noncancelable operating leases as of January
2, 1999 are summarized as follows (in thousands):
Fiscal year ending
1999 $ 21,485
2000 23,657
2001 22,755
2002 22,320
2003 21,622
Thereafter 172,201
--------
Total minimum lease payments $284,040
========
Minimum rentals for operating leases do not include contingent rentals which may
become due under certain lease terms which provide that rentals may be increased
based on a percentage of sales. During 1998, 1997 and 1996, the Company paid
contingent rentals of $610,000, $453,000 and $388,000, respectively.
12. NON-RECURRING EXPENSES
During 1998, a $393,000 non-recurring charge was recorded in conjunction with
two pooling-of-interests transactions (see Note 2). The non-recurring charge
consisted of $201,000 of employee severance costs, $162,000 of inventory and
fixed asset write-downs, and $30,000 of lease cancellation costs. As of January
2, 1999, the remaining accrued liabilities related to the non-recurring charge
totaled $22,000.
During 1996, the Company's Board of Directors made the following decisions
related to the Company's operations, which resulted in an approximate $7.0
million non-recurring charge being recorded. Specifically, as a direct result of
the July 1996 acquisition of Alfalfa's, the Company incurred $2.0 million by:
(1) closing the Wild Oats Lawrence, Kansas store as well as a regional bakery
and kitchen; (2) moving out of its existing corporate headquarters and
relocating to Alfalfa's; and (3) consolidating certain information systems,
thereby abandoning certain Wild Oats hardware and software. In addition, after
operating the combined businesses, management closed the Alfalfa's Seattle,
Washington store and a restaurant in a Capers, Vancouver, British Columbia store
which, at the time of the acquisition, it had planned to retain. These closures
resulted in the remaining $5.0 million of the charge. Components of the
non-recurring charge consist primarily of lease cancellation costs ($1.0
million), employee severance and relocation costs ($300,000) and losses on
disposal or abandonment of certain assets ($5.7 million).
Cash paid for employee severance, relocation and lease cancellation costs
related to the non-recurring charge totaled approximately $900,000 in 1997.
During 1997, management adjusted certain accruals related to the non-recurring
charge, including a $500,000 reduction following the settlement of a
property-related obligation. At December 27, 1997, there were no remaining
accrued liabilities related to the non-recurring charge.
33
<PAGE>
13. BENEFIT PLANS
The Company maintains a tax-qualified employee savings and retirement plan (the
"401(k) Plan") covering the Company's employees. Pursuant to the 401(k) Plan,
eligible employees may elect to reduce their current compensation by up to the
lesser of 15% of their annual compensation or the statutorily prescribed annual
limit ($10,000 in 1998) and have the amount of such reduction contributed to the
401(k) Plan. The 401(k) Plan provides for additional matching contributions to
the 401(k) Plan by the Company in an amount determined by the Company prior to
the end of each plan year. Total Company contributions during 1998, 1997 and
1996 were approximately $408,000, $256,000 and $95,000, respectively. The
trustees of the 401(k) Plan, at the direction of each participant, invest the
assets of the 401(k) Plan in designated investment options. The 401(k) Plan is
intend to qualify under Section 401 of the Internal Revenue Code.
The Company, through Henry's, also sponsored a 401(k) plan covering Henry's
employees with at least 12 months of service. Contributions are discretionary.
Henry's contributed $106,000 and $72,000 to this 401(k) plan for fiscal 1998 and
1997, respectively. Henry's had no 401(k) plan prior to fiscal 1997.
The Company, through Sun Harvest, also sponsored a 401(k) plan covering Sun
Harvest employees with at least 12 months of service. Contributions are
discretionary. Sun Harvest contributed $36,134, $33,168, and $28,792 to this
401(k) plan for fiscal 1998, 1997, and 1996, respectively. Sun Harvest also paid
plan administrative expenses of $8,920, $18,188 and $14,575 in fiscal 1998,
1997, and 1996, respectively.
