UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 1,
2000 OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR SECTION 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO
Commission file number 0-21577
WILD OATS MARKETS, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1100630
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
3375 Mitchell Lane
Boulder, Colorado 80301-2244
(Address of principal executive offices, including zip code)
(303) 440-5220
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
As of May 1, 2000, there were 23,067,737 shares outstanding of the Registrant's
Common Stock (par value $0.001 per share).
<PAGE>
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet
April 1, 2000 (Unaudited) and January 1, 2000 3
Consolidated Statement of Operations and Comprehensive Income
(Unaudited) Three Months Ended April 1, 2000 4
Consolidated Statement of Cash Flows (Unaudited)
Three Months Ended April 1, 2000 and April 3, 1999 5
Notes to Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
WILD OATS MARKETS, INC.
Consolidated Balance Sheet
(in thousands, except share data)
<TABLE>
<CAPTION>
April 1, January 1,
2000 2000
(Unaudited) ----------
----------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 13,281 $ 21,877
Accounts receivable (less allowance 2,264 2,159
for doubtful accounts of $363 and
$259, respectively)
Inventories 53,349 51,412
Income tax receivable 520 520
Prepaid expenses and other current assets 2,201 2,424
Deferred income taxes 1,732 1,775
------------- -------------
Total current assets 73,347 80,167
Property and equipment, net 166,751 156,156
Long-term equity investment 2,288 1,500
Intangible assets, net 111,818 108,734
Deposits and other assets 3,876 4,072
----------- -----------
$ 358,080 $ 350,629
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 50,403 $ 48,048
Accrued liabilities 32,136 30,381
Current portion of debt and capital leases 19,528 22,709
----------- -----------
Total current liabilities 102,067 101,138
Long-term debt 81,679 80,328
Deferred income taxes 1,185 1,185
Other long-term obligations 2,236 2,591
----------- -----------
187,167 185,242
Stockholders' equity:
Common stock, $0.001 par value; 60,000,000
Shares authorized; 23,043,706 and 22,992,437
shares issued and outstanding 23 23
Additional paid-in capital 148,671 148,307
Retained earnings 21,990 16,656
Accumulated other comprehensive income 229 401
------------ -----------
Total stockholders' equity 170,913 165,387
----------- -----------
$ 358,080 $ 350,629
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
<PAGE>
WILD OATS MARKETS, INC.
Consolidated Statement of Operations and Comprehensive Income
(in thousands, except per-share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 1, 2000 April 3, 1999
(1)
<S> <C> <C>
Sales $ 211,241 $ 159,643
Cost of goods sold and occupancy costs 144,717 111,291
----------- -----------
Gross profit 66,524 48,352
Operating expenses:
Direct store expenses 46,546 33,996
Selling, general and administrative expenses 7,845 6,140
Pre-opening expenses 1,354 674
Restructuring expenses 10,894
----------- -----------
Income (loss) from operations 10,779 (3,352)
Interest expense (income), net 1,782 250
----------- -----------
Income (loss) before income taxes 8,997 (3,602)
Income tax expense (benefit) 3,663 (2,445)
----------- -----------
Net income (loss) before cumulative effect of change
in accounting principle 5,334 (1,157)
Cumulative effect of change in accounting principle,
net of tax 281
----------- -----------
Net income (loss) 5,334 (1,438)
----------- -----------
Other comprehensive income (loss):
Foreign currency translation adjustment, net (172) 166
----------- -----------
Comprehensive income (loss) $ 5,162 $ (1,272)
=========== ============
Basic net income (loss) per common share:
Net income (loss) before cumulative effect
of change in accounting principle $ .23 $ (.05)
Cumulative effect of change in accounting principle,
net of tax (.01)
----------- -----------
Net income (loss) $ .23 $ (.06)
=========== ============
Diluted net income (loss) per common share:
Net income (loss) before cumulative effect of
change in accounting principle .23 (.05)
Cumulative effect of change in accounting principle,
net of tax (.01)
----------- -----------
Net income (loss) $ .23 $ (.06)
=========== ============
Average common shares outstanding 23,000 22,626
Dilutive effect of stock options 464
----------- ------------
Average common shares outstanding, assuming dilution 23,464 22,626
=========== ============
</TABLE>
(1) Restated for pooling of interests.
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE>
WILD OATS MARKETS, INC.
