UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report: September 27, 1999
WILD OATS MARKETS, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-21577 84-1100630
(State or other jurisdiction of Commission Files Number (I.R.S. Employer
incorporation or organization) Identification Number)
3375 Mitchell Lane
Boulder, Colorado 80301
(Address of principal executive offices, including zip code)
(303) 440-5220
(Registrant's telephone number, including area code)
TABLE OF CONTENTS
Page
Item 5. Other Events. 1
Item 7. Financial Statements and Exhibits. 1
SIGNATURES 2
i
Item 5. Other Events
On September 27, 1999, Wild Oats Markets, Inc. (the "Company") acquired all of
the outstanding capital stock of Henry's Marketplace, Inc. ("Henry's") from its
shareholders in exchange for 1,400,193 shares of the Company's $0.001 par value
common stock. Henry's operates 11 natural foods markets in the San Diego,
California metropolitan area, with one site in development. The transaction was
accounted for as a pooling of interests, and accordingly, the Company's
supplemental combined financial statements for all periods presented include the
operations of Henry's for the respective years, adjusted to conform with the
Company's accounting policies and presentation.
The following supplemental combined financial statements are filed as a part of
this report:
Item Page
Audited supplemental combined financial statements of Wild Oats
Markets, Inc.
Report of PricewaterhouseCoopers LLP, Independent Accountants 3
Independent Auditors' Report of KPMG LLP 4
Supplemental Combined Statement of Operations for the Three Years
Ended January 2, 1999 5
Supplemental Combined Balance Sheet as of January 2, 1999 and
December 27, 1997 6
Supplemental Combined Statement of Changes in Stockholders'
Equity (Deficit) for the Three Years Ended January 2, 1999 7
Supplemental Combined Statement of Cash Flows for the Three Years
Ended January 2, 1999 8
Notes to the Supplemental Combined Financial Statements 9-20
Unaudited supplemental combined interim financial statements of Wild
Oats Markets, Inc.
Supplemental Combined Statement of Operations for
the Six-Month Periods Ended July 3, 1999 and June 27, 1998 21
Supplemental Combined Balance Sheet as of July 3, 1999 22
Supplemental Combined Statement of Cash Flows for
the Six-Month Periods Ended July 3, 1999 and June 27, 1998 23
Notes to Unaudited Supplemental Combined Interim Financial
Statements 24-26
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
Not applicable.
(b) Pro Forma Financial Information
Not applicable.
(c) Exhibits
The following exhibits to this Form 8-K are filed pursuant to the
requirements of Item 601 of Regulation S-K:
Exhibit Number Description of Document
2.1 Stock Purchase Agreement between Henry's Marketplace, Inc.,
the selling shareholders and Registrant dated July 27, 1999
2.2 Letter Agreement amending Stock Purchase Agreement
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule - December 27, 1997
27.2 Financial Data Schedule - January 2, 1999
27.3 Financial Data Schedule - July 3, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 29th day of September, 1999.
Wild Oats Markets, Inc.
By /s/ Mary Beth Lewis
Mary Beth Lewis
Executive Officer and Chief Financial Officer
(Principal Financial and Accounting Officer)
2
Report of Independent Accountants
To the Board of Directors and Stockholders of Wild Oats Markets, Inc.
In our opinion, based upon our audits and the report of other auditors, the
accompanying supplemental combined balance sheets and the related supplemental
combined statements of operations, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of Wild
Oats Markets, Inc. and its subsidiaries at January 2, 1999 and December 27,
1997, and the results of their operations and their cash flows for each of the
three years in the period ended January 2, 1999, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Henry's Marketplace, Inc., which statements reflect
total assets of $10,930,032 at December 27, 1998, and total revenues of
$81,025,852 for the fifty-two weeks ended December 27, 1998. Those statements
were audited by other auditors whose report thereon has been furnished to us,
and our opinion expressed herein, insofar as it relates to the amounts included
for Henry's Marketplace, Inc. as of and for the fifty-two weeks ended December
27, 1998, is based solely on the report of the other auditors. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for the
opinion expressed above.
As described in Note 2, on September 27, 1999, the Company merged with Henry's
Marketplace, Inc. in a transaction accounted for as a pooling of interests. The
accompanying supplemental combined financial statements give retroactive effect
to the merger of the Company with Henry's Marketplace, Inc. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of the Company after
financial statements covering the date of consummation of the business
combination are issued.
PricewaterhouseCoopers LLP
Denver, Colorado
January 29, 1999,
except as to the pooling of interests
with Henry's Marketplace, Inc., which
is as of September 27, 1999
3
Independent Auditors' Report
The Board of Directors
Henry's Marketplace, Inc.
We have audited the balance sheet of Henry's Marketplace, Inc. as of December
27, 1998, and the related statements of earnings, stockholders' equity and cash
flows for the fifty-two weeks ended December 27, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Henry's Marketplace, Inc. as of
December 27, 1998, and the results of its operations and its cash flows for the
fifty-two weeks ended December 27, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
San Diego, California
February 5, 1999
4
SUPPLEMENTAL COMBINED STATEMENT OF OPERATIONS
(In thousands, except per-share amounts)
For the Fiscal Year Ended January 2, December 27, December 28,
1999 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Sales $479,883 $383,853 $253,606
Cost of goods sold and occupancy costs 333,944 268,059 175,698
-------- -------- --------
Gross profit 145,939 115,794 77,908
Operating expenses:
Direct store expenses 99,534 85,280 58,928
Selling, general and administrative expenses 19,630 14,083 10,558
Pre-opening expenses 3,277 1,149 1,863
Non-recurring expenses 393 -- 7,035
-------- -------- --------
Income (loss) from operations 23,105 15,282 (476)
Interest income 975 309 95
Interest expense (780) (687) (1,327)
-------- -------- ---------
Income (loss) before income taxes 23,300 14,904 (1,708)
Income tax expense (benefit) 7,793 5,457 (156)
-------- -------- ---------
Net income (loss) $ 15,507 $ 9,447 $ (1,552)
Other comprehensive income:
Foreign currency translation adjustment, net 22 (46) (85)
-------- -------- ---------
Comprehensive income (loss) $ 15,529 $ 9,401 $ (1,637)
======== ======== =========
Pro forma net income (loss) (Note 16) $ 14,011 $ 8,823 $ (2,248)
Accretion of redeemable preferred stock 2,396
-------- -------- ---------
Pro forma net income (loss)
allocable to common stock $ 14,011 $ 8,823 $ (4,644)
======== ======== =========
Basic Net Income (Loss) per share $ 1.08 $ 0.79 $ (0.61)
-------- -------- ---------
Diluted Net Income (Loss) per share $ 1.05 $ 0.76 $ (0.61)
-------- -------- ---------
Pro Forma Basic Net Income (Loss)
per share $ 0.98 $ 0.74 $ (0.72)
-------- -------- ---------
Pro Forma Diluted Net Income (Loss)
per share $ 0.95 $ 0.71 $ (0.72)
-------- -------- ---------
Weighted average common shares
outstanding:
Basic 14,367 11,968 6,478
Assuming dilution 14,793 12,357 6,478
The accompanying notes are an integral part of these supplemental combined
financial statements.