14. STOCKHOLDER RIGHTS PLAN
The Company has adopted a stockholder rights plan having both "flip-in" and
"flip-over" provisions. Stockholders of record as of May 22, 1998 received the
right ("Right") to purchase a fractional share of preferred stock at a purchase
price of $145 for each share of common stock held. In addition, until the Rights
become exercisable as described below and in certain limited circumstances
thereafter, the Company will issue one Right for each share of common stock
issued after May 22, 1998. For the "flip-in provision," the Rights would become
exercisable only if a person or group acquires beneficial ownership of 15% (the
"Threshold Percentage") or more of the outstanding common stock. Holdings of
certain existing affiliates of the Company are excluded from the Threshold
Percentage. In that event, all holders of Rights other than the person or group
who acquired the Threshold Percentage would be entitled to purchase shares of
common stock at a substantial discount to the then-current market price. This
right to purchase common stock at a discount would be triggered as of a
specified number of days following the passing of the Threshold Percentage. For
the "flip-over" provision, if the Company was acquired in a merger or other
business combination or transaction, the holders of such Rights would be
entitled to purchase shares of the acquirer's common stock at a substantial
discount.
15. RELATED PARTY TRANSACTIONS
Elizabeth C. Cook and Michael C. Gilliland, executive officers and directors of
the Company, are trustees of Wild Oats Community Foundation ("Foundation"), a
non-profit organization. In 1998, the Foundation opened Wild Oats Wellness
Centers in Boulder, Colorado and Albuquerque, New Mexico in space subleased from
the Company. The Foundation pays to the Company the same rent as paid by the
Company for the space. There are no material transactions between the Company
and the Foundation.
Additionally, the Company had outstanding notes payable to directors and
stockholders of Henry's totaling approximately $80,000 and $477,000 at January
2, 1999 and December 27, 1997, respectively (see Note 5).
During September 1999, the Company, through Sun Harvest, borrowed $100,000 on
its line of credit which it advanced to a related party. The amount was repaid
in October 1999.
In November 1998, the Company entered into a lease agreement with a related
party for $7,500 per month for a term of 14 months. The total amount paid under
this lease was $67,500 and $15,000 for the period ended September 28, 1999 and
the year ended December 29, 1998, respectively.
34
<PAGE>
16. PRO FORMA NET INCOME (LOSS)
The pro forma net income (loss) and pro forma net income (loss) per share
reflects the tax adjustment for the fiscal 1999 stock-for-stock transactions
with the shareholders of Henry's and Sun Harvest, accounted for as a pooling of
interests transactions (see Note 2), which included entities that were
previously not taxable, as if Henry's and Sun Harvest had filed C Corporation
tax returns for all periods presented. The effect is as follows:
Fiscal Fiscal Fiscal
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------------
Net income (loss) before pro forma
adjustments, per the supplemental
combined statements of operations $ 16,439 $ 10,296 $ (982)
Pro forma provision
for income taxes 2,096 907 78
- ------------------------------------------------------------------------------
Pro forma net income (loss) $ 14,343 $ 9,389 $ (904)
- ------------------------------------------------------------------------------
17. SUBSEQUENT EVENTS (UNAUDITED)
In October 1999, at a special meeting of shareholders, the shareholders of the
Company approved an increase in the authorized common stock of the Company to
60,000,000 shares.
A five-year warrant to purchase 7,904 shares of the Company's common stock at an
exercise price of $9.47 per share was outstanding at January 2, 1999. The
warrant was exercised prior to its November 14, 1999 expiration date.
On November 15, 1999, the Company acquired the operations of four existing
natural foods supermarkets in metropolitan Boston, Massachusetts. The purchase
price for this acquisition aggregated $12.5 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 of $782,000 was allocated to goodwill, which is
being amortized on a straight-line basis over 40 years.
The Company declared a 3-for-2 stock split for all stockholders of record as of
November 17, 1999, effective December 1, 1999. All shares and per-share prices
presented herein have been retroactively restated to reflect this stock split.
As of February 15, 2000, there were $75.0 million in borrowings outstanding
under the $90.0 million line of this facility and $15.5 million outstanding
under the $30.0 million line of this facility.