Consolidated Statement of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 1, 2000 April 3, 1999
(1)
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) $ 5,334 $ (1,438)
Adjustments to reconcile net
income (loss) to net cash provided by operating activities:
Depreciation and amortization 7,045 13,915
Non-recurring expenses 919
Deferred tax provision (benefit) (37) (789)
Change in assets and liabilities (net of acquisitions):
Inventories (1,940) (980)
Receivables and other assets (566) 411
Accounts payable 2,361 (1,526)
Accrued liabilities 2,039 (312)
------------ ------------
Net cash provided by operating activities 14,236 10,200
------------ ------------
Cash Flows from Investing Activities
Capital expenditures (18,085) (10,971)
Payment for purchase of acquired entities, net of cash acquired (3,100) (18,491)
Long-term equity investment (38)
------------- ------------
Net cash used in investing activities (21,223) (29,462)
------------- ------------
Cash Flows from Financing Activities
Net borrowings (repayments) under line-of-credit agreement (1,589) 22,300
Proceeds from notes payable and long-term debt 53
Repayments on notes payable, long-term debt & capital leases (244) (3,605)
Proceeds from issuance of common stock, net 217 327
Distributions to stockholders of pooled businesses (643)
------------- ------------
Net cash (used in) provided by financing activities (1,616) 18,432
------------- ------------
Effect of exchange rate changes on cash 7 41
------------- ------------
Net decrease in cash and cash equivalents (8,596) (789)
Cash and cash equivalents at beginning of period 21,877 11,389
------------- ------------
Cash and cash equivalents at end of period $ 13,281 $ 10,600
============= ============
Non-cash Investing and Financing Activities:
Stock received in exchange for services $ 750 $
(1) Restated for pooling of interests.
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
<PAGE>
WILD OATS MARKETS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. Accounting Policies
The consolidated balance sheet as of April 1, 2000, the consolidated
statement of operations for the three months ended April 1, 2000 and
April 3, 1999, as well as the consolidated statement of cash flows for
the three months ended April 1, 2000 and April 3, 1999 have been
prepared without an audit. In the opinion of management, all
adjustments, consisting only of normal, recurring adjustments necessary
for a fair presentation thereof, have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested
that these consolidated financial statements be read in conjunction
with financial statements and notes thereto included in the Company's
1999 Annual Report to Stockholders. The results of operations for
interim periods presented are not necessarily indicative of the
operating results for the full year.
2. New Accounting Pronouncements
In April 1998, the AICPA issued SOP 98-5, Accounting for the Costs of
Start-Up Activities. SOP 98-5 provides guidance on how entities should
account for pre-opening costs, pre-operating costs, organization costs
and start-up costs. SOP 98-5 requires that the costs of start-up
activities be expensed as incurred. SOP 98-5 is effective for fiscal
years beginning after December 15, 1998, and the initial application
should be reported as a cumulative effect of a change in accounting
principle. The Company adopted SOP 98-5 in fiscal 1999 and recorded
approximately $281,000 as a cumulative effect of a change in accounting
principle, net of taxes, during the first quarter of 1999. The Company
expects SOP 98-5 to have no material effect on its ongoing results of
operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards requiring that
every derivative instrument be recorded on the balance sheet as either
an asset or liability measured at its fair value. FAS No. 133 also
requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are
met. In June 1999, the FASB issued FAS No. 137 which defers the
effective date of FAS No. 133 to fiscal years beginning after June 15,
2000. The Company will adopt FAS No. 137 in the first quarter of fiscal
2001, but does not expect such adoption to materially affect financial
statement presentation.
3. Earnings Per Share
Earnings per share are calculated in accordance with the provisions of
FAS No. 128, Earnings Per Share. FAS No. 128 requires the Company to
report both basic earnings per share, which is based on the
weighted-average number of common shares outstanding, and diluted
earnings per share, which is based on the weighted-average number of
common shares outstanding and all dilutive potential common shares
outstanding, except where the effect of their inclusion would be
antidilutive (i.e., in a loss period).
4. Subsequent Events
In the second quarter of 2000, the Company undertook an assessment of
its inventory of operating and vacant properties as part of a strategic
repositioning of the Company. The Company identified a group of stores
to be closed or sold in the second and third quarters of 2000, as well
as identified leases on vacant properties held by the Company, the
value of which are expected to be impaired. As a result, the Company
will take a restructuring charge to earnings in the second quarter of
2000 of approximately $15 million to $20 million on a pretax basis.