5
SUPPLEMENTAL COMBINED BALANCE SHEET
(In thousands, except share amounts)
January 2, December 27,
1999 1997
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,348 $ 46,784
Inventories, net 31,867 24,623
Accounts receivable (net of allowance
for doubtful accounts of $159 and $214, respectively) 2,155 1,026
Income tax receivable 317
Prepaid expenses and other current assets 2,298 1,096
Deferred income taxes 812 1,447
-------- --------
Total current assets 48,480 75,293
Property and equipment, net 103,990 63,291
Intangible assets, net 56,018 44,712
Deposits and other assets 1,282 1,255
-------- --------
$209,770 $184,551
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,952 $ 25,356
Accrued liabilities 13,570 13,018
Notes payable 3,150 --
Current portion of long-term obligations 1,384 1,385
-------- --------
Total current liabilities 50,056 39,759
Long-term debt 2,675 4,157
Deferred income taxes 1,958 2,187
Other long-term obligations 1,582 1,064
-------- --------
56,271 47,167
-------- --------
Commitments and contingencies (Notes 10 and 11)
Stockholders' equity:
Preferred stock; $0.001 par value; 5,000,000 shares authorized;
no shares issued and outstanding
Common stock; $0.001 par
value; 20,000,000 shares authorized; 14,478,077 and
14,146,164 issued and outstanding, respectively 14 14
Additional paid-in capital 142,446 138,483
Retained earnings (accumulated deficit) 11,148 (982)
Accumulated other comprehensive income (109) (131)
-------- ---------
Total stockholders' equity 153,499 137,384
-------- --------
$209,770 $184,551
======== ========
The accompanying notes are an integral part of these supplemental combined
financial statements.
6
SUPPLEMENTAL COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share and per-share amounts)
Retained Accumulated Total
Common Stock Treasury Stock Additional Earnings Other Stockholders'
------------- --------------- Paid-in (Accumulated Comprehensive Equity
Shares Amount Shares Amount Capital Deficit) Income (Deficit)
------ ------ ------ ------ ---------- ----------------------------------
Balance at December 30, 1995 5,485,154 $5 602,387 $(5,349) $ 3,320 $ (3,185) $ (5,209)
Equity transactions of pooled companies 1,215 (1,643) (428)
Issuance of common stock
($11.13 per share) 1,175,132 1 13,086 13,087
Initial public offering of
common stock ($16.67 per share),
net of issuance costs 2,100,000 2 31,400 31,402
Accretion of redeemable
preferred stock (2,396) (2,396)
Conversion of redeemable convertible
preferred stock into shares of
common stock 3,484,213 3 43,099 43,102
Issuance of stock options 1,109 1,109
Common stock options exercised
($4.70 to $11.40 per share) 76,380 298 298
Repurchase of common stock 5,028 (42) (42)
Retirement of treasury stock (607,415) (607,415) 5,391 (5,391)
Net loss (1,552) (1,552)
Foreign currency translation
adjustment $ (85) (85)
---------- --- -------- ------- --------- -------- ------- -------
Balance at December 28, 1996 11,713,464 11 - - 88,136 (8,776) (85) 79,286
Equity transactions of pooled
companies (1,653) (1,653)
Issuance of common stock
($10.67 to $14.17 per share) 101,564 1,117 1,117
Public offering of common stock
($22.48 per share), net of
issuance costs 2,083,542 2 46,536 46,538
Common stock options and warrants
exercised ($2.65 to $12.67
per share) 247,594 1 2,694 2,695
Net income 9,447 9,447
Foreign currency translation
adjustment (46) (46)
---------- --- -------- ------- -------- -------- ------- -------
Balance at December 27, 1997 14,146,164 14 - - 138,483 (982) (131) 137,384
Pooling-of-interests transactions 133,363 60 188 248
Equity transactions of pooled
companies (3,565) (3,565)
Issuance of common stock
($14.45 to $30.50 per share) 46,564 1,096 1,096
Common stock options exercised
($4.70 to $24.00 per share) 151,986 2,807 2,807
Net income 15,507 15,507
Foreign currency translation
adjustment 22 22
---------- --- -------- ------- -------- -------- ------- ------
Balance at January 2, 1999 14,478,077 $14 - $ - $142,446 $ 11,148 $ (109) $153,499
========== === ======== ======= ======== ======== ======= ========
The accompanying notes are an integral part of these supplemental combined
financial statements.
7
SUPPLEMENTAL COMBINED STATEMENT OF CASH FLOWS
(In thousands)
Fiscal Year Ended January 2, December 27, December 28,
1999 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $15,507 $ 9,447 $(1,552)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Write-off of assets in non-recurring expenses 5,746
Depreciation and amortization 15,047 10,656 7,754
Loss (gain) on disposal of property and equipment and
settlement of property-related obligations (580) (1,060) 110
Deferred tax provision (benefit) 406 1,737 (863)
Deferred severance 476
Change in assets and liabilities:
Inventories (5,635) (3,697) (5,008)
Receivables and other assets (2,271) (593) (777)
Accounts payable 6,627 4,527 3,181
Accrued liabilities 2,046 1,045 5,284
-------- ------- -------
Net cash provided by operating activities 31,147 22,538 13,875
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (55,197) (26,482) (17,193)
Payment for purchase of acquired
entities, net of cash acquired (10,481) (14,003) (14,043)
Proceeds from sale of property and equipment 2,894 566
------- ------- -------
Net cash used by investing activities (62,784) (39,919) (31,236)
------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on line of credit (12,486)
Payments on long-term debt (2,239) (2,996) (3,285)
Principal payments under capitalized leases (60) (88)
Proceeds from notes payable and long-term debt 376 1,661 3,455
Proceeds from issuance of redeemable preferred stock, net 16,068
Proceeds from issuance of common stock, net 2,003 49,705 31,700
Distribution to stockholders (3,565) (1,653) (1,643)
Purchase of treasury stock (42)
Bank overdraft (436) (89)
------- ------- -------
Net cash provided (used) by financing activities (3,861) 46,568 33,679
------- ------- -------
Effect of exchange rates on cash 62 (46) (85)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (35,436) 29,141 16,233
Cash and cash equivalents at beginning of year 46,784 17,643 1,410
------- ------- -------
Cash and cash equivalents at end of year $11,348 $46,784 $17,643
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $648 $619 $1,349
========== ========= =======
Cash paid for income taxes $6,326 $2,469 $1,027
========== ========= =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Short-term note payable issued for business acquisition $3,150
Common stock issued in relation to prior year business acquisition $488 $269
========== =======
Preferred stock, common stock and options issued and total debt
and liabilities incurred and assumed in acquisitions $3,400 $35,500
========= =======
Conversion of preferred stock into common stock $43,100
=======
Accretion of preferred stock $2,400
=======
In addition, the Company issued 133,363 shares as consideration for
pooling-of-interests transactions in 1998.
The accompanying notes are an integral part of these supplemental combined
financial statements.
8
NOTES TO THE SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization
Wild Oats Markets, Inc. ("Wild Oats" or the "Company"), headquartered in
Boulder, Colorado, owns and operates natural foods supermarkets in the United
States and Canada. The Company also operates bakeries, commissary kitchens, and
warehouses that supply the retail stores. The Company's operations are
concentrated in one market segment--grocery stores--and are geographically
concentrated in the western and central United States. Management considers a
downturn in this market segment and geographic location to be unlikely.
Basis of Presentation
Certain amounts in the prior years' financial statements have been reclassified
to conform to the current year presentation.
Principles of Consolidation
The Company's supplemental combined financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Alfalfa's Canada, Inc. and Wild
Oats Markets Canada, Inc. All significant intercompany accounts and transactions
have been eliminated. As more fully described in Note 2, on September 27, 1999,
Henry's Marketplace, Inc. ("Henry's") was merged with and into the Company in a
transaction accounted for as a pooling of interests. The accompanying
supplemental combined financial statements have been restated to include the
accounts of Henry's for all periods presented.
Fiscal Year
The Company reports its financial results on a 52- or 53-week fiscal year ending
on the Saturday closest to December 31. Each fiscal quarter consists of a
13-week period, with one 14-week period in a 53-week year. Fiscal year 1998 was
a 53-week period, and fiscal years 1997 and 1996 were 52-week periods. Henry's
fiscal year ends on the Sunday nearest December 31. Fiscal years 1998, 1997 and
1996 for Henry's were 52-week periods. The effect of consolidation of these
fiscal periods with the fiscal periods of the Company for all periods presented
is not considered material.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Such cash equivalents
aggregated $2.1 million and $40.2 million at January 2, 1999 and December 27,
1997, respectively.