On February 17, 2000, the Company was named as defendant in CORNERSTONE III, LLC
V. WILD OATS MARKETS, INC., a suit filed in U.S. District Court for the Eastern
District of Missouri by a former landlord who alleges that the Company breached
its obligations under a lease agreement when Wild Oats notified the landlord
that it was exercising its rights under the lease to terminate after the
landlord failed to turn over possession of the leased property within the time
period provided for in the lease. The plaintiff seeks actual and punitive
damages.
35
<PAGE>
<TABLE>
<CAPTION>
WILD OATS MARKETS, INC.
SUPPLEMENTAL COMBINED STATEMENT OF OPERATIONS
(In thousands) October 2, September 26,
For the Nine-Month Period Ended 1999 1998
- ---------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
--------- ---------
<S> <C> <C>
Sales $ 519,372 $ 385,917
Cost of goods sold and occupancy costs 360,251 268,337
--------- ---------
Gross profit 159,121 117,580
Operating expenses:
Direct store expenses 111,045 82,664
Selling, general and administrative expenses 20,373 14,847
Pre-opening expenses 2,262 1,899
Non-recurring expenses 11,538 393
--------- ---------
Income from operations 13,903 17,777
Interest expense (income) 2,655 (55)
--------- ---------
Income before income taxes 11,248 17,832
Income tax expense 2,926 5,435
--------- ---------
Net income before cumulative effect of change in accounting principle 8,322 12,397
Cumulative effect of change in accounting principle, net of taxes 281 --
Net income $ 8,041 $ 12,397
========= =========
Other comprehensive income:
Foreign currency translation adjustment, net 640 (84)
--------- ---------
Comprehensive income $ 8,681 $ 12,313
========= =========
Pro forma net income (Note 4) $ 6,205 $ 10,870
========= =========
Basic net income (loss) per common share:
Continuing operations $ 0.37 $ 0.55
Cumulative effect of change in accounting principle (0.01) --
--------- ---------
Net income $ 0.36 $ 0.55
--------- ---------
Diluted net income (loss) per common share:
Continuing operations $ 0.36 $ 0.54
Cumulative effect of change in accounting principle (0.01) --
--------- ---------
Net income $ 0.35 $ 0.54
--------- ---------
Weighted average common shares outstanding:
Basic 22,759 22,395
Assuming dilution 23,353 23,121
</TABLE>
The accompanying notes are an integral part of these supplemental combined
financial statements (unaudited).
36
<PAGE>
<TABLE>
<CAPTION>
WILD OATS MARKETS, INC.
SUPPLEMENTAL COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
October 2,
1999
- -------------------------------------------------------------------------------------
(Unaudited)
-----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,640
Inventories, net 47,094
Accounts receivable (net of allowance for doubtful accounts of $189) 2,447
Prepaid expenses and other current assets 3,089
Deferred income taxes 2,320
--------
Total current assets 75,590
--------
Property and equipment, net 142,930
Intangible assets, net 110,469
Deposits and other assets 1,982
--------
$330,971
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 44,890
Accrued liabilities 23,114
Notes payable 6,145
Current portion of long-term debt 1,444
Current portion of obligations in capital leases 342
--------
Total current liabilities 75,935
--------
Long-term debt 88,399
Obligations in capital leases 687
Deferred income taxes 3,608
Other long-term obligations 1,684
--------
170,313
Stockholders' equity:
Preferred stock; $0.001 par value; 5,000,000
shares authorized; no shares issued and outstanding
Common stock; $0.001 par value; 60,000,000
shares authorized; 22,053,674 issued and outstanding 23
Additional paid-in capital 147,891
Retained earnings 12,215
Accumulated other comprehensive income 529
--------
Total stockholders' equity 160,658
--------
$330,971
========
</TABLE>
The accompanying notes are an integral part of these supplemental combined
financial statements (unaudited).
37
<PAGE>
WILD OATS MARKETS, INC.