6
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
This report on Form 10-Q contains certain forward-looking statements
regarding our future results of operations and performance. Important factors
that could cause differences in results of operations include, but are not
limited to, the availability and integration of acquisitions, the timing and
execution of new store openings, relocations, remodels, sales and closures, the
timing and impact of promotional and advertising campaigns, the impact of
competition, changes in product supply, changes in management information needs,
changes in customer needs and expectations, governmental and regulatory actions,
and general industry or business trends or events, changes in economic or
business conditions in general or affecting the natural foods industry in
particular and competition for and the availability of sites for new stores and
potential acquisition candidates and the amount of actual restructuring charges
taken by the Company compared to estimated charges. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Cautionary
Statement Regarding Forward-Looking Statements."
Overview
Store openings, closings, remodels, relocations and acquisitions. In the
first three months of 2000, we opened four new stores in San Diego, California,
Kansas City, Kansas, St. Louis, Missouri, and Reno, Nevada, and relocated two
stores in West Hartford, Connecticut and Salt Lake City, Utah. To date in the
second quarter of 2000, we have opened one new store in Las Vegas and acquired
two operating stores in Hemet and Escondido, California under the "Boney Market"
name, which we will operate as "Henry's Market" stores. We plan to open, acquire
or relocate as many as eight stores in the remainder of 2000. We are actively
looking for other acquisition opportunities and may complete additional
acquisitions in 2000.
As has been our past practice, we will continue to evaluate the
profitability, strategic positioning, impact of potential competition on and
sales growth potential of all of our stores on an ongoing basis. We may, from
time to time, make decisions regarding closures, disposals, relocations or
remodels in accordance with such evaluations. As a result of such evaluations,
in the first quarter of 2000 we closed two of our older, smaller stores. To date
in the second quarter of 2000, we have closed one store acquired in 1997 and
have announced the closure of a second store, the lease for which expires in
August 2000. We have also entered into an agreement to sell as many as three
stores to a third party in the second quarter of 2000. During the first three
quarters of 2000, we plan to remodel as many as 30 of our existing, older stores
to remerchandise and incorporate new features.
In the second quarter of 2000, the Company undertook an assessment of its
inventory of operating and vacant properties as part of a strategic
repositioning of the Company. The Company has identified a group of stores to be
closed or sold in the second and third quarters of 2000, as well as identified
leases on vacant properties held by the Company, the value of which is expected
to be impaired. As a result, the Company will take a restructuring charge to
earnings in the second quarter of 2000 of approximately $15 million to $20
million on a pretax basis.
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 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, Wild Harvest
and Sun Harvest stores acquired in 1999, will have a temporary negative impact
7
<PAGE>
on our consolidated results of operations. In particular, the four Wild Harvest
stores acquired in metropolitan Boston in November 1999 have experienced lower
than expected sales due to a reduced level of advertising and promotion, and
correspondingly higher than expected expenses as a percentage of sales. We
expect that these stores will take longer than our average six months to
approach our gross margin and store contribution margin averages.
We are actively upgrading, remodeling or relocating some of our older
stores. We plan to remodel or remerchandise as many as 30 of our older stores in
the first three quarters of 2000. 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.
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:
the opening of stores by us or by our competitors in markets where
we have existing stores
the relative proportion of new or relocated stores to mature stores
the timing of advertising and promotional events
store remodels
our ability to execute our operating plans effectively
changes in consumer preferences for natural foods products
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, among other factors, 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. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Store format and
clustering strategy." We expect that comparable store sales results 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 and Salt
Lake City, Utah. For certain stores opened in the second half of 1999 and the
first quarter of 2000, we have experienced a higher degree of cannibalization
than in the past in markets where we expected higher demand for additional
stores. As a result of this higher degree of cannibalization, as well as reduced
levels of marketing, increased competition in some regions and other factors,
comparable store sales decreased 2% in the first quarter of 2000. We expect
comparable store sales percentage results to be flat to slightly negative for
the second quarter of 2000, and to average in the low single digits for the
remainder of 2000. There can be no assurance that comparable store sales for any
particular period will not decrease in the future.
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 have pursued 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. Certain new stores opened
8
<PAGE>
in 1999 and in the first quarter of 2000 have caused a greater degree of
cannibalization than previously expected, and we are unable to determine at this
time whether sales at the older, affected stores in these regions will rebound
to their prior levels. In the remainder of 2000 we expect to cluster several
more stores in certain existing markets 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. We are currently
reevaluating our clustering strategy in response to greater than expected sales
cannibalization in certain existing markets where we have recently opened new
stores.