Inventories
Inventories consisting of products held for sale are stated at the lower of cost
(first-in, first-out) or market, as determined by the retail inventory method.
Depreciation and Amortization
Property and equipment are recorded at cost. Depreciation is computed using
straight-line or accelerated methods over the estimated useful lives of the
respective assets (three to seven years). Leasehold improvements are amortized
on a straight-line basis over the shorter of the useful life of the asset or the
lease term. Maintenance and repairs are expensed as incurred, and improvements
are capitalized.
Intangible Assets
Intangible assets consist primarily of goodwill, which is amortized using the
straight-line method over 30 to 40 years, and are shown net of accumulated
amortization of $4.4 million and $2.8 million at January 2, 1999 and December
27, 1997, respectively. The carrying value of goodwill is assessed for
recoverability by management based on an analysis of undiscounted expected
future cash flows from the related acquired entities. The Company believes that
there has been no impairment thereof as of January 2, 1999.
Pre-Opening Expenses
Pre-opening expenses are included in other current assets and consist primarily
of labor costs, rent, utilities, supplies, and other expenses incurred in
connection with the opening of a new store. Through fiscal 1998, pre-opening
expenses were deferred until the store's opening date, at which time such costs
were expensed in full. Beginning in fiscal 1999, pre-opening expenses will be
recognized as incurred.
Advertising
Advertising is expensed as incurred. Advertising expense was $5.8 million,
$6.1 million, and $4.5 million for 1998, 1997 and 1996, respectively.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, including cash and
cash equivalents, short-term trade receivables and payables and long-term debt,
approximate their fair values.
9
Use of Estimates
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the supplemental combined
financial statements and accompanying notes. Actual results could differ from
those estimates.
Foreign Currency Translation
The functional currency for the Company's Canadian subsidiary is the Canadian
dollar. Translation into U.S. dollars is performed for assets and liabilities at
the exchange rate as of the balance sheet date. Income and expense accounts are
translated at average exchange rates for the year. Adjustments resulting from
the translation are reflected as a separate component of stockholders' equity.
Pro Forma Income Taxes
In fiscal 1999, the Company merged with Henry's in a pooling of interests
transaction (see Note 2), which included entities that were previously not
taxable and, accordingly, any income tax liabilities for the periods prior to
the merger are the responsibility of the previous owner. For purposes of these
supplemental combined financial statements, federal and state income taxes have
been provided as a pro forma adjustment as if the acquired entity had filed C
Corporation tax returns for all periods presented (see Note 16).
Earnings Per Share
Basic earnings per share is based on the weighted-average number of common
shares outstanding, and diluted earnings per share is based on the
weighted-average number of common shares outstanding and all dilutive potential
common shares outstanding, except where the effect of their inclusion would be
antidilutive (i.e., in a loss period) and is calculated using net income and pro
forma net income (net income after giving effect to the pro forma tax adjustment
discussed above). A reconciliation of the basic and diluted per-share
computations is as follows (in thousands, except per-share data):
Jan. 2, Dec. 27, Dec. 28,
Fiscal Year Ended 1999 1997 1996
- ------------------ --------- --------- --------
Basic earnings (loss) per
common share computation:
Net income (loss) allocable
to common stock $15,507 $ 9,447 $(3,948)
Pro forma net income (loss) allocable to
common stock 14,011 $ 8,823 (4,644)
Weighted average common shares issued 14,367 11,968 6,478
------- ------- -------
Earnings (loss) per common share $ 1.08 $ 0.79 $ (0.61)
======= ======= =======
Pro forma earnings (loss)
per common share $ 0.98 $ 0.74 $ (0.72)
======= ======= =======
Diluted earnings (loss) per
common share computation:
Net income (loss) allocable
to common stock $15,507 $ 9,447 $(3,948)
Pro forma net income (loss) allocable to
common stock $14,011 $ 8,823 $(4,644)
Weighted average common shares issued 14,367 11,968 6,478
Incremental shares from assumed
conversions:
Stock options 426 389
------- ------ ------
Total dilutive average
common shares issued 14,793 12,357 6,478
------- ------ ------
Diluted earnings (loss) per
common share $ 1.05 $ 0.76 $(0.61)
======= ======= =======
Pro forma diluted earnings (loss)
per common share $ 0.95 $ 0.71 $(0.72)
========= ========= ======
Due to the Company's net loss allocable to common stock in 1996, diluted loss
per share is the same as basic. In 1996, dilutive securities not included in the
calculation consisted of stock options and warrants convertible into 1,028,178
shares of common stock. Weighted average shares outstanding related thereto
would have been 6,733,000.
New Accounting Pronouncements
In 1997, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("FAS") No. 131, Disclosure about Segments of an
Enterprise and Related Information. FAS No. 131 revises the current requirements
for reporting business segments by redefining such segments according to
management's disaggregation of the business for purposes of making operating
10
decisions and allocating internal resources. The Company adopted FAS No. 131 in
1998. The adoption of FAS No. 131 did not affect results of operations,
financial position, or the disclosure of segment information as the Company has
one reportable segment, retail sales.
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1, which is effective
for transactions in fiscal years beginning after December 15, 1998, provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. The Company will adopt SOP 98-1 for the 1999 fiscal year, but
does not expect such adoption to have a material effect on its reported
financial results.
In April 1998, the AICPA issued SOP 98-5, Accounting for the Costs of Start-Up
Activities. SOP 98-5 requires that pre-opening costs be expensed as incurred.
SOP 98-5 is effective for fiscal years beginning after December 15, 1998, and
the initial application should be reported as a cumulative effect of a change in
accounting principle. The Company will adopt SOP 98-5 in fiscal 1999 and will
record approximately $284,000 as a cumulative effect of a change in accounting
principle, net of taxes, during the first quarter of fiscal 1999.
In June 1998, the FASB issued FAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. FAS No. 133, which is effective for fiscal years
beginning after June 15, 1999, requires all derivatives to be recognized in the
balance sheet as either assets or liabilities and measured at fair value. In
addition, all hedging relationships must be reassessed and documented pursuant
to the provisions of FAS No. 133. The Company will adopt FAS No. 133 for the
2000 fiscal year, but does not expect such adoption to materially affect
financial statement presentations.
2. Business Combinations
1999
On September 27, 1999, the Company issued approximately 1.4 million shares of
common stock in exchange for all of the outstanding stock of Henry's in a
transaction accounted for as a pooling of interests. Accordingly, the financial
position, results of operations and cash flows of Henry's have been combined
with those of the Company in these supplemental combined financial statements.
Certain reclassifications have been made to the prior financial statements of
Henry's to conform with the Company financial presentation and policies. There
were no intercompany transactions between the Company and Henry's for all
periods presented.
Results of Pooled Company Prior to Merger
Separate results of operations for the Company and Henry's operations for the
periods prior to the merger are as follows (in thousands):
Jan. 2, Dec. 27, Dec. 28,
Fiscal Year Ended 1999 1997 1996
- ------------------ -------- -------- --------
Sales:
Wild Oats $398,857 $311,077 $192,493
Henry's 81,026 72,776 61,113
-------- -------- --------
Combined $479,883 $383,853 $253,606
======== ========= ========
Net Income:
Wild Oats $ 11,648 $ 7,036 $ (4,483)
Henry's 3,859 2,411 2,931
-------- -------- --------
Combined $ 15,507 $ 9,447 $ (1,552)
-------- -------- --------
Other Changes in Stockholders' Equity:
Wild Oats $ 4,173 $ 50,304 $ 86,475
Henry's (3,565) (1,653) (428)
--------- -------- --------
Combined $ 608 $ 48,651 $ 86,047
-------- -------- --------
1998
In January, May, June and December 1998, in four separate transactions, the
Company acquired the assets and assumed certain liabilities of five operating
natural foods supermarkets in Nashville, Tennessee, New York, New York, Santa
Barbara, California, Victoria, British Columbia, Canada, and Boulder, Colorado.