SUPPLEMENTAL COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
October 2, September 26,
For the Nine-Month Period Ended 1999 1998
- --------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,041 $ 12,397
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 15,768 10,903
Loss (gain) on disposal of property and equipment 14 (106)
Non-recurring expenses 11,249
Deferred tax provision (benefit) (987) 60
Change in assets and liabilities:
Inventories (5,473) (2,616)
Receivables and other assets (556) (812)
Accounts payable 9,178 6,668
Accrued liabilities 2,126 5,730
--------- ---------
Net cash provided by operating activities 39,360 32,224
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (49,035) (40,923)
Payment for purchase of acquired entities, net of cash acquired (65,758) (9,585)
Proceeds from sale of assets 16,356 --
--------- ---------
Net cash used by investing activities (98,437) (50,508)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under line-of-credit agreement 144,845
Payments under line-of-credit agreement (64,845)
Payments on notes payable and long-term debt (9,750) (2,741)
Payments on capital leases (587)
Distribution to stockholders (5,150) (3,437)
Contributions 300
Proceeds from notes payable and long-term borrowing 1,463 810
Proceeds from issuance of common stock, net 2,618 1,517
Net cash provided (used) by financing activities 68,594 (3,551)
--------- ---------
Effect of exchange rate on cash (266) (93)
--------- ---------
Net increase in cash and cash equivalents 9,251 (21,928)
Cash and cash equivalents at beginning of year 11,389 46,822
--------- ---------
Cash and cash equivalents at end of period $ 20,640 $ 24,894
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 2,313 $ 755
========= =========
Cash paid for income tax $ 1,912 $ 3,757
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Non-cash adjustment to purchase price for
Nature's acquisition $ 3,129
========
Short-term note receivable for sale of property $ 365
=========
</TABLE>
The accompanying notes are an integral part of these supplemental combined
financial statements (unaudited).
38
<PAGE>
WILD OATS MARKETS, INC.
NOTES TO THE SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS (UNAUDITED)
1. ACCOUNTING POLICIES
The supplemental combined balance sheet as of October 2, 1999, and the
supplemental combined statement of operations, the supplemental combined
statement of changes in stockholders' equity, and the supplemental combined
statement of cash flows for the nine-month periods ended October 2, 1999 and
September 26, 1998, have been prepared without an audit. In the opinion of
management, all adjustments, consisting only of normal, recurring adjustments
necessary for a fair presentation thereof, have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these supplemental combined
financial statements be read in conjunction with the supplemental combined
financial statements and notes thereto as of January 2, 1999 and for the three
fiscal years then ended included in this Form 8-K. The results of operations for
interim periods presented are not necessarily indicative of the operating
results for the full year.
As more fully described in Note 3, on December 15, 1999, the Company completed a
stock-for-stock transaction with the shareholders of Sun Harvest Farms, Inc. and
its affiliate (together, "Sun Harvest"), which was accounted for as a pooling of
interests. The accompanying unaudited supplemental combined financial statements
have been restated to include the accounts of Sun Harvest for all periods
presented.
2. NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1, which is effective
for transactions in fiscal years beginning after December 15, 1998, provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. The Company adopted SOP 98-1 in fiscal 1999 with no material
effect on its reported financial results.
In April 1998, the AICPA issued SOP 98-5, Accounting for the Costs of Start-Up
Activities. SOP 98-5 provides guidance on how entities should account for
pre-opening costs, pre-operating costs, organization costs and start-up costs.
SOP 98-5 requires that the costs of start-up activities be expensed as incurred.
SOP 98-5 is effective for fiscal years beginning after December 15, 1998, and
the initial application should be reported as a cumulative effect of a change in
accounting principle. The Company adopted SOP 98-5 in fiscal 1999 and recorded
approximately $281,000 as a cumulative effect of a change in accounting
principle, net of taxes, during the first quarter of 1999. The impact on basic
and diluted earnings per share of this adoption was $(0.02) for the six months
ended July 3, 1999. The Company expects SOP 98-5 to have no material effect on
its ongoing results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. FAS No. 133, as amended is effective for
fiscal quarters 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 all fiscal quarters beginning after June 15, 2000, but does not
expect such adoption to materially affect its financial statement presentation
due to the Company's limited use of such instruments.