Pre-opening expenses. Pre-opening expenses include labor, rent, utilities,
supplies 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 the first
quarter of 1999.
Results of Operations
The following table sets forth for the periods indicated, certain selected
income statement data expressed as a percentage of sales:
<TABLE>
<CAPTION>
April 1, April 3,
Three Months Ended 2000 1999
<S> <C> <C>
Sales 100.0% 100.0%
Cost of goods sold and occupancy costs 68.5 69.7
------ ------
Gross margin 31.5 30.3
Direct store expenses 22.0 21.4
Selling, general and administrative expenses 3.7 3.8
Pre-opening expenses .7 .4
Restructuring expenses 6.8
----- ------
Income (loss) from operations 5.1 (2.1)
Interest expense (income), net .9 .2
------ ------
Income (loss) before income taxes 4.2 (2.3)
Income tax expense (benefit) 1.7 (1.6)
------ -------
Net income (loss) before cumulative effect
of change in accounting principle 2.5 (.7)
Cumulative effect of change in accounting
principle, net of taxes (.2)
----- -------
Net income (loss) 2.5% (.9)%
====== =======
</TABLE>
Sales Sales for the three months ended April 1, 2000 increased 32.3% to $211.2
million from $159.6 million for the same period in 1999. The increase was
primarily due to the opening of four new stores and relocation of two stores, as
well as the inclusion of seventeen acquired stores, eight stores opened, and
five stores relocated in 1999. Comparable store sales decreased 2% for the first
quarter of 2000, as compared to a 9% increase for the same period in 1999, as a
result of many factors, including higher than expected cannibalization of sales
by new stores in several regions due to the implementation of our clustering
strategy, reduced levels of marketing and, in certain regions, increased
competition. See Management's Discussion and Analysis of Financial Condition and
Results of Operations - Comparable Store Sales Results.
Gross Profit Gross profit for the three months ended April 1, 2000, increased
37.6% to $66.5 million from $48.4 million for the same period in 1999. The
increase in gross profit is primarily attributable to the opening of four new
stores and relocation of two stores in the first three months of 2000, as well
9
<PAGE>
as the inclusion of seventeen acquired stores, eight stores opened, and five
stores relocated in 1999. As a percentage of sales, gross profit for the first
quarter of 2000 increased to 31.5% from 30.3% in the same period in 1999 due to
the maturation of the Company's store base and the Company's increasing volume
purchase discounts, as well as increases in sales of private label products and
the implementation of loss prevention policies.
Direct Store Expenses Direct store expenses for the three months ended April 1,
2000, increased 36.9% to $46.5 million from $34.0 million for the same period in
1999. The increase in direct store expenses is attributable to the increase in
the number of stores operated by the Company. As a percentage of sales, direct
store expenses increased to 22.0% in the first three months of 2000 from 21.4%
for the same period in 2000 due to the increased number of acquired and
newly-opened stores in late 1999, as well as significant investments that the
Company has made in employee benefit programs, particularly expanded health
insurance offerings.
Selling, General and Administrative Expenses Selling, general and administrative
expenses for the three months ended April 1, 2000, increased 27.8% to $7.8
million from $6.1 million for the same period in 1999. As a percentage of sales,
selling, general and administrative expenses decreased to 3.7% from 3.8% for the
same period in 1999 because of greater leverage of such expenses on a higher
sales volume.
Pre-Opening Expenses Pre-opening expenses for the three months ended April 1,
2000, increased 100.9% to $1.4 million from $700 thousand for the same period in
1999. As a percentage of sales, pre-opening expenses increased to .7% from .4%.
The increases are the result of the opening of four new stores and relocation of
two stores in the first three months of 2000 as compared to one new store and
two relocations for the same period in 1999.
Restructuring Expenses There were no restructuring expenses for the three months
ended April 1, 2000. During the three months ended April 3, 1999, the Company's
management made certain decisions relating to the Company's operations and
selected store closures, which resulted in approximately $10.9 million of
restructuring expenses being recorded in the three months ended April 3, 1999.