11
The purchase price for these acquisitions aggregated $10.6 million in cash and a
note payable of $3.1 million that was repaid in full on January 5, 1999 (see
Note 5). The acquisitions were accounted for using the purchase method, and the
excess of cost over the fair value of the assets acquired of $12.0 million was
allocated to goodwill, which is being amortized on a straight-line basis over 40
years.
The fair values of the acquired assets and liabilities of these acquisitions are
as follows (in thousands):
Current assets ($127 of cash) $1,304
Equipment 1,397
Other assets 25
Liabilities (1,022)
Goodwill 12,014
--------
$13,718
Also during 1998, the Company issued 133,363 shares of the Company's common
stock in exchange for all of the common stock of two companies operating natural
foods grocery stores in Columbus, Ohio and Little Rock, Arkansas. These
acquisitions were accounted for as poolings of interests, and accordingly, the
Company's consolidated financial statements for 1998 include the operations of
the stores for the entire year, adjusted to conform with the Company's
accounting policies and presentation. The Company's financial statements prior
to 1998 were not restated to include the results of these pooling transactions
as the effect is immaterial. Non-recurring, acquisition-related expenses of
$393,000 were recorded in conjunction with the poolings.
1997
In February, March and June 1997, in four separate transactions, the Company
acquired the assets and assumed certain liabilities of nine operating natural
foods supermarkets: two in south Florida, two in Eugene, Oregon, two in Memphis,
Tennessee, and three in Phoenix and Scottsdale, Arizona. The purchase price for
these acquisitions aggregated $15.0 million and consisted of $14.0 million in
cash and 91,793 shares of the Company's common stock valued at approximately
$979,000. The acquisitions were accounted for using the purchase method, and the
excess of cost over the fair value of the assets acquired of $10.3 million was
allocated to goodwill, which is being amortized on a straight-line basis over 40
years.
The fair values of the acquired assets and liabilities of these acquisitions are
as follows (in thousands):
Current assets ($27 of cash) $3,304
Equipment 3,782
Other assets 23
Liabilities (2,460)
Goodwill 10,338
--------
$14,987
1996
In July 1996, the Company acquired all of the outstanding common and preferred
stock of Alfalfa's, Inc. for $39.1 million, consisting of $16.2 million of cash,
issuance of 1,175,132 shares of common stock and options to acquire 186,152
shares of common stock valued at $14.2 million, issuance of 612,504 shares of
redeemable convertible Series D preferred stock valued at $7.7 million and $1.0
million of acquisition-related costs. The acquisition was accounted for using
the purchase method, and the excess of cost over the fair value of the assets
acquired of $27.8 million was allocated to goodwill, which is being amortized on
a straight-line basis over 40 years.
In May 1996, the Company acquired substantially all of the combined assets of
three related natural foods retail stores in Salt Lake City, Utah, in exchange
for total consideration of $2.2 million consisting of $500,000 in cash and $1.7
million in promissory notes. The acquisition was accounted for using the
purchase method, and the excess of cost over the fair value of the assets
acquired of $2.1 million was allocated to goodwill, which is being amortized on
a straight-line basis over 40 years.
The fair values of the acquired assets and liabilities of these acquisitions are
as follows (in thousands):
Current assets ($3,591 of cash) $8,507
Equipment 12,030
Other assets 523
Liabilities (9,738)
Goodwill 29,899
--------
$41,221
12
The following unaudited pro forma combined results of operations of the Company
and the acquired businesses discussed above have been prepared as if the
transactions occurred as of the beginning of the respective periods (after
giving effect to the pro forma tax adjustment -- see Notes 2 and 16)(in
thousands):
Jan. 2, Dec. 27, Dec. 28,
Fiscal Year Ended 1999 1997 1996
- ----------------- -------- --------- ------
Sales $497,717 $403,319 $303,431
Pro forma net income (loss) 14,369 9,341 (1,442)
Pro forma net income (loss)
allocable to common stock 14,369 9,341 (3,838)
Pro forma basic earnings (loss)
per share $1.00 $0.78 $ (0.59)
Pro forma diluted earnings (loss)
per share $0.97 $0.76 $ (0.59)
The unaudited pro forma results above are not necessarily representative of the
actual results that would have occurred or may occur in the future, if the
transactions had been in effect on the dates indicated. The pre-merger
historical results of the acquired businesses discussed above are not reflected
in the Company's historical financial statements.
3. Property and Equipment
Property and equipment consist of the following (in thousands):
Jan. 2, Dec. 27,
Fiscal Year Ended 1999 1997
- ----------------- -------- --------
Machinery and equipment $65,140 $ 44,208
Leasehold improvements 43,986 23,358
Land and building 10,992 685
Construction in progress 17,609 14,983
-------- --------
137,727 83,234
Less accumulated depreciation
and amortization (33,737) (19,943)
-------- --------
$103,990 $ 63,291
======== ========
The amounts shown above include $310,000 of machinery and equipment which are
accounted for as capitalized leases and which have accumulated amortization of
$258,000 at December 27, 1997. There were no fixed assets accounted for as
capitalized leases as of January 2, 1999.
4. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Jan. 2, Dec. 27,
Fiscal Year Ended 1999 1997
- ----------------- -------- -------
Accrued wages and employee costs $8,264 $6,934
Accrued sales and property taxes 2,567 2,030
Deferred charges and other accruals 2,739 4,054
-------- --------
$13,570 $13,018
======== ========
13
5. Notes Payable and Long-Term Debt
Long-term debt outstanding consists of the following (in thousands):
Jan. 2, Dec. 27,
1999 1997
------- --------
Notes payable to corporations and individuals:
Due January 5, 1999, bearing no interest,
secured by inventory and fixed assets $3,150
Due in monthly installments of $4,635
(including interest) through April 2017,
bearing interest at 10%, secured by
fixed assets, penalty for early repayment $ 475
Notes payable to bank and lending institutions
payable in monthly installments ranging from
$632 to $10,992, including interest ranging from
8.0% to 14.55% per annum at January 2, 1999,
due dates ranging from June 1, 1998 through
January 29, 2003, secured by equipment 3,668 4,456
Unsecured notes payable in monthly installments
ranging from $3,805 to $14,311, including interest
ranging from 6.0% to 14.75% per annum at January 2,
1999, due dates ranging from December 18,1999
through July 18, 2001 311 524
Note payable to a related party, unsecured,
interest of 10.0% at January 2, 1999, payable
in monthly installments of $1,366, including
interest through October 1, 2005 80 87
------ ------
7,209 5,542
Less current portion (4,534) 1,385
------ ------
$2,675 $4,157
====== ======
The maturities of long-term debt are as follows:
Fiscal year ending
1999 $4,534
2000 1,457
2001 859
2002 245
2003 95
Thereafter 19
------
Total $7,209
======
In 1998, the Company, through Henry's, entered into a financing agreement with a
commercial bank that permits Henry's to borrow through 2003 up to $200,000 at an
interest rate of 9.5%. As of January 2, 1999, there were no borrowings
outstanding under this facility.
The Company has a $40.0 million revolving line of credit. The facility has a
seven-year term and bears interest, at the Company's option, at the prime rate
or LIBOR plus 1.25%. The line of credit agreement includes certain financial and
other covenants, as well as restrictions on payments of dividends. As of January
2, 1999, there were no borrowings outstanding under this facility. In March
1999, the Company increased its revolving line of credit to an $80.0 million
commitment with a three-year term and bearing interest at the Company's option,
at the prime rate or LIBOR plus 0.65%.