3. BUSINESS COMBINATIONS
On February 1, 1999, the Company acquired the operations of three existing
natural foods supermarkets in Tucson, Arizona. The purchase price for this
acquisition aggregated $18.4 million in cash. The acquisition was accounted for
using the purchase method, and the excess of cost over the fair value of the
assets acquired of $16.8 million was allocated to goodwill, which is being
amortized on a straight-line basis over 40 years.
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
39
<PAGE>
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 $33.5 million was allocated to
goodwill, which is being amortized on a straight-line basis over 40 years.
On September 27, 1999, the Company issued approximately 2.1 million shares of
its common stock in exchange for all of the outstanding stock of Henry's
Marketplace, Inc. ("Henry's") in a transaction accounted for as a pooling of
interests. Accordingly, the financial position, results of operations and cash
flows of Henry's have been combined with those of the Company. Certain
reclassifications have been made to the prior financial statements of Henry's to
conform with the Company financial presentation and policies. There were no
intercompany transactions between the Company and Henry's for all periods
presented.
On December 15, 1999, the Company issued approximately 889,000 shares of its
common stock in exchange for all of the outstanding stock of Sun Harvest in a
transaction accounted for as a pooling of interests. Accordingly, the financial
position, results of operations and cash flows of Sun Harvest have been combined
with those of the Company in these supplemental combined financial statements.
Certain reclassifications have been made to the prior financial statements of
Sun Harvest to conform with the Company financial presentation and policies.
There were no intercompany transactions between the Company and Sun Harvest for
all periods presented.
RESULTS OF POOLED COMPANY PRIOR TO TRANSACTION
Separates results of operations for the Company and Sun Harvest operations for
the periods prior to the transaction are as follows (in thousands):
October 2, September 26,
For the Nine-Month Period Ended 1999 1998
- -----------------------------------------------------------------------
Sales:
Wild Oats $ 478,163 $ 347,981
Sun Harvest 41,209 37,936
--------- ---------
Combined $ 519,372 $ 385,917
========= =========
Net Income:
Wild Oats $ 6,755 $ 11,424
Sun Harvest 1,286 973
--------- ---------
Combined $ 8,041 $ 12,397
========= =========
Other Changes in Stockholders' Equity:
Wild Oats $ 898 $ 697
Sun Harvest (889) 158
--------- ---------
Combined $ 9 $ 855
========= =========
40
<PAGE>
4. NON-RECURRING EXPENSES
During the first quarter of 1999, the Company's management made certain
decisions relating to the Company's operations and selected store closures,
which resulted in approximately $10.9 million of non-recurring expenses being
recorded. These decisions included (1) a change in the Company's strategic
direction, resulting in the closure in the second quarter of 1999 of its two
"Farm to Market" stores located in Buffalo Grove, Illinois, and Tempe, Arizona
($4.5 million), and (2) a decision by the Company's management to allocate
corporate resources to servicing new and existing stores, rather than closed
sites ($6.4 million). Components of the non-recurring charge consist primarily
of non-cancelable lease obligations through the year 2000 ($1.2 million) and
abandonment of fixed and intangible assets ($9.7 million). At October 2, 1999,
the remaining accrued liabilities related to the non-recurring charge totaled
approximately $511,000.
During the third quarter of 1999, the Company recognized non-recurring expenses
related to the pooling transaction with Henry's that totaled $645,000.
Components of the non-recurring charge consist primarily of non-cancelable lease
obligations and professional fees associated with the pooling.
5. LITIGATION
In August 1998, the Company filed WILD OATS MARKETS, INC. V. PLAZA ACQUISITION,
INC. in United States District Court for the Northern District of Illinois,
Eastern Division, seeking recovery of $300,000 in tenant improvement allowances
owed to it by its landlord for the build-out of its Buffalo Grove, Illinois
store. The landlord counterclaimed for $1 million in damages, alleging that the
Company breached covenants requiring construction to be completed by a certain
date and other operating covenants. After the Company closed the Buffalo Grove
store in May 1999, the landlord increased its counterclaim to $3 million,
including accelerated rent resulting from an alleged breach of a continuous
operations clause in the lease. However, because the lease requires the payment
of percentage rent only until a certain level of gross sales is achieved, and
because that level was never achieved, the actual amount of rent due, even if
accelerated, cannot be determined at this time. The Company asserted several
defenses to the counterclaim. Motions for summary judgment were filed by each
party. The Company's motion was denied and the landlord's motion to accelerate
rent was granted; however, at this time an assessment of damages, if any, to
which the landlord may become entitled cannot be made for the reasons stated
above.