These decisions included (1) a change in the Company's strategic direction with
respect to its two "Farm to Market" stores located in Buffalo Grove, Illinois,
and Tempe, Arizona ($4.5 million), and (2) a decision by the Company's
management to allocate corporate resources to servicing new and existing stores,
rather than closed sites ($6.4 million). Components of the restructuring charge
incurred in 1999 consisted primarily of non-cancelable lease obligations through
the year 2000 ($1.2 million) and abandonment of fixed and intangible assets
($9.7 million). The Company also is expecting to record a restructuring charge
in the second quarter of 2000. See "Notes to Consolidated Financial Statements -
Note 4 - Subsequent Events" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Store openings, closings,
remodels, relocations and acquisitions."
Interest Expense, Net Net interest expense for the three months ended April 1,
2000, increased to $1.8 million, from $250 thousand for the same period in 1999.
As a percentage of sales, net interest expense increased to .9% from .2% for the
same period in 1999. The increase is primarily attributable to interest on
borrowings on our line of credit to fund acquisitions, new stores, relocations
and remodels.
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,
relocations, remodels, acquisitions and purchases of real property.
Net cash provided by operating activities was $14.2 million during the
first three months of 2000 as compared to $10.2 million during the same period
in 1999. 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. 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
10
<PAGE>
costs, and we anticipate that vendor financing will continue to be available for
the new store openings.
Net cash used in investing activities was $21.2 million during the first
three months of 2000 as compared to $29.5 million during the same period in
1999. The decrease is due to acquisition of three stores in the first quarter of
1999, as compared to no acquisitions in the first quarter of 2000, partially
offset by increased expenditures in the first quarter of 2000 for new store
construction and remodels.
Net cash used in financing activities was $1.6 million during the first
quarter of 2000 as compared to $18.4 million net cash provided during the same
period in 1999. The decrease reflects repayments under our revolving line of
credit in the first quarter of 2000, as compared to borrowings in the first
quarter of 1999.
We have a $120.0 million revolving credit facility. 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 August 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. As of April 1, 2000, there were $81.1 million in borrowings
outstanding under the $90.0 million line of this facility and $12.5 million in
borrowings outstanding under the $30.0 million line. We are currently
negotiating with our bank group to increase the commitment under the revolving
credit facility to $180.0 million.
We spent approximately $18.1 million during the first three months of 2000
for new store construction, development, remodels and maintenance capital
expenditures, exclusive of acquisitions, and anticipate that we will spend $60
to $65 million in 2000 for new store construction, equipment, leasehold
improvements, remodels and maintenance capital expenditures, relocations of
existing stores and purchases of leasehold interests, exclusive of acquisitions.
Our average capital expenditures to open a leased store, including leasehold
improvements, equipment and fixtures, have ranged from approximately $2.0
million to $3.0 million historically, excluding inventory costs and initial
operating losses. We anticipate that our average capital expenditures will be
$2.5 to $3.5 million in the future, partly because of increases in the size of
new stores and partly because our new store prototype requires more expensive
fixturing. Several stores previously projected to open in 2000 have been delayed
to periods in 2000 later than originally planned or into 2001 because of delays
in landlord turnover of sites and receipt of permits. Delays in opening new
stores may result in increased capital expenditures, increased pre-opening costs
and lower sales.
We own one vacant parcel of property acquired as part of the acquisition of
the outstanding stock of Nature's Fresh Northwest in the second quarter of 1999,
and acquired an office building in the fourth quarter of 1999 as part of the
pooling of interests transaction with Sun Harvest Farms, Inc. We plan to sell
the office building and vacant parcel in 2000.
The cost of initial inventory for a new store has historically been
approximately $500,000 to $600,000 and is projected to increase to $600,000 to
$800,000 in the future as a function of the increase in average store size and
the introduction of certain new categories of merchandise, including beer and
wine and housewares; 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.
11
<PAGE>
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("FAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards requiring that every derivative instrument be
recorded on the balance sheet as either an asset or liability measured at its
fair value. FAS No. 133 also requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. In June 1999, the FASB issued FAS No. 137 which defers the
effective date of FAS No. 133 to fiscal years beginning after June 15, 2000. The
Company will adopt FAS No. 137 in the first quarter of fiscal 2001, but does not
expect such adoption to materially affect financial statement presentation.