6. Income Taxes
Income (loss) before income taxes consists of the following (in thousands):
Jan. 2, Dec. 27, Dec. 28,
Fiscal Year Ended 1999 1997 1996
- ----------------- --------- --------- ------
Domestic $22,506 $14,002 $(1,777)
Foreign 794 902 69
--------- --------- -------
$23,300 $14,904 $(1,708)
========= ========= ========
14
Income tax expense (benefit) consists of the following (in thousands):
Jan. 2, Dec. 27, Dec. 28,
Fiscal Year Ended 1999 1997 1996
- ----------------- --------- --------- ------
Current: Federal $5,685 $3,009 $ 526
State and foreign 1,702 711 181
--------- -------- -------
7,387 3,720 707
--------- --------- -------
Deferred: Federal 430 1,728 (705)
State and foreign (24) 9 (158)
--------- --------- -------
406 1,737 (863)
--------- --------- -------
$7,793 $5,457 $(156)
========= ========= =======
The differences between the U.S. federal statutory income tax rate and the
Company's effective tax rate are as follows:
Jan. 2, Dec. 27, Dec. 28,
Fiscal Year Ended 1999 1997 1996
- ----------------- ------- -------- -------
Statutory tax rate 35.0% 34.0% (34.0%)
State income taxes, net of federal
income tax benefit 4.6 4.6 (3.8)
Tax effect of non-deductible goodwill 1.8 6.7 14.3
Untaxed earnings (Note 16) (6.6) (4.4) 8.8
Other, net (1.4) (4.3) 5.6
------- -------- -------
Effective tax rate 33.4% 36.6% (9.1%)
======= ======== =========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are as follows (in
thousands):
Jan. 2, Dec. 27,
Fiscal Year Ended 1999 1997
- ----------------- ------- -------
Deferred tax assets
Inventory related $237 $326
Vacation accrual 724 574
Other accruals 352 502
Other 3 408
------- --------
Total deferred tax assets 1,316 1,810
------- --------
Deferred tax liabilities
Property related (2,462) (2,550)
------- ---------
Total deferred tax liabilities (2,462) (2,550)
------- ---------
Net deferred tax liability $(1,146) $(740)
======= =========
During 1997, the Company fully utilized U.S. net operating loss carryforwards of
approximately $1.9 million. Additionally, during 1997, the Company utilized
state net operating loss carryforwards of approximately $4.1 million and, as of
December 27, 1997, had state net operating loss carryforwards of approximately
$137,000.
These state net operating loss carryforwards were fully utilized during 1998.
7. Redeemable Convertible Preferred Stock
Upon the closing of the Company's initial public offering on October 22, 1996,
the Company's Series A, B, C, D and E redeemable convertible preferred stock
shares were converted into an aggregate of 3,484,213 shares of the Company's
common stock.
15
8. Capital Stock
The Company declared a 3:2 stock split for all stockholders of record as of
December 22, 1997, effective January 7, 1998. All shares and per-share prices
presented herein have been retroactively restated to reflect the stock split.
In December 1997, the Company completed a public offering of its common stock.
The proceeds from the sale of 2,083,542 shares of common stock at $22.48 per
share were approximately $46.5 million, net of the underwriting discount of $2.5
million and stock offering costs of $300,000.
The Company completed an initial public offering of its common stock on October
22, 1996. The proceeds from the sale of 2,100,000 shares of common stock at
$16.67 per share were approximately $31.4 million, net of the underwriting
discount of $2.5 million and stock offering costs of $1.1 million.
9. Stock Plans, Options and Warrants
Employee Stock Purchase Plan
In August 1996, the Company's board of directors approved and adopted the
Employee Stock Purchase Plan ("Purchase Plan") covering an aggregate of 191,538
shares of common stock. The Purchase Plan is intended to qualify as an employee
stock purchase plan within the meaning of Section 423 of the Internal Revenue
Code. Under the Purchase Plan, the board of directors may authorize
participation by eligible employees, including officers, in periodic offerings.
The offering period for any offering will be no more than 27 months. The board
authorized an offering commencing on the initial public offering date of October
22, 1996 and ending June 30, 1997, and sequential six-month offerings
thereafter.
Employees are eligible to participate in the currently authorized offerings if
they have been employed by the Company or an affiliate of the Company
incorporated in the United States for at least six months preceding October 22,
1996. Employees can have up to 15% of their earnings withheld pursuant to the
Purchase Plan (10% under the currently authorized offerings) and applied on
specified purchase dates (currently the last day of each authorized offering) to
the purchase of shares of common stock. The price of common stock purchased
under the Purchase Plan will be equal to 85% of the lower of the fair market
value of the common stock on the commencement date of each offering or the
relevant purchase date. As of January 2, 1999, there were approximately $43,000
of payroll deductions to be applied to purchase stock on June 30, 1999; as of
December 27, 1997, there were approximately $126,000 of payroll deductions which
purchased 8,607 shares of common stock on December 31, 1997.
Employee Stock Ownership Plan
In conjunction with the acquisition of Alfalfa's in July 1996, the Company
assumed an employee stock ownership plan ("ESOP") for Alfalfa's employees who
were participants at the time of the acquisition. Following the acquisition, the
Company discontinued contributions to the ESOP. In January 1998, the Company
received a favorable determination letter from the Internal Revenue Service,
authorizing termination of the ESOP and distribution of the ESOP shares. The
75,078 shares of the Company's common stock held in trust as of December 27,
1997, were distributed to the ESOP participants, pursuant to the terms of the
ESOP, in February 1998.
1996 Equity Incentive Plan
The Company's 1996 Equity Incentive Plan (the "Incentive Plan") was adopted by
the board of directors in August 1996 as an amendment and restatement of the
Company's 1993 Stock Option Plan (the "1993 Plan"). The board designated all
shares formerly available for issuance under the 1993 Plan and the 1991 Option
Plan (the "1991 Plan") of Alfalfa's following the July 1996 acquisition of
Alfalfa's to be available for issuance under the Incentive Plan. The board also
amended the 1993 Plan and the 1991 Plan to transfer to the Incentive Plan any
shares of common stock that are subject to an option which expires or otherwise
terminates prior to exercise. At plan adoption, 1,235,147 shares of common stock
were reserved for issuance under the Incentive Plan. In May 1998, an additional
825,000 shares of common stock were reserved for issuance under the Incentive
Plan, pursuant to stockholder vote and approval.
The Incentive Plan provides for the grant of incentive stock options to
employees (including officers and employee-directors) and nonqualified stock
options, restricted stock purchase awards and stock bonuses to employees and
directors. The exercise price of options granted under the Incentive Plan is
determined by the board of directors, provided that the exercise price for an
incentive stock option cannot be less than 100% of the fair market value of the
common stock on the grant date and the exercise price for a nonqualified stock
option cannot be less than 85% of the fair market value of the common stock on
the grant date. Outstanding options generally vest ratably over a period of five
years and generally expire ten years from the grant date.
16
Warrants
A five-year warrant to purchase 5,269 shares of the Company's common stock at an
exercise price of $14.21 per share was outstanding at January 2, 1999. The
warrant expires on November 14, 1999.