41
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired
Not applicable.
(b) Pro Forma Financial Information
Not applicable.
(c) Exhibits
The following exhibits to this Form 8-K are filed pursuant to the requirements
of Item 601 of Regulation S-K:
Exhibit Number Description of Document
- -------------- -----------------------
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of KPMG LLP
23.3 Consent of Ernst & Young LLP
27.1 Financial Data Schedule - December 27, 1997
27.2 Financial Data Schedule - January 2, 1999
27.3 Financial Data Schedule - October 2, 1999
42
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 28th day of February, 2000.
Wild Oats Markets, Inc.
By /s/ MARY BETH LEWIS
-------------------------------------------------
Mary Beth Lewis
Executive Officer and Chief Financial Officer
(Principal Financial and Accounting Officer)
43
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-88011, No. 333-62175 and No. 333-52747) and in
the Registration Statements on Form S-8 (No. 333-66347 and No. 333-20539) of
Wild Oats Markets, Inc. of our report dated January 29, 1999 except as to the
pooling of interests with Henry's Marketplace, Inc., which is as of September
27, 1999, and except as to the pooling of interests with Sun Harvest Farms,
Inc., which is as of December 15, 1999, relating to the supplemental combined
financial statements, which report appears in the Current Report on Form 8-K of
Wild Oats Markets, Inc. dated February 28, 2000.
PricewaterhouseCoopers LLP
Denver, Colorado
February 28, 2000
44
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Henry's Marketplace, Inc.:
We hereby consent to the inclusion of our report dated February 5, 1999, with
respect to the balance sheet of Henry's Marketplace, Inc. as of December 27,
1998, and the related statements of earnings, stockholders' equity, and cash
flows for the fifty-two weeks then ended, which report appears in the Form 8-K
of Wild Oats Markets, Inc. dated February 28, 2000 and the incorporation by
reference of such report which appears in the Form 8-K of Wild Oats Markets,
Inc., dated September 27, 1999, as amended February 28, 2000.
We hereby consent to the incorporation by reference in the prospectuses
constituting part of the registration statements on Form S-3 (No. 333-88011, No.
333-62175 and No. 333-52747) and in the registration statements on Form S-8 (No.
333-66347 and No. 333-20539) of Wild Oats Markets, Inc. of our report dated
February 5, 1999, with respect to the balance sheet of Henry's Marketplace, Inc.
as of December 27, 1998, and the related statements of earnings, stockholders'
equity, and cash flows for the fifty-two weeks then ended, which report appears
in the Form 8-K of Wild Oats Markets, Inc. dated February 28, 2000.
KPMG LLP
San Diego, California
February 28, 2000
45
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements on
Form S-3, No. 333-88011, No. 333-62175, and No. 333-52474 of Wild Oats Markets,
Inc. and the Registration Statements on Form S-8, No. 333-66347 and No.
333-20539 pertaining to certain benefit plans of Wild Oats Markets, Inc. of our
report dated November 17, 1999, with respect to the financial statements of Sun
Harvest Farms, Inc. as of September 28, 1999, December 29, 1998, and December
30, 1997, and for the nine-month period ended September 28, 1999 and the fiscal
years ended December 29, 1998, December 30, 1997, and December 31, 1996,
included in the Current Report (Form 8-K) dated February 28, 2000; we hereby
also consent to such inclusion.
Ernst & Young LLP
San Antonio, Texas
February 28, 2000
46
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This schedule contains summary financial information extracted from the
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combined statement of operations for the year ended December 27, 1997 and is
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This schedule contains summary financial information extracted from the
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</LEGEND>
<CIK> 0000909990
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<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
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</LEGEND>
<CIK> 0000909990
<NAME> WILD OATS MARKETS, INC.
<MULTIPLIER> 1,000
<CURRENCY> USD
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<PERIOD-START> JAN-03-1999
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