Cautionary Statement Regarding Forward-Looking Statements
This Report on Form 10-Q 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, open or relocate additional stores, the
anticipated performance of such stores, the impact of competition, the amount of
restructuring change taken in the second quarter of 2000, 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, the availability and integration of
acquisitions, the timing and execution of new store openings, relocations,
remodels, sales and closures, the timing and impact of promotional and
advertising campaigns, the impact of competition, changes in product supply,
changes in management information needs, changes in customer needs and
expectations, governmental and regulatory actions, and general industry or
business trends or events, changes in economic or business conditions in general
or affecting the natural foods industry in particular, competition for and the
availability of sites for new stores and potential acquisition candidates and
factors such as timing of closures and sales that could cause a difference
between the actual restructuring charges taken by the Company and estimated
amounts of such charges. The Company undertakes no obligation to update any
forward-looking statements in order to reflect events or circumstances that may
arise after the date of this Report.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
The Company's exposure to interest rate changes is primarily related to
its variable rate debt issued under its $120 million revolving credit facility.
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 August 2000. Both bear interest,
at our option, at the prime rate or LIBOR plus 1.15%. As of April 1, 2000, there
were $81.1 million in borrowings outstanding under the $90.0 million line of
this facility and $12.5 million in borrowings outstanding under the $30.0
million line. Because the interest rates on these facilities are variable, based
upon the bank's prime rate or LIBOR, the Company's interest expense and net
income are affected by interest rate fluctuations. If interest rates were to
increase or decrease by 100 basis points, the result, based upon the existing
outstanding debt as of April 1, 2000 and using the average interest rate paid on
borrowed funds during the first quarter of 2000, would be an annual increase or
decrease of approximately $935,000 in interest expense and a corresponding
decrease or increase of approximately $560,000 in the Company's net income after
taxes.
12
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
In August 1998, we 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
us by our landlord for the build-out of our Buffalo Grove, Illinois store. The
landlord counterclaimed for $1 million in damages, alleging that we breached
covenants requiring construction to be completed by a certain date and other
operating covenants. After we 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 us to pay 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. We asserted several defenses to the counterclaim.
Motions for summary judgment were filed by each party. Our 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.
In February 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 $4.8 million in
actual damages, as well as punitive damages. We have filed an answer denying the
plaintiff's allegations. No estimate of probability of success or potential
damages can be made at this time.
Alfalfa's Canada, Inc., our Canadian subsidiary, is a defendant in a suit
brought in the Supreme Court of British Columbia, by one of its distributors,
Waysafer Wholefoods Limited and one of its principals, seeking monetary damages
for breach of contract and injunctive relief to enforce a buying agreement for
three Canadian stores entered into by a predecessor of Alfalfa's Canada, Inc.
The suit was filed in September 1996. In June 1998, we filed a Motion for
Dismissal on the grounds that the contract in dispute constituted a restraint of
trade. The Motion was subsequently denied. We do not believe our potential
exposure in connection with the suit to be material.
There are no other material pending legal proceedings to which our
subsidiaries or we are a party. From time to time, we are involved in lawsuits
that we consider to be in the normal course of our business.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description of Document
27.1 Financial Data Schedule (first quarter 2000).
27.2 Restated Financial Data Schedule (first quarter 1999).
Included herewith.
(b) Reports on Form 8-K.
(i) Report dated February 28, 2000, reported under Item 5, Other
Events, the acquisition of all of the outstanding capital
stock of Sun Harvest Farms, Inc. and all of the partnership
interests in an affiliated entity, which together owned nine
natural food stores and four small vitamin stores located in
San Antonio, Austin and other Texas communities. The following
audited financial statements were filed with this report:
Supplemental Combined Statement of Operations, Supplemental
Combined Statement of Changes in Stockholders Equity (Deficit)
and Statement of Cash Flows for the Three Years Ended January
2, 1999, and Supplemental Combined Balance Sheet as of January
2, 1999 and December 27, 1997.
(ii) Report dated February 28, 2000 on Form 8-K/A to amend a report
on Form 8-K filed on September 29, 1999 to restate the
financial information included in the previously filed report
as the historic financial statements of the Company.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boulder, County of
Boulder, State of Colorado, on the 16th day of May 2000.
Wild Oats Markets, Inc.
By /s/ Mary Beth Lewis
Mary Beth Lewis
Executive Officer, Vice President of
Finance, Treasurer and Chief Financial
Officer
(Principal Financial and Accounting Officer)
15
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This schedule contains summary financial information extracted from the
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of operations for the three months ended April 1, 2000 and is qualified in its
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<TOTAL-REVENUES> 211,241
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<PERIOD-START> JAN-03-1999
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