Fair Values
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock plans. Accordingly, no compensation
expense has been recognized for these plans. Had compensation cost for these
plans been determined based on the fair value at the grant dates as prescribed
by FAS No. 123, Accounting for Stock-Based Compensation, the Company's net
income (loss) allocable to common stock and basic and diluted earnings (loss)
per share would have been reduced to the pro forma amounts indicated below
(after giving effect to the pro forma tax adjustment -- see Notes 2 and 16):
1998 1997 1996
-------- ------ -------
Pro forma net income (loss)
allocable to common stock
As reported $14,011 $8,823 $(4,644)
Pro forma $12,219 $7,837 $(5,239)
Pro forma basic earnings (loss)
per share
As reported $0.98 $0.74 $(0.72)
Pro forma $0.85 $0.65 $(0.81)
Pro forma diluted earnings (loss)
per share
As reported $0.95 $0.71 $(0.72)
Pro forma $0.83 $0.63 $(0.81)
The fair value of the employees' purchase rights was estimated using the
Black-Scholes model with the following weighted-average assumptions:
1998 1997 1996
--------- --------- ------
Estimated dividends None None None
Expected volatility 46% 51% 51%
Risk-free interest rate 4.5% 5.5% 5.6%
Expected life (years) 0.5 0.5 0.7
Weighted-average fair value per share $6.99 $5.53 $4.92
The fair value of each option grant under the Incentive Plan is estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
1998 1997 1996
----------- ----------- -------
Estimated dividends None None None
Expected volatility 46% 49% 51%
Risk-free interest rate 4.5%-4.7% 5.8% 5.6%-7.1%
Expected life (years) 7 7 7
A summary of the status of the Company's Incentive Plan as of the 1998, 1997 and
1996 fiscal year ends and changes during the years ending on those dates is
presented below:
Weighted
Number Average
of Exercise
Shares Price
Outstanding as of
December 30, 1995 470,539 $7.97
Granted 704,029 $10.07
Forfeited (64,311) $9.79
Exercised (76,380) $3.90
-----------
Outstanding as of
December 28, 1996 1,033,877 $9.42
Granted 295,479 $16.36
Forfeited (150,934) $10.68
Exercised (243,577) $7.06
-----------
Outstanding as of
December 27, 1997 934,845 $11.93
Granted 231,074 $26.86
Forfeited (67,697) $16.66
Exercised (151,986) $9.04
-----------
Outstanding as of
January 2, 1999 946,236 $15.73
===========
17
At January 2, 1999, options exercisable for 954,995 shares were available for
future grant under the Incentive Plan. At December 27, 1997 and December 28,
1996, options exercisable for 350,242 and 411,269 shares with weighted average
exercise prices of $10.82 and $7.38, respectively, were exercisable. The
weighted-average grant-date per-share fair values of options granted during
1998, 1997 and 1996 were $26.23, $16.36 and $11.27, respectively.
The following table summarizes information about incentive and nonqualified
stock options outstanding and exercisable at January 2, 1999:
Options Outstanding Options Exercisable
Weighted-
Range of Number Remaining Average
Exercise Outstanding Contractual Exercise Number Weighted Average
Prices Life Price Exercisable Exercise Price
- ------------- ---------- ------------ --------- ----------- --------------
$2.65-6.58 75,897 4.9 years $5.24 75,314 $5.23
$7.81-12.67 509,254 7.3 $11.12 263,780 $11.09
$16.67-22.67 95,311 8.6 $18.80 38,632 $18.53
$24.00-26.33 179,149 9.3 $24.70 18,562 $24.04
$26.50-36.00 86,625 9.5 $30.11 2,235 $28.94
---------- -----------
946,236 7.8 $15.73 398,523 $11.41
========== ===========
10. Litigation
Alfalfa's Canada, Inc., a Canadian subsidiary of the Company, is a defendant in
a suit brought in the Supreme Court of British Columbia, by one of its
distributors, Waysafer Wholefoods Limited and one of its principals, seeking
monetary damages for breach of contract and injunctive relief to enforce a
buying agreement for the three Canadian stores entered into by a predecessor of
Alfalfa's Canada. Under the buying agreement, the stores must buy products
carried by the plaintiff if such are offered at the current advertised price of
its competitors. The suit was filed in September 1996. In June 1998, the Company
filed a Motion for Dismissal on the grounds that the contract in dispute
constituted a restraint of trade. The Motion was subsequently denied. The
Company does not believe its potential exposure in connection with the suit to
be material. The Company cannot estimate the amount of damages, if any, at this
time.
The Company also is named as defendant in various actions and proceedings
arising in the normal course of business. In all of these cases, the Company is
denying the allegations and is vigorously defending against them and, in some
cases, has filed counterclaims. Although the eventual outcome of the various
lawsuits cannot be predicted, it is management's opinion that these lawsuits
will not result in liabilities that would materially affect the Company's
financial position or results of operations.
11. Commitments
The Company has numerous operating leases related to facilities occupied and
store equipment. These leases generally contain renewal provisions at the option
of the Company. Total rental expense (consisting of minimum rent and contingent
rent) under these leases was $16.1 million, $12.8 million and $9.0 million
during 1998, 1997 and 1996, respectively.
18
Future minimum lease payments under noncancelable operating leases as of January
2, 1999 are summarized as follows (in thousands):
Fiscal year ending
1999 $20,271
2000 22,485
2001 21,625
2002 21,359
2003 20,875
Thereafter 168,672
--------
Total minimum lease payments $275,287
========
Minimum rentals for operating leases do not include contingent rentals which may
become due under certain lease terms which provide that rentals may be increased
based on a percentage of sales. During 1998, 1997 and 1996, the Company paid
contingent rentals of $766,000, $570,000 and $424,000, respectively.
12. Non-Recurring Expenses
During 1998, a $393,000 non-recurring charge was recorded in conjunction with
two pooling-of-interests transactions (see Note 2). The non-recurring charge
consisted of $201,000 of employee severance costs, $162,000 of inventory and
fixed asset write-downs, and $30,000 of lease cancellation costs. As of January
2, 1999, the remaining accrued liabilities related to the non-recurring charge
totaled $22,000.
During 1996, the Company's Board of Directors made the following decisions
related to the Company's operations, which resulted in an approximate $7.0
million non-recurring charge being recorded. Specifically, as a direct result of
the July 1996 acquisition of Alfalfa's, the Company incurred $2.0 million by:
(1) closing the Wild Oats Lawrence, Kansas store as well as a regional bakery
and kitchen; (2) moving out of its existing corporate headquarters and
relocating to Alfalfa's; and (3) consolidating certain information systems,
thereby abandoning certain Wild Oats hardware and software. In addition, after
operating the combined businesses, management closed the Alfalfa's Seattle,
Washington store and a restaurant in a Capers, Vancouver, British Columbia store
which, at the time of the acquisition, it had planned to retain. These closures
resulted in the remaining $5.0 million of the charge. Components of the
non-recurring charge consist primarily of lease cancellation costs ($1.0
million), employee severance and relocation costs ($300,000) and losses on
disposal or abandonment of certain assets ($5.7 million).
Cash paid for employee severance, relocation and lease cancellation costs
related to the non-recurring charge totaled approximately $900,000 in 1997.
During 1997, management adjusted certain accruals related to the non-recurring
charge, including a $500,000 reduction following the settlement of a
property-related obligation. At December 27, 1997, there were no remaining
accrued liabilities related to the non-recurring charge.
13. Benefit Plans
The Company maintains a tax-qualified employee savings and retirement plan (the
"401(k) Plan") covering the Company's employees. Pursuant to the 401(k) Plan,
eligible employees may elect to reduce their current compensation by up to the
lesser of 15% of their annual compensation or the statutorily prescribed annual
limit ($10,000 in 1998) and have the amount of such reduction contributed to the
401(k) Plan. The 401(k) Plan provides for additional matching contributions to
the 401(k) Plan by the Company in an amount determined by the Company prior to
the end of each plan year. Total Company contributions during 1998, 1997 and
1996 were approximately $408,000, $256,000 and $95,000, respectively. The
trustees of the 401(k) Plan, at the direction of each participant, invest the
assets of the 401(k) Plan in designated investment options. The 401(k) Plan is
intend to qualify under Section 401 of the Internal Revenue Code.
The Company, through Henry's, also sponsored a 401(k) plan covering Henry's
employees with at least 12 months of service. Contributions are discretionary.
Henry's contributed $106,000 and $72,000 to this 401(k) plan for fiscal 1998 and
1997, respectively. Henry's had no 401(k) plan prior to fiscal 1997.
19
14. Stockholder Rights Plan
The Company has adopted a stockholder rights plan having both "flip-in" and
"flip-over" provisions. Stockholders of record as of May 22, 1998 received the
right ("Right") to purchase a fractional share of preferred stock at a purchase
price of $145 for each share of common stock held. In addition, until the Rights
become exercisable as described below and in certain limited circumstances
thereafter, the Company will issue one Right for each share of common stock
issued after May 22, 1998. For the "flip-in provision," the Rights would become
exercisable only if a person or group acquires beneficial ownership of 15% (the
"Threshold Percentage") or more of the outstanding common stock. Holdings of
certain existing affiliates of the Company are excluded from the Threshold
Percentage. In that event, all holders of Rights other than the person or group
who acquired the Threshold Percentage would be entitled to purchase shares of
common stock at a substantial discount to the then-current market price. This
right to purchase common stock at a discount would be triggered as of a
specified number of days following the passing of the Threshold Percentage. For
the "flip-over" provision, if the Company was acquired in a merger or other
business combination or transaction, the holders of such Rights would be
entitled to purchase shares of the acquirer's common stock at a substantial
discount.
15. Related Party Transaction
Elizabeth C. Cook and Michael C. Gilliland, executive officers and directors of
the Company, are trustees of Wild Oats Community Foundation ("Foundation"), a
non-profit organization. In 1998, the Foundation opened Wild Oats Wellness
Centers in Boulder, Colorado and Albuquerque, New Mexico in space subleased from
the Company. The Foundation pays to the Company the same rent as paid by the
Company for the space. There are no material transactions between the Company
and the Foundation.
Additionally, the Company had outstanding notes payable to directors and
stockholders of Henry's totaling approximately $80,000 and $477,000 at January
2, 1999 and December 27, 1997, respectively (see Note 5).
16. Pro Forma Net Income (Loss)
The pro forma net income (loss) and pro forma net income (loss) per share
reflects the tax adjustment for the fiscal 1999 merger with Henry's in a pooling
of interests transaction (see Note 2), which included entities that were
previously not taxable, as if Henry's had filed C Corporation tax returns for
all periods presented. The effect is as follows:
Fiscal Fiscal Fiscal
(In thousands) 1998 1997 1996
- -----------------------------------------------------------------
Net income (loss) before pro forma
adjustments, per the supplemental
combined statements of operations $15,507 $9,447 $(1,552)
Pro forma provision
for income taxes 1,496 624 696
- -----------------------------------------------------------------
Pro forma net income (loss) $14,011 $8,823 $(2,248)
- -----------------------------------------------------------------
17. Subsequent Events (Unaudited)
On February 1, 1999, the Company acquired the operations of three existing
natural foods supermarkets in Tucson, Arizona. The purchase price for this
acquisition aggregated $18.4 million in cash. The acquisition was accounted for
using the purchase method, and the excess of cost over the fair value of the
assets acquired of $16.8 million was allocated to goodwill, which is being
amortized on a straight-line basis over 40 years.
20
WILD OATS MARKETS, INC.
SUPPLEMENTAL COMBINED STATEMENT OF OPERATIONS
(In thousands)
For the Six-Month Period Ended July 3, June 27,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Sales $305,334 $230,308
Cost of goods sold and occupancy costs 212,168 159,999
-------- --------
Gross profit 93,166 70,309
Operating expenses:
Direct store expenses 64,601 48,291
Selling, general and administrative expenses 12,193 9,971
Pre-opening expenses 1,600 981
Non-recurring expenses 10,894 393
-------- --------
Income from operations 3,878 10,673
Interest expense (income) 832 (259)
-------- --------
Income before income taxes 3,046 10,932
Income tax expense 298 3,448
-------- --------
Net income before cumulative effect of change in accounting principle 2,748 7,484
Cumulative effect of change in accounting principle, net of taxes 281
------- --------
Net income $ 2,467 $ 7,484
======== ========
Other comprehensive income:
Foreign currency translation adjustment, net 424 30
-------- --------
Comprehensive income $ 2,891 $ 7,514
======== ========
Pro forma net income (Note 4) $ 1,539 $ 6,641
======== ========
Basic Net Income (Loss) per common share:
Continuing Operations $ 0.19 $ 0.52
Cumulative effect of change in
accounting principle (0.02) -
-------- --------
Net Income $ 0.17 $ 0.52
-------- --------
Diluted Net Income (Loss) per common share:
Continuing Operations $ 0.18 $ 0.50
Cumulative effect of change in
accounting principle (0.02) -
-------- --------
Net Income $ 0.16 $ 0.50
-------- --------
Pro Forma Basic Net Income (Loss) per common share:
Continuing Operations $ 0.13 $ 0.46
Cumulative effect of change in
accounting principle (0.02) -
-------- --------
Net Income $ 0.11 $ 0.46
-------- --------
Pro Forma Diluted Net Income (Loss) per common share:
Continuing Operations $ 0.12 $ 0.45
Cumulative effect of change in
accounting principle (0.02) -
-------- --------
Net Income $ 0.10 $ 0.45
-------- --------
Weighted average common shares outstanding:
Basic 14,538 14,354
Assuming dilution 14,909 14,840
The accompanying notes are an integral part of these supplemental combined
financial statements (unaudited).
21
WILD OATS MARKETS, INC.
SUPPLEMENTAL COMBINED BALANCE SHEET
(In thousands, except share amounts)
July 3,
1999
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 14,844
Inventories, net 41,410
Accounts receivable (net of allowance for doubtful accounts of $211) 2,404
Prepaid expenses and other current assets 1,906
Deferred income taxes 3,663
--------
Total current assets 64,227
Property and equipment, net 145,321
Intangible assets, net 109,535
Deposits and other assets 1,661
--------
$320,744
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $41,594
Accrued liabilities 21,587
Notes payable 3,400
Current portion of long-term debt 1,972
--------
Total current liabilities 68,553
Long-term debt 88,326
Obligations in capital leases 1,031
Deferred income taxes 2,021
Other long-term obligations 2,957
--------
162,888
Stockholders' equity:
Preferred stock; $0.001 par value; 5,000,000
shares authorized; no shares
issued and outstanding
Common stock; $0.001 par value; 20,000,000
shares authorized; 14,666,695
issued and outstanding 14
Additional paid-in capital 145,794
Retained earnings 11,735
Accumulated other comprehensive income 313
--------
157,856
--------
Total stockholders' equity $320,744
========
The accompanying notes are an integral part of these supplemental combined
financial statements (unaudited).
22
WILD OATS MARKETS, INC.
SUPPLEMENTAL COMBINED STATEMENT OF CASH FLOWS
(In thousands)
For the Six-Month Period Ended July 3, June 27,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,467 $ 7,484
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 9,292 6,778
Loss (gain) on disposal of property and equipment 14 (106)
Non-recurring expenses 10,794
Deferred tax provision (benefit) (1,462) 426
Change in assets and liabilities:
Inventories (4,147) (1,296)
Receivables and other assets 365 (998)
Accounts payable 9,633 32
Accrued liabilities 2,330 1,554
-------- -------
Net cash provided by operating activities 29,286 13,874
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (32,200) (27,334)
Payment for purchase of acquired entities, net of cash acquired (64,995) (9,585)
-------- -------
Net cash used by investing activities (97,195) (36,919)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under line-of-credit agreement 75,500
Payments on notes payable and long-term debt (3,866) (1,380)
Distribution to stockholders (1,880) (1,795)
Proceeds from notes payable and long-term borrowing 423
Proceeds from issuance of common stock, net 1,255 1,128
Bank overdraft (241) (677)
-------- -------
Net cash provided (used) by financing activities 71,191 (2,724)
-------- -------
Effect of exchange rate on cash 214 30
-------- -------
Net increase in cash and cash equivalents 3,496 (25,739)
Cash and cash equivalents at beginning of year 11,348 46,784
-------- -------
Cash and cash equivalents at end of period $ 14,844 $21,045
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 814 $ 253
======== =======
Cash paid for income tax $ 1,280 $ 2,595
======== =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Non-cash adjustment to purchase price for Nature's acquisition $ 2,090
========
Short-term note receivable for sale of property $ 365
=======
The accompanying notes are an integral part of these supplemental combined
financial statements (unaudited).
23
WILD OATS MARKETS, INC.
NOTES TO THE SUPPLEMENTAL COMBINED FINANCIAL STATEMENTS (UNAUDITED)
1. Accounting Policies
The supplemental combined balance sheet as of July 3, 1999, and the supplemental
combined statement of operations, the supplemental combined statement of changes
in stockholders' equity, and the supplemental combined statement of cash flows
for the six-month periods ended July 3, 1999 and June 27, 1998, have been
prepared without an audit. In the opinion of management, all adjustments,
consisting only of normal, recurring adjustments necessary for a fair
presentation thereof, have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these supplemental combined
financial statements be read in conjunction with the supplemental combined
financial statements and notes thereto as of January 2, 1999 and for the three
fiscal years then ended included in this Form 8-K. The results of operations for
interim periods presented are not necessarily indicative of the operating
results for the full year.
As more fully described in Note 3, on September 27, 1999, Henry's Marketplace,
Inc. ("Henry's") was merged with and into the Company in a transaction accounted
for as a pooling of interests. The accompanying unaudited supplemental combined
financial statements have been restated to include the accounts of Henry's for
all periods presented.
2. New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants ("AICPA")
issued Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. SOP 98-1, which is effective
for transactions in fiscal years beginning after December 15, 1998, provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. The Company adopted SOP 98-1 in fiscal 1999 with no material
effect on its reported financial results.
In April 1998, the AICPA issued SOP 98-5, Accounting for the Costs of Start-Up
Activities. SOP 98-5 provides guidance on how entities should account for
pre-opening costs, pre-operating costs, organization costs and start-up costs.
SOP 98-5 requires that the costs of start-up activities be expensed as incurred.
SOP 98-5 is effective for fiscal years beginning after December 15, 1998, and
the initial application should be reported as a cumulative effect of a change in
accounting principle. The Company adopted SOP 98-5 in fiscal 1999 and recorded
approximately $281,000 as a cumulative effect of a change in accounting
principle, net of taxes, during the first quarter of 1999. The impact on basic
and diluted earnings per share of this adoption was $(0.02) for the six months
ended July 3, 1999. The Company expects SOP 98-5 to have no material effect on
its ongoing results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("FAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. FAS No. 133, as amended is effective for
fiscal years beginning after June 15, 2000, and requires all derivatives to be
recognized in the balance sheet as either assets or liabilities and measured at
fair value. In addition, all hedging relationships must be reassessed and
documented pursuant to the provisions of FAS No. 133. The Company will adopt FAS
No. 133 for the 2000 fiscal year, but does not expect such adoption to
materially affect its financial statement presentation due to the Company's
limited use of such instruments.
3. Business Combinations
On April 30, 1999, the Company acquired the operations of three existing natural
foods supermarkets in Norwalk and Hartford, Connecticut and Melbourne, Florida.
The purchase price for this acquisition aggregated $6.5 million in cash. The
acquisition was accounted for using the purchase method, and the excess of cost
over the fair value of the assets acquired and liabilities assumed of $6.1
million was allocated to goodwill, which is being amortized on a straight-line
basis over 40 years.
24
On May 29, 1999, the Company acquired all of the outstanding stock of Nature's
Fresh Northwest, Inc. ("Nature's"), a Delaware corporation that owned seven
operating nature foods stores, with one new store and one relocation in
development in metropolitan Portland, Oregon. The purchase price for this
acquisition aggregated $40.0 million in cash, including the assumption by the
Company of a $17.0 million promissory note owed by Nature's to General
Nutrition, Incorporated, its parent corporation. The acquisition was accounted
for using the purchase method, and the excess of cost over the fair value of the
assets acquired and liabilities assumed of $33.5 million was allocated to
goodwill, which is being amortized on a straight-line basis over 40 years.
On September 27, 1999, the Company issued approximately 1.4 million shares of
its common stock in exchange for all of the outstanding stock of Henry's in a
transaction accounted for as a pooling of interests. Accordingly, the financial
position, results of operations and cash flows of Henry's have been combined
with those of the Company in these supplemental combined financial statements.
Certain reclassifications have been made to the prior financial statements of
Henry's to conform with the Company financial presentation and policies. There
were no intercompany transactions between the Company and Henry's for all
periods presented.
Results of Pooled Company Prior to Merger
Separate results of operations for the Company and Henry's operations for the
periods prior to the merger are as follows (in thousands):
July 3, June 27,
For the Six-Month Period Ended 1999 1998
- ------------------------------ --------- ------
Sales:
Wild Oats $257,846 $190,266
Henry's 47,488 40,042
--------- -------
Combined $305,334 $230,308
========= ========
Net Income:
Wild Oats $ 78 $ 5,308
Henry's 2,389 2,176
--------- --------
Combined $ 2,467 $ 7,484
========= ========
Other Changes in Stockholders' Equity:
Wild Oats $ 3,770 $ 3,008
Henry's (1,880) (1,795)
--------- --------
Combined $ 1,890 $ 1,213
========= ========
4. Pro Forma Net Income
The pro forma net income (loss) and pro forma net income (loss) per share
reflects the tax adjustment for the fiscal 1999 merger with Henry's in a pooling
of interests transaction (see Note 3), which included entities that were
previously not taxable, as if Henry's had filed C Corporation tax returns for
all periods presented. The effect is as follows:
For the Six-Month Period Ended
July 3, June 27,
(In thousands) 1999 1996
- -----------------------------------------------------------------
Net income before pro forma
adjustments, per the supplemental
combined statements of operations $2,467 $7,484
Pro forma provision
for income taxes 928 843
- -----------------------------------------------------------------
Pro forma net income $1,539 $6,641
- -----------------------------------------------------------------
5. Pro Forma Earnings Per Share
The Company reports both pro forma basic earnings per share, which is based on
the weighted-average number of common shares outstanding, and pro forma diluted
earnings per share, which is based on the weighted-average number of common
shares outstanding and all dilutive potential common shares outstanding, except
where the effect of their inclusion would be antidilutive (i.e., in a loss
period) and is calculated using pro forma net income (net income after giving
effect to the pro forma tax adjustment) (see Note 4).
25
6. Non-Recurring Expenses
During the first quarter of 1999, the Company's management made certain
decisions relating to the Company's operations and selected store closures,
which resulted in approximately $10.9 million of non-recurring expenses being
recorded. These decisions included (1) a change in the Company's strategic
direction, resulting in the closure in the second quarter of 1999 of its two
"Farm to Market" stores located in Buffalo Grove, Illinois, and Tempe, Arizona
($4.5 million), and (2) a decision by the Company's management to allocate
corporate resources to servicing new and existing stores, rather than closed
sites ($6.4 million). Components of the non-recurring charge consist primarily
of non-cancelable lease obligations through the year 2000 ($1.2 million) and
abandonment of fixed and intangible assets ($9.7 million). At July 3, 1999, the
remaining accrued liabilities related to the non-recurring charge totaled
approximately $785,000.
26